<PAGE> 1
As filed with the Securities and Exchange Commission on February 28, 1997
File Nos. 33-52742; 811-7238
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 11 X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
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Amendment No. 13 X
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(Check appropriate box or boxes)
SUNAMERICA SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
1 SunAmerica Center, Century City
Los Angeles, CA 90067-6022
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (800) 858-8850
Robert M. Zakem
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address of Agent for Service)
Copy to:
Susan L. Harris, Esq.
SunAmerica Inc.
1 SunAmerica Center, Century City
Los Angeles, CA 90067-6022
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)
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on (date) pursuant to paragraph (a) of Rule 485
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X 75 days after filing pursuant to paragraph (a)(2)
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The Registrant has elected to register an indefinite number of shares
of beneficial interest, par value $.01 per share, under the Securities Act of
1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. The Rule 24f-2 Notice for the Registrant's fiscal year ended November
30, 1996 was filed on January 24, 1997.
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<PAGE> 2
PROSPECTUS - MAY 15, 1997
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SUNAMERICA SERIES TRUST
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P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
SunAmerica Series Trust ("Trust") is an open-end management investment
company. The Trust consists of 21 Portfolios, each of which has its own
investment objectives and policies.
The CASH MANAGEMENT PORTFOLIO seeks high current yield while preserving
capital by investing in a diversified selection of money market instruments.
The GLOBAL BOND PORTFOLIO seeks a high total return, emphasizing current
income and, to a lesser extent, providing opportunities for capital
appreciation, through investment in high quality fixed-income securities of U.S.
and foreign issuers and through transactions in foreign currencies.
The CORPORATE BOND PORTFOLIO seeks a high total return with only moderate
price risk by investing primarily in investment grade fixed-income securities.
The HIGH-YIELD BOND PORTFOLIO seeks a high level of current income and
secondarily seeks capital appreciation by investing primarily in intermediate
and long-term corporate obligations, with emphasis on higher-yielding,
higher-risk, lower-rated or unrated securities.
The WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income and,
secondarily, capital appreciation, by investing primarily in a portfolio of
high-yielding fixed-income securities of issuers located throughout the world.
The SUNAMERICA BALANCED PORTFOLIO seeks to conserve principal by
maintaining at all times a balanced portfolio of stocks and bonds.
The BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO seeks reasonable income,
long-term capital growth and conservation of capital by investing primarily in
common stocks and fixed-income securities, with an emphasis on income-producing
securities which appear to have some potential for capital enhancement.
The ASSET ALLOCATION PORTFOLIO seeks high total return (including income
and capital gains) consistent with preservation of capital over the long-term
through a diversified portfolio that can include common stocks and other
securities having common stock characteristics, bonds and other intermediate and
long-term fixed-income securities and money market instruments (debt securities
maturing in one year or less) in any combination.
The UTILITY PORTFOLIO seeks high current income and moderate capital
appreciation by investing primarily in the equity and debt securities of utility
companies.
THE HIGH-YIELD BOND AND WORLDWIDE HIGH INCOME PORTFOLIOS INVEST
PREDOMINANTLY IN, AND THE CORPORATE BOND, BALANCED/PHOENIX INVESTMENT COUNSEL,
ASSET ALLOCATION, REAL ESTATE, INTERNATIONAL GROWTH AND INCOME AND EMERGING
MARKETS PORTFOLIOS MAY INVEST IN, LOWER-RATED AND UNRATED BONDS (ALSO KNOWN AS
"JUNK BONDS"). BONDS OF THIS TYPE ARE TYPICALLY SUBJECT TO GREATER MARKET
FLUCTUATIONS AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE
ISSUER THAN ARE INVESTMENTS IN LOWER-YIELDING, HIGHER-RATED BONDS. SEE
"DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES -- RISK FACTORS RELATING TO
HIGH-YIELD BONDS" FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH HIGH-YIELD,
HIGH-RISK SECURITIES.
(Cover continued on next page)
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INVESTMENTS IN A PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT OR ANY OTHER
ENTITY OR PERSON.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Trust. Please read it carefully and retain
it for future reference. A Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. Further information about the performance of the Portfolios is
contained in the Trust's Annual Report to Shareholders. The Annual Report to
Shareholders and the Statement of Additional Information may be obtained upon
request and without charge by writing to the Trust at the above address or by
calling 1-800-445-SUN2.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<PAGE> 3
(Cover continued from previous page)
The GROWTH-INCOME PORTFOLIO seeks growth of capital and income by investing
primarily in common stocks or securities which demonstrate the potential for
appreciation and/or dividends.
The FEDERATED VALUE PORTFOLIO seeks growth of capital and income by
investing primarily in the securities of high quality companies.
The VENTURE VALUE PORTFOLIO seeks to achieve growth of capital by investing
primarily in common stocks.
The ALLIANCE GROWTH, GROWTH/PHOENIX INVESTMENT COUNSEL and PUTNAM GROWTH
PORTFOLIOS each seeks long-term growth of capital by investing primarily in
common stocks or securities with common stock characteristics which the Adviser
believes have the potential for appreciation.
The GLOBAL EQUITIES PORTFOLIO seeks long-term growth of capital through
investment primarily in common stocks or securities of U.S. and foreign issuers
with common stock characteristics which demonstrate the potential for
appreciation and through transactions in foreign currencies.
The INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIO seeks long-term capital
appreciation by investing in accordance with country weightings determined by
the Subadviser in common stocks of foreign issuers which, in the aggregate,
replicate broad country indices.
The AGGRESSIVE GROWTH PORTFOLIO seeks capital appreciation by investing
primarily in equity securities of small capitalization growth companies.
THE INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks growth of capital with
current income as a secondary objective by investing primarily in common stocks
traded on markets outside the United States.
THE REAL ESTATE PORTFOLIO seeks to achieve total return through a
combination of growth and income by investing primarily in securities of
companies principally engaged in or related to the real estate industry or which
own significant real estate assets or which primarily invest in real estate
financial instruments.
THE EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by
investing mainly in the common stocks and other equity securities of companies
that the Subadviser believes have above-average growth prospects primarily in
emerging markets outside the United States.
Shares of the Trust are issued and redeemed only in connection with
investments in and payments under variable annuity contracts and may be sold to
fund variable life contracts issued in the future. The contracts involve fees
and expenses not described in this Prospectus. Certain Portfolios may not be
available in connection with a particular contract. See the applicable contract
prospectus for information regarding contract fees and expenses and any
restrictions or limitations.
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
-----
<S> <C>
FINANCIAL HIGHLIGHTS...................................................................... 4
THE TRUST, ITS INVESTMENT OBJECTIVES AND POLICIES......................................... 7
Cash Management Portfolio............................................................ 8
Global Bond Portfolio................................................................ 8
Corporate Bond Portfolio............................................................. 9
High-Yield Bond Portfolio............................................................ 10
Worldwide High Income Portfolio...................................................... 11
SunAmerica Balanced Portfolio........................................................ 12
Balanced/Phoenix Investment Counsel Portfolio........................................ 13
Asset Allocation Portfolio........................................................... 13
Utility Portfolio.................................................................... 14
Growth-Income Portfolio.............................................................. 15
Federated Value Portfolio............................................................ 15
Venture Value Portfolio.............................................................. 16
Alliance Growth, Growth/Phoenix Investment Counsel and Putnam Growth Portfolios...... 16
Global Equities Portfolio............................................................ 17
International Diversified Equities Portfolio......................................... 17
Aggressive Growth Portfolio.......................................................... 18
International Growth and Income Portfolio............................................ 18
Real Estate Portfolio................................................................ 19
Emerging Markets Portfolio........................................................... 20
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES....................................... 20
MANAGEMENT................................................................................ 30
PORTFOLIO TURNOVER AND BROKERAGE.......................................................... 36
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES................................................ 36
PRICE OF SHARES........................................................................... 37
PURCHASES AND REDEMPTIONS................................................................. 37
SHAREHOLDER VOTING RIGHTS................................................................. 38
INDEPENDENT ACCOUNTANTS................................................................... 38
SHAREHOLDER INQUIRIES..................................................................... 38
FINANCIAL INFORMATION..................................................................... 38
</TABLE>
3
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following Financial Highlights for the Portfolios and periods set forth
below have been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose report on the financial statements containing such
information is included in the Trust's Annual Report to Shareholders. These
Financial Highlights* should be read in conjunction with the financial
statements and notes thereto, which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DIVIDENDS
NET TOTAL DECLARED FROM NET
NET ASSET NET REALIZED FROM FROM NET REALIZED NET ASSET
VALUE INVEST- & UNREALIZED INVEST- INVEST- GAIN ON VALUE
BEGINNING MENT GAIN (LOSS) ON MENT MENT INVEST- END OF
PERIOD ENDED OF PERIOD INCOME** INVESTMENTS OPERATIONS INCOME MENTS PERIOD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash Management Portfolio
2/9/93-11/30/93 $ 10.00 $ 0.19 $ 0.01 $ 0.20 $ -- $ -- $ 10.20
11/30/94 10.20 0.38 (0.02) 0.36 (0.09) -- 10.47
11/30/95 10.47 0.56 0.01 0.57 (0.34) -- 10.70
11/30/96 10.70 0.53 (0.02) 0.51 (0.45) -- 10.76
Global Bond Portfolio
7/1/93-11/30/93 10.00 0.13 0.17 0.30 -- -- 10.30
11/30/94 10.30 0.53 (0.86) (0.33) (0.09) (0.05) 9.83
11/30/95 9.83 0.60 0.97 1.57 (0.38) -- 11.02
11/30/96 11.02 0.59 0.54 1.13 (0.75) -- 11.40
Corporate Bond Portfolio
7/1/93-11/30/93 10.00 0.14 0.05 0.19 -- -- 10.19
11/30/94 10.19 0.52 (0.87) (0.35) (0.05) (0.04) 9.75
11/30/95 9.75 0.60 1.00 1.60 (0.53) -- 10.82
11/30/96 10.82 0.65 0.03 0.68 (0.41) -- 11.09
High-Yield Bond Portfolio
2/9/93-11/30/93 10.00 0.76 0.36 1.12 -- -- 11.12
11/30/94 11.12 1.20 (1.65) (0.45) (0.29) (0.06) 10.32
11/30/95 10.32 1.11 0.12 1.23 (1.02) -- 10.53
11/30/96 10.53 0.98 0.48 1.46 (0.95) -- 11.04
Worldwide High Income Portfolio
10/28/94-11/30/94 10.00 0.04 (0.09) (0.05) -- -- 9.95
11/30/95 9.95 1.10 0.47 1.57 (0.10) -- 11.42
11/30/96 11.42 1.25 1.60 2.85 (0.87) (0.05) 13.35
SunAmerica Balanced Portfolio
6/3/96-11/30/96 10.00 0.10 1.03 1.13 -- -- 11.13
<CAPTION>
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NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES INCOME AVERAGE
TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED RETURN*** (000'S) NET ASSETS NET ASSETS TURNOVER PER SHARE@
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash Management Portfolio
2/9/93-11/30/93 2.00% $ 24,603 0.71%+++ 2.53%+++ --% N/A
11/30/94 3.51 89,098 0.70++ 3.73++ -- N/A
11/30/95 5.59 90,731 0.67 5.32 -- N/A
11/30/96 4.92 91,247 0.62 4.90 -- N/A
Global Bond Portfolio
7/1/93-11/30/93 3.00 25,010 1.35+++ 3.56+++ 84 N/A
11/30/94 (3.18) 44,543 1.06 5.29 347 N/A
11/30/95 16.40 59,759 0.95 5.89 339 N/A
11/30/96 10.94 68,221 0.89 5.44 223 N/A
Corporate Bond Portfolio
7/1/93-11/30/93 1.90 11,667 0.94+++ 3.92+++ 208 N/A
11/30/94 (3.41) 15,869 0.94++ 5.21++ 419 N/A
11/30/95 17.01 29,475 0.96++ 5.93++ 412 N/A
11/30/96 6.51 37,207 0.97 6.11 338 N/A
High-Yield Bond Portfolio
2/9/93-11/30/93 11.20 41,851 0.94+++ 9.43+++ 229 N/A
11/30/94 (4.26) 55,803 0.92++ 11.07++ 225 N/A
11/30/95 12.64 82,174 0.80 10.80 174 N/A
11/30/96 14.86 113,229 0.77 9.41 107 N/A
Worldwide High Income Portfolio
10/28/94-11/30/94 (0.50) 10,478 1.60+++ 4.48+++ 2 N/A
11/30/95 16.02 21,515 1.30 10.46 176 N/A
11/30/96 26.87 49,204 1.18 10.45 177 N/A
SunAmerica Balanced Portfolio
6/3/96-11/30/96 11.30 10,224 1.00+++ 1.92+++ 40 0.0600
</TABLE>
- ------------------
* Calculated based upon average shares outstanding
** After fee waivers and expense reimbursements by the investment adviser
*** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company and First SunAmerica Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number
of shares purchased or sold.
+ Annualized
++ During the periods ended November 30, 1993, 1994, 1995 and 1996, the
investment adviser waived a portion of or all fees and assumed a portion
of or all expenses for the Portfolios. If all fees and expenses had been
incurred by the Portfolios, the ratio of expenses to average net assets
and the ratio of net investment income (loss) to average net assets would
have been as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME
---------------------------- -------------------------------
1993 1994 1995 1996 1993 1994 1995 1996
---------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Management Portfolio................................. 1.10% 0.78% 0.67% 0.62% 2.14% 3.65% 5.32% 4.90%
Global Bond Portfolio..................................... 1.81 1.06 0.95 0.89 3.10 5.29 5.89 5.44
Corporate Bond Portfolio.................................. 1.81 1.09 0.97 0.97 3.05 5.06 5.92 6.11
High-Yield Bond Portfolio................................. 1.29 0.93 0.80 0.77 9.08 11.06 10.80 9.41
Worldwide High Income Portfolio........................... -- 2.26 1.30 1.18 -- 3.82 10.46 10.45
SunAmerica Balanced Portfolio............................. -- -- -- 1.43 -- -- -- 1.49
</TABLE>
<TABLE>
<CAPTION>
DEBT AVERAGE AVERAGE AVERAGE
YEAR OUTSTANDING DEBT SHARES DEBT
ENDED AT YEAR END OUTSTANDING OUTSTANDING PER SHARE
-------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Worldwide High Income Portfolio...................... 11/30/96 -- $ 120,656 3,085,308 $0.0391
</TABLE>
4
<PAGE> 6
The following Financial Highlights for the Portfolios and periods set forth
below have been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose report on the financial statements containing such
information is included in the Trust's Annual Report to Shareholders. These
Financial Highlights* should be read in conjunction with the financial
statements and notes thereto, which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DIVIDENDS
NET NET TOTAL DECLARED FROM NET
NET ASSET INVEST- REALIZED FROM FROM NET REALIZED NET ASSET
VALUE MENT & UNREALIZED INVEST- INVEST- GAIN ON VALUE
BEGINNING INCOME GAIN (LOSS) ON MENT MENT INVEST- END OF
PERIOD ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME MENTS PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced/Phoenix Investment Counsel Portfolio
10/28/94-11/30/94 $ 10.00 $ 0.04 $(0.08) $(0.04) $ -- $ -- $ 9.96
11/30/95 9.96 0.34 2.23 2.57 (0.05) -- 12.48
11/30/96 12.48 0.34 1.31 1.65 (0.19) (0.31) 13.63
Asset Allocation Portfolio
7/1/93-11/30/93 10.00 0.08 0.28 0.36 -- -- 10.36
11/30/94 10.36 0.29 (0.25) 0.04 (0.05) (0.03) 10.32
11/30/95 10.32 0.42 2.24 2.66 (0.20) (0.04) 12.74
11/30/96 12.74 0.48 2.00 2.48 (0.31) (0.39) 14.52
Utility Portfolio
6/3/96-11/30/96 10.00 0.24 0.51 0.75 -- -- 10.75
Growth-Income Portfolio
2/9/93-11/30/93 10.00 0.12 0.49 0.61 -- -- 10.61
11/30/94 10.61 0.13 (0.36) (0.23) (0.04) (0.01) 10.33
11/30/95 10.33 0.17 3.31 3.48 (0.10) -- 13.71
11/30/96 13.71 0.18 3.48 3.66 (0.12) (0.43) 16.82
Federated Value Portfolio
6/3/96-11/30/96 10.00 0.07 1.01 1.08 -- -- 11.08
Venture Value Portfolio
10/28/94-11/30/94 10.00 0.03 (0.25) (0.22) -- -- 9.78
11/30/95 9.78 0.17 3.55 3.72 (0.03) -- 13.47
11/30/96 13.47 0.18 3.46 3.64 (0.09) (0.12) 16.90
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES INCOME AVERAGE
TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED RETURN*** (000'S) NET ASSETS NET ASSETS TURNOVER PER SHARE@
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced/Phoenix Investment Counsel Portfolio
10/28/94-11/30/94 (0.40)% $ 1,516 1.00%+++ 4.25%+++ 10% N/A
11/30/95 25.89 32,429 0.98++ 3.08++ 153 N/A
11/30/96 13.75 70,021 0.84 2.74 194 0.0589
Asset Allocation Portfolio
7/1/93-11/30/93 3.60 35,590 0.99+++ 2.33+++ 71 N/A
11/30/94 0.30 106,856 0.94++ 2.71++ 152 N/A
11/30/95 26.10 199,836 0.81 3.62 207 N/A
11/30/96 20.27 316,388 0.74 3.66 200 0.0587
Utility Portfolio
6/3/96-11/30/96 7.50 6,299 1.05+++ 4.41+++ 24 0.0439
Growth-Income Portfolio
2/9/93-11/30/93 6.10 45,080 0.82+++ 1.59+++ 27 N/A
11/30/94 (2.20) 84,899 0.81++ 1.26++ 59 N/A
11/30/95 33.89 171,281 0.77 1.42 59 N/A
11/30/96 27.41 325,463 0.72 1.21 82 0.0597
Federated Value Portfolio
6/3/96-11/30/96 10.80 12,460 1.05+++ 1.26+++ 30 0.0520
Venture Value Portfolio
10/28/94-11/30/94 (2.20) 4,449 1.10+++ 3.93+++ -- N/A
11/30/95 38.17 154,908 1.00++ 1.43++ 18 N/A
11/30/96 27.44 516,413 0.85 1.21 22 0.0598
</TABLE>
- ------------------
* Calculated based upon average shares outstanding
** After fee waivers and expense reimbursements by the investment adviser
*** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company and First SunAmerica Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number of
shares purchased or sold.
+ Annualized
++ During the periods ended November 30, 1993, 1994, 1995 and 1996, the
investment adviser waived a portion of or all fees and assumed a portion
of or all expenses for the Portfolios. If all fees and expenses had been
incurred by the Portfolios, the ratio of expenses to average net assets
and the ratio of net investment income (loss) to average net assets would
have been as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
---------------------------- -------------------------------
1993 1994 1995 1996 1993 1994 1995 1996
---------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced/Phoenix Investment Counsel Portfolio............. --% 6.82% 1.11% 0.84% --% (1.57)% 2.95% 2.74%
Asset Allocation Portfolio................................ 1.67 0.94 0.81 0.74 1.65 2.71 3.62 3.66
Utility Portfolio......................................... -- -- -- 1.93 -- -- -- 3.53
Growth-Income Portfolio................................... 1.40 0.89 0.77 0.72 1.01 1.18 1.42 1.21
Federated Value Portfolio................................. -- -- -- 1.57 -- -- -- 0.74
Venture Value Portfolio................................... -- 3.89 1.02 0.85 -- 1.14 1.41 1.21
</TABLE>
5
<PAGE> 7
The following Financial Highlights for the Portfolios and periods set forth
below have been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose report on the financial statements containing such
information is included in the Trust's Annual Report to Shareholders. These
Financial Highlights* should be read in conjunction with the financial
statements and notes thereto, which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DIVIDENDS
NET NET TOTAL DECLARED FROM NET
NET ASSET INVEST- REALIZED FROM FROM NET REALIZED NET ASSET
VALUE MENT & UNREALIZED INVEST- INVEST- GAIN ON VALUE
BEGINNING INCOME GAIN (LOSS) ON MENT MENT INVEST- END OF
PERIOD ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME MENTS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alliance Growth Portfolio
2/9/93-11/30/93 $ 10.00 $ 0.05 $ 0.87 $ 0.92 $ -- $ -- $ 10.92
11/30/94 10.92 0.04 (0.14) (0.10) (0.01) (0.17) 10.64
11/30/95 10.64 0.07 5.08 5.15 (0.03) (0.13) 15.63
11/30/96 15.63 0.08 4.07 4.15 (0.04) (1.01) 18.73
Growth/Phoenix Investment Counsel Portfolio
2/9/93-11/30/93 10.00 0.17 0.61 0.78 -- -- 10.78
11/30/94 10.78 0.16 (0.87) (0.71) (0.06) -- 10.01
11/30/95 10.01 0.12 3.14 3.26 (0.13) -- 13.14
11/30/96 13.14 0.11 2.16 2.27 (0.11) (0.91) 14.39
Provident Growth Portfolio****
2/9/93-11/30/93 10.00 0.02 0.02 0.04 -- -- 10.04
11/30/94 10.04 0.03 (0.01) 0.02 (0.01) -- 10.05
11/30/95 10.05 (0.01) 3.09 3.08 (0.03) -- 13.10
11/30/96 13.10 -- 2.61 2.61 -- -- 15.71
Global Equities Portfolio
2/9/93-11/30/93 10.00 0.03 0.96 0.99 -- -- 10.99
11/30/94 10.99 0.05 0.71 0.76 (0.01) (0.07) 11.67
11/30/95 11.67 0.12 1.64 1.76 (0.08) (0.29) 13.06
11/30/96 13.06 0.14 2.19 2.33 (0.14) (0.33) 14.92
International Diversified Equities Portfolio
10/28/94-11/30/94 10.00 0.01 (0.23) (0.22) -- -- 9.78
11/30/95 9.78 0.07 0.38 0.45 (0.08) -- 10.15
11/30/96 10.15 0.05 1.43 1.48 (0.26) -- 11.37
Aggressive Growth Portfolio
6/3/96-11/30/96 10.00 0.02 0.34 0.36 -- -- 10.36
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES INCOME AVERAGE
TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED RETURN*** (000'S) NET ASSETS NET ASSETS TURNOVER PER SHARE @
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alliance Growth Portfolio
2/9/93-11/30/93 9.20% $ 23,256 0.82%+++ 0.61%+++ 73% N/A
11/30/94 (0.93) 52,213 0.82++ 0.37++ 146 N/A
11/30/95 48.91 167,870 0.79 0.51 138 N/A
11/30/96 28.05 381,367 0.71 0.51 121 0.0649
Growth/Phoenix Investment Counsel Portfolio
2/9/93-11/30/93 7.80 65,032 0.82+++ 2.20+++ 165 N/A
11/30/94 (6.64) 104,194 0.81++ 1.52++ 211 N/A
11/30/95 32.92 149,910 0.76 1.01 229 N/A
11/30/96 18.40 186,368 0.74 0.82 164 0.0534
Provident Growth Portfolio****
2/9/93-11/30/93 0.40 42,911 0.97+++ 0.32+++ 40 N/A
11/30/94 0.19 75,342 0.96+++ 0.31+++ 54 N/A
11/30/95 30.66 115,276 0.93 (0.05) 52 N/A
11/30/96 19.92 160,073 0.90 (0.02) 63 0.0443
Global Equities Portfolio
2/9/93-11/30/93 9.90 43,737 1.50+++ 0.38+++ 58 N/A
11/30/94 6.87 136,758 1.28 0.42 67 N/A
11/30/95 15.58 165,752 1.14 1.02 106 N/A
11/30/96 18.21 246,482 1.03 1.04 70 0.0256
International Diversified Equities Portfolio
10/28/94-11/30/94 (2.20) 12,438 1.70+++ 1.60+++ -- N/A
11/30/95 4.63 48,961 1.70++ 0.76++ 52 N/A
11/30/96 14.85 157,008 1.59 0.47 53 0.0023
Aggressive Growth Portfolio
6/3/96-11/30/96 3.60 35,124 1.05+++ 0.46+++ 47 0.0600
</TABLE>
- ------------------
* Calculated based upon average shares outstanding
** After fee waivers and expense reimbursements by the investment adviser
*** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company and First SunAmerica Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency commissions
paid on equity securities trades and dividing by the number of shares
purchased or sold.
