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JULIUS BAER INVESTMENT
FUNDS
Prospectus
March 1, 1999
JULIUS BAER GLOBAL INCOME FUND
JULIUS BAER INTERNATIONAL EQUITY FUND
Neither the Securities and Exchange Commission nor any state securities
commission has approved any Fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
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CONTENTS
THE FUNDS PAGE
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WHAT EVERY INVESTOR
SHOULD KNOW ABOUT JULIUS BAER INVESTMENT FUNDS 3
THE FUNDS
RISK/RETURN SUMMARIES 3
Introduction 3
Investments, Risks, Performance
and Fees 3
INVESTMENT STRATEGIES AND RISKS 12
THE FUNDS' MANAGEMENT 20
YOUR INVESTMENT
INFORMATION FOR
MANAGING YOUR INVESTING IN THE FUNDS 21
FUND ACCOUNT Opening an Account 21
Pricing of Fund Shares 21
Purchasing Your Shares 22
Selling Your Shares 26
Distribution and Shareholder Servicing
Plans 28
DISTRIBUTIONS AND TAXES 28
Distributions 28
Tax Information 28
FOR MORE INFORMATION
WHERE TO FIND MORE INFORMATION
ABOUT JULIUS BAER INVESTMENT FUNDS BACK COVER
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JULIUS BAER INVESTMENT FUNDS
RISK/RETURN SUMMARIES
INTRODUCTION
Julius Baer Investment Funds (the Trust) currently offers two funds: Julius Baer
International Equity Fund and Julius Baer Global Income Fund (the Funds). Each
Fund has a different investment goal and risk level. Each Fund currently offers
only Class A shares, although Class B shares have been authorized for each Fund.
INVESTMENTS, RISKS, PERFORMANCE AND FEES
The following information is only a summary of important information that you
should know about each Fund. More detailed information is included elsewhere in
this Prospectus and in the Statement of Additional Information (SAI) and should
be read in addition to this summary.
As with any mutual fund, there is no guarantee that either Fund will achieve its
goals. Each Fund's share price will fluctuate and you may lose money on your
investment.
An investment in either of the Funds is not a bank deposit and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
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JULIUS BAER INTERNATIONAL EQUITY FUND
THE FUND'S INVESTMENT GOAL
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Q. What is the Fund's investment goal?
A. The International Equity Fund seeks long term growth of
capital.
ITS PRINCIPAL INVESTMENT STRATEGIES
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Q. What is the Fund's principal investment strategy?
A. The Fund invests in a wide variety of international equity
securities issued anywhere in the world, normally excluding the
U.S.
The Adviser will choose securities in industries and companies it believes are
experiencing favorable demand for their products or services. The Adviser's
selection process focuses on growth potential rather than income. Other
considerations include expected levels of inflation, government policies or
actions, currency relationships and prospects for economic growth in a country
or region.
In selecting its investments, the portfolio manager focuses on securities
located in at least five different countries, although the Fund may at times
invest all of its assets in fewer than five countries. The Fund will normally
invest at least 65% of its total assets in no fewer than three different
countries outside the U.S. The Fund will invest a portion of its assets in
securities of issuers located in developing countries.
The Fund may also invest in debt securities of U.S. or foreign issuers,
including (up to 10%) in high risk and high yield, non-investment grade
instruments commonly known as junk bonds.
THE KEY RISKS
You could lose money on your investment in the Fund, or the Fund could return
less than other investments. Some of the main risks of investing in the Fund are
listed below:
o Market Risk: the possibility that the Fund's investments in equity securities
will lose value because of declines in the stock market.
o Foreign Investing Risk: the possibility that the Fund's investments in foreign
securities will lose value because of currency exchange rate fluctuations,
price volatility, uncertain political conditions and other factors.
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o The use of futures, options and forward contracts, which may expose the Fund
to additional investment risks and transaction costs. These are described more
fully under the heading Investment Strategies and Risks and in the SAI.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the International
Equity Fund by showing changes in the performance of the Fund's shares from year
to year since the Fund commenced operations. How the Fund has performed in the
past is not necessarily an indication of how the Fund will perform in the
future.
International Equity Fund
1994 1995 1996 1997 1998
Total Return -33.58% -0.19% 17.66% 15.33% 27.07%
During the periods shown in the Bar Chart, the highest quarterly return was
21.79% (for the quarter ended March 31, 1998) and the lowest quarterly
return was -22.49% (for the quarter ended March 31, 1994).
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The table below shows how the Fund's average annual total returns for the
periods shown compare to that of the Morgan Stanley Capital International Europe
Australia and Far East Index (MSCI EAFE Index). The MSCI EAFE Index is an
unmanaged index that measures stock performance in Europe, Australia and the Far
East.
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 1998)
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SINCE FUND'S
PAST ONE YEAR PAST FIVE YEARS INCEPTION
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International Equity Fund 27.07% 2.71% 7.79%
MSCI EAFE Index 18.23% 7.54% 7.11%
</TABLE>
THE FUND'S FEES AND EXPENSES
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SHAREHOLDER FEES--FEES PAID DIRECTLY FROM YOUR INVESTMENT
There are no fees or sales loads charged to your account when you
buy or sell Fund shares. However, if you sell shares and request
your money by wire transfer, there is a $12.00 fee. (Your bank
may also charge you a fee for receiving wires.)
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
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ANNUAL FUND OPERATING EXPENSES--EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS
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Management Fees 1.00%
Distribution and/or Service (12b-1) Fees 0.25%
Other Expenses 0.84%
Total Annual Fund Operating Expenses 2.09%
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EXAMPLE OF EFFECT OF THE FUND'S OPERATING EXPENSES
The following Example is intended to help you compare the cost of investing in
the International Equity Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. While
your return may vary, the Example also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual returns and expenses may be higher or lower, based on these
assumptions your costs would be:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
$212 $655 $1,124 $2,421
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JULIUS BAER GLOBAL INCOME FUND
THE FUND'S INVESTMENT GOAL
Q. What is the Fund's investment goal?
A. The Global Income Fund seeks to maximize current income consistent
with the protection of principal.
ITS PRINCIPAL INVESTMENT STRATEGIES
Q. What is the Fund's principal investment strategy?
A. The Fund invests in a non-diversified portfolio of fixed-income
securities of issuers located anywhere in the world, including the U.S.
The Fund invests primarily (at least 65% of total assets) in high quality
fixed-income securities consisting of bonds, debentures and notes. The
securities in which the Fund invests may be issued by governments,
supranational entities or corporations.
The Adviser chooses individual investments based on many factors such as yield,
duration, maturity, classification and quality. The Adviser also considers the
local economy and political environment, expected movements in interest rates,
the strength and relative value of a particular currency, and the supply of a
type of security relative to expected demand.
The Adviser expects the Fund to have a duration of approximately four years.
The Fund will normally invest in the securities of issuers located in at least
three different countries. The Fund will invest less than 40% of its total
assets in any one country other than the U.S.
The Fund will invest less than 25% of its total assets in securities issued by:
o any one foreign government, its agencies, instrumentalities, or political
subdivisions; and
o supranational entities as a group.
THE KEY RISKS
As a non-diversified investment company, the Global Income Fund may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers than a diversified fund and, as a result, may be subject to greater risk
with respect to its portfolio securities.
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You could lose money on your investment in the Fund, or the Fund could return
less than other investments due to:
o Interest Rate Risk: the possibility that the Fund's investments in
fixed-income securities will lose value because of increases in interest
rates.
o Credit Risk: Credit risk is the chance that a bond issuer will fail to repay
interest and principal in a timely manner, reducing the Fund's return.
o Prepayment Risk: The Fund's investments in mortgage-related securities are
subject to the risk that the principal amount of the underlying mortgage may
be repaid prior to the bond's maturity date. Such repayments are common when
interest rates decline.
o Income Risk: Income risk is the chance that falling interest rates will
cause the Portfolio's income to decline. Income risk is generally higher for
short-term bonds.
o Foreign Investing Risk: the possibility that the Fund's investments in
foreign securities will lose value because of currency exchange rate
fluctuations, price volatility, uncertain political conditions and other
factors.
o The use of futures, options and forward contracts, which may expose the Fund
to additional investment risks and transaction costs. These are described
more fully under the heading Investment Strategies and Risks and in the SAI.
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THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the Global Income
Fund. It shows changes in the performance of the Fund's shares from year to year
since the Fund commenced operations. How the Fund has performed in the past is
not necessarily an indication of how the Fund will perform in the future.
Global Income Fund
Global Income Fund
1993 1994 1995 1996 1997 1998
Total Return 11.47% -6.61% 19.15% 5.73% 2.83% 9.60%
During the periods shown in the Bar Chart, the highest quarterly return
was 6.98% (for the quarter ended March 31, 1995) and the lowest quarterly
return was -3.63% (for the quarter ended June 30, 1994).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of a benchmark composed of 80% Merrill Lynch 1-10 Year
U.S. Government/Corporate Index and 20% J.P. Morgan Global Government Bond
(non-U.S.) Index. The Merrill Lynch 1-10 Year U.S. Government/Corporate Index
and the J.P. Morgan Global Government Bond (non-U.S.) Index are unmanaged
composites consisting of publicly-issued, fixed-rate, non-convertible bonds.
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDED DECEMBER 31, 1998)
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SINCE FUND'S
PAST ONE YEAR PAST FIVE YEARS INCEPTION
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Global Income Fund 9.60% 5.80% 6.77%
80% Merrill Lynch 1-10 Year U.S.
Government/Corporate Index/20% J.P. Morgan Global
Government Bond (non-U.S.) Index 10.42% 7.12% 7.44%
</TABLE>
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THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Global Income Fund.
SHAREHOLDER FEES--FEES PAID DIRECTLY FROM YOUR INVESTMENT
There are no fees or sales loads charged to your account when
you buy or sell Fund shares. However, if you sell shares and
request your money by wire transfer, there is a $12.00 fee.
(Your bank may also charge you a fee for receiving wires.)
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ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 0.65%*
Distribution and/or Service (12b-1) Fees 0.25%
Other Expenses 0.93%
Total Annual Fund Operating Expenses 1.83%
</TABLE>
* Commencing on September 1, 1998, the Adviser agreed to waive half of
the Management Fee charged to the Global Income Fund on the first
$25 million of the Fund's average daily net assets. Net of this waiver
Total Annual Fund Operating Expenses would have been reduced to 1.77%.
The Adviser can end the waiver at any time.
EXAMPLE OF EFFECT OF THE FUND'S OPERATING EXPENSES
The following Example is intended to help you compare the cost of investing in
the Global Income Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. While
your return may vary, the Example also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual returns and expenses may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ ------------------------ ------------------------ ------------------------
$186 $576 $990 $2,148
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INVESTMENT STRATEGIES AND RISKS
JULIUS BAER INTERNATIONAL EQUITY FUND
THE FUND'S INVESTMENT GOAL
The International Equity Fund seeks long term growth of capital.
THE FUND'S INVESTMENT STRATEGIES
The Fund seeks to achieve its goal by investing primarily in a diversified
portfolio of common stocks, convertible securities and preferred stocks of
foreign issuers of all sizes. The Fund will not normally invest in the
securities of U.S. issuers. In addition to the strategies discussed earlier, the
Fund may also engage in some or all of the strategies discussed here or in the
SAI.
The Fund intends to invest in securities denominated in the currencies of a
variety of countries. The Fund may also invest in securities denominated in
multinational currencies such as European Currency Units and the Euro. To
attempt to protect the Fund against a decline in the value of portfolio
securities due to fluctuations in currency exchange rates, the Adviser may enter
into currency hedges which may decrease or offset any losses from such
fluctuations.
The Fund may invest up to 10% of its total assets in equity warrants and
interest rate warrants. Equity warrants give the Fund the right to buy newly
issued securities of a company at a fixed price. Interest rate warrants give the
Fund the right to buy or sell a specific bond issue or interest rate index at a
set price.
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The Fund may invest in American Depository Receipts DEPOSITORY RECEIPTS:
(ADRs), Global Depository Receipts (GDRs) and European receipts, typically issued by a bank or trust company,
Depository Receipts (EDRs) issued by sponsored or which represent ownership of underlying securities
unsponsored facilities. ADRs are usually issued by a issued by a foreign company and held by the bank or
U.S. bank or trust company and traded on a U.S. trust company.
exchange. GDRs may be issued by institutions located
anywhere in the world and traded in any securities
market. EDRs are issued in Europe and used in bearer
form in European markets.
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Most of the purchases and sales made by the Fund will be made in the primary
trading market for the particular security. The primary market is usually in the
country in which the issuer has its main office. The Fund will generally invest
in large and well established companies, but may also invest in smaller emerging
growth companies.
When the Fund invests in fixed-income securities it will limit such investments
to securities of U.S. companies, the U.S. government, foreign governments, U.S.
and foreign governmental entities and supranational organizations. When the Fund
invests in such fixed-income securities it may earn increased investment income
(which would subject shareholders to tax liability when distributed) and the
Fund would be foregoing market advances or declines to the extent it is not
invested in equity markets.
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The Fund may at times use futures, options and forward contracts for hedging
purposes. The Fund may hedge the value of the securities in its portfolio using
currency futures contracts, forward foreign exchange contracts, foreign currency
exchange transactions, stock index futures, options on securities and options on
futures, so as to limit losses due to changes in the value of the currencies in
which the securities are denominated or in the underlying value of portfolio
securities. The Fund may, within limits, write or purchase certain put and call
options and use other types of derivative instruments. These types of
instruments may expose the Fund to increased risks.
The Fund may also invest up to 5% of its total assets in gold bullion and coins
which earn no investment income but are regularly traded in the market.
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JULIUS BAER GLOBAL INCOME FUND
THE FUND'S INVESTMENT GOAL
The Global Income Fund seeks to maximize current income consistent with the
protection of principal.
THE FUND'S PRINCIPAL INVESTMENT STRATEGY
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The Fund seeks to achieve its goal by investing primarily in a NON-DIVERSIFIED:
non-diversified portfolio of fixed-income securities (generally because it is non-diversified, the Global
bonds, debentures and notes) of governmental, supranational and Income Fund may invest a larger portion
corporate issuers denominated in various currencies, including of its assets in the securities of a
U.S. dollars. In addition to the strategies discussed earlier, the smaller number of issuers.
Fund may also engage in some or all of the strategies discussed Nevertheless, the Fund will buy no more
here or in the SAI. than 10% of the voting securities, no
more than 10% of the securities of any
class and no more than 10% of the debt
securities of any one issuer (other
than the U.S. government).
The Adviser expects that the Global Income Fund will have a DURATION:
duration of approximately four years. Longer-term fixed-income duration takes into account the pattern of a
securities can also have higher fluctuations in value. If the Fund securities cash flow over time,
holds such securities, the value of the Fund's shares may including how cash flow is affected by
fluctuate more in value as well. prepayments and interest rate changes.
This is a better indicator than
maturity which generally measures only
the time until payment is due.
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The Fund may buy fixed-income obligations consisting of bonds, debentures and
notes issued or guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or political subdivisions, as well as supranational entities
organized or supported by several national governments, such as the
International Bank for Reconstruction and Development (the World Bank) or the
European Investment Bank. The Fund may, at times, invest a significant
proportion of its assets in mortgage-backed securities. The Fund also may
purchase debt obligations of U.S. or foreign corporations issued in a currency
other than U.S. dollars.
The Fund intends to invest in securities denominated in the currencies of a
variety of countries. The Fund may also invest in securities denominated in
multinational currencies such as European Currency Units and the Euro. To
attempt to protect the Fund against a decline in the value of portfolio
securities due to
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fluctuations in currency exchange rates, the Adviser may enter into currency
hedges which may decrease or offset any losses from such fluctuations.