**** Currently, the Putnam Growth Portfolio.
+ Annualized
++ During the periods ended November 30, 1993, 1994, 1995 and 1996, the
investment adviser waived a portion of or all fees and assumed a portion
of or all expenses for the Portfolios. If all fees and expenses had been
incurred by the Portfolios, the ratio of expenses to average net assets
and the ratio of net investment income (loss) to average net assets would
have been as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
------------------------------- -----------------------------------
1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Growth Portfolio........................... 1.56% 0.96% 0.79% 0.71% (0.13)% 0.23% 0.51% 0.51%
Growth/Phoenix Investment Counsel Portfolio......... 1.28 0.87 0.76 0.74 1.74 1.46 1.01 0.82
Provident Growth Portfolio****...................... 1.46 1.05 0.93 0.90 (0.17) 0.22 (0.05) (0.02)
Global Equities Portfolio........................... 2.52 1.28 1.14 1.03 (0.64) 0.42 1.02 1.04
International Diversified Equities Portfolio........ -- 3.50 2.09 1.59 -- (0.20) 0.37 0.47
Aggressive Growth Portfolio......................... -- -- -- 1.09 -- -- -- 0.42
</TABLE>
- ------------------
**** Currently, the Putnam Growth Portfolio.
6
<PAGE> 8
THE TRUST, ITS INVESTMENT OBJECTIVES AND POLICIES
The Trust, organized as a Massachusetts business trust on September 11,
1992, is an open-end management investment company. It was established to
provide a funding medium for certain annuity contracts issued by the Anchor
National Life Insurance Company and First SunAmerica Life Insurance Company
(collectively referred to as the "Life Companies").
The Trust issues 21 separate series of shares ("Portfolios"), each of which
represents a separate managed portfolio of securities with its own investment
objectives. The Board of Trustees may establish additional series in the future.
The current Portfolios are the Cash Management Portfolio, Global Bond Portfolio,
Corporate Bond Portfolio, High-Yield Bond Portfolio, Worldwide High Income
Portfolio, SunAmerica Balanced Portfolio, Balanced/Phoenix Investment Counsel
Portfolio, Asset Allocation Portfolio, Utility Portfolio, Growth-Income
Portfolio, Federated Value Portfolio, Venture Value Portfolio, Alliance Growth
Portfolio, Growth/Phoenix Investment Counsel Portfolio, Putnam Growth Portfolio,
Global Equities Portfolio, International Diversified Equities Portfolio,
Aggressive Growth Portfolio, International Growth and Income Portfolio, Real
Estate and Emerging Markets Portfolio. All shares may be purchased or redeemed
by the Accounts at net asset value without any sales or redemption charge.
SunAmerica Asset Management Corp. ("SAAMCo" or the "Adviser"), an indirect,
wholly owned subsidiary of Anchor National Life Insurance Company, serves as
investment adviser for all the Portfolios of the Trust. (See "Management.")
Alliance Capital Management L.P. ("Alliance") serves as Subadviser for the
Global Equities, Alliance Growth and Growth-Income Portfolios; Davis Selected
Advisers, L.P. ("Davis Selected") serves as subadviser for the Venture Value
Portfolio and Real Estate Portfolios; Federated Investment Counseling
("Federated") serves as subadviser for the Corporate Bond, Federated Value and
Utility Portfolios; Goldman Sachs Asset Management ("GSAM") serves as subadviser
for the Asset Allocation Portfolio; Goldman Sachs Asset Management International
("GSAM-International") serves as subadviser for the Global Bond Portfolio;
Morgan Stanley Asset Management Inc. ("MSAM") serves as subadviser for the
International Diversified Equities and Worldwide High Income Portfolios; Phoenix
Investment Counsel, Inc. ("Phoenix") serves as subadviser for the Growth/Phoenix
Investment Counsel and Balanced/Phoenix Investment Counsel Portfolios; Putnam
Investment Management, Inc. ("Putnam") serves as subadviser for the Putnam
Growth Portfolio, International Growth and Income Portfolio and Emerging Markets
Portfolio. There is no subadviser for the Cash Management, High-Yield Bond,
SunAmerica Balanced, or Aggressive Growth Portfolios. SAAMCo performs all
investment advisory services for these Portfolios.
Each Portfolio has investment objectives and certain policies as described
in this Prospectus. There can be no guarantee that any Portfolio's investment
objectives will be met or that the net return on an investment in a Portfolio
will exceed that which could have been obtained through other investment or
savings vehicles. Investors should carefully review the investment objectives
and policies of a Portfolio and consider their ability to assume the risks
involved before making an investment in a Portfolio. Each Portfolio also has
certain fundamental investment restrictions, which are described in the
Statement of Additional Information. A Portfolio's fundamental investment
restrictions may not be changed without a majority of the outstanding voting
securities of that Portfolio. See "Shareholder Voting Rights." All other
investment practices may be changed without a vote of the shareholders.
The Global Bond, Worldwide High Income and International Diversified
Equities Portfolios are organized as separate "non-diversified" portfolios of
the Trust (as such term is defined under the Investment Company Act of 1940, as
amended, (the "1940 Act")); subject, however, to certain tax diversification
requirements and to diversification guidelines of the California Department of
Insurance. See "Dividends, Distributions and Federal Taxes." Each of the Utility
and Real Estate Portfolios intend to concentrate its investments in the industry
stated in its name, which means that each Portfolio intends to invest at least
25% of its total assets in the securities of such industry.
The Portfolios' investment objectives are discussed below. Please also
refer, however, to the section captioned "Description of Securities and
Investment Techniques" for a more detailed description of the characteristics
and risks associated with the types of securities in which the various
Portfolios may invest. Reference is also made in the following sections to
ratings assigned to certain types of securities by Standard & Poor's Rating
Services, a Division of the McGraw Hill Companies, Inc. ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff & Phelps Credit Rating Co. ("Duff & Phelps") and Thomson BankWatch, Inc.,
recognized independent securities ratings institutions. References to the
particular ratings categories of the securities in which a Portfolio may invest
should be read to include unrated securities deemed by the Adviser or Subadviser
to be of comparable quality to the rated securities in such categories. A
description of the ratings
7
<PAGE> 9
categories assigned by S&P, Moody's, Fitch and Duff & Phelps is contained in the
Statement of Additional Information.
CASH MANAGEMENT PORTFOLIO
The Cash Management Portfolio seeks high current yield while preserving
capital by investing in a diversified selection of money market instruments
including corporate bonds and notes; commercial bank obligations; securities of
the U.S. government, its agencies and instrumentalities; commercial paper and
savings association obligations. These securities mature in one year or less.
The Cash Management Portfolio also may enter into repurchase agreements and firm
commitment agreements and purchase when-issued securities. See "Description of
Securities and Investment Techniques."
The Cash Management Portfolio invests only in securities determined, in
accordance with procedures established by the Trust's Board of Trustees, to
present minimal credit risks. It is the current policy to invest only in
instruments rated in the highest rating category by Moody's and S&P (for
example, commercial paper rated P-1 and A-1 by Moody's and S&P, respectively) or
in instruments that are issued, guaranteed or insured by the U.S. government,
its agencies or instrumentalities as to the payment of principal and interest,
or in other instruments rated in the highest two categories by either Moody's or
S&P, provided the issuer has commercial paper rated in the highest rating
category by Moody's and S&P.
Although investments in the Cash Management Portfolio should present
minimal market risk because the investments of the Portfolio consists of only
short-term debt obligations, an investment in this Portfolio is subject to the
risks of declining interest rates and the economy as a whole. Also, the return
on an investment in the Cash Management Portfolio would not be the same as the
return on an investment in a money market fund available directly to the public
even where yields are equivalent, due to fees imposed at the variable annuity
contract level.
GLOBAL BOND PORTFOLIO
The investment objective of the Global Bond Portfolio is to provide
investors with a high total return, emphasizing current income and, to a lesser
extent, providing opportunities for capital appreciation. Under normal
circumstances, the Portfolio will seek to meet its investment objective by
pursuing investment opportunities in foreign and domestic high quality
fixed-income securities markets and by engaging in currency transactions to
enhance returns and for the purpose of hedging its investments. High quality
securities are defined as securities which have ratings of at least AA by S&P or
Aa by Moody's ("High Quality Ratings").
The fixed-income securities in which the Portfolio may invest include: (i)
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and custodial receipts thereof; (ii) securities issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies or instrumentalities or by multiple governmental entities
(i.e., international organizations designated or supported by governmental
entities to promote economic reconstruction or development, such as the World
Bank) rated A or better by S&P or Moody's, provided that the obligations are
denominated in the issuer's own currency; (iii) corporate debt securities having
at least one high quality rating or, if unrated, determined by the Subadviser to
be of comparable credit quality; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks
(including U.S. or foreign branches of U.S. banks or U.S. or foreign branches of
foreign banks) having total assets of more than $1 billion and determined by the
Subadviser to be of comparable credit quality to securities with a high quality
rating; (v) commercial paper rated A-1 or better by S&P, P-1 or better by
Moody's, Fitch-1 or better by Fitch, or Duff 1 or better by Duff & Phelps or, if
not rated, issued by U.S. or foreign companies having outstanding debt
securities with a high quality rating and determined by the Subadviser to be of
comparable credit quality to securities with a high quality rating; and (vi)
mortgage-related and asset-backed securities having at least one high quality
rating.
Although the Portfolio may invest in securities satisfying the minimum
credit quality criteria prescribed above, the Portfolio generally intends to
invest at least 50% of its total assets in securities having the highest
applicable credit quality rating. Currently, most of the foreign securities that
meet the Portfolio's credit quality standards are likely to be securities issued
by foreign governments. The debt securities in which the Portfolio will invest
may have fixed, variable or floating interest rates.
In selecting securities for the Portfolio, the Subadviser will consider
such factors as the security's duration, sector and credit quality rating as
well as the security's yield and prospects for capital appreciation. It is
expected
8
<PAGE> 10
that the Portfolio will use currency transactions both to enhance returns for a
given level of risk and to hedge its exposure to foreign currencies. While the
Portfolio will have both long and short currency positions, neither its net long
foreign currency exposure nor its net short foreign currency exposure will
exceed the value of the Portfolio's total assets.
Under normal circumstances, the Portfolio will maintain a dollar-weighted
average duration of not more than 7.5 years. However, the Portfolio is not
subject to any limitation with respect to the average maturity of its Portfolio
or the individual securities in which the Portfolio may invest. Duration
represents the weighted average maturity of expected cash flows on a debt
obligation, discounted to present value. Maturity measures only the time until
final payment is due on a bond or other debt security; it takes no account of
the pattern of a security's cash flows over time. In computing the duration of
its portfolio, the Subadviser will have to estimate the duration of debt
obligations that are subject to prepayment or redemption by the issuer. The
Portfolio may use various techniques to shorten or lengthen its dollar-weighted
average duration, including the acquisition of debt obligations at a premium or
discount, transactions in options, futures contracts, options on futures and
interest-rate swaps, caps and floors. The Portfolio may also invest in
mortgage-related securities and enter into dollar rolls.
It is expected that the Portfolio will employ certain active currency and
interest-rate management techniques involving risks different from those
associated with investing solely in dollar-denominated fixed-income securities
of U.S. issuers. Such active management techniques include transactions in
options (including yield curve options), futures and options on futures, forward
foreign currency exchange contracts, currency options and futures, currency and
interest-rate swaps and floors, caps and collars. The aggregate amount of the
Portfolio's net currency exposure will not exceed its total asset value.
However, to the extent that the Portfolio is fully invested in fixed-income
securities while also maintaining currency positions, it may be exposed to
greater combined risk. The Portfolio's net currency positions may expose it to
risks independent of its securities positions.
The Portfolio will, under normal market conditions, have at least 30% of
its total assets, adjusted to reflect the Portfolio's net exposure after giving
effect to currency transactions and positions, denominated in U.S. dollars. The
Portfolio may, for temporary defensive purposes (such as when instability or
unfavorable conditions exist in foreign countries), invest 100% of its total
assets in dollar-denominated securities or securities of U.S. issuers.
Because the securities markets in each of Canada, Germany, Japan and the
United Kingdom are highly developed, liquid and subject to extensive regulation,
the Global Bond Portfolio may invest up to 35% of its total assets in the
securities of corporate and government issuers located in any one of such
countries. Concentration of the Portfolio's investments in such issuers will
subject the Portfolio to the risks of adverse social, political or economic
events which may occur in those countries.
Investment in foreign securities involves special risks. See "Description
of Securities and Investment Techniques -- Risks and Considerations Applicable
to Investment in Securities of Foreign Issuers."
CORPORATE BOND PORTFOLIO
The Corporate Bond Portfolio seeks a high total return with only moderate
price risk by investing primarily in investment grade fixed-income securities.
Under normal market conditions, at least 65% of the Portfolio's total assets
will be invested in investment grade debt securities (i.e., those rated at the
time of purchase within the four highest grades assigned by Moody's (Aaa, Aa, A
or Baa) or by S&P (AAA, AA, A or BBB)), securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities (including mortgage-backed
securities) or repurchase agreements collateralized by such investment grade or
U.S. government securities. In addition, under normal circumstances, the
Portfolio will invest at least 65% of the value of its total assets, taken at
market value at the time of investment, in corporate debt securities, including
asset-backed securities and privately placed debt securities, of domestic and
foreign issuers. Certain fixed rate obligations in which the Portfolio invests
may involve equity characteristics. The Portfolio may, for example, invest in
unit offerings that combine fixed rate securities and common stock or common
stock equivalents such as warrants, rights and options. These may be purchased
by the Portfolio only when the debt security meets the Portfolio's investment
criteria and the value of the equity security or equity equivalent is relatively
small. If the equity security or equity equivalent becomes valuable it will
ordinarily be sold rather than exercised in the case of warrants, rights or
options. It is anticipated that no more than 10% of the assets of the Portfolio
will constitute equity securities or equity equivalents regardless of how such
securities were acquired. To the extent that such securities are acquired, there
may be some additional investment risk and countervailing opportunity, depending
upon the extent to which the common stock price fluctuates.
9
<PAGE> 11
Up to 35% of the Portfolio's total assets may be invested in the following:
other types of debt securities, including those rated below investment grade,
zero-coupon bonds, pay-in-kind securities, and units consisting of bonds and
equity equivalents; commercial paper rated at the time of purchase P-1 by
Moody's or A-1 by S&P; obligations of banks having total assets in excess of $1
billion; and preferred stocks (including those rated below investment grade,
convertible into, or carrying warrants to purchase, common stocks or other
equity interests).
The Portfolio will generally invest in debt securities and preferred stocks
rated below investment grade only to the extent that the Subadviser believes
that lower credit quality of such securities is offset by more attractive
yields. There is no limit with respect to the rating categories for securities
in which the Portfolio may invest. The weighted average ratings by S&P as a
percentage of all bonds held by the Portfolio during the fiscal year ended
November 30, 1996 were: "AAA" 21.2%; "AA" 10.0%; "A" 20.0%; "BBB" 26.6%; "BB"
9.9%; and "B" 12.3%. See "Description of Securities and Investment
Techniques -- Corporate Debt Instruments -- Lower Grade" for a description of
lower-rated securities.
The Portfolio may invest in high quality short-term money market
instruments denominated in U.S. dollars, including repurchase agreements, which
are also authorized for purchase by the Cash Management Portfolio. The Portfolio
may enter into "dollar rolls" in which the Portfolio sells mortgage or other
asset-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same types, coupons and maturity)
securities on a specified future date. The Portfolio may also invest in
synthetic or derivative instruments based on permitted investments, including
futures contracts, options, interest-rate swaps, mortgage swaps and
interest-rate caps, floors and collars.
HIGH-YIELD BOND PORTFOLIO
The primary investment objective of the High-Yield Bond Portfolio is a high
level of current income; its secondary investment objective is capital
appreciation. Under normal market conditions, the Portfolio will invest at least
65% of its total assets in high-yield bonds. Subject to this requirement the
Portfolio may maintain assets in cash or cash equivalents, including commercial
bank obligations (certificates of deposit; bankers' acceptances, which are time
drafts on a commercial bank for which the bank accepts an irrevocable obligation
to pay at maturity; and demand or time deposits), commercial paper (short-term
notes issued by corporations or governmental bodies) and obligations issued or
guaranteed by the U.S. government. These "high-yield" bonds, commonly referred
to as "junk bonds," typically are subject to greater market fluctuations and
risk of loss of income and principal due to default by the issuer than are
investments in lower-yielding, higher-rated bonds. Further, a substantial
portion of the Portfolio's assets will generally be invested in long-term (over
10 years to maturity) and intermediate-term (3 to 10 years to maturity)
fixed-income securities, with emphasis on higher-yielding, higher-risk,
lower-rated or unrated corporate bonds.
High-yield, high-risk bonds generally include any bonds that are rated Ba
or below by Moody's or BB or below by S&P. Bonds rated Ba or BB or below are
considered speculative. The Portfolio may invest without limitation in bonds
rated as low as Ca by Moody's or C by S&P (or unrated but considered by the
Adviser of equivalent quality). In addition, the Portfolio may invest up to 10%
of its total assets in bonds rated C by Moody's or D by S&P. The weighted
average ratings by Moody's as a percentage of all bonds held by the Portfolio
during the fiscal year ended November 30, 1996 were: "Ba" 8.0%; "B" 86.3%; and
"Caa" 4.4%; and the balance 1.3% in unrated bonds which the subadviser deemed
comparable to "Caa" rating. See "Description of Securities and Investment
Techniques -- Corporate Debt Instruments -- Lower Grade" and "Description of
Securities and Investment Techniques -- Risk Factors Relating to High-Yield
Bonds" for a more detailed description of these securities.
In pursuing its secondary investment objective of capital appreciation, the
Portfolio may purchase high-yield bonds that are expected by the Adviser to
increase in value due to improvements in their credit quality or ratings or
anticipated declines in interest rates. In addition, the Portfolio may invest
for this purpose up to 25% of its assets in equity securities, such as common
stocks, or other securities having common stock characteristics. Securities
designated as having "common stock" characteristics include, but are not limited
to, securities convertible into or exchangeable for common stock. Such
securities normally will be purchased as part of a unit with fixed-income
securities or when an unusual opportunity for capital appreciation is perceived
due to anticipated improvement in the issuer's credit quality or ratings. The
Portfolio also may purchase or hold warrants or rights.
Up to 25% of the Portfolio's assets may be invested in securities of
foreign issuers, which are generally denominated in currencies other than the
U.S. dollar. The Portfolio also has the ability to hold a portion of its assets
in foreign currencies and to enter into forward foreign currency exchange
contracts, currency options, currency and
10
<PAGE> 12
financial futures contracts, and options on such futures contracts. The
Portfolio may enter into repurchase agreements and firm commitment agreements
and may purchase securities on a when-issued basis. Investment in foreign
securities also involves special risks. See "Description of Securities and
Investment Techniques -- Risks and Considerations Applicable to Investment in
Securities of Foreign Issuers."
WORLDWIDE HIGH INCOME PORTFOLIO
The investment objective of the Worldwide High Income Portfolio is high
current income and, secondarily, capital appreciation, by investing primarily in
a portfolio of high-yielding fixed-income securities of issuers located
throughout the world. The Portfolio seeks to achieve its investment objective by
allocating its assets among any or all of three investment sectors: U.S.
corporate lower-rated and unrated debt securities, emerging country debt
securities and global fixed-income securities offering high real yields. The
types of securities in each of these investment sectors are described in detail
in the Statement of Additional Information. In selecting U.S. corporate
lower-rated and unrated debt securities for the Portfolio, the Subadviser will
consider, among other things, the price of the security, and the financial
history, condition, prospects and management of the issuer. The Subadviser
intends to invest a portion of the Portfolio's assets in emerging country debt
securities that provide a high level of current income, while at the same time
holding the potential for capital appreciation if the perceived creditworthiness
of the issuers improves due to improving economic, financial, political, social
or other conditions in the country in which the issuer is located. In addition,
the Subadviser will attempt to invest a portion of the Portfolio's assets in
fixed-income securities of issuers in global fixed-income markets displaying
high real (inflation adjusted) yields. Under normal conditions, the Portfolio
intends to invest between 80% and 100% of its total assets in some or all of
three categories of higher-yielding securities, some of which may entail
increased credit and market risk. The weighted average ratings by Moody's as a
percentage of all bonds held by the Portfolio during the fiscal year ended
November 30, 1996 were: "Ba" 21.34%; "B" 35.80%; and "Caa" 1.14%; "C" 0.05%; and
the balance 41.67% in unrated bonds. See "Risk Factors Relating to High-Yield
Bonds" and "Risks and Considerations Applicable to Investment in Securities of
Foreign Issuers" under "Description of Securities and Investment Techniques."
The Subadviser's approach to multi-currency fixed-income management is
strategic and value-based and designed to produce an attractive real rate of
return. The Subadviser's assessment of the bond markets and currencies is based
on an analysis of real interest rates. Current nominal yields of securities are
adjusted for inflation prevailing in each currency sector using an analysis of
past and projected inflation rates. The Portfolio's aim is to invest in bond
markets which offer the most attractive real returns relative to inflation.
From time to time, a portion of the Portfolio's investments, which may be
up to 100% of its investments, may be considered to have credit quality below
investment grade as determined by internationally recognized credit rating
agency organizations, such as Moody's and S&P. Such lower-rated bonds are
commonly referred to as "junk bonds." Securities in such lower rating categories
may have predominantly speculative characteristics or may be in default. See
"Description of Securities and Investment Techniques -- Corporate Debt
Instruments -- Lower Grade" for a description of Moody's and S&P's corporate
bond ratings. Ratings represent the opinion of rating agencies as to the quality
of bonds and other debt securities they undertake to rate at the time of
issuance. However, ratings are not absolute standards of quality and may not
reflect changes in an issuer's creditworthiness. Accordingly, while the
Subadviser will consider ratings, it will perform its own analysis and will not
rely principally on ratings. Emerging country debt securities in which the
Portfolio may invest will be subject to high risk and will not be required to
meet a minimum rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. The Portfolio's
investments in U.S. corporate lower-rated and unrated debt securities and
emerging country debt securities are expected to be rated in the lower and
lowest rating categories of internationally recognized credit rating
organizations. Ratings of a foreign debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a foreign debt instrument is denominated; instruments issued
by a foreign government in other than the local currency, for example, typically
have a lower rating than local currency instruments due to the existence of an
additional risk that the government will be unable to obtain the required
foreign currency to service its foreign currency-denominated debt. In general,
the ratings of debt securities or obligations issued by a foreign public or
private entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer. To mitigate
the risks associated with investment in such lower-rated securities, the
Portfolio will diversify its holdings by market, issuer, industry and credit
quality.
11
<PAGE> 13
The Portfolio may invest in or own securities of companies in various
stages of financial restructuring, bankruptcy or reorganization which are not
currently paying interest or dividends, provided that the total value at the
time of purchase of all such securities will not exceed 10% of the value of the
Portfolio's total assets. The Portfolio may have limited recourse in the event
of default on such debt instruments. The Portfolio may invest in loans,
assignments of loans and participation in loans. See the Statement of Additional
Information for a description of these investments. The Portfolio may also
invest in depository receipts issued by U.S. or foreign financial institutions.
See the Statement of Additional Information for further information.
The Portfolio is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of its assets may be invested in non-U.S. dollar-denominated securities.
The portion of the Portfolio's assets invested in securities denominated in
currencies other than the U.S. dollar will vary depending on market conditions.
The analysis of currencies is made independent of the analysis of markets. Value
in foreign exchange is determined by relative purchasing power parity of a given
currency. The Portfolio seeks to invest in currencies currently undervalued
based on purchasing power parity. The Subadviser analyzes current account and
capital account performance and real interest rates to adjust for short-term
currency flows. Although the Portfolio is permitted to engage in a wide variety
of investment practices designed to hedge against currency exchange rate risks
with respect to its holdings of non-U.S. dollar-denominated debt securities, the
Portfolio may be limited in its ability to hedge against these risks. See
"Foreign Currency Transactions" and "Short Sales" under "Description of
Securities and Investment Techniques." The Portfolio may also write (i.e., sell)
covered call options and may enter into futures contracts and options on futures
and sell indexed financial futures contracts. See "Futures Contracts and Options
Thereon" and "Options on Securities and Securities Indices" under "Description
of Securities and Investment Techniques."
The average time to maturity of the Portfolio's securities will vary
depending upon the Subadviser's perception of market conditions. The Subadviser
invests in medium-term securities (i.e., those with a remaining maturity of
approximately five years) in a market neutral environment. When the Subadviser
believes that real yields are high, the Subadviser lengthens the remaining
maturities of securities held by the Portfolio and, conversely, when the
Subadviser believes real yields are low, it shortens the remaining maturities.
Thus, the Portfolio is not subject to any restrictions on the maturities of the
debt securities it holds, and the Subadviser may vary the average maturity of
the securities held in the Portfolio without limit.
The Portfolio may also invest in other types of securities and/or engage in
a variety of investment strategies including: zero-coupon, pay-in-kind, illiquid
and restricted securities; repurchase agreements; and borrowing for investment
and temporary purposes. See "Description of Securities and Investment
Techniques." For temporary defensive purposes, the Portfolio may invest part or
all of its total assets in cash or in short-term securities, including
certificates of deposit, commercial paper, notes, obligations issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
SUNAMERICA BALANCED PORTFOLIO
The investment objective of the SunAmerica Balanced Portfolio is to
conserve principal by maintaining at all times a balanced portfolio of stocks
and bonds. In seeking to achieve the investment objective of the Portfolio, the
Adviser has the flexibility to select among different types of investments for
capital growth and income and may alter the composition of the Portfolio as
economic and market trends change. The Adviser considers both the opportunity
for gain and the risk of loss in making investments. The Adviser anticipates
that, over the long term, the Portfolio will consist of equity investments, in
the form of common and preferred stocks, warrants and other rights, as well as
long-term bonds and other debt securities such as convertible securities,
short-term investments and U.S. government securities. The Portfolio will, under
normal circumstances, invest at least 25% of its assets in fixed-income senior
securities; however, the fixed-income component will exceed 25% when the Adviser
believes such an adjustment in portfolio mix to be necessary in order to
conserve principal, such as in anticipation of decline in the equities market.
The Adviser shifts its emphasis among these different types of investments, as
well as among various industry sectors, as financial trends and economic
conditions change.
In selecting equity investments, the Adviser typically seeks companies of
medium to large capitalizations (generally $1 billion or more) that, based on
their future prospects or opportunities, it believes are undervalued in the
marketplace. Investments in companies with market capitalizations of less than
$1 billion may be more volatile than investments in companies with larger market
capitalizations, and thus the Portfolio intends to limit its
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investments in such companies to no more than 20% of its total assets. See
"Description of Securities and Investment Techniques -- Risks Associated with
Investing in Small Companies."
In selecting debt investments, the Adviser seeks debt securities with
longer maturities during periods of anticipated lower interest rates and
shorter-term debt securities when interest rates are expected to rise. The
Adviser generally selects long-term debt securities from high quality bonds
(rated AA or higher by S&P, Aa or higher by Moody's) to achieve income and
capital gains. The Adviser may also invest the Portfolio's assets in high
quality, short-term debt securities (such as commercial paper rated A-1 by S&P
or P-1 by Moody's, or determined by the Adviser to be of equivalent quality if
unrated). However, the Adviser may invest up to 10% of the value of the
Portfolio's total assets (measured at the time of investment) in securities
rated as low as BBB by S&P or Baa by Moody's. See "Fixed-Income Securities" in
"Description of Securities and Investment Techniques" below for a discussion of
the risks associated with investing in such securities. See also the Statement
of Additional Information for a description of securities ratings.
The Adviser may select equity and debt securities for the Portfolio issued
by either domestic or foreign issuers. See "Description of Securities and
Investment Techniques" for a description of the risks associated with foreign
securities.
BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO
The Balanced/Phoenix Investment Counsel Portfolio seeks as its investment
objectives reasonable income, long-term capital growth and conservation of
capital. The Portfolio intends to invest based on combined considerations of
risk, income, capital enhancement and protection of capital value.
The Portfolio may invest in any type or class of security. Under normal
circumstances, the Portfolio will invest in common stocks and fixed-income
securities; however, it may also invest in securities convertible into common
stocks. At least 25% of the value of the Portfolio's assets will normally be
invested in fixed-income senior securities. The Portfolio may also engage in
certain options transactions and enter into financial futures contracts and
related options for hedging purposes, and may invest in zero coupon debt
obligations. Notwithstanding the foregoing, for temporary defensive purposes,
the Portfolio may actively pursue a policy of retaining cash or investing part
or all of its assets in cash equivalents, such as government securities and high
quality commercial paper. See "Description of Securities and Investment
Techniques" for a full discussion of the types of securities in which the
Portfolio may invest.
The Portfolio may invest up to 25% of the value of the Portfolio's total
assets in securities of foreign issuers, including emerging market securities
and those issued by foreign branches of U.S. banks. Such foreign investments may
involve a higher degree of risk than investments in domestic issuers. Foreign
securities are often denominated in foreign currencies, which means that their
value will be affected by changes in exchange rates, as well as other factors
that affect securities prices. Investment in foreign securities involves special
risks. See "Description of Securities and Investment Techniques -- Risks and
Considerations Applicable to Investment in Securities of Foreign Issuers."
With respect to investment in fixed-income securities, the Portfolio
intends to emphasize investments in investment grade fixed-income securities
which are rated within the four highest categories by recognized rating agencies
such as Moody's, S&P, Duff & Phelps or Fitch. However, the Portfolio may invest
in lower- or non-rated fixed-income securities, but will not invest more than
35% of its net assets, determined at the time of investment, in high-yield,
high-risk fixed-income securities. A fixed-income securities issue may have its
ratings reduced below the minimum permitted for purchase by the Portfolio. In
that event, the Subadviser will determine whether the Portfolio should continue
to hold such security. If, in the Subadviser's opinion, market conditions
warrant, the Portfolio may, from time to time, increase its position in lower-
and non-rated securities. Investment in lower-rated and unrated fixed-income
securities involves certain risks not attendant to higher rated securities. For
the fiscal year ended November 30, 1996, less than 5% of the Portfolio's bond
holdings were below investment grade. See "Description of Securities and
Investment Techniques -- Corporate Debt Instruments and Risk Factors Relating to
High-Yield Bonds" for a full discussion of below investment grade fixed-income
securities and the risks associated therewith.
ASSET ALLOCATION PORTFOLIO
The investment objective of the Asset Allocation Portfolio is high total
return (including income and capital gains) consistent with preservation of
capital over the long-term. The Portfolio seeks to achieve its objectives by
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<PAGE> 15
investing in a diversified portfolio that can include common stocks and other
securities having common stock characteristics, bonds and other intermediate and
long-term fixed-income securities, including mortgage-related and asset-backed
securities, and money market instruments (debt securities maturing in one year
or less). Securities designated as having "common stock" characteristics
include, but are not limited to, securities convertible into or exchangeable for
common stock.
The Subadviser will determine the relative mix of equities, fixed-income
securities and money market instruments for the Portfolio based on its view of
long-term economic and market trends under the relative risks and opportunities
for long-term total return of the different classes of assets. Under normal
conditions, the Subadviser expects (but is not required) to maintain an
investment mix falling within the following ranges: 40% to 80% in equities; 20%
to 50% in fixed-income securities; and 0% to 40% in money market instruments.
The Subadviser may make frequent shifts within these broad ranges whenever, in
the Subadviser's judgment, market or economic changes warrant a reallocation.
The Subadviser intends in normal situations to make any shifts in the
Portfolio's asset allocation gradually over time based on its views of long-term
trends and conditions.
The Portfolio may invest in securities of foreign issuers (which are
generally denominated in currencies other than the U.S. dollar), although there
is no requirement that the Portfolio maintain investments in foreign issuers.
See "Description of Securities and Investment Techniques -- Risks and
Considerations Applicable to Investment in Securities of Foreign Issuers." The
Portfolio also has the ability to hold a portion of its assets in foreign
currencies and to enter into forward foreign currency exchange contracts,
currency options, currency swaps, currency and financial futures contracts, and
options on such futures contracts.
The Portfolio's fixed-income investments will consist primarily of
"investment grade" bonds; that is, bonds that are rated BBB or better by S&P or
Baa or better by Moody's. Up to 25% of the Portfolio's fixed-income assets may
be invested in securities that are below investment grade as defined above,
including securities rated as low as CC by S&P or Ca by Moody's. Securities
rated BBB or below by S&P or Baa or below by Moody's are considered to have
speculative characteristics. The weighted average ratings by S&P as a percentage
of all bonds held by the Portfolio during the fiscal year ended November 30,
1996 were: "AAA" 55.6%; "A" 8.1%; "BBB" 20.2%; "BB" 14.1%; and "B" 2.0%. For a
more detailed description of the risks involved with these securities, see
"Description of Securities and Investment Techniques -- Corporate Debt
Instruments -- Lower Grade" and "Risk Factors relating to High-Yield, High-Risk
Bonds." The Portfolio's investments in foreign fixed-income securities will be
concentrated in securities issued or guaranteed as to principal and interest by
foreign governments or their agencies and instrumentalities or by multinational
agencies.
The Portfolio may enter into repurchase agreements and firm commitment
agreements, and may purchase when-issued securities. The Portfolio may also
engage in interest-rate swaps, mortgage swaps, transactions involving
interest-rate caps, floors and collars, dollar rolls and securities lending.
UTILITY PORTFOLIO
The Utility Portfolio seeks high current income and moderate capital
appreciation. The Portfolio's investment approach is based on the Subadviser's
conviction that over the long-term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Portfolio intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies.
The Portfolio will, under normal circumstances, invest at least 65% of its
total assets in securities of utility companies. Such investments will be
primarily in common stocks selected by the Subadviser on the basis of
traditional research techniques, including assessment of earnings and dividend
growth prospects and of the risk and volatility of an issuer's industry.
However, other factors, such as product position, market share, or profitability
will also be considered by the Subadviser. The Portfolio may also invest in
preferred stocks, corporate bonds, notes, and warrants of utility companies.
Fixed-income securities purchased by the Portfolio will be rated at least BBB by
S&P or Baa by Moody's.
The Portfolio may also invest in other types of securities and/or engage in
a variety of investment strategies, including: U.S. government securities; money
market instruments; foreign securities; illiquid securities; repurchase and
reverse repurchase agreements; securities lending; when-issued and
delayed-delivery transactions; and options, financial futures and options on
such futures. See "Description of Securities and Investment Techniques" for more
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information on these securities and strategies. For temporary defensive
purposes, the Portfolio may invest up to 100% of its assets in cash, cash
equivalents and short-term debt instruments.
Risk Factors Applicable to Utility Securities -- There exist certain risks
associated with the utility industry of which investors in the Portfolio should
be aware. These include (i) utility companies' difficulty in earning adequate
returns on investment despite frequent rate increases; (ii) restrictions on
operations and increased costs and delays due to governmental regulations; (iii)
building or construction delays; (iv) environmental regulations; (v) difficulty
of the capital markets in absorbing utility debt and equity securities; and (vi)
difficulties in obtaining fuel at reasonable prices. Further information
concerning the risks associated with the utility industry generally, and
particular segments within the utility industry is contained in the Statement of
Additional Information.
Reducing Risks of Utility Securities -- The Subadviser believes that the
risks of investing in utility securities can be reduced. The professional
portfolio management techniques used by the Subadviser to attempt to reduce
these risks include credit research and diversification techniques. The
Subadviser will perform its own credit analysis in addition to using recognized
rating agencies, and will obtain information from other sources, including the
issuer's management and other investment analysts. The Subadviser's credit
analysis will consider the issuer's financial soundness, its responsiveness to
changes in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage, and earnings. In evaluating an issuer, the
Subadviser places special emphasis on the estimated current value of the
issuer's assets rather than historical cost.
GROWTH-INCOME PORTFOLIO
The Growth-Income Portfolio seeks growth of capital and income. In the
selection of securities for investment, the possibilities of appreciation and
potential dividends are given more weight than current yield. Ordinarily, the
assets of the Portfolio consist principally of a diversified group of common
stocks, but other types of securities, including preferred stocks, corporate
bonds and convertible bonds, may be held when deemed advisable. The Subadviser
determines the relative amounts to be invested in common stocks, preferred
stocks, bonds (including corporate and convertible), securities of the U.S.
government, its agencies and instrumentalities, cash and cash equivalents (such
as commercial bank and savings association obligations, commercial paper and
short-term corporate bonds and notes) and repurchase agreements. See
"Description of Securities and Investment Techniques."
FEDERATED VALUE PORTFOLIO
The Federated Value Portfolio seeks growth of capital and income. The
Portfolio pursues its investment objective by investing, under normal
circumstances, at least 65% of its assets in a portfolio of securities issued by
the one hundred companies contained in "The Leaders List" described below. The
Portfolio's investment approach is based upon the Subadviser's conviction that
over the longer term, the economy will continue to expand and develop and that
this economic growth will be reflected importantly in the growth of major
corporations. Generally, the Subadviser makes portfolio selections utilizing
fundamental analysis, with emphasis on the issuer's earning power, financial
condition and valuation.
The securities in which the Portfolio invests include, but are not limited
to: common stocks; preferred stocks; domestic issues of corporate debt
obligations; and warrants. The fixed-income securities in which the Portfolio
may invest must be rated, at the time of purchase, BBB or better by S&P, Baa by
Moody's, or BBB by Fitch. If a security loses its rating or has its rating
reduced after the Portfolio has purchased it, the Portfolio is not required to
sell the security, but will consider doing so.
The Portfolio may also invest in other securities and/or engage in various
investment strategies, including: foreign securities; repurchase agreements;
illiquid securities; and securities lending. See "Description of Securities and
Investment Techniques" for more information on these securities and strategies.
For temporary or defensive purposes, the Portfolio may also hold cash and invest
in U.S. government securities in such proportions as the Subadviser may deem
necessary for such purposes.
"The Leaders List" is a trade name which represents a list of 100 blue chip
companies selected by the Subadviser. In the opinion of the Subadviser,
securities of these companies represent diversified and highly marketable
investments. The Subadviser uses its proprietary securities selection process to
evaluate the relative value of securities suitable for the Leaders List. The
Subadviser also uses a number of standards and fundamental research factors in
selecting "The Leaders List." "The Leaders List" generally includes leading
companies in their industries determined in terms of sales, earnings, and/or
market capitalization. Companies on the "Leaders List"
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typically have a market capitalization in excess of $1 billion. The list is
subject to continuous review and modification.
VENTURE VALUE PORTFOLIO
The Venture Value Portfolio seeks growth of capital. Under normal
circumstances, the assets of the Portfolio will be invested in securities which
the Subadviser believes have above-average appreciation potential. Usually these
securities are common stocks. Income is not a significant factor in selecting
investments for the Portfolio.
Generally, the Portfolio will invest predominantly in equity securities of
companies with market capitalizations of at least $250 million. Investments will
consist of issues which the Subadviser believes have capital growth potential
due to factors such as undervalued assets or earnings potential, product
development and demand, favorable operating ratios, resources for expansion,
management abilities, reasonableness of market price, and favorable overall
business prospects.
The Portfolio may invest in securities of foreign issuers. Such foreign
investments may involve a higher degree of risk than investments in domestic
issuers. Foreign securities are often denominated in foreign currencies, which
means that their value will be affected by changes in exchange rates, as well as
other factors that affect securities prices. To help reduce exposure to currency
fluctuations, the Portfolio may trade in forward foreign currency exchange
contracts (forward contracts), currency futures contracts and options thereon
and securities indexed to foreign securities. The Subadviser will use these
techniques to lock in an exchange rate in connection with transactions in
securities denominated or traded in foreign currencies, to hedge the currency
risk in foreign securities held by the Portfolio and to hedge a currency risk
involved in an anticipated purchase of foreign securities.
The Portfolio will generally invest in securities of foreign companies
through trades of individual securities on recognized exchanges and developed
over-the-counter markets, through American Depositary Receipts (ADRs) covering
such securities, and through U.S. registered investment companies primarily
investing in foreign securities. With respect to other registered investment
companies, no such investment may cause more than 10% of the Portfolio's total
assets to be invested in such companies. Such other investment companies usually
have their own management costs or fees and the Portfolio's Subadviser earns its
regular fee on such assets.
Investment in foreign securities and engaging in foreign currency
transactions involves special risks. See "Description of Securities and
Investment Techniques -- Risks and Considerations Applicable to Investment in
Securities of Foreign Issuers and Foreign Currency Transactions."
Sometimes a more defensive position may be desirable under certain economic
or financial circumstances. At these times, the Portfolio may without limitation
hold assets in cash and cash equivalents, including repurchase agreements, or in
fixed-income or other defensive securities rather than in securities selected
for appreciation potential. The Portfolio may also have such holdings
temporarily for the purpose of managing exceptional in-flows and out-flows of
cash.
The Portfolio may also engage in other types of investment practices,
including, but not limited to, investment in illiquid securities and lending of
portfolio securities. See "Description of Securities and Investment Techniques"
for a description of these investment techniques and a discussion of the other
techniques in which the Portfolio may engage.
ALLIANCE GROWTH PORTFOLIO
GROWTH/PHOENIX INVESTMENT COUNSEL PORTFOLIO
PUTNAM GROWTH PORTFOLIO
The three Growth Portfolios have the same investment objectives, policies
and restrictions, but have different subadvisers. The investment objective of
each Portfolio is to seek long-term growth of capital. Whatever current income
is generated by the Portfolio is incidental to the objective of capital growth.
Each Portfolio's objective of capital growth is sought by investing primarily in
common stocks or securities with common stock characteristics. Securities
designated as having "common stock" characteristics include, but are not limited
to, securities convertible into or exchangeable for common stock. Such
convertible securities may be rated below BBB by S&P or Baa by Moody's (i.e.,
junk bonds). See "Description of Securities and Investment Techniques -- Risk
Factors Relating to High-Yield, High-Risk Securities"). In addition, each
Portfolio may purchase preferred stocks and debt securities if its Subadviser
believes they would help achieve the Portfolio's objective. The potential for
appreciation of capital is the basis for investment decisions. Each Portfolio's
Subadviser considers the factors that it believes affect potential
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for capital appreciation, including an issuer's current and projected revenue,
earnings, cash flow and assets, as well as general market conditions. When the
outlook for common stocks is not considered promising, for temporary defensive
purposes, a substantial portion of the assets may be invested in securities of
the U.S. government, its agencies and instrumentalities, cash and cash
equivalents (such as commercial bank and savings association obligations,
commercial paper and short-term corporate bonds and notes) and repurchase
agreements. Because the securities purchased by these Portfolios in pursuing
their investment objective are selected for growth potential rather than
production of income, the market values of such securities (and therefore, to a
large extent, the net asset values per share of the Portfolios) will tend to be
more volatile in response to market changes than they would be if
income-producing securities were sought for investment by the Portfolios. Up to
25% of each Portfolio's total assets may be invested in foreign securities. See
"Description of Securities and Investment Techniques -- Risks and Considerations
Applicable to Investment in Securities of Foreign Issuers" and the Statement of
Additional Information.
GLOBAL EQUITIES PORTFOLIO
The investment objective of the Global Equities Portfolio is to achieve
long-term growth of capital through investment primarily in common stocks or
securities of U.S. and foreign issuers with common stock characteristics and
through transactions in foreign currencies. Securities designated as having
"common stock" characteristics include, but are not limited to, securities
convertible into or exchangeable for common stock. A major premise of the
Portfolio's investment approach is the Subadviser's belief that economic and
political developments have helped to create new opportunities worldwide.
The assets of the Portfolio will be invested with geographic flexibility.
Under normal market conditions, the Portfolio will invest at least 50% of its
assets in equity securities of issuers domiciled outside the U.S. However, for
temporary defensive purposes, it may invest up to 100% of its assets in
dollar-denominated securities or securities of U.S. issuers. The Subadviser
seeks to identify those companies, both domestic and foreign, likely to benefit
from long-term trends and shifting trade patterns as they develop in the global
economy. The Subadviser currently does not intend to invest more than 20% of the
Portfolio's total assets in issuers domiciled in, or governments of, developing
countries (i.e., those identified as such by the international financial
community).
When prevailing market, economic, political or currency conditions warrant,
the Portfolio may purchase fixed-income securities (including securities of
governments other than the U.S., which may be securities of either national,
regional or local governments). For temporary defensive purposes, the Portfolio
may at times maintain all or any part of its assets in U.S. dollar-denominated
or foreign currency-denominated cash or cash equivalents (including U.S.
government securities, foreign government securities, certificates of deposit,
time deposits, commercial paper, bankers' acceptances and other high quality
short-term debt securities).
It is expected that the Portfolio will use currency transactions and
financial index futures both to enhance returns for a given level of risk and to
hedge its exposure to foreign currencies and local market conditions. While the
Portfolio will have both long and short currency positions, neither its net long
foreign currency exposure nor its net short foreign currency exposure will
exceed the value of the Portfolio's total assets. See "Description of Securities
and Investment Techniques -- Risks and Considerations Applicable to Investment
in Securities of Foreign Issuers" and the Statement of Additional Information.
INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIO
The investment objective of the International Diversified Equities
Portfolio is to provide long-term capital appreciation by investing in
accordance with country weightings determined by the Subadviser in common stocks
of foreign issuers which, in the aggregate, replicate broad country indices. The
Subadviser utilizes a top-down approach in selecting investments for the
Portfolio that emphasizes country selection and weighting rather than individual
stock selection. This approach reflects the Subadviser's philosophy that a
diversified selection of securities representing exposure to world markets,
based upon the economic outlook and current valuation levels for each country,
is an effective way to maximize the return and minimize the risk associated with
international investment.
The Subadviser determines country allocations for the Portfolio on an
ongoing basis within policy ranges dictated by each country's market
capitalization and liquidity. The Portfolio will invest in the industrialized
countries throughout the world that comprise the Morgan Stanley Capital
International EAFE (Europe, Australia and the Far East) Index. The Portfolio
will also invest in emerging country equity securities. Further information
concerning emerging country equity securities is contained in the Statement of
Additional Information. See "Description of
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Securities and Investment Techniques -- Risks and Considerations Applicable to
Investment in Securities of Foreign Issuers."
By analyzing a variety of macroeconomic and political factors, the
Subadviser develops fundamental projections on interest rates, currencies,
corporate profits and economic growth for each country. These country
projections are used then to determine what the Subadviser believes to be a fair
value for the stock market of each country. Discrepancies between actual value
and fair value as determined by the Subadviser provide an expected return for
each stock market. The expected return is adjusted by currency return
expectations derived from the Subadviser's purchasing-power parity exchange rate
model to arrive at an expected total return in U.S. dollars. The final country
allocation decision is then arrived at by considering the expected total return
in light of various country specific considerations such as market size,
volatility, liquidity and country risk.
Within a particular country, investments are made through the purchase of
common stocks which, in aggregate, replicate a broad market index, which in most
cases will be the Morgan Stanley Capital International EAFE Index for the given
country. The Subadviser may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Portfolio.
Common stocks purchased for the Portfolio include common stocks and equivalents,
such as securities convertible into common stocks and securities having common
stock characteristics, such as rights and warrants to purchase common stocks.
Indexation of the Portfolio's stock selection reduces stock-specific risk
through diversification and minimizes transaction costs, which can be
substantial in foreign markets.
Common stocks purchased for the Portfolio normally will be listed on a
major stock exchange in the subject country. The Portfolio will not invest in
the stocks of U.S. issuers. For a description of special considerations and
certain risks associated with investments in foreign issuers, see "Description
of Securities and Investment Techniques -- Risks and Considerations Applicable
to Investment in Securities of Foreign Issuers." The Portfolio may temporarily
reduce its equity holdings in response to adverse market conditions and invest
in domestic, Eurodollar and foreign short-term money market instruments for
defensive purposes.
The Portfolio may also engage in certain options transactions and enter
into financial futures contracts and related options for hedging purposes.
AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks capital appreciation as its
objective. The Portfolio pursues this investment objective by investing, under
normal circumstances, at least 65% of its total assets in the equity securities
of small, lesser known or new growth companies or industries, such as
telecommunications, media and biotechnology. Such "Small Cap" companies will
typically have, at the time of purchase, market capitalizations of under $1
billion and have achieved, or are expected to achieve, growth or earnings over
various major business cycles. These companies may offer greater potential for
capital appreciation but may also involve certain risks. See "Description of
Securities and Investment Techniques -- Risks Associated with Investing in Small
Companies." The Portfolio may invest in securities issued by well known and
established domestic or foreign companies, as well as in newer and less-seasoned
companies. Such securities may be listed on an exchange or traded
over-the-counter. In addition, the Portfolio may invest up to 35% of its total
assets in debt securities that have the potential for capital appreciation due
to anticipated market conditions. The Portfolio may invest in securities rated
as low as BBB by S&P or Baa by Moody's.
The Portfolio is authorized to borrow for investment purposes to increase
the opportunity for greater return and for payment of dividends. Such borrowings
would constitute leverage, which is a speculative characteristic. Leveraging
will magnify declines as well as increases in the net asset value of the
Portfolio's shares and in the yield on the Portfolio's investments. See
"Description of Securities and Investment Techniques -- Borrowing and Other
Forms of Leverage."
INTERNATIONAL GROWTH AND INCOME PORTFOLIO
The investment objective of the International Growth and Income Portfolio
is growth of capital with current income as a secondary objective. The Portfolio
will seek its objectives by investing primarily in common stocks that offer
potential for capital growth. The Portfolio may also invest, consistent with its
objectives, in stocks that offer potential for current income. Under normal
market conditions, the Portfolio expects to invest substantially all of its
assets in securities principally traded on markets outside the United States.
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Moreover, the Portfolio will normally diversify its investments among a
number of different countries and, except when investing for defensive purposes,
will invest at least 65% of its total assets in at least three countries other
than the United States.
The Portfolio may also purchase corporate bonds, notes and debentures
(including those rated below BBB by S&P or Baa by Moody's, i.e., junk bonds),
preferred stocks, securities convertible into common stocks or other equity
securities, or U.S. or foreign government securities if the Subadviser
determines that their purchase would help further the Portfolio's investment
objectives or for temporary defensive purposes. In addition, when circumstances
warrant, the Portfolio may hold some or all of its assets in cash or
high-quality money market instruments. See "Description of Securities and
Investment Techniques -- Corporate Debt Instruments" and " -- Risk Factors
Relating to High-Yield, High-Risk Bonds."