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The Fund will invest in fixed-income securities rated at the time EQUIVALENT OR UNRATED:
of purchase "A" or better by Moody's Investors Service, Inc. or the Fund may invest in securities with
Standard & Poor's Rating Service. If a security is downgraded equivalent ratings from another
below "A," the Adviser intends to dispose of the security within a recognized rating agency and non- rated
reasonable time period. Investors should be aware that ratings are issues that the Adviser believes are
relative and subjective and are not absolute standards of quality. comparable in quality.
</TABLE>
The Fund may at times use futures, options and forward contracts for hedging
purposes. The Fund may hedge the value of the securities in its portfolio using
currency and interest rate futures contracts, forward foreign exchange
contracts, foreign currency exchange transactions and options on futures, so as
to limit losses due to changes in the value of the currencies in which the
securities are denominated or in interest rates. The Fund may, within limits,
write or purchase certain put and call options and use other types of derivative
instruments. These types of instruments may expose the Fund to increased risks.
GENERAL
CAN A FUND DEPART FROM ITS NORMAL STRATEGIES?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
THE FUNDS AT A GLANCE
The following two tables can give you a quick basic understanding of the types
of securities each Fund tends to invest in and some of the risks associated with
each Fund's investments. You should read all of the information about a Fund and
its risks before deciding to invest.
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HOW CAN I TELL, AT A GLANCE, WHICH TYPES OF SECURITIES A FUND MIGHT INVEST IN?
The following table shows the main types of securities in which each Fund
may invest.
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INTERNATIONAL EQUITY FUND GLOBAL INCOME FUND
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FINANCIAL INSTRUMENTS
INVESTS IN FOREIGN STOCKS O
INVESTS IN INVESTMENT GRADE DEBT SECURITIES O O
INVESTS IN BELOW-INVESTMENT GRADE DEBT SECURITIES O
INVESTS IN FOREIGN DEBT SECURITIES O O
INVESTS IN CONVERTIBLE SECURITIES AND BONDS WITH
WARRANTS ATTACHED O O
INVESTS IN FUTURES CONTRACTS O O
INVESTS IN FORWARD CURRENCY CONTRACTS O O
INVESTS IN MORTGAGE-BACKED SECURITIES O
INVESTMENT TECHNIQUES
INVESTS IN SECURITIES OF DEVELOPING COUNTRIES O O
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HOW CAN I TELL, AT A GLANCE, A FUND'S KEY RISKS?
The following table shows some of the main risks to which each Fund is
subject. Each risk is described in detail below.
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INTERNATIONAL EQUITY FUND GLOBAL INCOME FUND
<S> <C> <C>
MARKET RISK O
INTEREST RATE RISK O
MORTGAGE-BACKED SECURITIES O
CREDIT RISK O
BELOW-INVESTMENT GRADE SECURITIES O
FOREIGN INVESTING RISK O O
DEVELOPING COUNTRY RISK O O
POLITICAL RISK O O
</TABLE>
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RISKS OF INVESTING IN THE FUNDS
Market Risk. A Fund that invests in common stocks is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a particular company's operations. Stock
markets tend to run in cycles, with periods when stock prices generally go up
and periods when they generally go down. Common stock prices tend to go up and
down more than those of bonds.
Interest Rate Risk. A Fund that invests in debt securities is subject to the
risk that the market value of the debt securities will decline because of rising
interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
Mortgage-Backed Securities. Payments from the pool of loans underlying a
Mortgage-backed security may not be enough to meet the monthly payments of
the Mortgage-backed security. If this occurs the Mortgage-backed security
will lose value. Also, prepayments of mortgages or mortgage foreclosures
will shorten the life of the pool of mortgages underlying a Mortgage-backed
security and will affect the average life of the Mortgage-backed security
held by the Fund. Mortgage prepayments vary based on several facts
including the level of interest rates, general economic conditions, the
location and age of the mortgage and other demographic conditions. In
periods of falling interest rates, there are usually more prepayments. The
reinvestment of cash received from prepayments will, therefore, usually be
at a lower interest rate than the original investment, lowering a Fund's
yield. Mortgage-backed securities may be less likely to increase in value
during periods of falling interest rates than other debt securities.
Credit Risk. The debt securities in a Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
Investment Grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
Below-Investment Grade Securities. Below-Investment Grade securities are
sometimes referred to as junk bonds and are very risky with respect to
their issuers' ability to make payments of interest and principal. There is
a high risk that a Fund which invests in Below-Investment Grade securities
could suffer a loss caused by the default of an issuer of such securities.
Part of the reason for this high risk is that, in the event of a default or
bankruptcy, holders of Below-Investment Grade securities generally will not
receive payments until the holders of all other debt have been paid. In
addition, the market for Below-Investment Grade securities has, in the
past, had more frequent and larger price changes than the markets for other
securities. Below-Investment Grade securities can also be more difficult to
sell for good value.
Income Risk. Income risk is the chance that falling interest rates will cause
the Portfolio's income to decline. Income risk is generally higher for
short-term bonds.
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Foreign Investing. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
Developing Country Risk. Investments in a country that is still relatively
underdeveloped involves exposure to economic structures that are generally
less diverse and mature than in the U.S. and to political and legal systems
which may be less stable. In the past, markets of developing countries have
had more frequent and larger price changes than those of developed
countries.
Political Risk. Political risk includes a greater potential for revolts,
and the taking of assets by governments. For example, a Fund may invest in
Eastern Europe and former states of the Soviet Union. These countries were
under Communist systems that took control of private industry. This could
occur again in this region or others in which a Fund may invest, in which
case the Fund may lose all or part of its investment in that country's
issuers.
YEAR 2000 RISK
Like other funds and business organizations around the world, the Funds could be
adversely affected if the computer systems used by the Manager and the Funds'
other service providers do not properly process and calculate date-related
information for the Year 2000 and beyond. The Funds have been informed that the
Adviser, and the Funds' other service providers (i.e., Administrator, Transfer
Agent, Fund Accounting Agent, Distributor and Custodian) have developed and are
implementing clearly defined and documented plans to minimize the risk
associated with the Year 2000 problem. These plans include the following:
carefully checking each software system, determining items that may not function
properly after December 31, 1999, reprogramming or replacing such systems and
retesting for Year 2000 readiness. In addition, the service providers are
obtaining assurances from their vendors and suppliers in the same manner.
Non-complaint Year 2000 systems upon which the Funds are dependent may result in
errors and account maintenance failures. The Funds have no reason to believe
that (i) the Year 2000 plans of the Adviser and the Funds' other service
providers will not be completed by December, 1999, and (ii) the costs currently
associated with the implementation of their plans will have material adverse
impact on the business, operations or financial condition of the Funds or their
service providers.
In addition, the Year 2000 problem may adversely affect the companies in which
the Funds invest, particularly since the Funds invest heavily outside of the
U.S. For example, these companies may incur substantial costs to correct the
problem and may suffer losses caused by data processing errors. Since the
ultimate costs or consequences of incomplete or untimely resolution of the Year
2000 problem by the Funds' service providers are unknown to the Funds at this
time, no assurance can be made that such costs or consequences will not have a
material adverse impact on the Funds or their service providers.
The Funds and the Manager will continue to monitor developments relating to the
Year 2000 problem, including the development of contingency plans for providing
back-up computer services in the event of a systems failure.
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EURO RISK
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro."
Participating countries replaced their existing currency with the Euro on
January 1, 1999. Other European countries may participate in the future. This
conversion presents unique uncertainties, including whether the payment and
operational systems of banks and other financial institutions will be ready by
the scheduled launch date; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the Euro; the establishment of exchange rates for existing currencies and the
Euro; and the creation of suitable clearing and settlement payment systems for
the new currency. These or other factors, including political and economical
risks, could cause market disruptions before or after the interaction of the
Euro, and could adversely affect the value of securities held by the Funds.
The Funds have been informed that the Adviser, and the Funds' other service
providers, as applicable, are taking steps to minimize the risk associated with
the conversion. In addition, where appropriate, certain service providers are
obtaining assurances from their vendors in the same manner.
Since the ultimate consequences of the conversion are unknown to the Funds at
this time, no assurance can be made that such consequences will not have a
material adverse impact on the Funds. The Funds and the Adviser will continue to
monitor developments relating to the conversion.
19
<PAGE>
THE FUNDS' MANAGEMENT
INVESTMENT ADVISER
Each Fund is managed by Bank Julius Baer & Co., Ltd., New York Branch located at
330 Madison Avenue, New York, New York 10017.
The Adviser is the New York branch of a Swiss bank that has over 50 years
experience in international and global portfolio experience. As of October 31,
1998, the Adviser had approximately $731 million in assets under management.
The Adviser is responsible for running all of the operations of the Funds,
except for those that are subcontracted to the custodian, transfer agent or
administrator.
Each Fund pays the Adviser a fee for its services. The fee paid by each Fund for
the fiscal year ended October 31, 1998 is shown in the table below.
FUND FEE (AS A % OF AVERAGE DAILY NET ASSETS)
International Equity Fund 0.75%
Global Income Fund 0.58%
Prior to July 1, 1998 the Global Income Fund was advised by Julius Baer
Investment Management Inc., an affiliate of the Adviser. The advisory fee rate
did not change as a result of the change in adviser.
PORTFOLIO MANAGEMENT OF THE FUNDS
Richard Pell, Chief Investment Officer and Senior Vice President of the Adviser
since January 1995, has been primarily responsible for management of the
International Equity Fund's assets since April 1995 and, since July 1, 1998, has
been primarily responsible for management of the Global Income Fund's assets.
Prior to joining the Adviser, he was Vice President and head of Global
Fixed-Income at Bankers Trust Company.
Rudolph-Riad Younes, CFA, First Vice President and Head of International Equity
with the Adviser since September 1993, has been managing the International
Equity Fund since April 1995. Prior to joining the Adviser, he was an Associate
Director at Swiss Bank Portfolio Management International from 1991 to 1993.
Karen Arrese, CFA, Vice President and Global Fixed-Income Specialist with the
Adviser since July 1, 1998, has been co-managing the Global Income Fund with
Mr. Pell since July 1, 1998. Prior to joining the Adviser, she was a Proprietary
Interest Rate and Currency Trader for Chase Manhattan Bank and prior to that,
Global Portfolio Manager at Standish, Ayer & Wood, Inc.
20
<PAGE>
INVESTING IN THE FUNDS
OPENING AN ACCOUNT
To invest in the Funds, you must first complete and sign an account application.
A copy of the application is included with this Prospectus. You can also obtain
an account application by calling 1-800-435-4659 or by writing to the Funds'
Transfer Agent, Unified Fund Services, Inc. ("Unified") at:
Unified Fund Services, Inc.
P.O. Box 6110
Indianapolis, Indiana 46206-6110
Attention: Julius Baer Investment Funds
Completed and signed account applications may be mailed to Unified at the above
address.
You can also invest in the Funds through your broker. If your broker does not
have a relationship with Unified Management Corporation, the Funds' distributor
(Distributor), you may be charged a transaction fee.
o INVESTOR ALERT: The Funds may choose to refuse any purchase order.
RETIREMENT PLANS. For information about investing in the Funds through a
tax-deferred retirement plan, such as an Individual Retirement Account (IRA),
self-employed retirement plan (H.R.10), a Simplified Employee Pension IRA
(SEP-IRA) or a profit sharing and money purchase plan, an investor should
telephone the Transfer Agent at 1-800-435-4659 or write to Unified at the
address set forth above.
o INVESTOR ALERT: You should consult your tax adviser about the establishment of
retirement plans.
PRICING OF FUND SHARES
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange (NYSE) is open. The Fund calculates the NAV per share, generally
using market prices, by dividing the total value of the Fund's net assets by the
number of the shares outstanding. Shares are purchased or sold at the next
offering price determined after your purchase or sale order is received and
accepted by the Distributor. The offering price is the NAV.
The Fund's investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days or less
are valued on the basis of amortized cost which the Board of Trustees has
determined represents fair value;
o Securities mainly traded on a U.S. exchange are valued at the last sale price
on that exchange or, if no sales occurred during the day, at the mean of the
current quoted bid and asked prices; and
21
<PAGE>
o Securities mainly traded on a non-U.S. exchange are generally valued according
to the preceding closing values on that exchange. However, if an event that may
change the value of a security occurs after the time the value was determined,
the Board of Trustees or its delegate might adjust the fair market value.
PURCHASING YOUR SHARES
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required as well as
to learn about the various ways you can purchase your shares.
TYPE OF INVESTMENT INITIAL INVESTMENT ADDITIONAL INVESTMENT
- --------------------------- ------------------------ ------------------------
Regular account $2,500 $1,000
Individual $100 $100
Retirement Account (IRA)
Tax deferred retirement $500 $500
plan other than an IRA
22
<PAGE>
You can invest in Fund shares in the following ways:
<TABLE>
<CAPTION>
<S> <C> <C>
OPENING AN ACCOUNT ADDING TO YOUR ACCOUNT
o THROUGH o You can purchase shares through a broker o You may add to an account established
A BROKER that has a relationship with the Distributor. through any broker either by contacting your
broker or directly through Unified by using
If you buy shares through a broker, the one of the methods described below.
broker is responsible for forwarding your
order to Unified in a timely manner.
If you place an order with a broker by
4:00 p.m. (Eastern time) on a day when the
NYSE is open for regular trading, and the
order is received by Unified by the end of
its business day, you will receive that day's
price and be invested in the Fund on that
day.
o You may also be able to purchase shares
through a broker that does not have a
relationship with the Distributor. Orders
from such a broker received by Unified by
4:00 p.m. (Eastern time) on a day when the
NYSE is open for regular trading will be
effected that day. You may be charged a
transaction fee by your broker.
o BY CHECK o Please make your check (in U.S. dollars) o Make your check payable to the Julius Baer
payable to the Julius Baer Investment Funds Investment Funds or the Fund in which you are
or the Fund in which you are investing. investing. The Funds do not accept third
party checks.
o Send your check with the completed account
application to: o Write your account number and Fund name on
the check.
Unified Fund Services, Inc.
P.O. Box 6110 o Mail your check directly to the Fund at the
Indianapolis, Indiana 46206-6110 address shown at left.
Attention: Julius Baer Investment Funds
Your application will be processed subject to
your check clearing.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO YOUR ACCOUNT
<S> <C> <C>
o BY WIRE o First, telephone the Transfer Agent at o Refer to wire instructions for opening an
(800) 435-4659 to notify the Transfer Agent account.
that a bank wire is being sent and to receive
an account number. A bank wire received by o Specify in the wire: (1) the name of the
4:00 p.m. (Eastern time) on a day when the Fund, (2) the account number, and (3) your
NYSE is open for regular trading will be name. If Unified receives the federal funds
effected that day. before the close of regular trading of the
NYSE on a day the NYSE is open for regular
o Transfer funds by wire to the following trading, your purchase of Fund shares will be
address: effected as of that day.
BOSTON SAFE DEPOSIT & TRUST COMPANY
ABA 011001234
GLOBAL INCOME FUND DDA NO. 166987
INTERNATIONAL EQUITY FUND DDA NO. 166995
o Specify in the wire: (1) the name of the
Fund, (2) the account number which Unified
assigned to you, and (3) your name.
o BY EXCHANGE o First, you should follow the procedures o You may exchange your Fund shares for
under "By Check" or "By Wire" in order to get shares of the other Fund described in the
an account number for Fund(s) which you do Prospectus at its respective NAV.
not currently own shares of, but which you
desire to exchange shares into. o You should review the disclosure provided
in this Prospectus relating to the other Fund
o You may exchange shares of a Fund for carefully before making an exchange of your
shares of the other Fund at its respective Fund shares.