The types of securities selected for the Portfolio may vary from time to
time in light of the Portfolio's investment objectives, changes in interest
rates, and economic and other factors. The Subadviser will seek to identify
securities that offer the potential for capital growth, and that are undervalued
in relation to underlying asset values or earnings potential. In selecting
securities for the Portfolio, the Subadviser may invest in the securities of
issuers in developed countries, as well as emerging markets. Investing in
emerging markets, however, may involve risks not generally associated with more
developed markets. See "Description of Securities and Investment Techniques --
Risks and Considerations Applicable to Investment in Securities of Foreign
Issuers" for more details. In addition, the Subadviser may invest in the
securities of companies with equity market capitalization of less than $1
billion. These companies may offer greater potential for capital appreciation,
but may also involve certain risks. See "Description of Securities and
Investment Techniques -- Risks Associated with Investing in Small Companies."
REAL ESTATE PORTFOLIO
The investment objective of the Real Estate Portfolio is total return
through a combination of growth and income. It invests primarily in securities
of companies principally engaged in or related to the real estate industry or
which own significant real estate assets or which primarily invest in real
estate financial instruments. Normally at least 65% of its total assets will be
invested in securities of companies which have at least 50% of the value of
their assets, gross income or net profits attributable to ownership, financing,
construction, management or sale of real estate, or to products or services that
are related to real estate or the real estate industry. The Portfolio does not
invest directly in real estate. Real estate companies include real estate
investment trusts ("REITs"), or other securitized real estate investments,
brokers, developers, lenders and companies with substantial real estate holdings
such as paper, lumber, hotel and entertainment companies. The Portfolio invests
in common stocks and other equity securities and debt securities. In keeping
with its primary growth objective, it will normally invest primarily in equity
securities (including securities convertible into equity securities). It may
also invest in fixed income securities for income or as a defensive strategy
when the Subadviser believes that adverse economic or market conditions require
such strategy.
The remaining 35% of the Portfolio's assets may be invested in securities
of companies in any other industries. These may include companies which are not
primarily involved in real estate operations or ownership but which have
products or services relating to the real estate industry, such as manufacturers
and distributors of building supplies, financial institutions which make or
service real estate loans or companies which have substantial real estate assets
such as some companies in the energy, retailing or railroad industries. There is
no limitation on such investments except that the Portfolio intends to invest
less than 25% of its total assets in the securities of any industry other than
the real estate industry.
The Portfolio will invest in shares of REITs. REITs pool investors' funds
for investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to shareholders if
it complies with various requirements relating to its organization, ownership,
assets and income and with the requirement that it distribute to its
shareholders at least 95% of its taxable income (other than net capital gains)
for each taxable year. REITs can generally be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily from rents.
Equity REITs can also realize capital gains by selling property that has
appreciated in value. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity REITs and Mortgage
REITs.
Because the Portfolio invests primarily in the real estate industry, it is
subject to risks associated with the direct ownership of real estate. The
Portfolio could also be subject to such risks by reason of direct ownership as a
result of a default on a debt security it may own. These risks include declines
in the value of real estate, risks related to
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general and local economic conditions, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, fluctuations in rental income, changes in
neighborhood values, the appeal of properties to tenants and increases in
interest rates. If the Portfolio has rental income or income from the
disposition of real property, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company
Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while Mortgage REITs may be affected by the
quality of credit extended. Equity and Mortgage REITs are dependent upon
management skill, may not be diversified and are subject to project financing
risks. Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for tax-
free pass-through of income under the Internal Revenue Code of 1986 (the "Code")
and to maintain exemption from registration under the 1940 Act. Changes in
interest rates may also affect the value of the debt securities in the
Portfolio's portfolio. By investing in REITs indirectly through the Portfolio, a
shareholder will bear not only his proportionate share of the expense of the
Portfolio, but also, indirectly, similar expenses of the REITs, including
compensation of management.
EMERGING MARKETS PORTFOLIO
The investment objective of the Emerging Markets Portfolio is long-term
capital appreciation. The Portfolio will invest in companies that the Subadviser
believes have above-average growth prospects primarily in emerging markets
outside the United States. The Subadviser currently expects that, under normal
market conditions, the Portfolio will invest substantially all of its assets,
other than short-term investments held pending investment, and, except when
investing for defensive purposes as described below, at least 65% of its total
assets, in common stocks and other equity securities of "emerging market"
companies. The Portfolio will consider an issuer of securities to be an
"emerging market" company if it is organized under the laws of an emerging
market country and has a principal office in such country, or if it derives 50%
or more of its revenues from business in emerging market countries. For these
purposes, a country is considered to be an "emerging market country" based on
the Subadviser's evaluation of its level of economic development or the size and
experience of its securities markets. While emerging market countries may change
over time depending on market and economic conditions, at present the Subadviser
believes that these countries include every country in the world except
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. Investing in emerging
market countries generally involves special risks. See "Description of
Securities and Investment Techniques -- Risks and Considerations Applicable to
Investment in Securities of Foreign Issuers." The Portfolio will normally
diversify its investments among a number of different countries.
Common stocks and other equity securities are normally the Portfolio's main
investments. However, the Portfolio may purchase preferred stock, debt
securities and securities convertible into common stock or other equity
securities if the Subadviser believes they would help achieve the Portfolio's
objective. The Portfolio may also hold a portion of its assets in cash or
high-quality money market instruments.
Because the Subadviser evaluates securities for the Portfolio based on
their long-term potential for capital appreciation, the Portfolio's investments
may not appreciate or yield significant income over the shorter term, and, as a
result, the Portfolio's total return over certain periods may be less than that
of other equity mutual funds.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
FIXED-INCOME SECURITIES -- Fixed-income securities are broadly
characterized as those that provide for periodic payments to the holder of the
security at a stated rate. Most fixed-income securities, such as bonds,
represent indebtedness of the issuer and provide for repayment of principal at a
stated time in the future. Others do not provide for repayment of a principal
amount, although they may represent a priority over common stockholders in the
event of the issuer's liquidation. Many fixed-income securities are subject to
scheduled retirement, or may be retired or "called" by the issuer prior to their
maturity dates.
The market values of fixed-income securities tend to vary inversely with
the level of interest rates -- when interest rates rise, their values will tend
to decline; when interest rates decline, their values generally will tend to
rise. Long-term instruments are generally more sensitive to these changes than
are short-term instruments. The market value of fixed-income securities and
therefore their yield is also affected by the perceived ability of the issuer to
make timely payments of principal and interest.
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CORPORATE DEBT INSTRUMENTS -- These instruments, such as bonds, represent
the obligation of the issuer to repay a principal amount of indebtedness at a
stated time in the future and, in the usual case, to make periodic interim
payments of interest at a stated rate.
Investment Grade -- A designation applied to intermediate and
long-term corporate debt securities rated within the highest four rating
categories assigned by S&P (AAA, AA, A or BBB) or by Moody's (Aaa, Aa, A or
Baa). The ability of the issuer of an investment grade debt security to pay
interest and to repay principal is considered to vary from extremely strong
(for the highest ratings) through adequate (for the lowest ratings given
above), although the lower-rated investment grade securities may be viewed
as having speculative elements as well.
Lower Grade -- A designation applied to intermediate and long-term
corporate debt securities that are not investment grade; commonly referred
to as "junk bonds". These include bonds rated BB or below by S&P, or Ba or
below by Moody's. These securities are considered speculative.
The Corporate Bond and Worldwide High Income Portfolios may invest in bonds
rated as low as C by Moody's or D by S&P without limitation. The High-Yield Bond
Portfolio may invest in bonds rated as low as Ca by Moody's (or CC by S&P) and
may invest in bonds rated as low as C by Moody's or D by S&P. The Asset
Allocation and Balanced/Phoenix Investment Counsel Portfolios may invest in
bonds rated as low as Ca by Moody's or CC by S&P. The International Growth and
Income Portfolio may invest up to 20% of its assets in bonds rated as low as C
by Moody's or S&P. The Real Estate Portfolio will generally not purchase
securities rated BB or Ba or lower if such purchase would then cause more than
30% of the Portfolio's net assets to be invested in such securities. The Real
Estate Portfolio does not presently intend to have more than 5% of its assets
invested in fixed income securities rated below BBB by S&P or Baa by Moody's in
the near future. The Emerging Markets Portfolio may invest in both higher-rated
and lower-rated fixed-income securities and is not subject to any restrictions
based on credit rating. Bonds rated Ca by Moody's are described as "speculative
in a high degree; often in default or having other marked shortcomings." Bonds
rated D by Moody's -- the lowest rated class -- can be "regarded as having
extremely poor prospects of ever attaining any real investment standing." Not
all fixed income securities are rated, and each of the foregoing Portfolios may
invest in securities that are not rated but that are determined by the Adviser
or Subadviser to be of comparable quality to the rated securities in which the
Portfolio may invest. Bonds rated C by S&P are of the "highest degree of
speculation"; those rated D by that organization are in default and in arrears.
RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS -- High-yield,
high-risk bonds are subject to greater fluctuations in value than are
higher-rated bonds because the values of high-yield bonds tend to reflect
short-term corporate, economic and market developments and investor perceptions
of the issuer's credit quality to a greater extent. Although under normal market
conditions longer-term securities yield more than shorter-term securities, they
are subject to greater price fluctuations. Fluctuations in the value of a
Portfolio's investments will be reflected in its net asset value per share. The
growth of the high-yield bond market paralleled a long economic expansion,
followed by an economic downturn which severely disrupted the market for
high-yield bonds and adversely affected the value of outstanding bonds and the
ability of the issuers to repay principal and interest. The economy may affect
the market for high-yield bonds in a similar fashion in the future including an
increased incidence of defaults on such bonds. From time to time, legislation
may be enacted which could have a negative effect on the market for high-yield
bonds.
High-yield bonds present the following risks:
Sensitivity to Interest Rate and Economic Changes -- High-yield,
high-risk bonds are very sensitive to adverse economic changes and
corporate developments. During an economic downturn or substantial period
of rising interest rates, highly leveraged issuers may experience financial
stress that would adversely affect their ability to service their principal
and interest payment obligations, to meet projected business goals and to
obtain additional financing. If the issuer of a bond defaulted on its
obligations to pay interest or principal or entered into bankruptcy
proceedings, a Portfolio may incur losses or expenses in seeking recovery
of amounts owed to it. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices
(and therefore yields) of high-yield bonds and the Portfolio's net asset
value.
Payment Expectations -- High-yield, high-risk bonds may contain
redemption or call provisions. If an issuer exercised these provisions in a
declining interest-rate market, a Portfolio would have to replace the
security with a lower-yielding security, resulting in a decreased return
for investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Portfolio's assets.
If the
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Portfolio experiences unexpected net redemptions, this may force it to sell
high-yield bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Portfolio's rate of return.
Liquidity and Valuation -- There may be little trading in the
secondary market for particular bonds, which may affect adversely a
Portfolio's ability to value accurately or dispose of such bonds. Under
such circumstances, the task of accurate valuation becomes more difficult
and judgment would play a greater role due to the relative lack of reliable
and objective data. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of
high-yield bonds, especially in a thin market.
The Adviser or Subadviser attempts to reduce these risks through
diversification of the applicable Portfolio and by credit analysis of each
issuer, as well as by monitoring broad economic trends and corporate and
legislative developments. If a high-yield bond previously acquired by a
Portfolio is downgraded, the Adviser or Subadviser, as appropriate, will
evaluate the security and determine whether to retain or dispose of it.
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury (such as Government National Mortgage
Association ("GNMA") certificates and Federal Housing Administration
debentures). For these securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. government. They are of the highest
possible credit quality. These securities are subject to variations in market
value due to fluctuations in interest rates, but if held to maturity, are
guaranteed by the U.S. government to be paid in full.
Securities issued by the U.S. government instrumentalities and certain
federal agencies are neither direct obligations of, nor are they guaranteed by,
the U.S. Treasury. However, they involve federal sponsorship in one way or
another. For example, some are backed by specific types of collateral; some are
supported by the issuer's right to borrow from the Treasury; some are supported
by the discretionary authority of the Treasury to purchase certain obligations
of the issuer; and others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and instrumentalities
include, but are not limited to, Federal Land Banks, Farmers Home
Administration, Central Bank for Cooperatives, Federal Intermediate Credit Banks
and Federal Home Loan Banks.
GNMA CERTIFICATES -- GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely payment
of interest and principal is guaranteed by the full faith and credit of the U.S.
government. GNMA certificates differ from typical bonds because principal is
repaid monthly over the term of the loan rather than returned in a lump sum at
maturity. Because both interest and principal payments (including prepayments)
on the underlying mortgage loans are passed through to the holder of the
certificate, GNMA certificates are called "pass-through" securities.
Although the mortgage loans in the pool have maturities of up to 30 years,
the actual average life of the GNMA certificates typically will be substantially
less because the mortgages are subject to normal principal amortization and may
be prepaid prior to maturity. Prepayment rates vary widely and may be affected
by changes in market interest rates. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of the GNMA certificates. Conversely, when interest rates are rising, the rate
of prepayment tends to decrease, thereby lengthening the actual average life of
the GNMA certificates. Accordingly, it is not possible to predict accurately the
average life of a particular pool. Reinvestment of prepayments may occur at
higher or lower rates than the original yield on the certificates. Due to the
prepayment feature and the need to reinvest prepayments of principal at current
rates, GNMA certificates can be less effective than typical bonds of similar
maturities at "locking-in" yields during periods of declining interest rates,
although they may have comparable risks of decline in value during periods of
rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS -- The Federal National Mortgage
Association ("FNMA"), a federally chartered and privately owned corporation,
issues pass-through securities representing an interest in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest but this guarantee is not backed by the full faith and credit of the
U.S. government. The Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States, issues participation
certificates that represent an interest in a pool of conventional mortgage
loans. FHLMC guarantees the timely payment of interest and the ultimate
collection of principal and maintains reserves to protect holders against losses
due to default, but
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the certificates are not backed by the full faith and credit of the U.S.
government. As is the case with GNMA certificates, the actual maturity of and
realized yield on particular FNMA and FHLMC pass-through securities will vary
based on the prepayment experience of the underlying pool of mortgages.
OTHER MORTGAGE-RELATED SECURITIES -- The Global Bond, Corporate Bond,
High-Yield Bond, SunAmerica Balanced, Balanced/Phoenix Investment Counsel and
Asset Allocation Portfolios may invest in collateralized mortgage obligations
("CMOs") or mortgage-backed bonds issued by financial institutions such as
commercial banks, savings and loan associations, mortgage banks and securities
broker-dealers (or affiliates of such institutions established to issue these
securities). CMOs are obligations fully collateralized directly or indirectly by
a pool of mortgages on which payments of principal and interest are dedicated to
payment of principal and interest on the CMOs. Payments on the underlying
mortgages (both interest and principal) are passed through to the holders,
although not necessarily on a pro rata basis, on the same schedule as they are
received. Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMOs). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds may be callable by the issuer prior to maturity).
The Global Bond, Corporate Bond, High-Yield Bond, Asset Allocation, and
Emerging Markets Portfolios may also invest in stripped mortgage-backed
securities ("SMBS"), which are derivative multiclass mortgage securities,
provided they are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving all of the
interest from the mortgage assets, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying mortgage
assets experience greater-than-anticipated prepayments of principal, the
Portfolio may fail to fully recoup its initial investment in these securities.
Although the market for such securities is increasingly liquid, certain SMBS may
not be readily marketable and will be considered illiquid for purposes of the
Portfolios' limitation on investments in illiquid securities. The market value
of the class consisting entirely of principal payments generally is unusually
volatile in response to changes in interest rates. The yields on a class of SMBS
that receives all or most of the interest from mortgage assets are generally
higher than prevailing market yields on other mortgage-backed securities because
their cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
ASSET-BACKED SECURITIES -- These securities represent an interest in a pool
of consumer or other types of loans ("asset-backed securities"). Payments of
principal and interest on the underlying loans are passed through to the holders
of asset-backed securities over the life of the securities. Some asset-backed
securities may be subject to early prepayment of principal, which can be
expected to accelerate during periods of declining interest rates. Such
prepayments can usually be reinvested only at the lower yields then prevailing
in the market. Therefore, during periods of declining interest rates,
asset-backed securities are less likely than other fixed-income obligations to
appreciate in value and less effective at locking in a particular yield. On the
other hand, asset-backed securities are subject to substantially the same risk
of depreciation during periods of rising interest rates as other fixed-income
securities.
DOLLAR ROLLS -- The Global Bond, Corporate Bond, High-Yield Bond,
SunAmerica Balanced, Balanced/Phoenix Investment Counsel, Asset Allocation and
Emerging Markets Portfolios may enter into "dollar rolls" in which the Portfolio
sells mortgage or other asset-backed securities ("Roll Securities") for delivery
in the current month and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, the Portfolio foregoes principal and interest paid on
the Roll Securities. A Portfolio is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A Portfolio also could be compensated through the
receipt of fee income equivalent to a lower forward price. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction. The Portfolio will hold and
maintain in a segregated account until the settlement date cash or liquid
securities in an amount equal to the forward purchase price. The Portfolios will
only enter into covered rolls. Covered rolls are not treated as a borrowing or
other senior security and will be excluded from the calculation of each
Portfolio's borrowings and other
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senior securities. Because "roll" transactions involve both the sale and
purchase of a security, they may cause the reported portfolio turnover rate to
be higher than that reflecting typical portfolio management activities.
Dollar rolls involve certain risks including that if the broker-dealer to
whom the Portfolio sells the security becomes insolvent, the Portfolio's right
to purchase or repurchase the security subject to the dollar roll may be
restricted and the instrument which the Portfolio is required to repurchase may
be worth less than an instrument which the Portfolio originally held. Successful
use of dollar rolls will depend upon the Adviser's or Subadviser's ability to
predict correctly interest rates and in the case of mortgage dollar rolls,
mortgage prepayments. For these reasons, there is no assurance that dollar rolls
can be successfully employed.
SHORT-TERM DEBT SECURITIES -- Debt securities maturing within one year of
date of the purchase include (1) commercial bank obligations (certificates of
deposit, bankers' acceptances (time drafts on a commercial bank where the bank
accepts an irrevocable obligation to pay at maturity) and documented discount
notes (corporate promissory discount notes accompanied by a commercial bank
guarantee to pay at maturity)), (2) savings association obligations
(certificates of deposit issued by mutual savings banks or savings and loan
associations), (3) commercial paper (short-term notes with maturities of up to 9
months issued by corporations or governmental bodies), (4) corporate bonds and
notes (corporate obligations that mature, or that may be redeemed, in one year
or less), and (5) adjustable-rate mortgage securities backed by GNMA, FNMA,
FHLMC and other non-agency issuers. Although certain floating or variable rate
obligations (securities whose coupon rate changes at least annually and
generally more frequently) have maturities in excess of one year, they are also
considered short-term debt securities.
ZERO-COUPON, PAY-IN-KIND AND DEFERRED INTEREST BONDS -- The Global Bond,
Corporate Bond, High-Yield Bond, Worldwide High Income, SunAmerica Balanced,
Balanced/Phoenix Investment Counsel, Asset Allocation and Venture Value
Portfolios may invest in zero-coupon bonds and deferred interest bonds, or other
obligations that contain "original issue discount" for federal income tax
purposes. In addition, the Corporate Bond, High-Yield Bond and Worldwide High
Income Portfolios may invest in pay-in-kind securities. Zero-coupon, deferred
interest and capital appreciation bonds are debt obligations which are issued or
purchased at a significant discount from face value. Pay-in-kind bonds are debt
obligations which provide that the issuer thereof may, at its option, pay
interest on such bonds in cash or in the form of additional debt obligations.
Such investments may experience greater volatility in market value due to
changes in interest rates than do debt obligations, which make regular payments
of interest. A Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Portfolio's distribution obligations.
REPURCHASE AGREEMENTS -- Each Portfolio may enter into repurchase
agreements, under which the Portfolio buys a security and obtains a simultaneous
commitment from the seller to repurchase the security at a specified time and
price. The seller must maintain appropriate collateral with the Trust's
custodian or subcustodian. A Portfolio will only enter into repurchase
agreements involving securities in which it could otherwise invest and with
selected banks and securities dealers whose financial condition is monitored by
the Adviser or applicable Subadviser, subject to the oversight of the Board of
Trustees. If the seller under the repurchase agreement defaults, the Portfolio
may incur a loss if the value of the collateral securing the repurchase
agreement has declined, and may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with respect
to the seller, realization of the collateral by the Portfolio may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS -- The Cash Management, Corporate Bond,
High-Yield Bond, Worldwide High Income, SunAmerica Balanced, Utility, Federated
Value and Aggressive Growth Portfolios may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Portfolio sells a security
subject to the right and obligation to repurchase such security. The Portfolio
then invests the proceeds from the transaction in another obligation in which
the Portfolio is authorized to invest. In order to minimize any risk involved,
the Portfolio maintains in a segregated account with the custodian cash or
liquid securities equal in value to the repurchase price.
ILLIQUID SECURITIES -- Each of the Portfolios may invest no more than 15%
(10% in the case of the Cash Management Portfolio) of the value of its net
assets in securities which are illiquid, including repurchase agreements
providing for settlement in more than seven days after notice, interest-rate and
currency swaps, caps, floors and collars. For this purpose, not all securities
which are restricted are deemed to be illiquid. For example, restricted
securities which the Board of Trustees, or the Adviser (or Subadviser, as the
case may be) pursuant to guidelines established by the Board of Trustees, has
determined to be marketable, such as securities eligible for sale under
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Rule 144A promulgated under the Securities Act of 1933, as amended, or certain
private placements of commercial paper issued in reliance on an exemption from
such Act pursuant to Section 4(2) thereof, may be deemed to be liquid for
purposes of this restriction. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolio to the extent that
qualified institutional buyers (as defined in Rule 144A) become for a time
uninterested in purchasing these restricted securities. In addition, a
repurchase agreement which by its terms can be liquidated before its nominal
fixed-term on seven days or less notice is regarded as a liquid instrument.
Subject to the applicable limitation on illiquid securities investments, a
Portfolio may acquire securities issued by the U.S. government, its agencies or
instrumentalities in a private placement. See "Illiquid Securities" in the
Statement of Additional Information for a further discussion of investments in
such securities.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED AND DELAYED-DELIVERY
TRANSACTIONS -- Each Portfolio may purchase securities on a firm commitment,
when-issued or delayed-delivery basis. Firm commitment agreements and
when-issued or delayed-delivery transactions call for the purchase or sale of
securities at an agreed-upon price on a specified future date. While a Portfolio
will only purchase securities on a when-issued or delayed-delivery basis with
the intention of acquiring the securities, the Portfolio may sell the securities
before the settlement date, if it is deemed advisable to do so. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed-delivery basis, the Portfolio will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of the Portfolio. At the time of delivery of the securities, the value may be
more or less than the purchase price. A Portfolio will maintain in a segregated
account liquid assets having a value equal to or greater than the Portfolio's
purchase commitments. The Portfolio will likewise segregate liquid assets with
respect to securities sold on a delayed-delivery basis.
INTEREST-RATE SWAPS, MORTGAGE SWAPS, CAPS, FLOORS AND COLLARS -- In order
to protect the value of the Global Bond, Corporate Bond, Asset Allocation, and
Emerging Markets Portfolios from interest rate fluctuations and to hedge against
fluctuations in the fixed-income market in which the Portfolio's investments are
traded, the Portfolios may enter into interest-rate swaps and mortgage swaps or
purchase or sell interest-rate caps, floors or collars. A Portfolio will enter
into these hedging transactions primarily to preserve a return or spread on a
particular investment or portion of the portfolio and to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Global Bond Portfolio may also enter into interest-rate swaps
for non-hedging purposes. Interest-rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating-rate payments for fixed-rate payments.
Since interest-rate swaps are individually negotiated, the Portfolios expect to
achieve an acceptable degree of correlation between their respective portfolio
investments and their interest-rate positions. The Portfolios will only enter
into interest-rate swaps on a net basis, which means that the two payment
streams are netted out, with the Portfolios receiving or paying, as the case may
be, only the net amount of the two payments. Interest-rate swaps do not involve
the delivery of securities, other underlying assets or principal. Accordingly,
the risk of loss with respect to interest-rate swaps is limited to the net
amount of interest payments that the Portfolio is contractually obligated to
make. If the other party to an interest-rate swap defaults, the Portfolio's risk
of loss consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive, if any. The use of interest-rate swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Mortgage swaps are similar to interest-rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, upon
which the value of the interest payments is based, is tied to a reference pool
or pools of mortgages.
The purchase of an interest-rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest-rate cap. The purchase of an interest-rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. An interest-rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates.
The Portfolios will not enter into any mortgage swap, interest-rate swap,
cap or floor transaction unless the unsecured commercial paper, senior debt, or
the claims paying ability of the other party thereto is rated either AA or A-1
or better by S&P or Aa or P-1 or better by Moody's, or is determined to be of
equivalent quality by the applicable Subadviser.
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STRUCTURED SECURITIES -- The Global Bond, and Emerging Markets Portfolios
may invest in structured notes, bonds or debentures, the value of the principal
of and/or interest on which is determined by reference to changes in the value
of specific currencies, interest rates, commodities, indices or other financial
indicators (the "Reference") or the relative change in two or more References.
The interest rate or the principal amount payable upon maturity or redemption
may be increased or decreased depending upon changes in the applicable
Reference. The terms of the structured securities may provide that in certain
circumstances no principal is due at maturity and, therefore, may result in the
loss of the Portfolio's investment. Structured securities may be positively or
negatively indexed, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at
maturity may be a multiple of the change in the value of the Reference.
Consequently, structured securities entail a greater degree of market risk than
other types of debt obligations. Structured securities may also be more
volatile, less liquid and more difficult to price accurately than less complex
securities.
SECURITIES LENDING -- Each Portfolio (except the Cash Management Portfolio)
may lend portfolio securities in amounts up to 33 1/3% of its respective total
assets to brokers, dealers and other financial institutions, provided such loans
are callable at any time by the Portfolio and are at all times secured by cash
or equivalent collateral. By lending its portfolio securities, a Portfolio will
receive income while retaining the securities' potential for capital
appreciation. As with any extensions of credit, there are risks of delay in
recovery and, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only to firms deemed by the Adviser or Subadviser to be
creditworthy. The proceeds of such loans will be invested in high-quality
short-term debt securities, including repurchase agreements.
BORROWING AND OTHER FORMS OF LEVERAGE -- All of the Portfolios (except the
Cash Management Portfolio) are authorized to borrow money to the extent
permitted by applicable law. The 1940 Act permits each Portfolio to borrow up to
33 1/3% of its total assets from banks for temporary or emergency purposes. In
seeking to enhance performance, a Portfolio may borrow for investment purposes
and may pledge assets to secure such borrowings. The Cash Management Portfolio
may not borrow, except from banks for temporary emergency purposes, and then in
an amount not in excess of 5% of the value of the Portfolio's total assets. In
the event that asset coverage for a Portfolio's borrowings falls below 300%, the
Portfolio will reduce within three days the amount of its borrowings in order to
provide for 300% asset coverage.
To the extent a Portfolio borrows for investment purposes, borrowing
creates leverage which is a speculative characteristic. Although a Portfolio is
authorized to borrow, it will do so only when the Adviser or Subadviser believes
that borrowing will benefit the Portfolio after taking into account
considerations such as the costs of borrowing and the likely investment returns
on securities purchased with borrowed monies. Borrowing by a Portfolio will
create the opportunity for increased net income but, at the same time, will
involve special risk considerations. Leveraging results from borrowing will
magnify declines as well as increases in a Portfolio's net asset value per share
and net yield. The Portfolios expect that all of their borrowing will be made on
a secured basis. The Portfolios' custodian will either segregate the assets
securing the borrowing for the benefit of the lenders or arrangements will be
made with a suitable subcustodian. If assets used to secure a borrowing decrease
in value, a Portfolio may be required to pledge additional collateral to the
lender in the form of cash or securities to avoid liquidation of those assets.
RISKS ASSOCIATED WITH INVESTING IN SMALL COMPANIES -- Investing in smaller,
lesser known companies may involve certain risks not generally associated with
investments in larger, more well-established companies. For example, it may be
difficult to obtain reliable information and financial data on such companies
and the securities of these small companies may not be readily marketable,
making it difficult to dispose of shares when desirable. Also, securities of
small or emerging growth companies may be subject to more abrupt or erratic
market movements than larger, more established companies or the market average
in general. A risk of investing in smaller, emerging companies is that they
often are at an earlier stage of development and therefore have limited product
lines, market access for such products, financial resources and depth in
management than larger, more established companies, and their securities may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. Finally, certain
smaller issuers may face difficulties in obtaining the capital necessary to
continue in operation and may go into bankruptcy, which could result in a
complete loss of an investment. Smaller companies also may be less significant
factors within their industries and may have difficulty withstanding competition
from larger companies. While smaller companies may be subject to these
additional risks, they may also realize more substantial growth than larger,
more established companies.
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RISKS AND CONSIDERATIONS APPLICABLE TO INVESTMENT IN SECURITIES OF FOREIGN
ISSUERS -- Elements of risk and opportunity when investments in foreign issuers
are made include trade imbalances and related economic policies; currency
fluctuations; foreign exchange control policies; taxation on income from sources
in such countries; expropriation or confiscatory taxation; limitation on the
removal of funds or other assets; political or social instability; the diverse
structure and liquidity of securities markets in various countries and regions;
policies of governments with respect to possible nationalization of their
industries; and other specific local political and economic considerations.
There may be less information publicly available about foreign companies, and
foreign companies may not be subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those of U.S.
companies. Investment decisions made in the context of the Portfolios'
objectives and policies involve the evaluation of opportunities and risks
presented by probable future currency relationships, especially during periods
of broad adjustments in such relationships.
The Emerging Markets Portfolio will invest, and the other Portfolios may
invest, in issuers domiciled in, or governments of, developing countries or
emerging markets as well as developed countries. Although there is no
universally accepted definition, a developing or emerging market country is
generally considered to be a country which is in the initial stages of its
industrialization cycle with a low per capita gross national product. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries; however, such markets can
provide higher rates of return to investors. The risks described above with
respect to investment in foreign securities generally may be exacerbated with
respect to investments in developing or emerging countries; however, such
markets can provide higher rates of return to investors. Investment in an
emerging market country may involve certain risks, including a less diverse and
mature economic structure, a less stable political system, an economy based on
only a few industries or dependent on international aid or development
assistance, the vulnerability to local or global trade conditions, extreme debt
burdens, or volatile inflation rates.
The performance of investments in securities denominated in a foreign
currency ("non-dollar securities") will depend on, among other things, the
strength of the foreign currency against the dollar and the interest rate
environment in the country issuing the foreign currency. Absent other events
which could otherwise affect the value of non-dollar securities (such as a
change in the political climate or an issuer's credit quality), appreciation in
the value of the foreign currency generally can be expected to increase the
value of a Portfolio's non-dollar securities in terms of U.S. dollars. A rise in
foreign interest rates or decline in the value of foreign currencies relative to
the U.S. dollar generally can be expected to depress the value of the
Portfolio's non-dollar securities. Currencies are evaluated on the basis of
fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status and economic policies) as well
as technical and political data.
Additional costs could be incurred in connection with a Portfolio's foreign
investment activities. Foreign brokerage commissions are generally higher than
in the U.S. and a Portfolio will bear certain expenses in connection with its
foreign currency transactions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances including bankruptcy, ability to
recover lost assets, expropriation, nationalization, record access, etc.) may be
associated with the maintenance of assets in foreign jurisdictions.
FOREIGN CURRENCY TRANSACTIONS -- Currency exchange rate fluctuations are a
major area of risk and opportunity for the Global Bond, Worldwide High Income,
Global Equities, International Diversified Equities, International Growth and
Income and Emerging Markets Portfolios, and is of some risk to the other
Portfolios. Each Portfolio (other than the Cash Management Portfolio) has the
ability to hold a portion of its assets in foreign currencies and to enter into
forward foreign currency exchange contracts. Each may also purchase and sell
exchange-traded futures contracts relating to foreign currency and purchase and
sell put and call options on currencies and futures contracts. A significant
portion of the Portfolios' currency transactions will be over-the-counter
transactions.
Each Portfolio may enter into forward foreign currency exchange contracts
to reduce the risks of fluctuations in exchange rates; however, these contracts
cannot eliminate all such risks and do not eliminate fluctuations in the prices
of the Portfolio's portfolio securities.
Each Portfolio may purchase and write put and call options on currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. The purchase of an option on currency may
constitute an effective hedge against exchange rate fluctuations; however, in
the event of exchange rate movements adverse to the Portfolio's position, the
Portfolio may forfeit the entire amount of the premium plus related transaction
costs. As with other kinds of option
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transactions, the writing of an option on currency will constitute only a
partial hedge, up to an amount of the premium received, and a Portfolio could be
required to purchase or sell currencies at disadvantageous exchange rates,
thereby incurring losses.
Each Portfolio that invests in foreign securities may utilize certain
techniques to attempt to enhance return, including forward foreign currency
exchange contracts, currency options and currency swaps. These techniques may be
used when the Subadviser anticipates that a foreign currency will appreciate or
depreciate in value, but securities denominated in that currency do not present
attractive investment opportunities or are not included in the Portfolio. Each
Portfolio may also use currency contracts and options to cross-hedge, which
involves selling or purchasing instruments on one currency to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. To limit any leverage in connection with currency contract
transactions for hedging or non-hedging purposes, each Portfolio will segregate
cash or liquid securities in an amount sufficient to meet its payment
obligations in these transactions or otherwise "cover" the obligation. See the
Statement of Additional Information for more information regarding foreign
currency transactions.
The Global Bond, Worldwide High Income, Asset Allocation, Global Equities,
International Diversified Equities, International Growth and Income, Real
Estate, and Emerging Markets Portfolios may enter into currency swaps. Currency
swaps involve the exchange by the Portfolio with another party of their
respective rights to make or receive payments in specified currencies. Currency
swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for the other designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser or a Subadviser is incorrect
in its forecasts of market values and currency exchange rates, the investment
performance of the respective Portfolio would be less favorable than it would
have been if this investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES -- Each Portfolio (other than
the Cash Management Portfolio) may write (sell) covered call and put options on
any securities in which it may invest. All call options written by each
Portfolio are covered, which means that the Portfolio will own the securities
subject to the option so long as the option is outstanding. All put options
written by each Portfolio are covered, which means that the Portfolio would have
deposited with its custodian cash or liquid securities with a value at least
equal to the exercise price of the put option. A Portfolio may also write call
and put options on any securities index composed of securities in which it may
invest. A Portfolio may purchase put and call options on any securities in which
it may invest or options on any securities index composed of securities in which
it may invest.
Each Portfolio (other than the Cash Management Portfolio) may purchase and
write options on the yield "spread," or yield differential between two
securities. Such transactions are referred to as "yield curve" options. In
contrast to other types of options, a yield curve option is based on the
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential widens (in
the case of a call) or narrows (in the case of a put), regardless of whether the
yields of the underlying securities increase or decrease. All yield curve
options written by a Portfolio will be covered in the manner described above.
There is no assurance that a liquid secondary market on a domestic or
foreign options exchange will exist for any particular exchange-traded option or
at any particular time. If a Portfolio is unable to effect a closing purchase
transaction with respect to covered options it has written, the Portfolio will
not be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised. Similarly, if a
Portfolio is unable to effect a closing sale transaction with respect to options
it has purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of the
underlying securities. In a closing purchase or sale transaction, a Portfolio
acquires a position that offsets and cancels an option position then held by the
Portfolio.
A Portfolio may purchase and sell both options that are traded (i) on U.S.
exchanges, (ii) on foreign exchanges and (iii) over-the-counter with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter options is more limited than with exchange-traded options and
may involve the risk that broker-dealers participating in such transactions will
not fulfill their obligations. Until such time as the staff of the U.S.
Securities and Exchange Commission ("SEC") changes its position, each Portfolio
will treat purchased over-the-counter options and all assets used to cover
written over-the-counter options as illiquid securities. However, for options
written with primary dealers in U.S. government securities pursuant to an
agreement requiring a closing
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purchase transaction at a formula price, the amount of illiquid securities may
be calculated with reference to a formula approved by the SEC staff.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to increase total
return involves the risk of loss if the Adviser or Subadviser is incorrect in
its expectations of fluctuations in securities prices or interest rates. The
successful use of puts for hedging purposes depends in part on the ability of
the Adviser or Subadviser to predict future price fluctuations and the degree of
correlation between the options and securities markets. A Portfolio pays
brokerage commissions or spreads in connection with its options transactions.
The writing of options could significantly increase portfolio turnover rate of a
Portfolio and, therefore, associated brokerage commissions or spreads.
FUTURES CONTRACTS AND OPTIONS THEREON -- Futures contracts may be based on
various securities (including U.S. government securities), securities indices,
foreign currencies and other financial instruments and indices. The purchases of
futures contracts or call options thereon can serve as a long hedge, and the
sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, using a strategy similar to that used for writing covered call
options on securities and indices.
In addition, subject to regulations promulgated by the Commodity Futures
Trading Commission, a Portfolio may engage in futures transactions for
non-hedging purposes. For example, futures strategies can be used to manage the
average duration of a Portfolio. To shorten the average duration of a Portfolio,
the Portfolio may sell a futures contract or a call option thereon, or purchase
a put option on that futures contract; to lengthen the average duration of a
Portfolio, the Portfolio may buy a futures contract or a call option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with the Trust's custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
or liquid securities, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call option on a
futures contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Portfolio at the termination of the transaction
if all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Portfolio may be required by an exchange
to increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when a
Portfolio purchases or sells a futures contract or writes a call option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Portfolio than if it
had not entered into any futures contracts or options transactions. The loss
incurred by a Portfolio in writing options on futures is potentially unlimited
and may exceed the amount of the premium received.
In the event of an imperfect correlation between a futures position and a
portfolio position which is intended to be protected, the desired protection may
not be obtained and a Portfolio may be exposed to risk of loss. In addition, it
is not possible to hedge fully or perfectly against currency fluctuations
affecting the value of securities denominated in foreign currencies because the
value of such securities is also likely to fluctuate as a result of independent
factors not related to currency fluctuations. Therefore, perfect correlation
between a Portfolio's futures positions and portfolio positions will be
impossible to achieve.
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Investment in futures contracts or options thereon may also involve
liquidity risks due, for example, to exchange-imposed daily trading limits that
would prevent the Portfolio from liquidating an unfavorable position. See the
Statement of Additional Information concerning futures and options contracts.
WARRANTS -- Certain Portfolios may invest in warrants which give the holder
of the warrant a right to purchase a given number of shares of a particular
issue at a specified price until expiration.
INVERSE FLOATERS -- The Corporate Bond, Asset Allocation, and Emerging
Markets Portfolios may invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. An inverse floater may be considered to be leveraged to the
extent that its interest rate varies by a magnitude that exceeds the magnitude
of the change in the index rate of interest. The higher degree of leverage
inherent in inverse floaters is associated with greater volatility in their
market values. Accordingly, the duration of an inverse floater may exceed its
stated final maturity. Certain inverse floaters may be deemed to be illiquid
securities for purposes of a Portfolio's 15% limitation on investments in such
securities.
MANAGEMENT
The Trust's Board of Trustees is responsible for the overall supervision of
the operations of the Trust and performs various duties imposed on trustees of
investment companies by the 1940 Act. The Board has retained others to provide
certain services to the Trust.
INVESTMENT ADVISER -- SAAMCo, located at The SunAmerica Center, 733 Third
Avenue, New York, New York 10017-3204, is a corporation organized in 1982 under
the laws of the State of Delaware. SAAMCo is an indirect, wholly owned
subsidiary of Anchor National Life Insurance Company, which is an indirect
subsidiary of SunAmerica Inc., financial services company which has over $
billion in assets. SAAMCo is engaged in providing investment advice and
management services to the Trust, other mutual funds and private accounts. As of
December 31, 1996, SAAMCo and its affiliates managed, advised and/or
administered assets of approximately $9.1 billion.
The Trust, on behalf of each Portfolio, entered into an Investment Advisory
and Management Agreement (the "Agreement") with SAAMCo to handle the Trust's
day-to-day affairs, to provide investment advisory services, office space, and
other facilities for the management of the affairs of the Trust, and to pay the
compensation of certain officers of the Trust who are affiliated persons of
SAAMCo. The Agreement authorizes SAAMCo to retain one or more Subadvisers to
make the investment decisions for the Portfolios, and to place the purchase and
sale orders for the Portfolio transactions. SAAMCo has hired Subadvisers for
certain Portfolios, and manages the investments of other Portfolios itself
without the assistance of a Subadviser. SAAMCo, in consultation with one or more
SunAmerica affiliates, monitors the activities of the Subadvisers, and from time
to time will recommend the replacement of a Subadviser on the basis of
investment performance or other considerations.
SAAMCo may terminate any Subadvisory Agreement without shareholder
approval. Moreover, SAAMCo has obtained an exemptive order from the Securities
and Exchange Commission which would permit SAAMCo, subject to certain
conditions, to enter into Subadvisory Agreements relating to the Trust with
Subadvisers approved by the Board without obtaining shareholder approval. The
exemptive order would also permit SAAMCo, subject to the approval of the Board
but without shareholder approval, to employ new Subadvisers for new or existing
Portfolios, change the terms of particular Subadvisory Agreements or continue
the employment of existing Subadvisers after events that would otherwise cause
an automatic termination of a Subadvisory Agreement. Shareholders of a Portfolio
have the right to terminate such agreements for such Portfolio at any time by a
vote of the majority of the outstanding voting securities of such Portfolio.
Shareholders will be notified when SAAMCo intends to commence relying on the
exemptive order, and would be notified of any Subadviser changes effected
thereafter.
Purchase and sale orders may be directed to any broker including, in the
manner and to the extent permitted by applicable law, affiliates of the Adviser
or a Subadviser. The individual Portfolio Managers for both the Adviser and
Subadvisers are identified in the "Portfolio Management" subsection of this
section.
The annual rates of the investment advisory fees which apply to the Cash
Management Portfolio are .55% on the first $100 million of Assets, .50% on the
next $200 million and .45% on Assets over $300 million. The annual rates of the
investment advisory fees which apply to both the Global Bond and Asset
Allocation Portfolios are .75% on the first $50 million of Assets, .65% on the
next $100 million, .60% on the next $100 million and .55% on Assets over $250
million. The annual rates of the investment advisory fees which apply to the
Corporate Bond Portfolio are .70% on the first $50 million of Assets, .60% on
the next $100 million, .55% on the next $100 million and .50% on Assets over
$250 million. The annual rates of the investment advisory fees which apply to
the High-Yield Bond
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Portfolio are .70% on the first $50 million of Assets, .65% on the next $100
million, .60% on the next $100 million, .55% on Assets over $250 million. The
annual rate of the investment advisory fees which apply to each of the Worldwide
High Income and International Diversified Equities Portfolios are 1.00%. The
annual rates of the investment advisory fees which apply to each of the
SunAmerica Balanced, Balanced/Phoenix Investment Counsel, Growth-Income,
Alliance Growth, and Growth/Phoenix Investment Counsel Portfolios are .70% on
the first $50 million of Assets, .65% on the next $100 million, .60% on the next
$150 million, .55% on the next $200 million, and .50% on Assets over $500
million. The annual rates of the investment advisory fees which apply to the
Utility and Federated Value Portfolios are .75% on the first $150 million of
Assets, .60% on the next $350 million and .50% on Assets over $500 million. The
annual rates of the investment advisory fees which apply to the Venture Value
and Real Estate Portfolios are .80% on the first $100 million of Assets, .75% on
the next $400 million and .70% on Assets over $500 million. Effective April 15,
1997, the annual rates of the investment advisory fees which apply to the Putnam
Growth Portfolio are .85% on the first $150 million of Assets, .80% on the next
$150 million and .70% on Assets over $350 million. The annual rates of the
investment advisory fees which apply to the Putnam Inter-National Growth and
Income Portfolio are 1.00% on the first $150 million of Assets, .90% on the next
$150 million of Assets and .80% on Assets over $300 million. The annual rate of
the advisory fee which applies to the Emerging Markets Portfolio is 1.25% of
Assets. The annual rates of the investment advisory fees which apply to the
Global Equities Portfolio are .90% on the first $50 million of Assets, .80% on
the next $100 million, .70% on the next $150 million and .65% of Assets over
$300 million. The annual rates of the investment advisory fees which apply to
the Aggressive Growth Portfolio are .75% on the first $100 million of Assets,
.675% on the next $150 million, .625% on the next $250 million and .60% on
Assets over $500 million. For the fiscal year ended November 30, 1996, the
following Portfolios paid to SAAMCo a fee equal to the following percentage of
average daily net assets: Cash Management Portfolio -- .54%, Global Bond
Portfolio -- .73%, Corporate Bond Portfolio -- .70%, High-Yield Bond
Portfolio -- .68%, Worldwide High Income Portfolio -- 1.00%, Balanced/Phoenix
Investment Counsel Portfolio -- .70% Asset Allocation Portfolio -- .65%,
Growth-Income Portfolio -- .64%, Venture Value Portfolio -- .76%, Alliance
Growth Portfolio -- .64%, Growth/Phoenix Investment Counsel Portfolio -- .66%,
Putnam Growth Portfolio -- .82%, Global Equities Portfolio -- .80%, and
International Diversified Equities Portfolio -- 1.00%. The advisory fees for the
Putnam Growth Portfolio for the fiscal year ended November 30, 1996 were
calculated at the annual rates set forth in the Statement of Additional
Information under "Investment Advisory and Management Agreement -- Advisory
Fees." For the period June 3, 1996 through November 30, 1996, the following
Portfolios paid to SAAMCo a fee equal to the following percentage of average
daily net assets: SunAmerica Balanced Portfolio -- .70%, Utility
Portfolio -- .75%, Federated Value Portfolio -- .75% and Aggressive Growth
Portfolio -- .75%.
For certain Portfolios, the Adviser has voluntarily agreed to waive fees or
reimburse expenses, if necessary, to keep annual operating expenses at or below
the lesser of the following percentages of each of the following Portfolio's
average net assets: SunAmerica Balanced Portfolio -- 1.00%, Utility
Portfolio -- 1.05%, Federated Value Portfolio -- 1.05%, Aggressive Growth
Portfolio -- 1.05%, International Growth and Income Portfolio -- % and
[Emerging Markets] Portfolio -- %. The Adviser also may voluntarily waive or
reimburse additional amounts to increase the investment return to a Portfolio's
investors. The Adviser may terminate all such waivers and/or reimbursements at
any time. Further, any waivers or reimbursements made by the Adviser (after June
3, 1996) with respect to a Portfolio are subject to recoupment from that
Portfolio within the following two years, provided that the Portfolio is able to
effect such payment to the Adviser and remain in compliance with the foregoing
expense limitations.
The term "Assets" means the average daily net assets of the Portfolio. The
investment advisory fees are accrued daily and paid monthly.
SUBADVISERS -- The organizations described below act as subadvisers to the
Trust and certain of its Portfolios pursuant to Subadvisory Agreements with
SAAMCo. Under the Subadvisory Agreements, the Subadvisers manage the investment
and reinvestment of the assets of the respective Portfolios for which they are
responsible. Each of the Subadvisers is independent of SAAMCo and discharges its
responsibilities subject to the policies of the Trustees and the oversight and
supervision of SAAMCo, which pays the Subadvisers' fees.
The subadviser for the Growth-Income, Alliance Growth and Global Equities
Portfolios is Alliance Capital Management L.P. Alliance is a Delaware limited
partnership with principal offices at 1345 Avenue of the Americas, New York, New
York 10105. Alliance is a major international investment manager, supervising
client accounts with assets totalling over $184.5 billion as of November 30,
1996. Alliance serves its clients, who primarily are major corporate employee
benefit funds, investment companies, foundations, endowment funds and public
employee
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retirement systems. As of November 30, 1996, Alliance was retained as an
investment manager of employee benefit fund assets for 33 of the Fortune 100
companies.
The portion of the annual investment advisory fees received by SAAMCo which
is paid to Alliance with respect to the Growth-Income Portfolio and the Alliance
Growth Portfolio is .35% on the first $50 million of Assets, .30% on the next
$100 million, .25% on the next $150 million, .20% on the next $200 million and
.15% on Assets over $500 million; and, with respect to the Global Equities
Portfolio, .50% on the first $50 million of Assets, .40% on the next $100
million, .30% on the next $150 million and .25% on Assets over $300 million. For
the fiscal year ended November 30, 1996, SAAMCo paid to Alliance, with respect
to each Portfolio subadvised by Alliance, a fee equal to the following
percentage of average daily net assets: Growth-Income Portfolio -- .29%,
Alliance Growth Portfolio -- .29%, and Global Equities Portfolio -- .40%.
The subadviser of the Venture Value and Real Estate Portfolios is Davis
Selected Advisers, L.P., 124 East Marcy Street, Sante Fe, New Mexico 87501.
Venture Advisers, Inc. is the sole General Partner of the limited partnership,
which, in turn, is controlled by Shelby M.C. Davis. Davis Selected provides
advisory services to other investment companies. As of November 30, 1996, Davis
Selected had over $6 billion of assets under management. The Subadvisory
Agreement with Davis Selected provides that Davis Selected may delegate any of
its responsibilities under the agreement to one of its affiliates, including
Davis Selected Advisers -- NY, Inc., a wholly-owned subsidiary; however Davis
Selected remains ultimately responsible (subject to supervision by SAAMCo) for
the assets of the Portfolios allocated to it.
The portion of the annual investment advisory fee received by SAAMCo which
is paid to Davis Selected with respect to the Venture Value and Real Estate
Portfolios is .45% on the first $100 million of Assets, .40% on the next $400
million and .35% on Assets over $500 million. For the fiscal year ended November
30, 1996, SAAMCo paid to Davis Selected, with respect to the Venture Value
Portfolio, a fee equal to .42% of the Portfolio's average daily net assets.