NAV.
o You should review the disclosure provided
in this Prospectus relating to the other Fund
carefully before making an exchange of your
Fund shares.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO YOUR ACCOUNT
<S> <C> <C>
o THROUGH o You may invest in each Fund through various
RETIREMENT PLANS Retirement Plans. The Funds' shares are
designed for use with certain types of tax
qualified retirement plans including defined
benefit and defined contribution plans.
o For further information about any of the
plans, agreements, applications and annual
fees, contact Unified or your financial
adviser.
</TABLE>
MORE INFORMATION ABOUT WIRE TRANSFERS: A $12.00 service charge is imposed on
shareholders for effecting wire transfers.
MORE INFORMATION ABOUT EXCHANGES:
o SPECIAL TAX CONSIDERATION: For federal income tax purposes, an exchange
of shares is treated as a sale of the shares and a purchase of the shares
you receive in exchange. Therefore, you may incur a taxable gain or loss
in connection with the exchange.
o AUTOMATIC INVESTMENT PLAN
You can pre-authorize monthly or quarterly investments of $100 or more in each
Fund to be processed electronically from a checking or savings account. You will
need to complete the appropriate portion of an account application or separate
forms to do this. Contact your broker or the Distributor for more information.
o PROCESSING ORGANIZATIONS
You may also purchase shares of the International Equity Fund through a
"Processing Organization," (e.g., a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. The International Equity Fund has authorized certain Processing
Organizations to accept purchase and sale orders on its behalf. Before investing
in the International Equity Fund through a Processing Organization, you should
read any materials provided by the Processing Organization in conjunction with
this Prospectus.
When shares are purchased this way, there may be various differences. The
Processing Organization may:
o charge a fee for its services;
o act as the shareholder of record of the shares;
o set different minimum initial and additional investment
requirements;
o impose other charges and restrictions; and
o designate intermediaries to accept purchase and sale orders on the
Fund's behalf.
25
<PAGE>
The Fund considers a purchase or sales order as received when an authorized
Processing Organization, or its authorized designee, accepts the order. These
orders will be priced based on the Fund's NAV determined after such order is
accepted.
Shares held through a Processing Organization may be transferred into your name
following procedures established by your Processing Organization and the Fund.
Certain Processing Organizations may receive compensation from the Fund, the
Adviser or their affiliates.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is accepted before the close of regular trading on the
NYSE, you will receive a price based on that day's NAV for the shares your sell.
Otherwise, the price you receive will be based on the NAV that is next
calculated.
<TABLE>
<S> <C>
O BY TELEPHONE o You can sell or exchange your shares over the telephone, unless you have
specifically declined this option. If you do not wish to have this ability, you
must mark the appropriate section of the New Account Application Form.
o To sell your Fund shares by telephone call (800) 435-4659 between the hours of
9:00 a.m. and 4:00 p.m. (Eastern time) on a day when the NYSE is open for regular
trading. You will be asked to:
o specify the name of the Fund from which the sale is to be made;
o indicate the number of shares or dollar amount to be sold;
o include your name as it exists on the Fund's records; and
o indicate your account number.
</TABLE>
<TABLE>
<S> <C>
o BY MAIL o To sell your Fund shares by mail you must write to Unified at:
Unified Fund Services, Inc.
P.O. Box 6110
Indianapolis, Indiana 46206-6110
Attention: Julius Baer Investment Funds
o specify the name of the Fund from which the sale is to be made;
o indicate the number of shares or dollar amount to be sold;
o include your name as it exists on the Fund's records;
o indicate your account number; and
o sign redemption request exactly as the shares are registered.
</TABLE>
26
<PAGE>
o INVESTOR ALERT: Unless otherwise specified, proceeds will be sent to the
record owner.
SIGNATURE GUARANTEES: Some circumstances (e.g., changing the bank account
designated to receive sale proceeds) require that the request for the sale of
shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public.
TELEPHONE SALES: If we receive your share sale request before 4:00 p.m. (Eastern
time), on a day when the NYSE is open for regular trading, the sale of your
shares will be processed that day. Otherwise it will occur on the next business
day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to Unified.
In order to protect your investment assets, Unified intends to only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable for those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If the Trust does
not follow such procedures in a particular case it may be liable for any losses
due to unauthorized or fraudulent instructions.
o LOW ACCOUNT BALANCES
Unified may sell your Fund shares if your account balance falls below $1,000 as
a result of redemptions that you have made (as opposed to a reduction from
market changes). Unified will let you know that your shares are about to be sold
and you will have 60 days to increase your account balance to more than $1,000.
o SPECIAL CONSIDERATION: Involuntary sales may result in sale of your Fund
shares at a loss or may result in taxable investment gains.
o RECEIVING SALE PROCEEDS
Unified will forward the proceeds of your sale to you within seven days.
FUND SHARES PURCHASED BY CHECK: If you purchase Fund shares by personal check,
the proceeds of a sale of those shares will not be sent to you until the check
has cleared, which may take up to 10 days. If you may need your money more
quickly, you should purchase shares by federal funds, bank wire, or with a
certified or cashier's check.
o It is possible that the payments of your sale proceeds could be
postponed or your right to sell your shares could be suspended during
certain circumstances.
REDEMPTIONS IN KIND: The Funds reserve the right to redeem your shares by giving
you securities from the Funds' portfolios under certain circumstance, generally
in connection with very large redemptions.
27
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS
Each Fund has adopted a distribution and service plan under Rule 12b-1 of the
1940 Act for its shares. This plan allows each Fund to pay distribution and
other fees for the sale and distribution of its shares and for services provided
to holders of the shares.
Under the plan, each Fund pays an annual fee of up to 0.25% of the
average daily net assets of the Fund that are attributable to the shares.
Because these fees are paid out of the Fund's assets on an ongoing basis,
these fees will increase the cost of your investment and over time may
cost you more than paying other types of sales charges.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Fund intends to distribute to its shareholders substantially all of its
income and capital gains. The table below outlines when income dividends are
declared and paid for each Fund.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
FUND DIVIDENDS DECLARED DIVIDENDS PAID
- -----------------------------------------------------------------------------------------------------------
International Equity Fund Annually Annually
- -----------------------------------------------------------------------------------------------------------
Global Income Fund Monthly Monthly
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Distributions of any capital gains earned by a Fund will be made at least
annually.
TAX INFORMATION
DISTRIBUTIONS: Each Fund will make distributions that may be taxed as ordinary
income or capital gains (which may be taxed at different rates depending on the
length of time a Fund holds its assets). Each Fund's distributions may be
subject to federal income tax whether you reinvest such dividends in additional
shares of a Fund or choose to receive cash.
ORDINARY INCOME: Income and short-term capital gains that are distributed to you
are taxable as ordinary income for federal income tax purposes regardless of how
long you have held your Fund shares.
LONG-TERM CAPITAL GAINS: Long-term capital gains distributed to you are taxable
as long-term capital gains for federal income tax purposes regardless of how
long you have held your Fund shares.
o TAX ON SALE OF SHARES: Selling your shares may cause you to incur a taxable
gain or loss.
STATEMENTS AND NOTICES: You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes paid by the Funds and certain distributions paid by the Funds
during the prior taxable year.
o SPECIAL TAX CONSIDERATION: You should consult with your tax adviser to address
your own tax situation.
28
<PAGE>
For investors who want more information about the Funds, the following documents
are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds and is legally a part of this Prospectus.
ANNUAL/SEMI-ANNUAL REPORTS: The Funds' Annual and Semi-Annual Reports provide
additional information about the Funds' investments. In each Fund's Annual
Report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. In the Funds' Annual Report, you will also find certain financial
highlight information which is legally a part of this Prospectus.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Funds by contacting the Funds' transfer agent at:
Unified Fund Services, Inc.
431 N. Pennsylvania Street
Indianapolis, Indiana 46204-1897
(800) 435-4659
You can view the Funds' SAI and the reports at the Public Reference Room of the
Securities and Exchange Commission (SEC).
For a fee, you can get text-only copies by writing to the Public Reference Room
of the SEC, Washington, D.C. 20549-6009. You can also call 1-800-SEC-0330.
You can also view the SAI and receive the reports free from the SEC's Internet
website at http://www.sec.gov.
Investment Company Act
file no. 811-6652
<PAGE>
PROSPECTUS AND APPLICATION
[NEW LOGO--OUTPUT FROM DTP]
Julius Baer
Global
Income
Fund
Julius Baer
International
Equity
Fund
March 1, 1999
[C/R/C ART TO BE PICKED UP
FROM ANNUAL REPORT #18525]
<PAGE>
JULIUS BAER INVESTMENT FUNDS
(formerly BJB Investment Funds)
Julius Baer International Equity Fund
Julius Baer Global Income Fund
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
This Statement of Additional Information (the "SAI") is not a Prospectus, but
it relates to the Prospectus of Julius Baer Investment Funds dated March 1,
1999.
Financial Statements are incorporated by reference into this SAI from the
Funds' most recent annual report.
You can get a free copy of the Prospectus for the Julius Baer Investment Funds
or the Funds' most recent annual and semi-annual reports, request other
information and discuss your questions about the Funds by contacting the
Transfer Agent at:
Unified Fund Services, Inc.
431 N. Pennsylvania Street
Indianapolis, Indiana 46204-1897
(800) 435-4659
You can view the Funds' Prospectus as well as other reports at the Public
Reference Room of the Securities and Exchange Commission.
You can get text-only copies:
For a fee by writing to or calling the Public Reference Room o
f the Commission, Washington, D.C. 20549-6009.
Telephone: 1-800-SEC-0330.
Free from the Commission's Internet website at
http:/www.sec.gov
<PAGE>
Contents
--------
Page
The Trust and the Funds 3
Description of the Funds, Their Investments and Risks 3
Common Investment Strategies 6
Additional Information on Investment Practices 12
Investment Limitations 24
Management of the Trust 26
Capital Stock 34
Additional Purchase and Redemption Information 36
Additional Information Concerning Exchange Privilege 38
Additional Information Concerning Taxes 38
Calculation of Performance Data 39
Independent Auditors 42
Counsel 42
Financial Statements 42
Appendix 43
2
<PAGE>
THE TRUST AND THE FUNDS
Julius Baer Investment Funds (the "Trust") is composed of two funds:
the Julius Baer International Equity Fund (the "Equity Fund") and the Julius
Baer Global Income Fund (the "Income Fund") (each, a "Fund" and collectively,
the "Funds").
The Trust was formed as a Massachusetts business trust under the laws
of The Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
April 30, 1992 and amended on June 22, 1992, September 16, 1993, January 1,
1995 and July 1, 1998 (the "Trust Agreement"). On July 1, 1998, the Trust
changed its name from BJB Investment Funds to Julius Baer Investment Funds. At
the same time, the name of each of the BJB International Equity Fund and the
BJB Global Income Fund was changed to Julius Baer International Equity Fund and
the Julius Baer Global Income Fund.
The Prospectus, dated March 1, 1999, provides the basic information
investors should know before investing, and may be obtained without charge by
calling Unified Fund Services, Inc. (the "Transfer Agent") at the telephone
number listed on the cover. This SAI, which is not a prospectus, is intended to
provide additional information regarding the activities and operations of the
Trust and should be read in conjunction with the Prospectus. This SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
CLASSIFICATION
The Income Fund is a non-diversified, open-end management investment
company. The Equity Fund is a diversified open-end management investment
company.
PORTFOLIO INVESTMENTS
INCOME FUND. The Income Fund may invest in a wide variety of fixed-income
securities issued anywhere in the world, including the United States. The
Income Fund may purchase debt obligations consisting of bonds, debentures and
notes issued or guaranteed by the United States or foreign governments, their
agencies, instrumentalities or political subdivisions, as well as supranational
entities organized or supported by several national governments, such as the
International Bank for Reconstruction and Development (the "World Bank") or the
European Investment Bank. The Income Fund also may purchase debt obligations of
U.S. or foreign corporations that are issued in a currency other than U.S.
dollars. The Income Fund currently contemplates that it will invest in
obligations denominated in the currencies of a variety of countries, including,
but not limited to, Australia, Austria, Belgium, Canada, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hong Kong, Indonesia, Italy, Japan,
Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, South Africa,
Spain, Sweden, Switzerland, the United Kingdom and the United States. The
Income Fund may invest in securities issued in multi-national currency units,
such as European Currency Units ("ECUs"), which is a composite of the
currencies of several European countries. The Income Fund may also invest in
the single European currency (the "Euro"). In order to seek to protect against
a decline in value of the Income Fund's assets due to fluctuating currency
values, the Income Fund may engage in certain hedging strategies, as described
under "Common Investment Strategies" below.
In selecting particular investments for the Income Fund, the Adviser
will seek to mitigate investment risk by limiting its investments to quality
fixed-income securities. The Income Fund may not
3
<PAGE>
invest in governmental or corporate bonds rated at the time of purchase below
"A" by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Rating
Service, a division of McGraw-Hill Companies ("S&P"). The Income Fund may invest
in securities with equivalent ratings from another recognized rating agency and
non-rated issues that are determined by the Adviser to have financial
characteristics that are comparable and that are otherwise similar in quality to
the rated issues it purchases. If a security is downgraded below the minimum
rating necessary for investment by the Income Fund, the Income Fund will
consider disposing of the security within a reasonable time period. Investors
should be aware that ratings are relative and subjective and are not absolute
standards of quality. For a description of the rating systems of Moody's and
S&P, see the Appendix to this SAI.
The Adviser will allocate investments among securities of particular
issuers on the basis of its views as to the yield, duration, maturity, issue
classification and quality characteristics of the securities, coupled with
expectations regarding the economy, movements in the general level and term of
interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it. Fixed-income securities denominated in currencies
other than the U.S. dollar or in multinational currency units are evaluated on
the strength of the particular currency against the U.S. dollar as well as on
the current and expected levels of interest rates in the country or countries.
Currencies generally are evaluated on the basis of fundamental economic
criteria (e.g., relative inflation and interest rate levels and trends, growth
rate forecasts, balance of payments status and economic policies) as well as
technical and political data. In addition to the foregoing, the Income Fund may
seek to take advantage of differences in relative values of fixed-income
securities among various countries.
EQUITY FUND. The Equity Fund may invest in a wide variety of international
equity securities issued anywhere in the world, normally excluding the United
States. The Equity Fund currently contemplates that it will invest in
securities denominated in the currencies of a variety of countries, including,
but not limited to, Argentina, Australia, Austria, Belgium, Brazil, Canada,
Chile, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Hong
Kong, Israel, Italy, Japan, Korea, Malaysia, Mauritius, Mexico, the
Netherlands, New Zealand, Pakistan, Peru, Poland, Portugal, Russia, Singapore,
Spain, Sweden, Switzerland, Thailand, the United Kingdom, the United States and
Venezuela. The Equity Fund also may invest up to 10% of its total assets in
equity warrants and interest rate warrants of international issuers. However,
the Equity Fund will not invest more than 2% of its net assets in warrants that
are not listed on a recognized U.S. or foreign exchange. Equity warrants are
securities that give the holder the right, but not the obligation, to subscribe
for newly created equity issues of the issuing company or a related company at
a fixed price either on a certain date or during a set period. Interest rate
warrants are rights that are created by an issuer, typically a financial
institution, entitling the holder to purchase, in the case of a call, or sell,
in the case of a put, a specific bond issue or an interest rate index (Bond
Index) at a certain level over a fixed time period. Interest rate warrants can
typically be exercised in the underlying instrument or settled in cash. The
Equity Fund may invest in securities issued in multi-national currency units,
such as ECUs, American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs") or European Depository Receipts ("EDRs") (collectively, "Depository
Receipts"). ADRs are receipts, typically issued by a U.S. bank or trust
company, which evidence ownership of underlying securities issued by a foreign
corporation. GDRs may be traded in any public or private securities market and
may represent securities held by institutions located anywhere in the world.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets and EDRs, in bearer form, are designed for use in
European securities markets. The Equity Fund may invest in Depository Receipts
through "sponsored" or "unsponsored" facilities if issues of such Depository
Receipts are available and are consistent with the
4
<PAGE>
Equity Fund's investment objective. A sponsored facility is established jointly
by the issuer of the underlying security and a depository, whereas a depository
may establish an unsponsored facility without participation by the issuer of
the deposited security. Holders of unsponsored Depository Receipts generally
bear all the costs of such facilities and the depository of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities. In order to seek to protect against a decline in value of
the Equity Fund's assets due to fluctuating currency rates, the Equity Fund
may engage in certain hedging strategies, as described under "Common
Investment Strategies" below.