The subadviser for the Corporate Bond, Utility and Federated Value
Portfolios is Federated Investment Counseling, Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. Federated is a wholly owned
subsidiary of Federated Investors, and together with other subsidiaries of
Federated Investors serves as investment adviser to a number of investment
companies and private accounts. With over $110 billion invested across more than
260 funds under management and/or administration as of November 30, 1996,
Federated Investors is one of the largest mutual fund investment managers in the
United States.
The portion of the annual investment advisory fees received by SAAMCo which
is paid to Federated with respect to the Corporate Bond Portfolio is .30% on the
first $25 million of Assets, .25% on the next $25 million, .20% on the next $100
million and .15% on Assets over $150 million; and with respect to each of the
Utility and Federated Value Portfolios is .55% on the first $20 million of
Assets, .35% on the next $30 million, .25% on the next $100 million, .20% on the
next $350 million and .15% on Assets over $500 million. For the fiscal year
ended November 30, 1996, SAAMCo paid to Federated, with respect to each
Portfolio subadvised by Federated, a fee equal to the following percentage of
average daily net assets: Utility -- .55%, and Federated Value -- .55%. For the
period June 3, 1996 through November 30, 1996, SAAMCo paid to Federated, with
respect to the Corporate Bond Portfolio, a fee equal to .30% of average daily
net assets.
The subadviser for the Asset Allocation Portfolio is GSAM, a separate
operating division of Goldman, Sachs & Co. The subadviser for the Global Bond
Portfolio is GSAM-International, an affiliate of Goldman, Sachs & Co. Goldman,
Sachs & Co. is a New York limited partnership with its principal offices at 85
Broad Street, New York, New York 10004. GSAM serves a wide range of clients
including private and public pension funds, endowments, foundations, banks,
thrifts, insurance companies, corporations, and private investors and family
groups. The asset management services are divided into the following areas:
institutional fixed-income investment management; global currency management;
institutional equity investment management; fund management; money market mutual
fund management and administration; and private asset management. As of November
30, 1996, GSAM, together with its affiliates, acted as investment adviser,
administrator or distributor for approximately $ billion in assets.
GSAM-International was organized in 1990 as a company with limited liability
under the laws of England. It is authorized to conduct investment advisory
business in the United Kingdom as a member of the Investment Management
Regulatory Organisation Limited, a United Kingdom self-regulatory organization.
GSAM and GSAM-International are able to draw on the research and market
expertise of Goldman, Sachs & Co. in making investment decisions for the
Portfolios for which they act as Subadviser. In performing their subadvisory
services, GSAM and GSAM-International, while remaining ultimately responsible
for the management of the Portfolio, are able to draw
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upon the research and expertise of their affiliate offices, for portfolio
decisions and management with respect to certain portfolio securities.
The portion of the annual investment advisory fees received by SAAMCo which
is paid to GSAM with respect to the Asset Allocation Portfolio is .40% on the
first $50 million of Assets, .30% on the next $100 million, .25% on the next
$100 million and .20% on Assets over $250 million. For the fiscal year ended
November 30, 1996, SAAMCo paid to GSAM, with respect to each Portfolio
subadvised by GSAM, a fee equal to the following percentage of average daily net
assets: Corporate Bond -- .34%, and Asset Allocation -- .30%. The portion of the
annual investment advisory fees received by SAAMCo which is paid to
GSAM-International with respect to the Global Bond Portfolio is .40% on the
first $50 million of Assets, .30% on the next $100 million, .25% on the next
$100 million and .20% on Assets over $250 million. For the fiscal year ended
November 30, 1996, SAAMCo paid to GSAM-International, with respect to the Global
Bond Portfolio, a fee equal to .38% of the Portfolio's average daily net assets.
The subadviser of the Worldwide High Income and International Diversified
Equities Portfolios is Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, New York, New York 10020. MSAM is a wholly owned subsidiary of Morgan
Stanley Group Inc., and provides a broad range of portfolio management services
to customers in the United States and abroad. As of November 30, 1996, MSAM,
together with its affiliated investment management companies, had approximately
$170 billion of assets under management (inclusive of assets under fiduciary
advisory control).
The portion of the annual investment advisory fee received by SAAMCo which
is paid to MSAM with respect to each of the Worldwide High Income and
International Diversified Equities Portfolios is .65% on Assets up to $350
million and .60% on Assets thereafter. For the fiscal year ended November 30,
1996, SAAMCo paid to MSAM, with respect to the International Diversified
Equities Portfolio and Worldwide High Income Portfolio, a fee equal to .65% of
each Portfolio's average daily net assets.
The subadviser of the Growth/Phoenix Investment Counsel and
Balanced/Phoenix Investment Counsel Portfolios is Phoenix Investment Counsel,
Inc. ("Phoenix"), an indirect wholly-owned subsidiary of Phoenix Duff & Phelps
Corporation. Phoenix is located at 56 Prospect Street, Hartford, CT 06115.
Phoenix was originally organized in 1932 as John P. Chase, Inc. and has been
engaged in the management of mutual funds since 1958. As of November 30, 1996,
Phoenix Duff & Phelps through its affiliated companies, had over $32 billion in
total assets under management for all its clients. Phoenix, the subadviser, had
in excess of $19 billion under management as of November 30, 1996.
The portion of the annual investment advisory fees received by SAAMCo which
is paid to Phoenix with respect to each of the Balanced/Phoenix Investment
Counsel and Growth/Phoenix Investment Counsel Portfolios is .35% on the first
$50 million of Assets, .30% on the next $100 million; .25% on the next $150
million; .20% on the next $200 million and .15% on Assets over $500 million. For
the fiscal year ended November 30, 1996, SAAMCo paid to Phoenix, with respect to
the Balanced/Phoenix Investment Counsel and Growth/Phoenix Investment Counsel
Portfolios, a fee equal to .35% and .31%, respectively, of each Portfolio's
average daily net assets.
The subadviser of the Putnam Growth, International Growth and Income and
Emerging Markets Portfolios is Putnam Investment Management, Inc., a
Massachusetts corporation with principal offices at One Post Office Square,
Boston, Massachusetts. Putnam has been managing mutual funds since 1937 and
serves as investment adviser to the funds in the Putnam Family. Putnam and its
affiliates managed approximately $173 billion as of December 31, 1996. Putnam is
a subsidiary of Putnam Investments, Inc., which is wholly owned by Marsh &
McLennan Companies, Inc., a publicly owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
The portion of the annual investment advisory fees received by SAAMCo which
is paid to Putnam with respect to the Putnam Growth Portfolio is .50% on the
first $150 million of Assets, .45% on the next $150 million of Assets and .35%
on Assets over $300 million. Putnam became the Subadviser to the Putnam Growth
Portfolio on April 15, 1997. For the fiscal year ended November 30, 1996, SAAMCo
paid to the Portfolio's predecessor subadviser a fee equal to .48% of the
Portfolio's average daily net assets. See "Investment Advisory and Management
Agreement--Advisory Fees" in the Statement of Additional Information for the
annual rates applicable with respect to the predecessor subadvisers. The portion
of the annual investment advisory fees received by SAAMCo which is paid to
Putnam with respect to the International Growth and Income Portfolio is .65% on
the first $150 million of Assets, .55% on the next $150 million of Assets and
.45% on Assets over $300 million. The portion of the annual investment
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advisory fees received by SAAMCo which is paid to Putnam with respect to the
Emerging Markets Portfolio is 1.00% on the first $150 million of Assets, .95% on
the next $150 million of Assets and .85% on Assets over $300 million.
PORTFOLIO MANAGEMENT -- The following individuals are primarily responsible
for the day-to-day management of the particular Portfolios as indicated below.
SAAMCo's Fixed Income Investment Team headed by P. Christopher Leary has
been responsible for managing the CASH MANAGEMENT PORTFOLIO, HIGH-YIELD BOND
PORTFOLIO and the fixed-income component of the SUNAMERICA BALANCED PORTFOLIO
since October 1996. Mr. Leary is a Senior Vice President of SAAMCo and has been
a portfolio manager with the firm since 1990. John W. Risner has supervisory
responsibility for the High-Yield Bond Portfolio. He is a Vice President of
SAAMCo and joined the firm in February 1997. Prior to joining SAAMCo, Mr. Risner
served as Senior Portfolio Manager of the Value Line Aggressive Income Trust and
the Value Line Convertible Fund. Audrey L. Snell serves as the portfolio manager
for the AGGRESSIVE GROWTH PORTFOLIO. Ms. Snell is a Senior Vice President of
SAAMCo and has been a portfolio manager with the firm since 1991.
Stephen Fitzgerald served as a portfolio manager for the GLOBAL BOND
PORTFOLIO since the inception date of July 1, 1993 and is currently the sole
portfolio manager. Mr. Fitzgerald is Vice President in the London office, and
joined GSAM-International in 1992. Prior to 1992, he spent two years managing
multi-currency, fixed-income and balanced portfolios at Invesco MIM Limited
where he was a senior member of the derivative products group.
Joseph M. Balestrino and Mark E. Durbiano serve as co-portfolio managers of
the CORPORATE BOND PORTFOLIO. Mr. Balestrino joined Federated Investors in 1986
and has been a Vice President of Federated Advisers since 1995. Mr. Balestrino
served as an Assistant Vice President of Federated Advisers from 1991 to 1995.
Mr. Balestrino is a Chartered Financial Analyst. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Vice President of Federated Advisers
since January 1996. From 1988 through 1995, Mr. Durbiano was a Vice President of
Federated Advisers. Mr. Durbiano is a Chartered Financial Analyst.
Robert Angevine and Paul Ghaffari have served as co-portfolio managers of
the WORLDWIDE HIGH INCOME PORTFOLIO since the inception date of October 28,
1994. Mr. Angevine is a principal of Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and a portfolio manager of MSAM's high yield investments. He has been
with the firm since 1988. Mr. Ghaffari is a managing director of Morgan Stanley
and a portfolio manager of MSAM's emerging market debt instruments. He has been
with the firm since 1983.
Stanton J. Feeley serves as the portfolio manager for the SUNAMERICA
BALANCED PORTFOLIO. Mr. Feeley has served as Executive Vice President and Chief
Investment Officer of SAAMCo since February 1992. Prior to joining SAAMCo, Mr.
Feeley was a Senior Portfolio Manager for Delaware Management Company, Inc.
C. Edwin Riley, Jr. has served as the portfolio manager of the
BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO since November 17, 1995. Prior to
joining Phoenix Investment Counsel in August 1995, Mr. Riley held the position
of Senior Vice President and Director of Equity Management at Nationsbank
Investment Management.
Mitchell E. Cantor and Ronald E. Gutfleish have served as co-portfolio
managers for the equity portion of the ASSET ALLOCATION PORTFOLIO since the
inception date of July 1, 1993 and February 1, 1995, respectively. Mr. Cantor is
a Vice President of GSAM and joined the company in 1991. Mr. Gutfleish is a Vice
President of GSAM, which he joined in 1993. Prior to 1993, he was a principal of
Sanford C. Bernstein & Co., Inc. in its Investment Management Research
Department. Jonathan A. Beinner and Richard C. Lucy have served as co-portfolio
managers for the fixed-income portion of the ASSET ALLOCATION PORTFOLIO since
its inception date of July 1, 1993. Mr. Beinner is a Vice President of GSAM,
where he joined the Funds Group in 1990. Mr. Lucy is a Vice President of GSAM,
where he joined the Funds Group in 1992 after spending nine years managing
fixed-income assets at Brown Brothers Harriman & Co.
Christopher H. Wiles and Linda A. Duessel serve as co-portfolio managers of
the UTILITY PORTFOLIO. Mr. Wiles joined Federated Investors in 1990 and has been
a Vice President of Federated Advisers since 1992. Mr. Wiles served as Assistant
Vice President of Federated Advisers in 1991. Mr. Wiles is a Chartered Financial
Analyst. Ms. Duessel joined Federated Investors in 1991, and has been a Vice
President of Federated Advisers since 1995. Ms. Duessel was an Assistant Vice
President of Federated Advisers from 1991 until 1995.
Michael R. Baldwin and Bruce W. Calvert have served as co-portfolio
managers for the GROWTH-INCOME PORTFOLIO since the inception date of February 9,
1993 and Stephen W. Pelensky has served as a co-portfolio manager for the
Portfolio since June 30, 1995. Mr. Baldwin is a Vice President of Alliance
Capital Management and joined the company in 1989. Mr. Calvert is Vice Chairman
and Chief Investment Officer, and joined Alliance Capital
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Management in 1973. Mr. Pelensky is a Vice President of Alliance Capital
Management and joined the company in 1994. Prior to joining Alliance Capital
Management, Mr. Pelensky was a portfolio manager and analyst with Affinity
Investment Advisors and BEA Associates.
Peter R. Anderson and Scott B. Schermerhorn serve as co-portfolio managers
of the FEDERATED VALUE PORTFOLIO. Mr. Anderson joined Federated Investors in
1972 as, and is presently, a Senior Vice President of Federated Advisers. Mr.
Anderson is a Chartered Financial Analyst. Mr. Schermerhorn joined Federated
Investors in 1996 as a Vice President of Federated Advisers. From 1990 through
1996, Mr. Schermerhorn was a Senior Vice President and Senior Investment Officer
at J. W. Seligman & Co., Inc.
Christopher C. Davis serves as portfolio manager of the VENTURE VALUE
PORTFOLIO. He has been employed by Davis Selected since September, 1989 as an
assistant portfolio manager and research analyst. Andrew A. Davis is the primary
portfolio manager of the REAL ESTATE FUND. He is a Vice President of Davis
Series, Inc. and a Co-President of Davis Selected's General Partner. Until
February 1993, he was the Vice President and head of convertible research at
PaineWebber, Incorporated. Shelby M.C. Davis previously served as co-portfolio
manager of The Venture Value Portfolio. He will continue to consult with
Christopher and Andrew Davis in his capacity as Chief Investment Officer of
Davis Selected.
James G. Reilly has served as the portfolio manager for the ALLIANCE GROWTH
PORTFOLIO since the inception date of February 9, 1993. Mr. Reilly is a Senior
Vice President of Alliance Capital Management and joined the company in 1984.
Van Harissis has served as the portfolio manager of the GROWTH/PHOENIX
INVESTMENT COUNSEL PORTFOLIO since May 1996. Mr. Harissis is a Vice President of
Phoenix Investment Counsel, Inc. and has been with the company since August
1995. Prior to joining Phoenix Investment Counsel, Inc., Mr. Harissis held the
position of Senior Portfolio Manager at Howe and Rusling, Incorporated and had
been with that firm since 1990.
C. Beth Cotner, Richard England, Manuel H. Weiss and David Santos will
serve as co-portfolio managers of the PUTNAM GROWTH PORTFOLIO. Ms. Cotner, a
Senior Vice President, has been an investment professional with Putnam since
1995. Prior to that time, she was an Executive Vice President of Kemper
Financial Services. Mr. England, a Senior Vice President, has been an investment
professional with Putnam since 1992. Prior to that time, he was an investment
officer with Aetna Equity Investors. Mr. Weiss, a Senior Vice President, has
been an investment professional with Putnam since 1987. Mr. Santos, a Vice
President, has been an investment professional with Putnam since 1986. Justin M.
Scott will serve as portfolio manager of the INTERNATIONAL GROWTH AND INCOME
PORTFOLIO. Mr. Scott, a Managing Director, has been an investment professional
with Putnam since 1988. Thomas R. Haslett, Managing Director, and J. Peter
Grant, Senior Vice President, are the portfolio managers of the EMERGING MARKETS
PORTFOLIO. Mr. Haslett has been employed as an investment professional by Putnam
since 1996. Prior to December 1996 he was a Managing Director of Montgomery
Asset Management, Ltd. Mr. Grant has been employed as an investment professional
by Putnam Management since 1973.
Barton Biggs has served as a co-portfolio manager for the INTERNATIONAL
DIVERSIFIED EQUITIES PORTFOLIO since the inception date of October 28, 1994 and
Francine Bovich and Ann Thivierge have served as co-portfolio managers for the
Portfolio since July 1, 1995. Mr. Biggs is Chairman and Chief Investment Officer
of Morgan Stanley Asset Management Inc. and a Director of Morgan Stanley Group,
Inc. He joined Morgan Stanley in 1973 as a General Partner and Managing Director
and is a member of Morgan Stanley Group, Inc.'s Board of Directors and of the
Management Committee. Ms. Bovich is responsible for product development,
portfolio management and communication of asset allocation strategy. She joined
Morgan Stanley Asset Management Inc., as a Principal in 1993. Prior to joining
Morgan Stanley Asset Management Inc., Ms. Bovich was a Principal and Executive
Vice President of Westwood Management Corp. and was with the firm from 1986 to
1993. Ms. Thivierge is a Principal of Morgan Stanley Asset Management Inc. and
joined the company in 1986 as an Analyst. From 1992 through 1996 she served as a
Vice President for Morgan Stanley Asset Management Inc.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT -- State Street Bank
and Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, is the Trust's custodian, transfer agent and dividend paying agent. State
Street maintains custody of the Trust's securities and cash and the records of
each shareholder's account. State Street also performs other related shareholder
service functions.
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PORTFOLIO TURNOVER AND BROKERAGE
All Portfolios effect portfolio transactions without regard to the length
of time particular investments have been held. Under certain market conditions,
the investment policies of the Portfolios may result in high portfolio turnover.
The portfolio turnover rates for the Portfolios (other than the Real Estate
International Growth and Income and Emerging Markets Portfolios) are contained
in the section entitled "Financial Highlights." The portfolio turnover rates for
the International Value: Growth and Income, Real Estate and [Emerging Markets]
Portfolios are not expected to exceed 150%, 50%, and , respectively. High
portfolio turnover involves correspondingly greater brokerage commissions, to
the extent such commissions are payable, and other transaction costs that are
borne directly by the Portfolio involved. Higher turnover rates reflect an
increased rate of realization of gains and losses by the Portfolio, which would
normally affect the taxable income of the Portfolio's shareholders. Where the
shareholder is an insurance company separate account funding variable annuity
contracts, qualified as such under the Internal Revenue Code of 1986, as amended
("Code"); however, the contractowners are not currently charged with such income
or losses except to the extent provided under the Code (normally when
distributions under the contracts are made). Corporate bonds and U.S. government
securities are generally traded on a net basis and usually neither brokerage
commissions nor transfer taxes are involved.
Broker-dealers involved in the execution of portfolio transactions on
behalf of the Trust are selected on the basis of their professional capability
and the value and quality of their services. In selecting such broker-dealers,
the Adviser and Subadvisers will consider various relevant factors, including,
but not limited to, the size and type of the transaction; the nature and
character of the markets in which the security can be purchased or sold; the
execution efficiency, settlement capability, and financial condition of the
broker-dealer; the broker-dealer's execution services rendered on a continuing
basis; and the reasonableness of any commissions. The Adviser or a Subadviser
also may select broker-dealers which provide it with research services and may
cause a Portfolio to pay such broker-dealers commissions which exceed those
which other broker-dealers may have charged, if in the Adviser's or Subadviser's
view the commissions are reasonable in relation to the value of the brokerage
and/or research services provided by the broker-dealer. Further, the Adviser or
a Subadviser may effect portfolio transactions through broker-dealer affiliates
of the Trust, Adviser or Subadvisers.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Under the Code each Portfolio is treated as a separate regulated investment
company providing qualification requirements are met. To qualify as a regulated
investment company, a Portfolio must, among other things, (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks, securities
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stocks, securities or currencies; (b) derive less than 30% of
its gross income from the sale or other disposition of stocks or securities or
certain foreign currencies (or options, futures or forward contracts thereon)
held less than three months ("short-short gains"); provided, however, that
foreign currency gains, including those derived from options, futures and
forward contracts, will not, in any event, be characterized as short-short gains
if they are directly related to the registered investment company's investments
in stocks, options or futures thereon; and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. government securities and other
securities limited in respect of any one issuer to 5% of the Portfolio's assets
and to not more than 10% of the voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. government securities). Each Portfolio is intended
to meet these qualification requirements.
The restriction on short-short gains may require a Portfolio's Subadviser
to defer closing out a position in a security or financial contract at the most
opportunistic time.
So long as a Portfolio qualifies as a regulated investment company, such
Portfolio will not be subject to federal income tax on the net investment
company taxable income or net capital gains distributed to shareholders as
ordinary income dividend or capital gains dividends. It is the policy of each
Portfolio to distribute to its shareholders substantially all of its ordinary
income and net long-term capital gains realized during each fiscal year. All
distributions are reinvested in shares of the Portfolio at net asset value
unless the transfer agent is instructed otherwise.
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Each Portfolio of the Trust is also subject to variable contract asset
diversification regulations prescribed by the U.S. Treasury Department under the
Code. These regulations generally provide that, as of the end of each calendar
quarter or within 30 days thereafter, no more than 55% of the total assets of
the Portfolio may be represented by any one investment, no more than 70% by any
two investments, no more than 80% by any three investments, and no more than 90%
by any four investments. For this purpose, all securities of the same issuer are
considered a single investment, but each U.S. agency or instrumentality is
treated as a separate issuer. If a Portfolio fails to comply with these
regulations, the contracts invested in that Portfolio will not be treated as
annuity, endowment or life insurance contracts for tax purposes.
A "passive foreign investment company" (PFIC) is a foreign corporation
that, in general, meets either of the following tests: (a) at least 75% of its
gross income is passive or (b) an average of at least 50% of its assets produce,
or are held for the production of, passive income. If a Portfolio acquires and
holds stock in a PFIC beyond the end of the year of its acquisition, the
Portfolio will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain from disposition of the stock
(collectively PFIC income), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Portfolio's investment
company taxable income and, accordingly, will not be taxable to it to the extent
that income is distributed to its shareholders. Proposed Treasury regulations
provide that the Portfolio may make a "mark-to-market" election with respect to
any stock it holds of a PFIC. If the election is in effect, at the end of the
Portfolio's taxable year, the Portfolio will recognize the amount of gains, if
any, with respect to PFIC stock. No loss will be recognized on PFIC stock.
Alternatively, the Portfolio may elect to treat any PFIC in which it invests as
a "qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Portfolio will be required to include in income each
year its pro rata share of the qualified electing fund's annual ordinary
earnings and net capital gain, even if they are not distributed to the
Portfolio; those amounts would be subject to the distribution requirements
applicable to the Portfolio described above. It may be very difficult, if not
impossible, to make this election because of certain requirements thereof.
See the applicable contract prospectus for information regarding the
federal income tax treatment of the contracts and distributions to the separate
accounts.
PRICE OF SHARES
The Portfolios are open for business on any day the New York Stock Exchange
("NYSE") is open for regular trading. Shares of each Portfolio of the Trust are
sold at the net asset value per share calculated daily at the close of regular
trading (generally, 4:00 p.m., Eastern time). Each Portfolio calculates its net
asset value per share by dividing the total value of its net assets by the
number of shares outstanding. Assets are generally valued at their market value,
where available, except that short-term securities with 60 days or less to
maturity are valued on an amortized cost basis. For a complete description of
the procedures involved in valuing various Trust assets, see the Statement of
Additional Information.
PURCHASES AND REDEMPTIONS
Shares of the Trust currently are offered only to separate accounts of
Anchor National Life Insurance Company and First SunAmerica Life Insurance
Company. At present, Trust shares are used as the investment vehicle for annuity
contracts only. The Life Companies may issue variable life contracts that also
will use the Trust as the underlying investment. The offering of Trust shares to
variable annuity and variable life separate accounts is referred to as "mixed
funding." It may be disadvantageous for variable annuity separate accounts and
variable life separate accounts to invest in the Trust simultaneously. Although
neither the Life Companies nor the Trust currently foresees such disadvantages
either to variable annuity or variable life contract owners, the Board of
Trustees of the Trust, based upon information provided by the Life Companies,
would monitor events in order to determine, should a material conflict arise,
what action, if any, need be taken in response thereto. Shares of the Trust may
be offered to separate accounts of other life insurance companies which are
affiliates of the Life Companies.
All shares may be purchased or redeemed by the separate accounts without
any sales or redemption charge at the next computed net asset value. Purchases
and redemptions are made subsequent to corresponding purchases and redemptions
of units of the separate accounts without delay.
Except in extraordinary circumstances and as permissible under the 1940
Act, the redemption proceeds are paid on or before the seventh day following the
request for redemption.
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SHAREHOLDER VOTING RIGHTS
All shares of the Trust have equal voting rights and may be voted in the
election of trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing trustees unless and until
such time as fewer than a majority of the trustees holding office have been
elected by shareholders. At that time, the trustees then in office will call a
shareholders' meeting for the election of trustees. The trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
trustee when requested to do so by the record holders of 10% or more of the
outstanding shares of the Trust. A trustee may be removed after the holders of
record of not less than two-thirds of the outstanding shares have declared that
the trustee be removed either by declaration in writing or by votes cast in
person or by proxy. Except as set forth above, the trustees shall continue to
hold office and may appoint successor trustees, provided that immediately after
the appointment of any successor trustee, at least two-thirds of the trustees
have been elected by the shareholders. Shares do not have cumulative voting
rights. Thus, holders of a majority of the shares voting for the election of
trustees can elect all the trustees. No amendment may be made to the Declaration
of Trust without the affirmative vote of a majority of the outstanding shares of
the Trust, except that amendments to conform the Declaration to the requirements
of applicable federal laws or regulations or the regulated investment company
provisions of the Code may be made by the trustees without the vote or consent
of shareholders. If not terminated by the vote or written consent of a majority
of its outstanding shares, the Trust will continue indefinitely.
A change in the fundamental investment restrictions of a Portfolio requires
the vote of a "majority of the outstanding voting securities" of that Portfolio.
This term is defined in the 1940 Act and explained in the Statement of
Additional Information.
In matters affecting only a particular Portfolio, the matter shall have
been effectively acted upon by a vote of that Portfolio even though: (1) the
matter has not been approved by a vote of any other Portfolio; or (2) the matter
has not been approved by a vote of the Trust as a whole.
The Life Companies' separate accounts, as shareholders of the Portfolios,
have the right to vote each Portfolio's shares at any meeting of shareholders.
However, the separate account will vote each Portfolio's shares in accordance
with instructions received from contract owners. See the applicable contract
prospectus for information regarding contract owners' voting rights.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP has been selected as independent accountants for the
Trust.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Anchor National Life Insurance
Company or First SunAmerica Life Insurance Company, Service Center, P.O. Box
54299, Los Angeles, California 90054-0299, telephone number (800) 445-SUN2. In
New York, shareholders should call (800) 99-NYSUN.
FINANCIAL INFORMATION
Further financial information can be found in the Statement of Additional
Information, which is available upon written request to the Trust.
38
<PAGE> 40
Statement of Additional Information
SUNAMERICA SERIES TRUST
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the current Prospectus of
SunAmerica Series Trust ("Trust"). Capitalized terms used herein
but not defined have the meanings assigned to them in the
Prospectus. The Prospectus may be obtained by writing to the
Trust at the following address:
P.O. Box 54299
Los Angeles, California 90054-0299
May 15, 1997
<PAGE> 41
TABLE OF CONTENTS
Topic Page
- ----- ----
The Trust .................................................................B-2
Investment Objectives and Policies ........................................B-3
Description of Commercial Paper and Bond Ratings .........................B-31
Investment Restrictions ..................................................B-36
Trust Officers and Trustees ..............................................B-42
Investment Advisory and Management Agreement .............................B-45
Subadvisory Agreements ...................................................B-48
Dividends, Distributions and Federal Taxes ...............................B-52
Price of Shares ..........................................................B-52
Execution of Portfolio Transactions ......................................B-53
General Information ......................................................B-60
Financial Statements .....................................................B-61
THE TRUST
The Trust, organized as a Massachusetts business trust on September 11,
1992, is an open-end management investment company. Shares of the Trust are
issued and redeemed only in connection with investments in and payments under
variable annuity contracts, and may be sold to fund variable life contracts in
the future.
On August 30, 1994, the Board of Trustees of the Trust (the "Trustees")
approved the creation of the Balanced/Phoenix Investment Counsel Portfolio,
International Diversified Equities Portfolio, Worldwide High Income Portfolio
and Venture Value Portfolio. On March 1, 1996, the Trustees approved the
creation of the SunAmerica Balanced Portfolio, Aggressive Growth Portfolio,
Federated Value Portfolio and Utility Portfolio. In addition, on March 1, 1996,
the Trustees approved changing the name of the Fixed Income Portfolio to the
Corporate Bond Portfolio, and such name change became effective on June 3, 1996.
Prior to June 3, 1996, Goldman Sachs Asset Management, a separate operating
division of Goldman, Sachs & Co., served as subadviser for the Corporate Bond
Portfolio (formerly, the Fixed Income Portfolio). On April 15, 1997, the
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Trustees approved the creation of the International Growth and Income Portfolio,
the Real Estate Portfolio and the Emerging Markets Portfolio. In addition, on
April 15, 1997 the Trustees approved changing the name of the Provident Growth
Portfolio to the Putnam Growth Portfolio, and such name change became effective
on [April 16, 1997].
Shares of the Trust are held by separate accounts of Variable Annuity
Account Four, Anchor National Life Insurance Company, an Arizona corporation,
and First SunAmerica Life Insurance Company, a New York corporation. Anchor
National Life Insurance Company and First SunAmerica Life Insurance Company are
wholly owned subsidiaries of SunAmerica Life Insurance Company, an Arizona
corporation wholly owned by SunAmerica Inc., a Maryland corporation.
INVESTMENT OBJECTIVES AND POLICIES
The discussion below is intended to supplement the information contained
in the Prospectus.
Cash Management Portfolio. The Cash Management Portfolio seeks to achieve
its investment objective by investing in a diversified selection of money market
instruments. The money market instruments that the Portfolio may invest in are
as follows:
Commercial Bank Obligations. Certificates of deposit (interest-bearing
time deposits), bankers' acceptances (time drafts drawn on a commercial
bank where the bank accepts an irrevocable obligation to pay at maturity)
and documented discount notes (corporate promissory discount notes
accompanied by a commercial bank guarantee to pay at maturity)
representing direct or contingent obligations of commercial banks with
total assets in excess of $1 billion, based on the latest published
reports. The Cash Management Portfolio may also invest in obligations
issued by commercial banks with total assets of less than $1 billion if
the principal amount of these obligations owned by the Cash Management
Portfolio is fully insured by the Federal Deposit Insurance Corporation
("FDIC").
Savings Association Obligations. Certificates of deposit (interest-bearing
time deposits) issued by mutual savings banks or savings and loan
associations with assets in excess of $1 billion and whose deposits are
insured by
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the FDIC. The Cash Management Portfolio may also invest in obligations
issued by mutual savings banks or savings and loan associations with total
assets of less than $1 billion if the principal amount of these
obligations owned by the Cash Management Portfolio is fully insured by the
FDIC.
Commercial Paper. Short-term notes (up to 9 months) issued by corporations
or governmental bodies. The Cash Management Portfolio may only purchase
commercial paper judged by SunAmerica Asset Management Corp. ("SAAMCo" or
the "Adviser") to be of suitable investment quality. This includes
commercial paper that is (a) rated in the two highest categories by
Standard & Poor's Ratings Services, a Division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") and by Moody's Investors Service,
Inc. ("Moody's"), or (b) other commercial paper deemed on the basis of the
issuer's creditworthiness to be of a quality appropriate for the Cash
Management Portfolio. (No more than 5% of the Cash Management Portfolio's
assets may be invested in commercial paper in the second highest rating
category; no more than the greater of 1% or $1 million may be invested in
such securities of any one issuer.) See "Description of Commercial Paper
and Bond Ratings" for a description of the ratings. The Cash Management
Portfolio will not purchase commercial paper described in (b) above if
such paper would in the aggregate exceed 15% of its total assets after
such purchase. The commercial paper in which the Cash Management Portfolio
may invest includes variable amount master demand notes. Variable amount
master demand notes permit the Cash Management Portfolio to invest varying
amounts at fluctuating rates of interest pursuant to the agreement in the
master note. These are direct lending obligations between the lender and
borrower, they are generally not traded, and there is no secondary market.
Such instruments are payable with accrued interest in whole or in part on
demand. The amounts of the instruments are subject to daily fluctuations
as the participants increase or decrease the extent of their
participation. Investments in these instruments are limited to those that
have a demand feature enabling the Cash Management Portfolio
unconditionally to receive the
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amount invested from the issuer upon seven or fewer days' notice.
Generally, the Cash Management Portfolio attempts to invest in instruments
having a one-day notice provision. In connection with master demand note
arrangements, the Adviser, subject to the direction of the trustees,
monitors on an ongoing basis, the earning power, cash flow and other
liquidity ratios of the borrower, and its ability to pay principal and
interest on demand. The Adviser also considers the extent to which the
variable amount master demand notes are backed by bank letters of credit.
These notes generally are not rated by Moody's or Standard & Poor's and
the Cash Management Portfolio may invest in them only if it is determined
that at the time of investment the notes are of comparable quality to the
other commercial paper in which the Portfolio may invest. Master demand
notes are considered to have a maturity equal to the repayment notice
period unless the Adviser has reason to believe that the borrower could
not make timely repayment upon demand.
Corporate Bonds and Notes. The Cash Management Portfolio may purchase
corporate obligations that mature or that may be redeemed in one year or
less. These obligations originally may have been issued with maturities in
excess of one year. The Cash Management Portfolio may invest only in
corporate bonds or notes of issuers having outstanding short-term
securities rated in the top two rating categories by Standard & Poor's and
Moody's. See "Description of Commercial Paper and Bond Ratings" for
description of investment-grade ratings by Standard & Poor's and Moody's.
Worldwide High Income and High-Yield Bond Portfolios. The following is
additional disclosure relating to the Portfolios' investments:
Loan Participations and Assignments. The Worldwide High Income Portfolio
may invest in fixed and floating rate loans ("Loans") arranged through
private negotiations between an issuer of sovereign or corporate debt
obligations and one or more financial institutions ("Lenders"). The
Portfolio's investments in Loans are
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expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans
("Assignments") from third parties. In the case of Participations, the
Portfolio will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the
borrower. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by
the Subadviser to be creditworthy. When the Portfolio purchases
Assignments from Lenders it will acquire direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, however,
the rights and obligations acquired by the Portfolio as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities,
the Portfolio anticipates that such securities could be sold only to a
limited number of institutional investors. The lack of a liquid secondary
market may have an adverse impact on the value of such securities and the
Portfolio's ability to dispose of particular Assignments or Participations
when necessary to meet the Portfolio's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for the Portfolio to assign
a value to these securities for purposes of valuing the Portfolio and
calculating its net asset value.
Structured Investments. The Worldwide High Income Portfolio may invest a
portion of its assets in entities organized and operated solely for the
purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or
purchase by an entity, such as a
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corporation or trust, of specified instruments (such as commercial bank
loans) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests
in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured
Securities to create securities with different investment characteristics,
such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Securities of the type in which the
Portfolio anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. The Portfolio is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Securities
typically have higher yields and present greater risks than unsubordinated
Structured Securities. Structured Securities are typically sold in private
placement transactions, and there currently is no active trading market
for Structured Securities.
The Portfolio's investments in government and government-related and
restructured debt instruments are subject to special risks, including the
inability or unwillingness to repay principal and interest, requests to
reschedule or restructure outstanding debt and requests to extend
additional loan amounts.
U.S. Corporate High-Yield Fixed-Income Securities. A portion of each of
the Worldwide High Income and High-Yield Bond Portfolios' assets will be
invested in U.S. corporate high-yield fixed-income securities, which offer
a yield above that generally available on U.S. corporate debt securities
in the four highest rating categories of the recognized rating services.
The Portfolio may acquire fixed-income securities of U.S. issuers,
including debt obligations (e.g., bonds, debentures, notes, equipment
lease certificates, equipment trust certificates, conditional sales
contracts, commercial
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paper and obligations issued or guaranteed by the U.S. government or any
of its political subdivisions, agencies or instrumentalities) and
preferred stock. These fixed-income securities may have equity features,
such as conversion rights or warrants, and the Portfolio may invest up to
10% of its total assets in equity features, such as conversion rights or
warrants, and the Portfolio may invest up to 10% of its total assets in
equity securities other than preferred stock (e.g., common stock, warrants
and rights and limited partnership interests). The Portfolio may not
invest more than 5% of its total assets at the time of acquisition in
either of (1) equipment lease certificates, equipment trust certificates,
equipment trust certificates and conditional sales contracts or (2)
limited partnership interests.
Emerging Country Fixed-Income Securities. A portion of each of the
Worldwide High Income and High-Yield Bond Portfolios' assets will be
invested in emerging country fixed-income securities, which are debt
securities of government and government-related issuers located in
emerging countries (including participations in loans between governments
and financial institutions), and of entities organized to restructure
outstanding debt of such issuers and debt securities of corporate issuers
located in or organized under the laws of emerging countries. As used with
respect to these Portfolios, an emerging country is any country that the
International Bank for Reconstruction and Development (more commonly known
as the World Bank) has determined to have a low or middle income economy.
There are currently over 130 countries which are considered to be emerging
countries, approximately 40 of which currently have established securities
markets. The countries generally include every nation in the world except
the United States, Canada, Japan, Australia, Singapore, New Zealand and
most nations located in Western Europe.
In selecting emerging country debt securities for investment by the
Portfolio, the Subadviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications,
interest
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rate sensitivity, counterparty risks and technical market considerations.
Currently, investing in many emerging country securities is not feasible
or may involve unacceptable political risks. The Portfolio expects that
its investments in emerging country debt securities will be made primarily
in some or all of the following emerging countries:
Argentina Indonesia Poland
Brazil Malaysia Portugal
Chile Mexico South Africa
Czech Republic Morocco Thailand
Egypt Pakistan Turkey
Greece Peru Uruguay
Hungary Philippines Venezuela
As opportunities to invest in debt securities in other emerging countries
develop, the Portfolio expects to expand and further diversify the
emerging countries in which it invests. While the Portfolio generally is
not restricted in the portion of its assets which may be invested in a
single country or region, it is anticipated that, under normal
circumstances, the Portfolio's assets will be invested in at least three
countries.
The Portfolio's investments in government and government-related and
restructured debt securities will consist of (i) debt securities or
obligations issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in emerging countries
(including participation in loans between governments and financial
institutions), (ii) debt securities or obligations issued by government
owned, controlled or sponsored entities located in emerging countries, and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any
of the entities described above. Such type of restructuring involves the
deposit with or purchase by an entity of specific instruments and the
issuance by that entity of one or more classes of securities backed by, or
representing an interest in, the underlying instruments. Certain issuers
of such structured securities may be
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deemed to be "investment companies" as defined in the Investment Company
Act of 1940, as amended, (the "1940 Act"). As a result, the Portfolio's
investment in such securities may be limited by certain investment
restrictions contained in the 1940 Act.
The Portfolio's investments in debt securities of corporate issuers
in emerging countries may include debt securities or obligations issued
(i) by banks located in emerging countries or by branches of emerging
country banks located outside the country or (ii) by companies organized
under the laws of an emerging country. Determinations as to eligibility
will be made by the Subadviser based on publicly available information and
inquiries made to the issuer. The Portfolio may also invest in certain
debt obligations customarily referred to as "Brady Bonds," which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a
plan introduced by former U.S. Secretary of the Treasury Nicholas F.
Brady.
Emerging country debt securities held by the Portfolio will take the
form of bonds, notes, bills, debentures, convertible securities, warrants,
bank debt obligations, short-term paper, mortgage-backed and other
asset-backed securities, loan participations, loan assignments and
interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by
emerging country issuers. U.S. dollar-denominated emerging country debt
securities held by the Portfolio will generally be listed but not traded
on a securities exchange, and non-U.S. dollar-denominated securities held
by the Portfolio may or may not be listed or traded on a securities
exchange. The Portfolio may invest in mortgage-backed securities and in
other asset-backed securities issued by non-governmental entities such as
banks and other financial institutions. Mortgage-backed securities include
mortgage pass-through securities and collateralized mortgage obligations.
Asset-backed securities are collateralized by such assets as automobile or
credit card receivables and are securitized
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either in a pass-through structure or in a pay-through structure similar
to a collaterized mortgage obligation.
Investments in emerging country debt securities entail special
investment risks. Many of the emerging countries listed above may have
less stable political environments than more developed countries. Also, it
may be more difficult to obtain a judgement in a court outside the United
States.
Global Fixed-Income Securities. The global fixed-income securities in
which a portion of the Worldwide High Income Portfolio's assets may be
invested are debt securities denominated in currencies of countries
displaying high real yields. Such securities include government
obligations issued or guaranteed by U.S. or foreign governments and their
political subdivisions, authorities, agencies or instrumentalities, and by
supranational entities (such as the World Bank, The European Economic
Community, The Asian Development Bank and the European Coal and Steel
Community), Eurobonds, and corporate bonds with varying maturities
denominated in various currencies. In this portion of the Portfolio, the
Subadviser seeks to minimize investment risk by investing in a high
quality portfolio of debt securities, the majority of which will be rated
in one of the two highest rating categories by a nationally recognized
statistical rating organization. U.S. government securities in which the
Portfolio may invest include obligations issued or guaranteed by the U.S.
government, such as U.S. Treasury securities, as well as those backed by
the full faith and credit of the United States, such as obligations of the
Government National Mortgage Association and The Export-Import Bank. The
Portfolio may also invest in obligations issued or guaranteed by U.S.
government agencies or instrumentalities where the Portfolio must look
principally to the issuing or guaranteeing agency for ultimate repayment.
The Portfolio may invest in obligations issued or guaranteed by foreign
governments and their political subdivisions, authorities, agencies or
instrumentalities, and by supranational entities (such as the World Bank,
The European Economic Community, The Asian Development Bank
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and the European Coal and Steel Community). Investment in foreign
government securities for this portion of the Portfolio will be limited to
those of developed nations which the Subadviser believes to pose limited
credit risk. These countries currently include Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan,
Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom. Corporate and supranational
obligations selected for this portion of the portfolio will be limited to
those rated A or better by Moody's, Standard and Poor's or IBCA Ltd.
In selecting securities for this portion of the Portfolio, the
Subadviser evaluates the currency, market and individual features of the
securities being considered for investment. The Subadviser believes that
countries displaying the highest real yields will over time generate a
high total return, and accordingly, the Subadviser's focus for this
portion of the Portfolio will be to analyze the relative rates of real
yield of twenty global fixed-income markets. In selecting securities, the
Subadviser will first identify the global markets in which the Portfolio's
assets will be invested by ranking such countries in order of highest real
yield. In this portion of its portfolio, the Portfolio will invest its
assets primarily in fixed-income securities denominated in the currencies
of countries within the top quartile of the Subadviser's ranking.
The Subadviser's assessment of the global fixed-income markets is
based on an analysis of real interest rates. The Subadviser calculates
real yield for each global market by adjusting current nominal yields of
securities in each such market for inflation prevailing in each country
using an analysis of past and projected (one-year) inflation rates for
that country. The Subadviser expects to review and update on a regular
basis its real yield ranking of countries and market sectors and to alter
the allocation of this portion of the Portfolio's investments among
markets as necessary when changes to real yields and inflation estimates
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significantly alter the relative rankings of the countries and market
sectors.
Short Sales. Each Portfolio (other than the Cash Management Portfolio) may
make short sales, including "short sales against the box." A short sale is
effected by selling a security which the Portfolio does not own. A short sale is
against the box to the extent that the Portfolio contemporaneously owns, or has
the right to obtain without payment, securities identical to those sold short. A
Portfolio may not enter into a short sale against the box, if, as a result, more
than 25% of its total assets would be subject to such short sales.
When a Portfolio makes a short sale, the proceeds it receives from the
sale will be held on behalf of a broker until the Portfolio replaces the
borrowed securities. To deliver the securities to the buyer, the Portfolio will
need to arrange through a broker to borrow the securities and, in so doing, the
Portfolio will become obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral deposited with the
Trust's Custodian in the name of the broker that consists of cash or liquid
securities. In addition, the Portfolio will place in a segregated account with
its Custodian an amount of cash or liquid securities equal to the difference, if
any, between (1) the market value of the securities sold at the time they were
sold short and (2) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). In the event that the value of the collateral deposited with the
broker, plus the value of the assets in the segregated account should fall below
the value of the securities sold short, additional amounts to cover the
difference will be placed in the segregated accounts. Short sales by the
Portfolio involve certain risks and special considerations. Possible losses from
short
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sales differ from losses that could be incurred from a purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
can equal only the total amount invested.
Illiquid Securities. Each of the Portfolios may invest no more than 15%
(10% in the case of the Cash Management Portfolio) of its net assets, determined
as of the date of purchase, in illiquid securities including repurchase
agreements which have a maturity of longer than seven days or in other
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal restrictions
on resale because they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), securities which are otherwise not
readily marketable and repurchase agreements having a maturity of longer than
seven days. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. Securities which have not been registered
under the Securities Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemptions
within seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. There generally will be a lapse of time between a mutual fund's decision
to sell an unregistered security and the registration of such security promoting
sale. Adverse market conditions could impede a public offering of such
securities. When purchasing unregistered securities, the Portfolios will seek to
obtain the right of registration at the expense of the issuer.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
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there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act for which there is a readily available market will not be deemed
to be illiquid. The Adviser or subadviser, as the case may be, will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Trustees of the Trust. In reaching liquidity decisions, the Adviser, or
subadviser, as the case may be, will consider, inter alia, pursuant to
guidelines and procedures established by the Trustees, the following factors:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
The Cash Management Portfolio may invest in commercial paper issues which
include securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the
so-called private placement exemption from registration which is afforded by
Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. The Cash Management
Portfolio's 10% limitation on investments in illiquid securities includes
Section 4(2) paper other than Section 4(2) paper that the Adviser has determined
to be liquid pursuant to guidelines established by the Trustees. The Portfolio's
Board of Trustees delegated to the Adviser the function of making day-to-day
determinations of liquidity with respect to Section 4(2) paper,
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pursuant to guidelines approved by the Trustees that require the Adviser to take
into account the same factors described above for other restricted securities
and require the Adviser to perform the same monitoring and reporting functions.
Reverse Repurchase Agreements. The Cash Management, Corporate Bond,
High-Yield Bond, Worldwide High Income, SunAmerica Balanced, Utility, Federated
Value and Aggressive Growth Portfolios may enter into reverse repurchase
agreements with brokers, dealers, domestic and foreign banks or other financial
institutions that have been determined by the Adviser or Subadviser to be
creditworthy. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. It may also be viewed
as the borrowing of money by the Portfolio. The Portfolio's investment of the
proceeds of a reverse repurchase agreement is the speculative factor known as
leverage. The Portfolios will enter into a reverse repurchase agreement only if
the interest income from investment of the proceeds is expected to be greater
than the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. The Portfolio will maintain
with the Custodian a separate account with a segregated portfolio of cash or
liquid securities in an amount at least equal to its purchase obligations under
these agreements (including accrued interest). In the event that the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of time
to determine whether to enforce the Portfolio's repurchase obligation, and the
Portfolio's use of proceeds of the agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings and are subject to the percentage limitations on borrowings. See
"Investment Restrictions."
Floating Rate Obligations. These securities have a coupon rate that
changes at least annually and generally more frequently. The coupon rate is set
in relation to money market rates. The obligations, issued primarily by banks,
other corporations, governments and semi-governmental bodies, may have a
maturity in excess of one year. In some cases, the coupon rate may vary with
changes in the yield on Treasury bills or notes or with changes in LIBOR (London
Interbank Offering Rate). The Adviser considers floating rate obligations to be
liquid investments because a number
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of United States and foreign securities dealers make active markets in these
securities.
Covered Options. Each Portfolio may write (sell) covered call and put
options on any securities in which it may invest. A Portfolio may purchase and
write such options on securities that are listed on national domestic securities
exchanges (and, for certain Portfolios, foreign securities exchanges) or traded
in the over-the-counter market. A call option written by a Portfolio obligates a
Portfolio to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by a Portfolio are covered, which means that a
Portfolio will own the securities subject to the option so long as the option is
outstanding. The purpose of writing covered call options is to realize greater
income than would be realized on portfolio securities transactions alone.
However, in writing covered call options for additional income, a Portfolio may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Portfolio would obligate a Portfolio to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Portfolio would be covered, which means that the Portfolio would have
deposited with its custodian cash, U.S. government securities or other
high-grade debt securities (i.e., securities rated in one of the top three
categories by Moody's or Standard & Poor's, or, if unrated, deemed by the
Adviser or subadviser to be of comparable credit quality) with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for a Portfolio. However, in return for
the option premium, a Portfolio accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities'
market value at the time of purchase.
Portfolio Strategies Related to Foreign Securities. Each Portfolio may
engage in various portfolio strategies to reduce certain risks of their
respective investments and/or to attempt to enhance return. Each Portfolio may
engage in strategies including the purchase and sale of forward foreign currency
exchange contracts, currency and financial index futures contracts
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(including, in the case of the Global Equities Portfolio, stock index futures)
and options thereon, put and call options on currencies and financial indices,
and combinations thereof. The Adviser or Subadviser will use such techniques as
market conditions warrant. Each Portfolio's ability to use these strategies may
be limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. New
financial products and risk management techniques continue to be developed and
these Portfolios may use these new investments and techniques to the extent
consistent with their investment objective and policies.