The Equity Fund will invest substantially all of its assets in equity
securities when the Adviser believes that the relevant market environment
favors profitable investing in those securities. Equity investments are
selected in industries and companies that the Adviser believes are experiencing
favorable demand for their products and services, and which operate in a
favorable regulatory and competitive climate. The Adviser's analysis and
selection process focuses on growth potential; investment income is not a
consideration. In addition, factors such as expected levels of inflation,
government policies influencing business conditions, the outlook for currency
relationships and prospects for economic growth among countries, regions or
geographic areas may warrant consideration in selecting foreign equity
securities. Generally, the Equity Fund intends to invest in marketable
securities that are not restricted as to public sale. Most of the purchases and
sales of securities by the Equity Fund will be effected in the primary trading
market for the securities. The primary trading market for a given security
generally is located in the country in which the issuer has its principal
office. While no assurances can be given as to the specific issuers of the
equity securities in which the Fund will invest, the Fund intends to seek out
the securities of large well-established issuers. However, the Equity Fund will
invest in the equity securities of smaller emerging growth companies when the
Adviser believes that such investments represent a beneficial investment
opportunity for the Fund.
Although the Equity Fund normally invests primarily in equity
securities, it may increase its cash or non-equity position when the Adviser is
unable to locate investment opportunities with desirable risk/reward
characteristics. The Equity Fund may invest in preferred stocks that are not
convertible into common stock, government securities, corporate bonds and
debentures, including high-risk and high-yield debt instruments (but in no
event will an amount exceeding 10% of the Fund's total assets be invested in
such high-risk/high-yield securities), high-grade commercial paper,
certificates of deposit or other debt securities when the Adviser perceives an
opportunity for capital growth from such securities or so that the Equity Fund
may receive a return on idle cash. The Equity Fund also may invest up to 5% of
its total assets in gold bullion and coins, which, unlike investments in many
securities, earn no investment income. Since a market exists for such
investments, the Adviser believes gold bullion and coins should be considered a
liquid investment. The Equity Fund intends to limit its investments in debt
securities to securities of U.S. companies, the United States government,
foreign governments, domestic or foreign governmental entities and
supranational organizations such as the European Economic Community and the
World Bank. When the Equity Fund invests in such securities, investment income
may increase and may constitute a large portion of the return of the Fund but,
under these certain circumstances, the Equity Fund would not expect to
participate in market advances or declines to the extent that it would if it
remained fully invested in equity securities.
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COMMON INVESTMENT STRATEGIES
In attempting to achieve their investment objectives, the Funds may
engage in a variety of investment strategies.
Convertible Securities and Bonds with Warrants Attached
Each Fund may invest in fixed-income obligations convertible into
equity securities, and bonds issued as a unit with warrants. Convertible
securities in which a Fund may invest, comprised of both convertible debt and
convertible preferred stock, may be converted at either a stated price or at a
stated rate into underlying shares of common stock. Because of this feature,
convertible securities enable an investor to benefit from increases in the
market price of the underlying common stock. Convertible securities provide
higher yields than the underlying equity securities, but generally offer lower
yields than non-convertible securities of similar quality. The value of
convertible securities fluctuates in relation to changes in interest rates like
bonds, and, in addition, fluctuates in relation to the underlying common stock.
Neither Fund intends to retain in its portfolio the common stock received upon
conversion of a convertible security or exercise of a warrant and will sell
such stocks as promptly as it can and in a manner that it believes will reduce
the risk to the Fund of a loss in connection with the sale. Neither Fund
intends to retain in its portfolio any warrant acquired as a unit with bonds if
the warrant begins to trade separately from the related bond.
Money Market Investments
Each Fund may invest up to 20% of its total assets in short-term
investment grade money market obligations. In addition, on occasion, the
Adviser may deem it advisable to adopt a temporary defensive posture by
investing a larger percentage of its assets in short-term money market
obligations. These short-term instruments, which may be denominated in various
currencies, consist of obligations of U.S. and foreign governments, their
agencies or instrumentalities; obligations of foreign and U.S. banks; and
commercial paper of corporations that, at the time of purchase, have a class of
debt securities outstanding that is rated A-2 or higher by S&P or Prime-2 or
higher by Moody's or is determined by the Adviser to be of equivalent quality.
Any short-term obligation rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, the equivalent from another rating service or, if unrated, in the
opinion of the Adviser determined to be an issue of comparable quality, will be
a permitted investment. For temporary defensive purposes, including during
times of international political or economic uncertainty, each Fund could also
invest without limit in securities denominated in U.S. dollars through
investment in obligations issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities") (including
repurchase agreements with respect to such securities).
Currency Hedging Transactions
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The Adviser may seek to limit losses through the use of currency
forward contracts, currency and interest rate futures contracts and options on
such futures contracts and options on currencies. These strategies may be used
for hedging purposes only and not for speculation. Each Fund may attempt to
decrease any losses from changes in currency exchange rates by entering into
currency hedging transactions in connection with up to 100% of its total
portfolio.
Currency and Interest Rate Futures Contracts and Options on Futures
A foreign currency futures contract provides for the future sale by
one party and the purchase by the other party of a certain amount of a
specified foreign currency at a specified price, date, time and place. Interest
rate futures contracts are standardized contracts traded on commodity exchanges
involving an obligation to purchase or sell a predetermined amount of debt
security at a fixed date and price. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. When deemed advisable by the Adviser, each Fund
may enter into currency futures contracts, interest rate futures contracts or
related options that are traded on U.S. or foreign exchanges. The Equity Fund
also may enter into options contracts relating to gold bullion. Such
investments by a Fund will be made solely for the purpose of hedging against
the effects of changes in the value of its portfolio securities due to
anticipated changes in interest rates, currency values and market conditions
and when the transactions are economically appropriate to the reduction of
risks inherent in the management of a Fund. A Fund may not enter into futures
contracts and options on futures contracts that are not considered "bona fide"
hedges under regulations of the Commodity Futures Trading Commission. With
respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash and
cash equivalents or other liquid obligations set aside, plus accrued profits
held at a Fund's custodian or at the commodity dealer, or a corresponding chart
position.
Currency Exchange Transactions and Options on Foreign Currencies
Each Fund may engage in currency exchange transactions and purchase
put and call options on foreign currencies. Each Fund will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or through entering into forward
contracts to purchase or sell currencies. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These contracts are
entered into in the interbank market conducted directly between currency
traders (usually large U.S. or foreign commercial banks) and their customers.
The Funds may enter into a forward contract in the following two circumstances:
(1) When a Fund purchases a foreign currency denominated security for
settlement in the near future, it may immediately purchase in the
forward market the foreign currency needed to pay for and settle the
transaction.
(2) When the Adviser believes that the currency of a specific country
may deteriorate against another currency, a Fund may enter into a
forward contract to sell the less attractive currency and buy the more
attractive one. The amount in question could be more or less than the
value of a Fund's securities denominated in the less attractive
currency. While such actions are intended to protect the Funds from
adverse currency movements, there is a risk that the currency
movements involved will not be properly anticipated. Use of this
currency hedging technique may also be
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limited by management's need to protect the U.S. tax status of the
Funds as regulated investment companies.
To support its obligation when a Fund enters into a forward contract
to buy or sell currencies, such Fund will either deposit with its custodian in
a segregated account cash or other liquid obligations having a value at least
equal to its obligation or continue to own or have the right to sell or
acquire, respectively the currency subject to the forward contract.
An option on a foreign currency, which may be entered into on a U.S.
or foreign exchange or in the over-the-counter market, gives the purchaser, in
return for a premium, the right to sell, in the case of a put, and buy, in the
case of a call, the underlying currency at a specified price during the term of
the option.
Each Fund may also invest in instruments offered by brokers that
combine forward contracts, options and securities in order to reduce foreign
currency exposure.
Covered Option Writing
Each Fund may write options to generate current income or as hedges to
reduce investment risk. Each Fund may write put and call options on up to 25%
of the net asset value of the securities in its portfolio and will realize fees
(referred to as "premiums") for granting the rights evidenced by the options. A
put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying security at a specified
price at any time during the option period. In contrast, a call option embodies
the right of its purchaser to compel the writer of the option to sell to the
option holder an underlying security at a specified price at any time during
the option period. Thus, the purchaser of a put option written by a Fund has
the right to compel such Fund to purchase from it the underlying security at
the agreed-upon price for a specified time period, while the purchaser of a
call option written by a Fund has the right to purchase from such Fund the
underlying security owned by the Fund at the agreed-upon price for a specified
time period.
Upon the exercise of a put option written by a Fund, such Fund may
suffer an economic loss equal to the difference between the price at which the
Fund is required to purchase the underlying security and its market value at
the time of the option exercise, less the premium received for writing the
option. Upon the exercise of a call option written by a Fund, such Fund may
suffer an economic loss equal to the excess of the security's market value at
the time of the option's exercise over the greater of (i) the Fund's
acquisition cost of the security and (ii) the exercise price, less the premium
received for writing the option.
The Funds will write only covered options. Accordingly, whenever a
Fund writes a call option it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, a Fund will either (1) deposit with its
custodian in a segregated account cash, U.S. government securities or other
liquid assets having a value at least equal to the exercise price of the
underlying securities or (2) continue to own an equivalent number of puts of
the same "series" (that is, puts on the same underlying security having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with
its custodian in a segregated account).
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Each Fund may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the
outstanding option's expiration). To affect a closing purchase transaction, a
Fund would purchase, prior to the holder's exercise of an option that a Fund
has written, an option of the same series as that on which such Fund desires to
terminate its obligation. The obligation of a Fund under an option that it has
written would be terminated by a closing purchase transaction, but the Fund
would not be deemed to own an option as the result of the transaction. There
can be no assurance that a Fund will be able to affect closing purchase
transactions at a time when it wishes to do so. To facilitate closing purchase
transactions, however, the Fund will write options only if a secondary market
for the option exists on a recognized securities exchange or in the
over-the-counter market. Option writing for the Funds may be limited by
position and exercise limits established by securities exchanges and the
National Association of Securities Dealers, Inc. (the "NASD"). Furthermore, a
Fund may, at times, have to limit its option writing in order to qualify as a
regulated investment company under the Code. Each Fund may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position. The Funds bear the risk that the prices of the securities being
hedged will not move in the same amount as the hedge. Each Fund will engage in
hedging transactions only when deemed advisable by the Adviser. Successful use
by a Fund of options will depend on the Adviser's ability to correctly predict
movements in the direction of the security or currency underlying the option
used as a hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect a Fund's performance.
Purchasing Put and Call Options on Securities
Each Fund may purchase put and call options that are traded on foreign
as well as U.S. exchanges and in the over-the-counter market. A Fund may
utilize up to 2% of its assets to purchase put options on portfolio securities
and may do so at or about the same time that it purchases the underlying
security or at a later time. By buying a put, a Fund limits its risk of loss
from a decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. A Fund may utilize up to
2% of its assets to purchase call options on portfolio securities. Call options
may be purchased by a Fund in order to acquire the underlying securities for
the Fund at a price that avoids any additional cost that would result from a
substantial increase in the market value of a security. A Fund also may
purchase call options to increase its return to investors at a time when the
call is expected to increase in value due to anticipated appreciation of the
underlying security.
Prior to their expirations, put and call options may be sold in
closing sale transactions (sales by a Fund, prior to the exercise of options
that it has purchased, of options of the same series), and profit or loss from
the sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs. If an option
purchased is not sold or exercised when it has remaining value, or if the
market price of the underlying security remains equal to or greater than the
exercise price, in the case of a put, or remains equal to or below the exercise
price, in the case of a call, during the life of the option, the option will
expire worthless and a Fund will lose the premium paid for the option.
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Securities of Other Investment Companies
Each Fund may invest in securities of other investment companies to
the extent permitted under the 1940 Act. Presently, under the 1940 Act, a fund
is permitted to hold securities of another investment company in amounts which
(a) do not exceed 3% of the total outstanding voting stock of such company, (b)
do not exceed 5% of the value of a fund's total assets and (c) when added to
all other investment company securities held by such fund, do not exceed 10% of
the value of the fund's total assets. Investors should note that investment by
a Fund in the securities of other investment companies would involve the
payment of duplicative fees (once with the Fund and again with the investment
company in which the Fund invests). Each Fund intends not to invest more than
5% of its total assets in the securities of other investment companies.
Repurchase Agreements
Each Fund may enter into repurchase agreements on portfolio securities
with member banks of the Federal Reserve System and certain non-bank dealers.
Repurchase agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under the terms of a typical repurchase agreement, a Fund would
acquire an underlying security for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase, and the
Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during such Fund's holding period. The value of the underlying securities will
at all times be at least equal to the total amount of the purchase obligation,
including interest. The Fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations or becomes bankrupt
and the Fund is delayed or prevented from exercising its right to dispose of
the collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period while the Fund seeks to
assert this right. The Adviser, acting under the supervision of the Trust's
Board of Trustees, monitor the creditworthiness of those bank and non-bank
dealers with which the Funds enter into repurchase agreements to evaluate this
risk. A repurchase agreement is considered to be a loan under the 1940 Act.
Under normal market conditions, a Fund may invest up to 20% of its total assets
in repurchase agreements, although, for temporary defensive purposes, a Fund
may invest in these agreements without limit.
When-Issued Securities and Delayed Delivery Transactions
Each Fund may utilize up to 20% of its total assets to purchase
securities on a when-issued basis and purchase or sell securities on a
delayed-delivery basis. In these transactions, payment for and delivery of the
securities occurs beyond the regular settlement dates, normally within 30-45
days after the transaction. A Fund will not enter into a when-issued or
delayed-delivery transaction for the purpose of leverage, although, to the
extent the Fund is fully invested, these transactions will have the same effect
on net asset value per share as leverage. A Fund may, however, sell the right
to acquire a when-issued
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security prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction if its Adviser deems it
advantageous to do so. The payment obligation and the interest rate that will
be received in when-issued and delayed-delivery transactions are fixed at the
time the buyer enters into the commitment. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered to the buyers. A Fund will not accrue income with respect to a debt
security it has purchased on a when-issued or delayed-delivery basis prior to
its stated delivery date but will continue to accrue income on a
delayed-delivery security it has sold. When-issued securities may include
securities purchased on a "when, as and if issued" basis under which the
issuance of the security depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. A Fund
will establish a segregated account with its custodian consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
of its when-issued and delayed-delivery purchase commitments, and will
segregate the securities underlying commitments to sell securities for delayed
delivery. Placing securities rather than cash in the segregated account may
have a leveraging effect on a Fund's net assets.
Rule 144A Securities
Each Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but that can be sold to
"qualified institutional buyers" in accordance with the requirements stated in
Rule 144A under the 1933 Act ("Rule 144A Securities"). A Rule 144A Security may
be considered illiquid and therefore subject to a Fund's 15% limitation on the
purchase of illiquid securities, unless the Trust's Board of Trustees
determines on an ongoing basis that an adequate trading market exists for the
security. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional
buyers become uninterested for a time in purchasing Rule 144A Securities. The
Board of Trustees may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring liquidity of Rule 144A Securities,
although the Board of Trustees will retain ultimate responsibility for any
determination regarding liquidity. The Board of Trustees will consider all
factors in determining the liquidity of Rule 144A Securities. The Board of
Trustees will carefully monitor any investments by the Funds in Rule 144A
Securities.
4(2) Commercial Paper
Each Fund may, under procedures adopted by the Board of Trustees,
consider 4(2) Commercial Paper to be liquid. If not considered liquid, such 4(2)
Commercial Paper will be subject to a Fund's 15% limitation of the purchase of
illiquid securities.
Lending Portfolio Securities
Each Fund is authorized to lend securities it holds to brokers,
dealers and other financial organizations. Loans of a Fund's securities may not
exceed 33 1/3% of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, letters of credit or U.S. government securities that
will be maintained at all times in a segregated account with such Fund's
custodian in an amount at least equal to the current market value of the loaned
securities. From time to time, a Fund may pay a part of the interest earned
from the investment collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Fund and that is acting as a
"finder."
By lending its portfolio securities, a Fund can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as
collateral. A Fund will adhere to the following conditions whenever it lends
its securities: (1) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower, which securities will be maintained by
daily marking-to-market; (2) the borrower must increase the collateral whenever
the market value of the securities loaned rises above the level of the
collateral; (3) the Fund must be able to terminate the loan at any time; (4)
the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5)
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the Fund may pay only reasonable custodian fees in connection with the loan;
and (6) voting rights on the loaned securities may pass to the borrower except
that, if a material event adversely affecting the investment in the loaned
securities occurs, the Fund must terminate the loan and regain the right to
vote the securities.
High-Yield/High-Risk Bonds
The Equity Fund may invest up to 10% of its total assets in
high-yield/high-risk bonds. Lower rated bonds involve a higher degree of credit
risk, the risk that the issuer will not make interest or principal payments
when due. Such bonds may have predominantly speculative characteristics. In the
event of an unanticipated default, the Fund would experience a reduction in its
income and could expect a decline in the market value of the securities so
affected. More careful analysis of the financial condition of each issuer of
lower grade securities is therefore necessary. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet projected
business goals and to obtain additional financing.
The market prices of lower grade securities are generally less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic or political changes or, in the case of corporate
issuers, individual corporate developments. Periods of economic or political
uncertainty and change can be expected to result in volatility of prices of
these securities. Lower rated securities may also have less liquid markets than
higher rated securities, and their liquidity as well as their value may be
adversely affected by adverse economic conditions. Adverse publicity and
investor perceptions as well as new or proposed laws may also have a negative
impact on the market for high-yield/high-risk bonds.
Unrated Debt Securities
Both Funds may invest in unrated debt instruments of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the Adviser may treat such securities as unrated debt. See the
Appendix for a description of bond rating categories.
ADDITIONAL INFORMATION ON INVESTMENT PRACTICES
Foreign Investments. Investors should recognize that investing in
foreign companies involves certain considerations, including those discussed
below, which are not typically associated with investing in U.S. issuers. Since
the Funds will be investing substantially in securities denominated in
currencies other than the U.S. dollar, and since the Funds may temporarily hold
funds in bank deposits or other money market investments denominated in foreign
currencies, the Funds may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies and
the dollar. A change in the value of a foreign currency relative to the U.S.
dollar will result in a corresponding change in the dollar value of a Fund's
assets denominated in that foreign currency. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
and gains, if any, to be distributed to shareholders by the Funds.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
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the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal and
trade policies pursued by the governments of the United States and other
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies.
Many of the foreign securities held by the Funds will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the Securities and Exchange Commission (the "SEC"). Accordingly, there may
be less publicly available information about the securities and about the
foreign company or government issuing them than is available about a domestic
company or government entity. Foreign issuers are generally not subject to
uniform financial reporting standards, practices and requirements comparable to
those applicable to U.S. issuers. In addition, with respect to some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political or
social instability, or domestic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payment positions. The Funds may
invest in securities of foreign governments (or agencies or instrumentalities
thereof), and many, if not all, of the foregoing considerations apply to such
investments as well.
Securities of some foreign companies are less liquid and their prices
are more volatile than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold. Due to the increased exposure
to the Funds of market and foreign exchange fluctuations brought about by such
delays, and due to the corresponding negative impact on Fund liquidity, the
Funds will avoid investing in countries which are known to experience
settlement delays which may expose the Funds to unreasonable risk of loss.
The interest payable on each Fund's foreign securities may be subject
to foreign withholding taxes, and while investors may be able to claim some
credit or deduction for such taxes with respect to their allocated shares of
such foreign tax payments, the general effect of these taxes will be to reduce
the Fund's income. Additionally, the operating expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the rate
of the investment advisory fees, are higher than those costs incurred by
investment companies investing exclusively in U.S. securities, but are not
higher than those paid by many other international funds.
Each Fund will not invest more than 25% or more of its assets
in the securities of supranational entities.
Futures Activities. The Funds may enter into futures contracts for the
purchase and sale of fixed-income securities or foreign currencies and purchase
or write related options that are traded on foreign as well as U.S. exchanges.
These investments may be made solely for the purpose of hedging against changes
in the value of its portfolio securities due to anticipated changes in interest
rates, currency values and/or market conditions when the transactions are
economically appropriate to the reduction of risks inherent in the management
of the Funds and not for purposes of speculation.
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Futures Contracts. A futures contract for the purchase or sale of
fixed-income securities provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific debt instrument
at a specified price, date, time and place. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specified foreign currency at a specified price, date,
time and place.
Entering into a futures contract enables a Fund to seek to protect its
assets from fluctuations in value without necessarily buying or selling the
assets. A Fund may not enter into futures transactions, other than those
considered to be "bona fide" hedging by the Commodity Futures Trading
Commission, if the sum of the amount of initial margin deposits on its existing
futures contracts and premiums paid for unexpired options would exceed 5% of
the fair market value of such Fund's total assets, after taking into account
unrealized profits and unrealized losses on commodity contracts into which it
has entered. A Fund will not use leverage when it enters into long futures or
options contracts and for each such long position such Fund will deposit cash,
or other liquid obligations, having a value equal to the underlying commodity
value of the contract as collateral with its custodian or approved futures
commission merchant ("FCM") in a segregated account.
The purpose of entering into a futures contract is to protect a Fund
from fluctuations in value of its portfolio securities without its necessarily
buying or selling the securities. Of course, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund,
an increase in the value of the futures contracts could only mitigate but not
totally offset the decline in the value of such Fund's assets. No consideration
is paid or received by a Fund upon entering into a futures contract. Upon
entering into a futures contract, a Fund will be required to deposit in a
segregated account with its custodian or approved FCM an amount of cash or
other liquid obligations equal to a portion of the contract amount. This amount
is known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to such Fund upon termination
of the futures contract, assuming all contractual obligations have been
satisfied. The broker will have access to amounts in the margin account if the
Fund fails to meet its contractual obligations. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the price of
the securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "marking-to-market." At any time prior to the expiration of a futures
contract, a Fund may elect to close the position by taking an opposite
position, which will operate to terminate such Fund's existing position in the
contract.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures contracts is subject
to the ability of Bank Julius Baer & Co., Ltd., New York Branch (the
"Adviser"), the investment adviser to predict correctly movements in the price
of the securities or currencies and the direction of the stock indices
underlying the particular hedge. These predictions and, thus, the use of
futures contracts involve skills and techniques that are different from those
involved in the management of the portfolio securities being hedged. In
addition, there can be no assurance that there will be a correlation between
movements in the price of the underlying securities or currencies and movements
in the price of the securities which are the subject of the hedge. A decision
concerning 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 unexpected market behavior or trends in interest rates.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market exists for such contracts. Although the
Funds intend to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any
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particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting the Funds to substantial losses. In such event, and in
the event of adverse price movements, a Fund would be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of such Fund's securities being hedged, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities being
hedged will, in fact, correlate with the price movements in a futures contract
and thus provide an offset to losses on the futures contract.
If a Fund has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does not
occur, such Fund will lose part or all of the benefit of the increased value of
securities which it has hedged because it will have offsetting losses in its
futures positions. Losses incurred in hedging transactions and the costs of
these transactions will affect a Fund's performance. In addition, in such
situations, if a Fund had insufficient cash, it might have to sell securities
to meet daily variation margin requirements at a time when it would be
disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in interest rates
or currency values, as the case may be.
Options on Futures Contracts. The Funds may purchase and write put and
call options on interest rate and foreign currency futures contracts that are
traded on a U.S. exchange or board of trade as a hedge against changes in
interest rates and market conditions, and may enter into closing transactions
with respect to such options to terminate existing positions. There is no
guarantee that such closing transactions can be effected.
An option on an interest rate futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser the right, in return
for the premium paid, to assume a position in a fixed-income security futures
contract at a specified exercise price at any time prior to the expiration date
of the option. An option on a foreign currency futures contract, as contrasted
with the direct investment in the contract, gives the purchaser the right, but
not the obligation, to assume a long or short position in the relevant
underlying currency at a predetermined exercise price at a time in the future.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of
the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net
asset value of the Funds.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated trends in interest
rates and securities markets by a Fund's Adviser, which could prove to be
incorrect. Even if those expectations were correct, there may be an imperfect
correlation between the change in the value of the options and of the portfolio
securities hedged.
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Currency Hedging Transactions. The value in U.S. dollars of the assets
of the Funds that are invested in foreign securities may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the Funds may incur costs in connection with
conversions between various currencies. The Funds, therefore, may engage in
currency hedging transactions to protect against uncertainty in the level of
future exchange rates. Income received from such transactions could be used to
pay a Fund's expenses and would increase an investor's total return. The Funds
will conduct foreign currency transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency market or through forward
foreign exchange contracts to purchase or sell currency. The Funds also are
authorized to purchase and sell listed foreign currency options and options on
foreign currency futures for hedging purposes.
The following is a description of the hedging instruments the Funds may utilize
with respect to foreign currency exchange rate fluctuation risks.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A Fund's dealings in
forward currency exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivables or payables of a
Fund generally accruing in connection with the purchase or sale of its
portfolio securities. Position hedging is the sale of forward currency with
respect to portfolio security positions denominated or quoted in that currency
or in another currency in which portfolio securities are denominated, the
movements of which tend to correlate to the movement in the currency sold
forward (the "hedged currency"). A Fund may not position hedge with respect to
a particular currency to an extent greater than the aggregate market value (at
the time of making such sale) of the securities held in its portfolio
denominated or quoted in or currently convertible into that particular currency
or the hedged currency. If a Fund enters into a position hedging transaction,
cash or liquid securities will be placed in a segregated account in an amount
equal to the value of that Fund's total assets committed to the consummation of
the forward contract or the Fund will own the currency subject to the hedge, or
the right to buy or sell it as the case may be. If the value of the securities
placed in the segregated account declines, additional cash or securities will
be placed in the account so that the value of the account will equal the amount
of such Fund's commitment with respect to the contract. Hedging transactions
may be made from any foreign currency into U.S. dollars or into other
appropriate currencies.
At or before the maturity of a forward contract, a Fund may either
sell a portfolio security and take delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which such Fund will obtain, on the
same maturity date, the same amount of the currency that it is obligated to
deliver. If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the
Fund will realize a gain to the extent the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
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involved. The use of forward currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, at the same time, they limit any potential gain that might
result should the value of the currency increase.
If a devaluation is generally anticipated, a Fund may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates. In light of the requirements that the Funds must meet to qualify
as regulated investment companies under the Internal Revenue Code of 1986, as
amended (the "Code") for a given year, the Funds currently intend to limit
their gross income from currency transactions to less than 10% of gross income
for that taxable year.
Foreign Currency Options. The Funds may purchase put and call options
on foreign currencies for the purpose of hedging against changes in future
currency exchange rates. Foreign currency options generally have three, six and
nine month expiration cycles. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires. Call options convey the
right to buy the underlying currency at a price which is expected to be lower
than the spot price of the currency at the time the option expires.
A Fund may use foreign currency options under the same circumstances
that it could use forward currency exchange transactions. A decline in the
dollar value of a foreign currency in which a Fund's securities are
denominated, for example, will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminution in the value of securities it holds, a Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, such Fund will have the right to sell the currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the adverse effect on
its securities that otherwise would have resulted. Conversely, if a rise in the
dollar value of a currency in which securities to be acquired are denominated
is projected, thereby potentially increasing the cost of the securities, a Fund
may purchase call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the adverse movements
in exchange rates. The benefit to a Fund derived from purchases of foreign
currency options, like the benefit derived from other types of options, will be
reduced by the amount of the premium and related transaction costs. In
addition, if currency exchange rates do not move in the direction or to the
extent anticipated, a Fund could sustain losses on transactions in foreign
currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
Foreign Currency Futures and Related Options. The Funds may enter into
currency futures contracts to purchase and sell currencies. They also may
purchase options on currency futures. Foreign currency futures are similar to
forward currency contracts, except that they are traded on commodities
exchanges and are standardized as to contract size and delivery date. In
investing in such transactions, a Fund would incur brokerage costs and would be
required to make and maintain certain "margin" deposits. A Fund also would be
required to segregate assets or otherwise cover, as described above, the
futures contracts requiring the purchase of foreign currencies. These
limitations are described more fully above under the heading "Futures
Activities." Most currency futures call for payment or delivery in U.S.
dollars.
Options on foreign currency futures entitle a Fund, in return for the
premium paid, to assume a position in an underlying foreign currency futures
contract. An option on a foreign currency futures contract, in contrast to a
direct investment in the contract, gives the purchaser the right, but not the
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obligation, to assume a long or short position in the relevant underlying
currency at a predetermined price at a time in the future.
Currency futures and related options are subject to the risks of other
types of futures activities, as described above. In addition, while the value
of currency futures and options on futures can be expected to correlate with
exchange rates, it will not reflect other factors that may affect the value of
a Fund's investments. A currency hedge, for example, should protect a
Yen-denominated security against a decline in the Yen, but will not protect a
Fund against price decline if the issuer's creditworthiness deteriorates.
Because the value of a Fund's investments denominated in foreign currency will
change in response to many factors other than exchange rates, it may not be
possible to match the amount of currency futures contracts to the value of the
Fund's investments denominated in that currency over time.
A more detailed discussion of futures contracts and options on futures
contracts, including the risks associated with such transactions and certain
limitations on the percentage of assets that may be used in such transactions,
can be found above under the heading "Futures Activities."
Options on Securities. In order to hedge against adverse market
shifts, a Fund may utilize up to 2% of its total assets to purchase put options
on securities and an additional 2% of its total assets to purchase call options
on securities, in each case that are traded on foreign as well as U.S.
exchanges or in the over-the-counter market. In addition, a Fund may write
covered call options and put options on up to 25% of the net asset value of the
securities in its portfolio. A Fund realizes fees (referred to as "premiums")
for granting the rights evidenced by the call options it has written. A put
option embodies the right of its purchaser to compel the writer of the option
to purchase from the option holder an underlying security at a specified price
at any time during the option period. In contrast, a call option embodies the
right of its purchaser to compel the writer of the option to sell to the option
holder an underlying security at a specified price at any time during the
option period. Thus, the purchaser of a call option written by a Fund has the
right to purchase from such Fund the underlying security owned by the Fund at
the agreed-upon price for a specified time period. A Fund may write only
covered call options. Accordingly, whenever a Fund writes a call option it will
continue to own or have the present right to acquire the underlying security
without additional consideration for as long as it remains obligated as the
writer of the option.
The principal reason for writing covered call options on a security is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Fund as
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
a Fund as the call writer retains the risk of a decline in the price of the
underlying security. The size of the premiums that a Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by a Fund will normally have expiration dates between
one and nine months from the date written. The exercise price of the options
may be below, equal to or above the market values of the underlying securities
at the times the options are written. In the case of call options, these
exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. A Fund may write (a) in-the-money call
options when its Adviser expects that the price of the underlying security will
remain flat or decline moderately during the option period, (b) at-the-money
call options when its Adviser expects that the price of the underlying security
will remain flat or advance moderately during the option period and (c)
out-of-the-money call options when its Adviser expects that the premiums
received from writing the call option plus the appreciation in market price of
the underlying
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security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received.
So long as the obligation of a Fund as the writer of an option
continues, such Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Fund to deliver the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Fund effects a closing purchase transaction. A Fund
can no longer effect a closing purchase transaction with respect to an option
once it has been assigned an exercise notice. To secure its obligation to
deliver the underlying security when it writes a call option, a Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the securities exchange on which the option is written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. The Funds may purchase and write
options on securities on U.S. and foreign securities exchanges or in the
over-the-counter market.
A Fund may realize a profit or loss upon entering into a closing
transaction. In cases where a Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when a Fund has purchased an option and engages in
a closing sale transaction, whether such Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs.
Although a Fund will generally purchase or write only those options
for which its Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest will exist to create a liquid secondary market on a securities
exchange for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow or other unforeseen
events have at times rendered certain of the facilities of the Clearing
Corporation and various securities exchanges inadequate and resulted in the
institution of special procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in one or more options.
There can be no assurance that similar events, or events that may otherwise
interfere with the timely execution of customers' orders, will not recur. In
such event, it might not be possible to effect closing transactions in
particular options. Moreover, a Fund's ability to terminate options positions
established in the over-the-counter market may be more limited than for
exchange-traded options and also may involve the risk that securities dealers
participating in over-the-counter transactions would fail to meet their
obligations to a Fund. Each Fund, however, intends to purchase over-the-counter
options only from dealers whose debt securities, as determined by its Adviser,
are considered to be investment grade. If, as a covered call option writer, a
Fund is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. In either case, a Fund would
continue to be at market risk on the security and could face higher transaction
costs, including brokerage commissions.
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Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or
written, or exercised within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of the Adviser and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. Dollar amount limits apply to U.S. government securities.
These limits may restrict the number of options a Fund will be able to purchase
on a particular security.
In the case of options written by a Fund that are deemed covered by
virtue of such Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, a Fund will not bear any market risk, since the Fund will have the
absolute right to receive from the issuer of the underlying security an equal
number of shares to replace the borrowed stock, but a Fund may incur additional
transaction costs or interest expenses in connection with any such purchase or
borrowing.
Additional risks exist with respect to certain of the U.S. government
securities for which a Fund may write covered call options. If a Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, a Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
In addition to writing covered options for other purposes, a Fund may
enter into options transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite direction of a
portfolio position. A hedge is designed to offset a loss on a portfolio
position with a gain on the hedged position; at the same time, however, a
properly correlated hedge will result in a gain on the portfolio position being
offset by a loss on the hedged position. A Fund bears the risk that the prices
of the securities being hedged will not move in the same amount as the hedge. A
Fund will engage in hedging transactions only when deemed advisable by its
Adviser. Successful use by a Fund of options will be subject to its Adviser's
ability to predict correctly movements in the direction of the securities
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect a Fund's performance.
Options on Gold. For hedging purposes, the Equity Fund may purchase
put and call options on gold and write covered call options on gold in an
amount which, when added to its assets committed to margin and premiums for
gold futures contracts and related options, does not exceed 5% of the Equity
Fund's net assets. The Equity Fund will only enter into gold options that are
traded on a regulated domestic commodities exchange or foreign commodities
exchanges approved for this purpose by the Commodity Futures Trading
Commission.
Short Sales "Against the Box." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return
the identical security. A Fund may engage in short sales if at the time of the
short sale such Fund owns or has the right to obtain an equal amount of the
security being sold short. This investment technique is known as a short sale
"against the box."
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In a short sale, the seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. If a Fund engages in a short sale, the collateral for the
short position will be maintained by such Fund's custodian or qualified
sub-custodian. While the short sale is open, a Fund will maintain in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute such Fund's long position.
Not more than 10% of a Fund's net assets (taken at current value) may be held
as collateral for such short sales at any one time.
The Funds do not intend to engage in short sales against the box for
investment purposes. A Fund may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when a Fund wants to sell the security at
an attractive current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Code. In such
case, any future losses in a Fund's long position should be offset by a gain in
the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount a Fund owns. There will be certain additional
transaction costs associated with short sales against the box, but the Funds
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
Fixed-Income Investments. The performance of the debt component of a
Fund's portfolio depends primarily on interest rate changes, the average
weighted maturity of the portfolio and the quality of the securities held. The
debt component of a Fund's portfolio will tend to decrease in value when
interest rates rise and increase when interest rates fall. Generally, shorter
term securities are less sensitive to interest rate changes, but longer term
securities offer higher yields. A Fund's share price and yield will also
depend, in part, on the quality of its investments. While U.S. government
securities are generally of high quality, government securities that are not
backed by the full faith and credit of the United States and other debt
securities may be affected by changes in the creditworthiness of the issuer of
the security. The extent that such changes are reflected in a Fund's share
price will depend on the extent of the Fund's investment in such securities.
U.S. Government Securities. The Funds may invest in debt obligations
of varying maturities issued or guaranteed by the United States government, its
agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Central Bank for Cooperatives,
Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Federal
National Mortgage Association, Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board and Student Loan Marketing
Association. The Funds also may invest in instruments that are supported by the
right of the issuer to borrow from the United States Treasury and instruments
that are supported by the credit of the instrumentality. Because the United
States government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund will invest in obligations issued by such
an instrumentality only if its Adviser determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
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Convertible Securities. Convertible securities in which a Fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an
investor to benefit from increases in the market price of the underlying common
stock. Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. Like bonds, the value of convertible securities fluctuates in
relation to changes in interest rates and, in addition, fluctuates in relation
to the underlying common stock.
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International Warrants. The Equity Fund may invest up to 10% of its
total assets in warrants of international issuers. The Equity Fund's holdings
of warrants will consist of equity warrants, index warrants, covered warrants,
interest rate warrants and long term options of, or relating to, international
issuers. Warrants are securities that give the holder the right, but not the
obligation, to subscribe for newly created equity issues (consisting of common
and preferred stock, convertible preferred stock and warrants that themselves
are only convertible into common, preferred or convertible preferred stock) of
the issuing company or a related company at a fixed price either on a certain
date or during a set period. The equity issue underlying an equity warrant is
outstanding at the time the equity warrant is issued or is issued together with
the warrant. At the time the Equity Fund acquires an equity warrant convertible
into a warrant, the terms and conditions under which the warrant received upon
conversion can be exercised will have been determined; the warrant received
upon conversion will only be convertible into a common, preferred or
convertible preferred stock.
Equity warrants are generally issued in conjunction with an issue of
bonds or shares, although they also may be issued as part of a rights issue or
scrip issue. When issued with bonds or shares, they usually trade separately
from the bonds or shares after issuance. The Equity Fund will not buy bonds
with warrants attached. Most warrants trade in the same currency as the
underlying stock ("domestic warrants"), but also may be traded in different
currency ("euro-warrants"). Equity warrants are traded on a number of European
exchanges, principally in France, Germany, Japan, Netherlands, Switzerland and
the United Kingdom, and in over-the-counter markets. Since there is a readily
available market for these securities, the Equity Fund Adviser believes that
international warrants should be considered a liquid investment.
Index warrants are rights created by an issuer, typically a financial
institution, entitling the holder to purchase, in the case of a call, or sell,
in the case of a put, an equity index at a certain level over a fixed period of
time. Index warrant transactions settle in cash.
Covered warrants are rights created by an issuer, typically a
financial institution, normally entitling the holder to purchase from the
issuer of the covered warrant outstanding securities of another company (or in
some cases a basket of securities), which issuance may or may not have been
authorized by the issuer or issuers of the securities underlying the covered
warrants. In most cases, the holder of the covered warrant is entitled on its
exercise to delivery of the underlying security, but in some cases the
entitlement of the holder is to be paid in cash the difference between the
value of the underlying security on the date of exercise and the strike price.
The securities in respect of which covered warrants are issued are usually
common stock, although they may entitle the holder to acquire warrants to
acquire common stock. Covered warrants may be fully covered or partially
covered. In the case of a fully covered warrant, the issuer of the warrant will
beneficially own all of the underlying securities or will itself own warrants
(which are typically issued by the issuer of the underlying securities in a
separate transaction) to acquire the securities. The underlying securities or
warrants are, in some cases, held by another member of the issuer's group or by
a custodian or other fiduciary for the holders of the covered warrants.
Interest rate warrants are rights that are created by an issuer,
typically a financial institution, entitling the holder to purchase, in the
case of a call, or sell, in the case of a put, a specific bond issue or an
interest rate index (Bond Index) at a certain level over a fixed time period.
Interest rate warrants can typically be exercised in the underlying instrument
or settle in cash.
Long term options operate much like covered warrants. Like covered
warrants, long term options are call options created by an issuer, typically a
financial institution, entitling the holder to purchase from the issuer
outstanding securities of another issuer. Long term options have an initial
23
<PAGE>
period of one year or more, but generally have terms between three and five
years. At present, long term options are traded only in the Netherlands, where
a distinct market does not exist. Unlike U.S. options, long term European
options do not settle through a clearing corporation that guarantees the
performance of the counterparty. Instead, they are traded on an exchange and
subject to the exchange's trading regulations.
The Equity Fund will acquire only covered warrants, index warrants,
interest rate warrants and long term options issued by entities deemed to be
creditworthy by its Adviser, who will monitor the creditworthiness of such
issuers on an on-going basis. Investment in these instruments involves the risk
that the issuer of the instrument may default on its obligation to deliver the
underlying security or warrants to acquire the underlying security (or cash in
lieu thereof). To reduce this risk, the Equity Fund will limit its holdings of
covered warrants, index warrants, interest rate warrants and long term options
to those issued by entities that either have a class of outstanding debt
securities that is rated investment grade or higher by a recognized rating
service or otherwise are considered by its Adviser to have the capacity to meet
their obligations to the Equity Fund.
INVESTMENT LIMITATIONS
The investment limitations numbered 1 through 11 have been adopted by
the Trust with respect to each Fund as fundamental policies and may not be
changed with respect to a Fund without the affirmative vote of the holders of a
majority of the Fund's outstanding shares. Such majority is defined as the
lesser of (a) 67% or more of the shares present at the meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (b) more than 50% of the outstanding shares.
Investment limitations 12 through 15 may be changed by a vote of the Board of
Trustees at any time.
A Fund may not:
1. Borrow money or issue senior securities except that a Fund may
borrow from banks for temporary or emergency purposes, and not for leveraging,
and then in amounts not in excess of 30% of the value of the Fund's total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any bank borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing. Whenever such borrowings
exceed 5% of the value of the Fund's total assets, the Fund will not make any
investments (including roll-overs). For purposes of this restriction, (a) the
deposit of assets in escrow in connection with the purchase of securities on a
when-issued or delayed-delivery basis and (b) collateral arrangements with
respect to options, futures or forward currency contracts will not be deemed to
be borrowings or pledges of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities in an amount not
exceeding 33-1/3% of the Fund's net assets and enter into repurchase
agreements.
24
<PAGE>
4. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed-income securities
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in real estate
limited partnerships, oil, gas or mineral exploration or development programs
or oil, gas and mineral leases, except that the Fund may invest in (a)
fixed-income securities secured by real estate, mortgages or interests therein,
(b) securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs and (c) futures contracts and related
options and options on currencies. The entry into forward foreign currency
exchange contracts is not and shall not be deemed to involve investing in
commodities.
6. Make short sales of securities or maintain a short position, except
that the Fund may maintain short positions in forward currency contracts,
options and futures contracts and make short sales "against the box."
7. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase or write options on
securities, indices and currencies and (b) purchase or write options on futures
contracts.
8. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
9. Purchase more than 10% of the voting securities of any one issuer,
more than 10% of the securities of any class of any one issuer or more than 10%
of the outstanding debt securities of any one issuer; provided that this
limitation shall not apply to investments in U.S. government securities.
10. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the maintenance of margin in
connection with options, forward contracts and futures contracts or related
options will not be deemed to be a purchase of securities on margin.
11. Invest more than 15% of the value of the Fund's total assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, (a) repurchase agreements with
maturities greater than seven days and (b) time deposits maturing in more than
seven calendar days shall be considered illiquid.
12. Purchase any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three
years.
13. Purchase or retain securities of any company if, to the knowledge
of the Fund, any of the Fund's officers or Trustees or any officer or director
of its Adviser individually owns more than 1/2 of 1% of the outstanding
securities of such company and together they own beneficially more than 5% of
the securities.
14. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market)
25
<PAGE>
would exceed 5% of the value of each Fund's net assets (10% in the case of the
Equity Fund) of which not more than 2% of each Fund's net assets may be
invested in warrants not listed on a recognized U.S. or foreign stock exchange.
15. Invest in oil, gas or mineral leases.
If a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of the
Fund's assets will not constitute a violation of such restriction. It is the
intention of the Funds, unless otherwise indicated, that with respect to the
Funds' policies that are the result of the application of law the Funds will
take advantage of the flexibility provided by rules or interpretations of the
SEC currently in existence or promulgated in the future or changes to such laws.
MANAGEMENT OF THE TRUST
Board of Trustees
Overall responsibility for management and supervision of the Trust and
the Funds rests with the Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons and companies that
furnish services to the Trust or the Funds, including agreements with its
distributor, custodian, transfer agent, investment adviser and administrator.
The day-to-day operations of the Funds are delegated to their Adviser. The SAI
contains background information regarding each of the Trustees and executive
officers of the Trust.
Trustees and Officers
The names of the Trust's Trustees and executive officers, their
addresses, birthdates, principal occupations during the past five years and
other affiliations are set forth below.
<TABLE>
<S> <C> <C>
Harvey B. Kaplan* Trustee Controller (Chief Financial Officer),
80 Voice Road Easter Unlimited, Inc., May 1990 -
Carle Place, New York 11514 present (toy company).
Birthdate: 09/22/37
Robert S. Matthews Trustee Partner of Matthews & Co.
331 Madison Avenue (certified public accountants).
8th Floor
New York, New York 10017
Birthdate: 10/16/43
Gerard J.M. Vlak Trustee Retired
181 Turn of the River Road #7
Stamford, Connecticut 06905
Birthdate: 09/28/33
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
Martin Vogel** Trustee Director of Legal and Tax, Julius Baer
Julius Baer Investment Funds Services Investment Fund Services, Ltd., 1996 to
Freighutstrasse 40 present; Attorney, Schaufelberger & van
Postfach CH - 8010 Hoboken, 1994 - 1996; Attorney, Rohner
Zurich, Switzerland & Partner, 1993 - 1994; Director, The
Birthdate: 09/29/63 European Warrant Fund, Inc. 1997 -
present; Secretary of the Board of
Directors of the Luxembourg domiciled
investment companies.
Peter Wolfram Trustee Partner in the law firm of Kelley Drye &
101 Park Avenue Warren.
New York, New York 10178
Birthdate: 04/02/53
Bernard Spilko** Chairman General Manager & Senior Vice President
Bank Julius Baer & Co., Ltd. of Bank Julius Baer & Co., Ltd., New
330 Madison Avenue York Branch; Managing Director of Julius
New York, New York 10017 Baer Securities Inc.; Chairman of the
Birthdate: 08/11/41 Board of The European Warrant Fund, Inc.
Michael K. Quain President, Treasurer, First Vice President of Bank Julius Baer
Bank Julius Baer & Co., Ltd. Chief Financial Officer & Co., Ltd., New York Branch; Vice
330 Madison Avenue and Secretary President of Julius Baer Securities Inc.;
New York, New York 10017 President, Treasurer and Chief Financial
Birthdate: 07/06/57 Office of The European Warrant Fund, Inc.
Richard C. Pell Vice President Senior Vice President & Chief Investment
Bank Julius Baer & Co., Ltd. Officer of Bank Julius Baer & Co., Ltd.,
330 Madison Avenue New York Branch, 1995 - present; Vice
New York, New York 10017 President & Head Global Fixed-income,
Birthdate: 09/21/54 Bankers Trust Co., New York, prior to
1995.
Karen Arrese Vice President Vice President - Co-Manager for the
Bank Julius Baer & Co., Ltd. Julius Baer Global Income Fund and
330 Madison Avenue Global Fixed-income Specialist for Bank
New York, New York 10017 Julius Baer, 1998 - present; Proprietary
Birthdate: 10/10/70 Interest Rate and Currency Trader for
Chase Manhattan Bank; Global Portfolio
Manager at Standish, Ayer & Wood in
Boston and Bankers Trust Company in New
York, prior to 1998.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Rudolf-Riad Younes Vice President First Vice President of Bank Julius Baer
Bank Julius Baer & Co., Ltd. & Co., Ltd., New York Branch, 1993 -
330 Madison Avenue present.
New York, New York 10017
Birthdate: 09/25/61
Hector Santiago Vice President Vice President of Bank Julius Baer &
Bank Julius Baer & Co., Ltd. Co., Ltd., New York Branch and Julius
330 Madison Avenue Baer Securities, 1998 - present; Vice
New York, New York 10017 President, The European Warrant Fund,
Birthdate: 01/14/69 Inc., June 1998 - present; Assistant
Vice President- Accounting, Operations &
Trading Manager, 1996 - 1998, Assistant
Vice President- Trading Manager/Treasurer,
1992 - 1996
Joachim Straehle Vice President Deputy Branch Manager-Senior Vice
Bank Julius Baer & Co., Ltd. President and Member of Management
330 Madison Avenue Committee of Bank Julius Baer & Co.,
New York, New York 10017 Ltd, New York Branch, 1991 - present;
Birthdate: 11/20/58 Vice President, The European Warrant
Fund, Inc., June 1998 - present; Head of
Credit Department of Bank Julius Baer &
Co., Ltd., New York Branch, 1994 - present;
Vice President; Deputy Head of the Credit
Department at Bank Julius Baer & Co., Ltd.,
New York Branch, 1991 - 1994.
Pierre Beauport Assistant Treasurer Assistant Vice President - of Bank Julius Baer
Bank Julius Baer & Co., Ltd. & Co., Ltd. New York Branch, 1998 -
330 Madison Avenue 1998 - present; Assistant Treasurer,
New York, New York 10017 The European Warrant Fund, Inc.,
Birthdate: 08/2/69 September 1998 - present;
Senior Analyst - Mutual Fund
Administration at AMT Capital Services,
Inc. and Investment Accountant at Furman
Selz LLC, prior to 1998.
Paul J. Jasinski Assistant Treasurer Managing Director, Investors Bank &
Investors Bank & Trust Company Trust Company, 1990 - present.
200 Clarendon Street
Boston, MA 02116
Birthdate: 02/14/47
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Jack Clark Assistant Treasurer Director, Investors Bank & Trust
Investors Bank & Trust Company Company, 1998 - present; (1996 -
200 Clarendon Street 1998, Custody Department); Price
Boston, MA 02116 Waterhouse LLP, 1990 - 1996.
Birthdate: 03/24/67
Andrew S. Josef Assistant Secretary Director, Investors Bank & Trust Company
Investors Bank & Trust Company May 1997 - present; Senior Associate,
200 Clarendon Street Sullivan & Worcester LLP, November 1995
Boston, MA 02116 - May 1997; Associate, Goodwin, Procter
Birthdate: 02/25/64 & Hoar, January 1993 - November 1995.
Susan C. Mosher Assistant Secretary Director, Investors Bank & Trust
Investors Bank & Trust Company Company, 1995 - present; Associate
200 Clarendon Street Counsel, 440 Financial Group of
Boston, MA 02116 Worcester, Inc. 1993 - 1995.
Birthdate: 01/29/55
</TABLE>
* Trustee who has a discretionary account with Julius Baer Securities
(less than $100,000).
** "Interested person" of the Trust.
Messrs. Matthews, Vlak and Wolfram are members of the Audit Committee
of the Board of Trustees. The Audit Committee advises the Board with respect to
accounting, auditing and financial matters affecting the Funds. Messrs.
Matthews, Vlak and Wolfram are members of the Nominating Committee of the Board
of Trustees. The Nominating Committee selects and nominates candidates for
election to the Board as "non-interested" Trustees.
No director, officer or employee of the Adviser, the Servicing Agent,
the Distributor, the Administrator, or any parent or subsidiary thereof
receives any compensation from the Funds for serving as an officer or Trustee.
The Trust intends to pay each of its Trustees who is not a director, officer or
employee of the Adviser, the Servicing Agent, the Distributor or the
Administrator or any affiliate thereof an annual fee of $5,000 plus $250 for
each Board of Trustees meeting attended and reimburse them for travel and
out-of-pocket expenses. For the fiscal year ended October 31, 1998, such fees
and expenses totaled approximately $25,000 for the Trust.
The following table shows the compensation paid to each Trustee of the
Trust who was not an affiliated person of the Trust for the fiscal year ended
October 31, 1998.
Name and Position Compensation from Trust
----------------- -----------------------
Harvey B. Kaplan, $6,250
Trustee
Robert S. Matthews, $6,500
Trustee
29
<PAGE>
Gerard J.M. Vlak, $6,000
Trustee
Peter Wolfram, $6,250
Trustee
Investment Advisory and Other Services
Bank Julius Baer & Co., Ltd., New York Branch, serves as the
investment adviser to the Income Fund and the Equity Fund. The Adviser is the
New York branch of a Swiss bank, Julius Baer Holding Ltd., that has over 50
years experience in international portfolio management. Prior to July 1, 1998,
Julius Baer Investment Management, Inc. served as the investment adviser to the
Income Fund.
Investors Bank & Trust Company ("Investors Bank" or the
"Administrator"), located at 200 Clarendon Street, Boston, Massachusetts 02116,
serves as administrator to each Fund. The Adviser and the Administrator each
serve pursuant to separate written agreements (the "Advisory Agreement" and the
"Administration Agreement," respectively).
For the last three fiscal years ended October 31, 1996, October 31,
1997 and October 31, 1998, the Funds have paid the following amounts as
investment advisory fees pursuant to each Advisory Agreement:
<TABLE>
<CAPTION>
Global Income Fund Gross Waiver Net
<S> <C> <C> <C>
Year Ended 10/31/96 $101,220 $ -- $101,220
Year Ended 10/31/97 91,644 -- 91,644
Year Ended 10/31/98 78,432 7,780 70,652
International Equity Fund
Year Ended 10/31/96 $117,362 $ 58,681 $ 58,681
Year Ended 10/31/97 346,856 173,428 173,428
Year Ended 10/31/98 576,830 140,412 436,418
</TABLE>
For the last three fiscal years ended October 31, 1996, October 31,
1997 and October 31, 1998, the Funds have paid the following amounts as
administrative services fees pursuant to each Administration Agreement and
otherwise:
Global Income Fund
Year Ended 10/31/96 $ 91,541
Year Ended 10/31/97 57,505
Year Ended 10/31/98 35,537
30
<PAGE>
International Equity Fund
Year Ended 10/31/96 $ 93,311
Year Ended 10/31/97 206,947
Year Ended 10/31/98 234,668
Brokerage Allocation and Other Practices
The Funds' Adviser is responsible for establishing, reviewing and,
where necessary, modifying a Fund's investment program to achieve its
investment objective. Purchases and sales of newly-issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or
execution will be obtained. The purchase price paid by a Fund to underwriters
of newly issued securities usually includes a concession paid by the issuer to
the underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or
mark-down. Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On exchanges
on which commissions are negotiated, the cost of transactions may vary among
different brokers. On most foreign exchanges, commissions are generally fixed.
There is generally no stated commission in the case of securities traded in
domestic or foreign over-the-counter markets, but the price of securities
traded in over-the-counter markets includes an undisclosed commission or
mark-up. U.S. government securities are generally purchased from underwriters
or dealers, although certain newly-issued U.S. government securities may be
purchased directly from the United States Treasury or from the issuing agency
or instrumentality.
The Funds' Adviser will select specific portfolio investments and
effect transactions for its Fund. An Adviser seeks to obtain the best net price
and the most favorable execution of orders. In evaluating prices and
executions, an Adviser will consider the factors it deems relevant, which may
include the breadth of the market in the security, the price of the security,
the financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, to the extent that the execution and price
offered by more than one broker or dealer are comparable, an Adviser may, in
its discretion, effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or other accounts
over which an Adviser exercises investment discretion. Research and other
services received may be useful to an Adviser in serving both the Fund and its
other clients and, conversely, research or other services obtained by the
placement of business of other clients may be useful to the Adviser in carrying
out its obligations to a Fund. The fee to the Adviser under its advisory
agreement with the Funds is not reduced by reason of its receiving any
brokerage and research services.
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by its
Adviser. Such other investment clients may invest in the same securities as a
Fund. When purchases or sales of the same security are made at substantially
the same time on behalf of such other clients, transactions are averaged as to
price and available investments allocated as to amount, in a manner which a
Fund's Adviser believes to be equitable to each client, including the Fund. In
some instances, this investment procedure may adversely affect the price paid
or received by a Fund or the size of the position obtained or sold for a Fund.
To the extent permitted by
31
<PAGE>
law, the Funds' Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
Any portfolio transaction for a Fund may be executed through Unified
Management Corporation ("UMC"), the Funds' distributor (the "Distributor"), or
Julius Baer Securities Inc., or any of their affiliates if, in its Adviser's
judgment, the use of such entity is likely to result in price and execution at
least as favorable as those of other qualified brokers, and if, in the
transaction, such entity charges a Fund a commission rate consistent with those
charged by such entity to comparable unaffiliated customers in similar
transactions. For the last three fiscal years ended October 31, 1996, October
31, 1997 and October 31, 1998, the Equity Fund paid $2,445, $3,534 and $31,750,
respectively, in brokerage commissions to BJB-Frankfurt and BJB-Zurich,
affiliates of the Adviser or 3.7%, 1.8% and 10.1% of the total brokerage
commissions paid. BJB-Frankfurt and BJB-Zurich executed 7.3%, 3.5% and 12.6% of
the aggregate dollar amount of transactions involving commissions during the
last three fiscal years ended October 31, 1996, October 31, 1997 and October
31, 1998, respectively. For the last three fiscal years ended October 31, 1996,
October 31, 1997 and October 31, 1998, the Equity Fund paid total brokerage
commissions of $66,653, $200,701 and $313,361, respectively. For each of the
last three fiscal years ended October 31, 1996, October 31, 1997 and October
31, 1998, the Income Fund paid $0 in brokerage commissions.
In no instance will portfolio securities be purchased from or sold to
the Adviser, the Distributor or any affiliated person of such companies as
principal in the absence of an exemptive order from the SEC.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities for its portfolio directly from an issuer in order to
take advantage of the lower purchase price available to members of such a
group. A Fund will engage in this practice, however, only when its Adviser, in
its sole discretion, believes such practice to be otherwise in such Fund's
interest.
Portfolio Turnover
Neither Fund intends to seek profits through short-term trading, but
the rate of turnover will not be a limiting factor when a Fund deems it
desirable to sell or purchase securities. A Fund's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
High rates of portfolio turnover can lead to increased taxable gains
and higher expenses.
Certain practices that may be employed by a Fund could result in high
portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. For each of the two fiscal years ended
October 31, 1997 and October 31, 1998, the Income Fund's portfolio turnover
rate was 162% and 269%, respectively. For each of the two fiscal years ended
October 31, 1997 and October 31, 1998, the Equity Fund's portfolio turnover
rate was 94% and 134%, respectively.
Distributor
UMC, is a wholly-owned subsidiary of Unified Financial Services, Inc.
The principal executive offices of UMC are located at 431 North Pennsylvania
Street, Indianapolis, Indiana 46204-1806. The Distributor is registered with
the SEC as a broker-dealer under the Securities Exchange Act of 1934 and is a
member of the NASD.
32
<PAGE>
The Trust intends to enter into distribution agreements or shareholder
servicing agreements ("Agreements") with certain financial institutions
("Servicing Organizations") to perform certain distribution, shareholder
servicing, administrative and accounting services for their customers
("Customers") who are beneficial owners of shares of the Funds.
A Service Organization may charge a Customer one or more of the
following types of fees, as agreed upon by the Service Organization and the
Customer, with respect to the cash management or other services provided by the
Service Organization: (1) account fees (a fixed amount per month or per year);
(2) transaction fees (a fixed amount per transaction processed); (3)
compensating balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (4) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or
of the dividend paid on those assets). A Customer of a Service Organization
should read the Prospectus and SAI in conjunction with the service agreement
and other literature describing the services and related fees that will be
provided by the Service Organization to its Customers prior to any purchase of
shares. No preference will be shown in the selection of Fund portfolio
investments for the instruments of Service Organizations.
There are currently unresolved issues with respect to existing laws
and regulations relating to the permissible activities of banks and trust
companies, including the extent to which certain Service Organizations may
perform shareholder and administrative services. A judicial or administrative
decision or interpretation with respect to those laws and regulations, as well
as future changes in such laws and regulations, could prevent certain Service
Organizations from performing these services or from receiving payments for
performing these services. In addition, state securities law on this issue may
differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law. If a Service Organization were prohibited from performing these services,
it is expected that all arrangements between the Trust and the Service
Organization would be terminated and that Customers of the Service Organization
who seek to invest in the Trust would have to purchase and redeem shares
directly through the Distributor or the Transfer Agent.
Distribution and Shareholder Servicing
Any distribution or shareholder servicing agreements will be governed
by a Distribution Plan or a Shareholder Services Plan (the "Plans"). The Plans
require that the Board of Trustees receive, at least quarterly, written reports
of amounts expended under the Plans and the purpose for which such expenditures
were made. A Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan. Any
material amendment of the Plans would require the approval of the Trustees in
the manner described above. A Plan may be terminated at any time, without
penalty, by vote of a majority of the Trustees or by a vote of a majority of the
outstanding voting shares of the Trust that have invested pursuant to the Plan.
The Adviser and Administrator may also pay for distribution related costs out of
their revenues. For the fiscal year ended October 31, 1998, the Income Fund paid
$30,145 in distribution fees. For the fiscal year ended October 31, 1998, the
Equity Fund paid $144,207 in distribution fees. All such distribution fees were
used to compensate sales personnel.
Custodian and Transfer Agent
33
<PAGE>
Investors Bank is custodian of each Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement"). For its services under the
Custodian Agreement and for administrative, fund accounting and other services,
the Funds pay Investors Bank an annual fee equal to 0.12% of the Funds' average
daily net assets. Under the Custodian Agreement, Investors Bank (a) maintains a
separate account or accounts in the name of each Fund, (b) holds and transfers
portfolio securities on account of each Fund, (c) makes receipts and
disbursements of money on behalf of each Fund, (d) collects and receives all
income and other payments and distributions on account of each Fund's portfolio
securities and (e) makes periodic reports to the Board of Trustees concerning
each Fund's operations. Investors Bank is authorized to select one or more
foreign or domestic banks or trust companies to serve as sub-custodian on
behalf of a Fund, subject to the approval of the Board of Trustees. The assets
of the Trust are held under bank custodianship in accordance with the 1940 Act.
Rules adopted under the 1940 Act permit the Funds to maintain their
securities and cash in the custody of certain eligible foreign banks and
depositories. The Funds' portfolios of non-U.S. securities are held by
sub-custodians which are approved by the Trustees or a foreign custody manager
appointed by the Trustees in accordance with these rules. The Board has
appointed Investors Bank to be its foreign custody manager. The determination
to place assets with a particular foreign sub-custodian is made pursuant to
these rules which require a consideration of a number of factors including, but
not limited to, the reliability and financial stability of the sub-custodian;
the sub-custodian's practices, procedures and internal controls; and the
reputation and standing of the sub-custodian in its national market.
Unified Fund Services, Inc. has agreed to serve as the Trust's
transfer and dividend disbursing agent pursuant to a Transfer Agency Agreement,
under which the Transfer Agent (a) issues and redeems shares of the Trust, (b)
addresses and mails all communications by the Trust to record owners of Trust
shares, including reports to shareholders, dividend and distribution notices
and proxy material for its meetings of shareholders, (c) maintains shareholder
accounts and, if requested, sub-accounts and (d) makes periodic reports to the
Board of Trustees concerning the Funds' operations.
CAPITAL STOCK
Under the Trust Agreement, the Trustees have authority to issue an
unlimited number of shares of beneficial interest, par value $.001 per share.
When matters are submitted for shareholder vote, each shareholder will have one
vote for each share owned and proportionate, fractional votes for fractional
shares held. There will normally be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of shareholders holding
at least 10% of the Trust's outstanding shares.
Shares do not have cumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of Trustees can elect
all Trustees. Shareholders generally vote by Fund, except with respect to the
election of Trustees and the selection of independent public accountants.
Shares are transferable but have no preemptive, conversion or subscription
rights.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Trust Agreement disclaims shareholder liability for acts or obligations of the
Trust, however, and requires that notice of the disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or a
Trustee. The Trust Agreement provides for indemnification from the Trust's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust
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would be unable to meet its obligations, a possibility that the
Trust's management believes is remote. Upon payment of any liability incurred
by the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Trust.
Control Persons
As of February 8, 1999, Bank Julis Baer - Zurich was record owner of
35.4% of the Equity Fund on behalf of their clients and as such, could be deemed
to control the Equity Fund within the meaning of the 1940 Act. Control is
defined by the 1940 Act as the beneficial ownership, either directly or through
one or more controlled companies, of more than 25 percent of the voting
securities of the company. Bank Julius Baer is a wholly-owned subsidiary of Baer
Holdings, Ltd.
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Principal Holders
As of February 8, 1999, the Trustees and officers of the Trust as a
group owned less than 1% of the Trust's total shares outstanding.
As of February 8, 1999, the following individuals or entities
beneficially owned more than 5% of the outstanding shares of the Income Fund:
Percent of
Amount of Owner
Name and Address of Owner Shares Owned Shares Owned
- ------------------------- ------------ ------------
Robert C. Wetenhall 194,864.664 15.02%
(beneficial owner)
c/o Bank Julius Baer & Co., Ltd.
330 Madison Avenue
New York, New York 10017
The Vera Leinsdorf Revocable Trust 148,466.193 11.44%
(beneficial owner)
c/o Bank Julius Baer & Co., Ltd.
330 Madison Avenue
New York, New York 10017
Harry Frisch and Lilo Frisch 104,857.422 8.08%
(beneficial owner)
c/o Bank Julius Baer & Co., Ltd.
330 Madison Avenue
New York, New York 10017
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem shares and how such shares
are priced is included in the Prospectus.
Portfolio Valuation
The Prospectus discusses the time at which the net asset value of the
Funds is determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Funds in valuing their assets.
Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of a Fund's net asset
value may not take place contemporaneously with the determination of the prices
of certain of its portfolio securities used in such calculation. A security
which is listed or traded on more than one exchange is valued at the quotation
on the exchange
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determined to be the primary market for such security. All assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the bid and offered quotations of
such currencies against U.S. dollars as last quoted by any recognized dealer.
If such quotations are not available, the rate of exchange will be determined
in good faith by the Board of Trustees. In carrying out the Board's valuation
policies Investors Bank & Trust Company ("Investors Bank"), as each Fund's
accounting agent, may consult with an independent pricing service retained by
the Fund.
Securities listed on a U.S. securities exchange (including securities
traded through the National Market System) or on a foreign securities exchange
will be valued on the basis of the closing value on the date on which the
valuation is made or, in the absence of sales, at the mean between the closing
bid and asked prices. U.S. over-the-counter securities and securities listed or
traded on certain foreign stock exchanges whose operations are similar to the
U.S. over-the-counter market will be valued on the basis of the bid price at
the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined by or under
the direction of the Board of Trustees. Securities listed on a national
securities exchange will be valued on the basis of the last sale on the date on
which the valuation is made or, in the absence of sales, at the mean between
the closing bid and asked prices. The valuation of fixed-income securities held
by a Fund (other than U.S. government securities and short-term investments) is
made by the Administrator after consultation with an independent pricing
service (the "Pricing Service") approved by the Board of Trustees. When, in the
judgment of the Pricing Service, quoted bid prices for investments are readily
available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices and asked
prices. Investments for which, in the judgment of the Pricing Service, there is
no readily obtainable market quotation are carried at fair value as determined
by the Pricing Service. For the most part, such investments are liquid and may
be readily sold. Notwithstanding the above, the Pricing Service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of the Pricing Service are reviewed periodically by
the officers of a Fund under the general supervision and responsibility of the
Board of Trustees, which may replace any such Pricing Service at any time.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Amortized cost involves valuing an instrument at its original cost to
the Fund 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. All other securities and other assets of a
Fund will be valued at their fair value as determined in good faith by the
Board of Trustees.
Limitations on Redemptions
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange, Inc. (the "NYSE") is closed, other than customary
weekend and holiday closings, or during which trading on the NYSE is
restricted, or during which (as determined by the SEC) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit.
If the Board of Trustees determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Funds
may make payment wholly or partly in securities or other property. If a
redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds.
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ADDITIONAL INFORMATION CONCERNING EXCHANGE PRIVILEGE
Shares of one Fund may be exchanged for Shares of the other Fund to
the extent such Shares are offered for sale in the shareholder's state of
residence. Shareholders may exchange their Shares on the basis of relative net
asset value at the time of exchange. No exchange fee is charged for this
privilege, provided that the registration remains identical.
The exchange privilege enables shareholders to acquire shares in a
Fund with different investment objectives when they believe that a shift
between Funds is an appropriate investment decision. This privilege is
available to all shareholders resident in any state in which Fund shares being
acquired may be legally sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current Prospectus of the Funds.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value; the proceeds are immediately invested, at the price as determined
above, in shares of the Fund being acquired. The Trust reserves the right to
reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
Each Fund has qualified, and intends to qualify each year, as a
"regulated investment company" under the Code. Provided that a Fund (a) is a
regulated investment company and (b) distributes to its shareholders at least
90% of the sum of its investment company taxable income and net realized
short-term capital gains, the Fund will not be subject to federal income tax to
the extent its entire investment company taxable income and its entire net
realized long-term and short-term capital gains are distributed to its
shareholders.
Each Fund is subject to a 4% nondeductible excise tax to the extent
that it fails to distribute to its shareholders during each calendar year an
amount equal to at least the sum of (a) 98% of its taxable ordinary investment
income (excluding long-term and short-term capital gain income) for the
calendar year; plus (b) 98% of its capital gain net income for the one year
period ending on October 31 of such calendar year; plus (c) 100% of its
ordinary investment income or capital gain net income from the preceding
calendar year which was neither distributed to shareholders nor taxed to a Fund
during such year. Each Fund intends to distribute to shareholders each year an
amount sufficient to avoid the imposition of such excise tax.
A Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by a
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to a Fund and defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require a Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out), and (b) may cause a Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the 90% and 98% distribution requirements for avoiding
income and excise taxes, respectively. Each Fund will monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries
in its books and records when it acquires any foreign currency, forward
contract, option, futures contract or hedged investment in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
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Net realized long-term capital gains will be distributed as described
in the Prospectus. Such distributions ("capital gain dividends"), if any, will
be taxable to a shareholder as long-term capital gains, regardless of how long
a shareholder has held shares. If, however, a shareholder receives a capital
gain dividend with respect to any share and if such share is held by the
shareholder for six months or less, then any loss on the sale or redemption of
such share that is less than or equal to the amount of the capital gain
dividend will be treated as a long-term capital loss.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income or fails to certify
that he or she has provided a correct taxpayer identification number and that
he or she is not subject to backup withholding, then the shareholder may be
subject to a 31% "backup withholding tax" with respect to (a) dividends and
distributions and (b) the proceeds of any redemptions of Fund shares. An
individual's taxpayer identification number is his or her social security
number. The 31% "backup withholding tax" is not an additional tax and may be
credited against a taxpayer's regular federal income tax liability.
The foregoing is only a summary of certain tax considerations
generally affecting the Funds and shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisers with specific reference to their own tax situations, including
their state and local tax liabilities.
CALCULATION OF PERFORMANCE DATA
From time to time, the Trust may quote a Fund's performance in
advertisements or in reports and other communications to shareholders.
Yield
From time to time, the Income Fund may advertise its yield over
various periods of time. The yield of the Fund refers to net investment income
generated by the Fund over a specified thirty-day period, which is then
annualized. That is, the amount of net investment income generated by the Fund
during that thirty-day period is assumed to be generated monthly over a
12-month period and is shown as a percentage of the investment.
The Income Fund's yield figure is calculated according to a formula
prescribed by the SEC. The formula can be expressed as follows:
Yield = 2[(a-b + 1)6-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends.
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d = the maximum offering price per share on
the last day of the period.
For the purpose of determining the interest earned (variable "a" in
the formula) on debt obligations that were purchased by the Income Fund at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations. The 30 day yield
for Shares of the Income Fund for the period ended October 31, 1998 was 2.51%.
Investors should recognize that in periods of declining interest
rates, the Income Fund's yield will tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates, the Fund's yield will
tend to be somewhat lower. In addition, when interest rates are falling, the
inflow of net new money to the Income Fund from the continuous sale of its
shares will likely be invested in portfolio instruments producing lower yields
than the balance of its portfolio of securities, thereby reducing the current
yield of the Fund. In periods of rising interest rates, the opposite can be
expected to occur.
Average Annual Total Return
From time to time, the Funds may advertise their average annual total
return. Average annual total return figures show the average percentage change
in value of an investment in a Fund from the beginning of the measuring period
to the end of the measuring period. The figures reflect changes in the price of
a Fund's Shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in Shares of
the Fund. Average annual total return will be shown for recent one-, five- and
ten-year periods, and may be shown for other periods as well (such as from
commencement of the Fund's operations or on a year-to-date or quarterly basis).
When considering average annual total return figures for periods longer than
one year, it is important to note that a Fund's average annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering average annual total return figures for periods
shorter than one year, investors should bear in mind that such return may not
be representative of a Fund's return over a longer market cycle. The Funds may
also advertise aggregate total return figures for various periods, representing
the cumulative change in value of an investment in the Funds for the specific
period (again reflecting changes in each Fund's Share prices and assuming
reinvestment of dividends and distributions). Aggregate and average annual
total returns may be shown by means of schedules, charts or graphs, and may
indicate various components of total return (i.e., change in value of initial
investment, income dividends and capital gain distributions).
Investors should note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance.
Current yield and total return figures may be obtained by calling the Transfer
Agent at 1-800-435-4659.
In reports or other communications to investors or in advertising
material, the Funds may describe general economic and market conditions
affecting the Funds and may compare their performance with (1) that of other
mutual funds as listed in the rankings prepared by Lipper Analytical Services,
Inc. or similar investment services that monitor the performance of mutual
funds or (2) appropriate indices of investment securities. The Funds may also
include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, Changing Times, Financial Times, Forbes, Fortune,
Institutional Investor, The International Herald Tribune, Money, Inc.,
Morningstar, Inc., The New York Times, The Wall Street Journal and USA Today.
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"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000 investment made
at the beginning of a 1-, 5- or
10-year period at the end of the
1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all
dividends and distributions.
The Income Fund's average annual total return for the one and five
year periods ended October 31, 1998 and for the period beginning July 1, 1992
(inception of the Fund) through October 31, 1998, was 9.43%, 6.08% and 6.87%,
respectively.
The Equity Fund's average annual total return for the one and five
year periods ended October 31, 1998 and for the period beginning October 4,
1993 (inception of the Fund) through October 31, 1998 was 16.10%, 3.61% and
5.36%, respectively.
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and its operating
expenses. As described above, total return is based on historical earnings and
is not intended to indicate future performance. Consequently, any given
performance quotation should not be considered as representative of a Fund's
performance for any specified period in the future. Performance information may
be useful as a basis for comparison with other investment alternatives.
However, a Fund's performance will fluctuate, unlike certain bank deposits or
other investments which pay a fixed yield for a stated period of time.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in
the value of an investment for the specified period and are computed by the
following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000 investment
made at the beginning of a 1-, 5-
or 10-year period at the end of the
1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all
dividends and distributions.
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The Income Fund's aggregate total return for the one and five year
periods ended October 31, 1998 and for the period beginning July 1, 1992
(inception of the Fund) through October 31, 1998 was 9.43%, 34.33% and 52.39%,
respectively. The Equity Fund's aggregate total return for the one and five
year periods ended October 31, 1998 and for the period beginning October 4,
1993 (inception of the Fund) through October 31, 1998 was 16.10%, 19.40% and
30.37%, respectively.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, independent auditors, 99 High Street, Boston,
Massachusetts 02110, serve as auditors of the Trust and performs annual
audits of the Funds' financial statements.
COUNSEL
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel for the
Trust and from time to time provides advice to the Adviser.
FINANCIAL STATEMENTS
The Financial Statements contained in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1998 are incorporated by
reference into this SAI. Copies of the Trust's 1998 Annual Report may be
obtained by calling the Trust at the telephone number on the first page of the
SAI.
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APPENDIX -- DESCRIPTION OF RATINGS
Commercial Paper Ratings
Standard and Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest.
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
Moody's Investors Service's Commercial Paper Ratings
Prime-1 - Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 - Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate bonds:
AAA -- This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and differs
from AAA issues only in small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic
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conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
BB, B, CCC, CC and C -- Bonds rated "BB", "B" , "CCC", "CC" and "C"
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions
CI - Bonds rated "CI" are income bonds on which no interest is being
paid.
To provide more detailed indications of credit quality, the ratings set
forth above may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
The following summarizes the ratings used by Moody's for corporate bonds:
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. Interest payments are
protected by a large or exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -- Bonds that are rated "Baa" are considered to be medium grade
obligations, that is, they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. These bonds
lack outstanding investment characteristics and may have speculative
characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
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Ca -- Bonds that are rated "Ca" represent obligations that are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds that are rated "C" are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
45