In addition to direct investment, the Portfolios which may invest in
foreign securities may also invest in American Depositary Receipts ("ADRs") and
in other Depositary Receipts, including Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and others (which, together with ADRs,
GDRs and EDRs, are hereinafter collectively referred to as "Depositary
Receipts"), to the extent that such Depositary Receipts become available. ADRs
are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of Depositary Receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Holders of unsponsored Depositary
Receipts generally bear all the costs associated with establishing the
unsponsored Depositary Receipt. The depositary of unsponsored Depositary
Receipts is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored Depositary Receipt voting rights with respect to the deposited
securities or pool of securities. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities to which they may
be connected. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
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designed for use in securities markets outside the United States. A Portfolio
may invest in sponsored and unsponsored Depositary Receipts. For purposes of a
Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities. The
Portfolios also may invest in securities denominated in European Currency Units
("ECUs"). Generally ADRs, in registered form, are dollar denominated securities
designed for use in the U.S. securities markets, which represent and may be
converted into the underlying foreign security. EDRs, in bearer form, are
designed for use in the European securities markets. An "ECU" is a "basket"
consisting of specified amounts of currencies of certain of the twelve member
states of the European Community. The specific amount of currencies comprising
the ECU may be adjusted by the Council of Ministers of the European Community
from time to time to reflect changes in relative values of the underlying
currencies. In addition, the Portfolios may invest in securities denominated in
other currency "baskets." See "Description of Securities and Investment
Techniques - Risks and Considerations Applicable to Investment in Securities of
Foreign Issuers" in the Prospectus.
The Portfolios may also invest in emerging country securities. As used
with respect to this Portfolio, the term "emerging country" applies to any
country which, in the opinion of the Subadviser, is generally considered to be
an emerging or developing country by the international financial community,
including the International Bank for Reconstruction and Development (more
commonly known as the World Bank) and the International Finance Corporation.
There are currently over 130 countries which, in the opinion of the Subadviser,
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand [,Singapore] and
most nations located in Western Europe. Currently, investing in many emerging
countries is not feasible or may invoke unacceptable political risks.
The International Diversified Equities Portfolio will focus its
investments on those emerging market countries in which it believes the
economies are developing strongly and in which the markets are becoming more
sophisticated. With respect to the portions of such Portfolio that is invested
in emerging country
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equity securities, the Portfolio initially intends to invest primarily in some
or all of the following countries:
Argentina Indonesia Portugal Thailand
Brazil Mexico South Africa Turkey
India Philippines South Korea
As markets in other countries develop, the International Diversified
Equities Portfolio expects to expand and further diversify the emerging
countries in which it invests. The Portfolio does not intend to invest in any
security in a country where the currency is not freely convertible to U.S.
dollars, unless the Portfolio has obtained the necessary governmental licensing
to convert such currency or other appropriately licensed or sanctioned
contractual guarantee to protect such investment against loss of that currency's
external value, or the Portfolio has a reasonable expectation at the time the
investment is made that such governmental licensing or other appropriately
licensed or sanctioned guarantee would be obtained or that the currency in which
the security is quoted would be freely convertible at the time of any proposed
sale of the security by the Portfolio.
An emerging country security is one issued by a company that, in the
opinion of the Subadviser, has one or more of the following characteristics:(i)
it is organized under the laws of, and has a principal office in, an emerging
country, or (ii) alone or on a consolidated basis it derives 50% or more of its
annual revenue from business in emerging countries. An emerging market security
may also include a company which has its principal securities trading market in
an emerging country. The Subadviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.
Foreign Currency and Financial Index Transactions - Forward Exchange and
Futures Contracts, Options and Options on Futures Contracts. Each Portfolio may
enter into contracts for the purchase or sale for future delivery of foreign
currencies ("forward currency exchange contracts"), financial and foreign
currency futures contracts or contracts based on financial indices ("futures
contracts") and may purchase and write put and call options to buy or sell
currencies and to buy or sell futures contracts ("options on futures
contracts").
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A forward foreign currency contract is an obligation to purchase or sell a
currency against another currency at a future date and price as agreed upon by
the parties. A "sale" of a foreign currency futures contract means entering into
a contract to deliver the foreign currencies called for by the contract at a
specified price on a specified date. A "purchase" of a foreign currency futures
contract means entering into a contract to acquire the foreign currencies called
for by the contract at a specified price on a specified date.
An exchange-traded futures contract relating to foreign currency, or a
financial index, is similar to a forward foreign currency exchange contract but
has a standardized size and exchange date. A Portfolio may either accept or make
delivery of the currency at the maturity of such a contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the difference between a
specified dollar multiple of the value of the index on the expiration date of
the contract and the price at which the contract was originally struck. No
physical delivery of the securities underlying the index is made.
Over-the-counter currency instruments are subject to the risk that the
counterparty to such instruments will default on its obligations. Since
over-the-counter currency instruments are not guaranteed by an exchange or
clearinghouse, a default on the instrument would deprive the Portfolio of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Portfolio to cover its purchase or sale commitments, if any, at the
current market price. A Portfolio will not enter into such transactions unless
the credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Adviser or
Subadviser.
Each Portfolio may enter into futures contracts in anticipation of, or to
protect against, fluctuations in currency exchange rates. A Portfolio might, for
example, enter into a futures contract when it wanted to hold securities
denominated in a particular currency but anticipated, and wished to be protected
against, a decline in that currency against the U.S. dollar. Similarly, it might
enter into futures contracts to "lock in" the U.S. dollar price of non-U.S.
dollar denominated securities that it
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anticipated purchasing. Although futures contracts typically will involve the
purchase and sale of a foreign currency against the U.S. dollar, a Portfolio
also may enter into currency contracts not involving the U.S. dollar.
In connection with these futures transactions, the Trust has filed a
notice of eligibility with the Commodity Futures Trading Commission ("CFTC")
that exempts the Trust from CFTC registration as a "commodity pool operator" as
defined under the Commodity Exchange Act. Pursuant to this notice, each
Portfolio will observe certain CFTC guidelines with respect to its futures
transactions that, among other things, require the Portfolio to use futures for
bona fide "hedging" purposes only (as defined by CFTC rules), and, in the case
of futures transactions for non-bona fide hedging purposes, to limit initial
margin deposits to no more than 5% of its net assets after taking into account
unrealized profits and unrealized losses on any such contracts entered into. In
addition, subject to the limitation on margin deposits described above, a
Portfolio may engage in futures transactions for non-bona fide hedging purposes,
provided that the total value of such long futures positions will not exceed the
sum of (a) cash or cash equivalents set aside in an identifiable manner for this
purpose, (b) cash proceeds on existing investments due within 30 days, and (c)
accrued profits on such futures or options positions.
Parties to futures contracts and holders and writers of options on futures
can enter into offsetting closing transactions, similar to closing transactions
on options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures may
be closed only on an exchange or board of trade where there appears to be a
liquid secondary market. However, there can be no assurance that such a market
will exist for a particular contract at a particular time. Secondary markets for
options on futures are currently in the development stage, and no Portfolio will
trade options on futures on any exchange or board of trade unless, in the
judgment of the Adviser or applicable Subadviser, the markets for such options
have developed sufficiently that the liquidity risks for such options are not
greater than the corresponding risks for futures.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related
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option can vary from the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the daily
limit for several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Portfolio were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Portfolio would continue to
be subject to market risk with respect to its position. In addition, except in
the case of purchased options, the Portfolio would continue to be required to
make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related option positions whose prices are moving unfavorably to avoid
being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
In connection with the purchase of futures contracts, a Portfolio will
deposit and maintain in a segregated account with the Trust's custodian an
amount of cash or liquid securities equal to its obligations under the futures
contracts less any amounts maintained in a margin account with the Trust's
futures broker.
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Options - Each Portfolio may attempt to accomplish objectives similar to
those involved in their use of futures contracts by purchasing or selling put or
call options on currencies, currency futures contracts, and financial index
futures (including, in the case of the Global Equities Portfolio, stock index
futures). A foreign currency put option gives the Portfolio as purchaser the
right (but not the obligation) to sell a specified amount of currency at the
exercise price until the expiration of the option. A call option gives the
Portfolio as purchaser the right (but not the obligation) to purchase a
specified amount of currency at the exercise price until its expiration. A
Portfolio might purchase a currency put option, for example, to protect itself
during the contract period against a decline in the U.S. dollar value of a
currency in which it holds or anticipates holding securities. If the currency's
value should decline against the U.S. dollar, the loss in currency value should
be offset, in whole or in part, by an increase in the value of the put. If the
value of the currency instead should rise against the U.S. dollar, any gain to
the Portfolio would be reduced by the premium it had paid for the put option. A
currency call option might be purchased, for example, in anticipation of, or to
protect against, a rise in the value against the U.S. dollar of a currency in
which a Portfolio anticipates purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. OTC options differ from exchange-traded options in
that OTC options are transacted with dealers directly and not through a clearing
corporation (which guarantees performance). Consequently, there is a risk of
non-performance by the dealer. Since no exchange is involved, OTC options are
valued on the basis of a quote provided by the dealer. A Portfolio will not
purchase an OTC option unless it is believed that daily valuations for such
options are readily obtainable. In the case of OTC options, there can be no
assurance that a liquid secondary market will exist for any particular option at
any specific time.
An option on a securities index is similar to an option on a security
except that, rather than the right to take or make
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delivery of a security at a specified price, an option on an index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
Options on futures contracts to be written or purchased by a Portfolio
will be traded on U.S. or foreign exchanges or over-the-counter. These
investment techniques will be used only to hedge against anticipated future
changes in market conditions or exchange rates which otherwise might either
adversely affect the value of a Portfolio's securities or adversely affect the
prices of securities which a Portfolio intends to purchase at a later date.
Certain Risk Factors Relating to High-Yield Bonds. The Corporate Bond,
High-Yield Bond, Worldwide High Income, Balanced/Phoenix Investment Counsel,
Asset Allocation, Real Estate and Emerging Markets Portfolios may invest in
high-yield bonds. These bonds present certain risks which are discussed below:
Sensitivity to Interest Rate and Economic Changes - High-yield bonds are
very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress that would
adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaulted on its obligations
to pay interest or principal or entered into bankruptcy proceedings, a
Portfolio may incur losses or expenses in seeking recovery of amounts owed
to it. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of high-yield
bonds and the Portfolio's net asset value.
Payment Expectations - High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining
interest rate market, a Portfolio would have to
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replace the security with a lower yielding security, resulting in a
decreased return for investors. Conversely, a high-yield bond's value will
decrease in a rising interest rate market, as will the value of the
Portfolio's assets. If the Portfolio experiences unexpected net
redemptions, this may force it to sell high-yield bonds without regard to
their investment merits, thereby decreasing the asset base upon which
expenses can be spread and possibly reducing the Portfolio's rate of
return.
Liquidity and Valuation - There may be little trading in the secondary
market for particular bonds, which may affect adversely a Portfolio's
ability to value accurately or dispose of such bonds. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis,
may decrease the values and liquidity of high-yield bonds, especially in a
thin market.
Certain Risk Factors Affecting Utility Companies. The Utility and Real
Estate Portfolios may invest in equity and debt securities of utility companies.
There are certain risks and considerations affecting utility companies, and the
holders of utility company securities, which an investor should take into
account when investing in those securities. Factors which may adversely affect
utility companies include: difficulty in financing large construction programs
during inflationary periods; technological innovations which may cause existing
plants, equipment, or products to become less competitive or obsolete; the
impact of natural or man-made disaster (especially on regional utilities);
increased costs or reductions in production due to the unavailability of
appropriate types of fuels; seasonally or occasionally reduced availability or
higher cost of natural gas; and reduced demand due to energy conservation among
consumers. These revenues of domestic and foreign utility companies generally
reflect the economic growth and developments in the geographic areas in which
they do business. Furthermore, utility securities tend to be interest rate
sensitive.
In addition, most utility companies in the United States and in foreign
countries are subject to government regulation. Generally, the purpose of such
regulation is to ensure desirable
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levels of service and adequate capacity to meet public demand. To this end,
prices are often regulated to enable consumers to obtain service at what is
perceived to be a fair price, while attempting to provide utility companies with
a rate of return sufficient to attract capital investment necessary for
continued operation and necessary growth. Recently, utility regulators have
permitted utilities to diversify outside of their original geographic regions
and their traditional lines of business. While the Subadvisers believe that
these opportunities will permit certain utility companies to earn more than
their traditional regulated rates of return, other companies may be forced to
defend their core business and may be less profitable. Of course, there can be
no assurance that all of the regulatory policies described in this paragraph
will continue in the future.
In addition to the effects of regulation described in the previous
paragraph, utility companies may also be adversely affected by the following
regulatory considerations: (i) the development and implementation of a national
energy policy; (ii) the differences between regulatory policies of different
jurisdictions (or different regulators which have concurrent jurisdiction);
(iii) shifts in regulatory policies; (iv) adequacy of rate increases; and (v)
future regulatory legislation.
Foreign utility companies may encounter different risks and opportunities
than those located in the United States. Foreign utility companies may be more
heavily regulated than their United States counterparts. Many foreign utility
companies currently use fuels which cause more pollution than fuels used by
United States utilities. In the future, it may be necessary for such foreign
utility companies to invest heavily in pollution control equipment or otherwise
meet pollution restrictions. Rapid growth in certain foreign economies may
encourage the growth of utility industries in those countries.
In addition to the foregoing considerations which affect most utility
companies, there are specific considerations which affect specific utility
industries:
Electric. The electric utility industry is composed of companies that are
engaged in the generation, transmission, and sale of electric energy. Electric
utility companies may be affected either favorably or unfavorably, depending
upon the
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circumstances, by the following: fuel costs; financing costs; size of the region
in which sales are made; operating costs; environmental and safety regulations;
changes in the regulatory environment; and the length of time needed to complete
major construction projects.
In the United States, the construction and operation of nuclear power
facilities is subject to a high degree of regulatory oversight by the Nuclear
Regulatory Commission and state agencies with concurrent jurisdiction. In
addition, the design, construction, licensing, and operation of nuclear power
facilities are often subject to lengthy delays and unanticipated costs due to
changes in regulatory policy, regional political actions, and lawsuits.
Furthermore, during rate authorizations, utility regulators may disallow the
inclusion in electric rates of the higher operating costs and expenditures
resulting from these delays and unanticipated costs, including the costs of a
nuclear facility which a utility company may never be able to use.
Telecommunications. The telephone industry is large and highly
concentrated. The greatest portion of this segment is comprised of companies
which distribute telephone services and provide access to the telephone
networks. While many telephone companies have diversified into other businesses
in recent years, the profitability of telephone utility companies could be
adversely affected by increasing competition, technological innovations, and
other structural changes in the industry.
Cable television companies are typically local monopolies, subject to
scrutiny by both utility regulators and municipal governments. Emerging
technologies and legislation encouraging local competition are combining to
threaten these monopolies and may slow future growth rates of these companies.
The radio telecommunications segment of this industry, including cellular
telephone, is in its early developmental phase and is characterized by emerging,
rapidly growing companies.
Gas. Gas transmission and distribution companies are undergoing
significant changes. In the United States, the Federal Energy Regulatory
Commission is reducing its regulation of interstate transmission of gas. While
gas utility companies have in the recent past been adversely affected by
disruptions in the oil industry, increased concentration, and increased
competition,
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the Subadviser believes that environmental considerations should benefit the gas
industry in the future.
Water. Water utility companies purify, distribute, and sell water. This
industry is highly fragmented because most of the water supplies are owned by
local authorities. Water utility companies are generally mature and are
experiencing little or no per capita volume growth. The Subadviser believes that
favorable investment opportunities may result if anticipated consolidation and
foreign participation in this industry occurs.
Conventional Mortgage Pass-Through Securities. Conventional mortgage
pass-through securities ("Conventional Mortgage Pass-Throughs") represent
participation interests in pools of mortgage loans that are issued by trusts
formed by originators of the institutional investors in mortgage loans (or
represent custodial arrangements administered by such institutions). These
originators and institutions include commercial banks, savings and loans
associations, credit unions, savings banks, insurance companies, investment
banks or special purpose subsidiaries of the foregoing. For federal income tax
purposes, such trusts are generally treated as grantor trusts or real estate
mortgage conduits ("REMIC") and, in either case, are generally not subject to
any significant amount of federal income tax at the entity level.
The mortgage pools underlying Conventional Mortgage Pass-Throughs consist
of conventional mortgage loans evidenced by promissory notes secured by first
mortgages or first deeds of trust or other similar security instruments creating
a first lien on residential or mixed residential and commercial properties.
Conventional Mortgage Pass-Throughs (whether fixed or adjustable rate) provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees or other amount paid to any
guarantor, administrator and/or servicer of the underlying mortgage loans. A
trust fund with respect to which a REMIC election has been made may include
regular interests in other REMICs which in turn will ultimately evidence
interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of interest than
government and government-related pools because of the absence of any direct or
indirect government or agency payment
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guarantees. However, timely payment of interest and principal of mortgage loans
in these pools may be supported by various forms of insurance or guarantees,
including individual loans, title, pool and hazard insurance and letters of
credit. The insurance and guarantees may be issued by private insurers and
mortgage poolers. Although the market for such securities is becoming
increasingly liquid, mortgage-related securities issued by private organizations
may not be readily marketable.
Certain Collateralized Mortgage Obligations. Principal and interest on the
underlying mortgage assets may be allocated among the several classes of
Collateralized Mortgage Obligations ("CMOs") in various ways. In certain
structures (known as "sequential pay" CMOs), payments of principal, including
any principal prepayments, on the mortgage assets generally are applied to the
classes of CMOs in the order of their respective final distribution dates. Thus,
no payment of principal will be made on any class of sequential pay CMOs until
all other classes having an earlier final distribution date have been paid in
full.
Additional structures of CMOs include, among others, "parallel pay" CMOs.
Parallel pay CMOs are those which are structured to apply principal payments and
prepayments of the mortgage assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of CMOs may be issued in the parallel pay or sequential pay
structures. These securities include accrual certificates (also known as
"Z-Bonds"), which only accrue interest at a specified rate until all other
certificates having an earlier final distribution date have been retired and are
converted thereafter to an interest-paying security, and planned amortization
class ("PAC") certificates, which are parallel pay CMOs which generally require
that specified amounts of principal be applied on each payment date to one or
more classes of CMOs (the "PAC Certificates"), even though all other principal
payments and prepayments of the mortgage assets are then required to be applied
to one or more other classes of the certificates. The scheduled principal
payments for the PAC Certificates generally have the highest priority on each
payment date after interest due has been paid to all classes entitled to receive
interest currently. Shortfalls, if any, are added to the amount payable on the
next
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payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to create
PAC tranches, one or more tranches generally must be created that absorb most of
the volatility in the underlying mortgage assets. These tranches tend to have
market prices and yields that are much more volatile than the PAC classes.
Warrants. The Corporate Bond, High-Yield, SunAmerica Balanced, Utility,
Federated Value, Aggressive Growth, Real Estate and Emerging Markets Portfolios
may invest in warrants which give the holder of the warrant a right to purchase
a given number of shares of a particular issue at a specified price until
expiration. Such investments can generally provide a greater potential for
profit or loss than investments of equivalent amounts in the underlying common
stock. The prices of warrants do not necessarily move with the prices of the
underlying securities. If the holder does not sell the warrant, it risks the
loss of its entire investment if the market price of the underlying stock does
not, before the expiration date, exceed the exercise price of the warrant plus
the cost thereof. Investment in warrants is a speculative activity. Warrants pay
no dividends and confer no rights (other than the right to purchase the
underlying stock) with respect to the assets of the issuer. Although certain of
the Portfolios may not invest directly in warrants, such Portfolios may invest
in securities that are acquired as part of a unit consisting of a combination of
fixed-income and equity securities or securities to which warrants are attached.
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
Commercial Paper Ratings. Moody's employs the designations "P-1," "P-2"
and "P-3" to indicate commercial paper having the highest capacity for timely
repayment. Issuers rated P-1 have a superior capacity for repayment of
short-term promissory obligations. P-1 repayment capacity will normally be
evidenced by 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. Issues rated P-2
have a strong capacity for repayment of short-term promissory obligations. This
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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.
Standard & Poor's ratings of commercial paper are graded into four
categories ranging from A for the highest quality obligations to D for the
lowest. A - Issues assigned its highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2, and 3 to indicate the relative degree of safety. A-1 - This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation. A-2 - Capacity for timely payments on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Duff & Phelps Rating Co. ("Duff & Phelps") commercial paper ratings are
consistent with the short-term rating criteria utilized by money market
participants. Duff & Phelps commercial paper ratings refine the traditional 1
category. The majority of commercial issuers carry the higher short-term rating
yet significant quality differences within that tier do exist. As a consequence,
Duff & Phelps has incorporated gradations of 1+ and 1- to assist investors in
recognizing those differences.
Duff 1+ - Highest certainty of time repayment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations. Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor. Duff 1- - High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small. Duff 2 - Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. Duff 3 - Satisfactory liquidity and other protection factors, qualify
issue as investment grade.
B-32
<PAGE> 72
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected. Duff 4 - Speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation. Duff 5
Default.
The short-term ratings of Fitch Investor Services, Inc. ("Fitch") apply to
debt obligations that are payable on demand or have original maturities of
generally up to three years, including commercial paper, certificates of
deposit, medium-term notes, and municipal and investment notes. The short-term
rating places greater emphasis than a long-term rating on the existence of
liquidity necessary to meet the issuer's obligations in a timely manner. Fitch
short-term ratings are as follows: F-1+ Exceptionally Strong Credit Quality -
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment. F-1 Very Strong Credit Quality -Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+. F-2 Good Credit Quality - Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3 Fair
Credit Quality Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, however, near-term
adverse changes could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality -Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions. D Default
Issues assigned this rating are in actual or imminent payment default. LOC - The
symbol LOC indicates that the rating is based on a letter of credit issued by a
commercial bank.
Thomson BankWatch, Inc. ("BankWatch") short-term ratings apply only to
unsecured instruments that have a maturity of one year or less. These short-term
ratings specifically assess the likelihood of an untimely payment of principal
and interest. TBW-1 is the highest category, which indicates a very high degree
of likelihood that principal and interest will be paid on a timely basis. TBW-2
is the second highest category and, while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
B-33
<PAGE> 73
Corporate Debt Securities. Moody's rates the long-term debt securities
issued by various entities from "Aaa" to "C." Aaa Best quality. These securities
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a larger, or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are more unlikely to impair
the fundamentally strong position of these issues. Aa - High quality by all
standards. They are rated lower than the best bond because margins of protection
may not be as large as in Aaa securities, fluctuation of protective elements may
be of greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat greater. A - Upper medium grade obligations.
These bonds possess many favorable investment attributes. Factors giving
security to principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment sometime in the future. Baa
- - Medium grade obligations. Interest payments 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. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. Ba - Have speculative elements; future cannot be
considered as well assured. 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. Bonds in this class are characterized by uncertainty of
position. B - Generally lack characteristics of the desirable investment
assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. Caa - Of poor standing.
Issues may be in default or there may be present elements of danger with respect
to principal or interest. Ca - Speculative in a high degree; often in default or
have other marked shortcomings. C - Lowest rated class of bonds; can be regarded
as having extremely poor prospects of ever attaining any real investment
standings.
Standard & Poor's rates the long-term securities debt of various entities
in categories ranging from "AAA" to "D" according to quality. AAA - Highest
rating. Capacity to pay interest and repay principal is extremely strong. AA -
High grade. Very strong capacity to pay interest and repay principal. Generally,
B-34
<PAGE> 74
these bonds differ from AAA issues only in a small degree. A Have a strong
capacity to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of change in circumstances and economic
conditions than debt in higher rated categories. BBB - Regarded as having
adequate capacity to pay interest and repay principal. These bonds normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C - Regarded, on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicated the lowest degree of speculation and C the highest
degree of speculative. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 - Reserved for income bonds on which no
interest is being paid. D - In default and payment of interest and/or repayment
of principal is in arrears.
Fitch rates the long-term debt securities issued by various entities in
categories "AAA" to "D" according to quality. AAA is considered to be investment
grade and of the highest credit quality. The ability to pay interest and repay
principal is exceptionally strong. AA is considered to be investment grade and
of very high credit quality. The ability to pay interest and repay principal is
very strong, although not quite as strong as AAA issues. A is considered to be
investment grade and of high credit quality. The ability to pay interest and
repay principal is strong, but these issues may be more vulnerable to adverse
changes in economic conditions and circumstances than higher rated issues. BBB
is considered to be investment grade and of satisfactory credit quality. The
ability to pay interest and repay principal is adequate. These issues are more
likely to be affected by adverse changes in economic conditions and
circumstances and, therefore, impair timely payment. The likelihood that the
ratings of these issues will fall below investment grade is higher than for
issues with higher ratings. BB is considered speculative. The ability to pay
interest and repay principal may be affected over time by adverse economic
changes. B is considered highly speculative. The probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of
B-35
<PAGE> 75
the issue. CCC issues are considered to have certain identifiable
characteristics which may lead to default. The ability to meet obligations
requires an advantageous business and economic environment. CC issues are
minimally protected and default in payment of interest and/or principal seems
probable over time. Issues rated C are in imminent default in payment of
interest or principal. DDD, DD, and D issues are in default on interest and/or
principal payments and are extremely speculative. Plus(+) and minus(-) signs are
used with a rating symbol to indicate the relative position within the rating
category.
Duff & Phelps rates long-term debt specifically to credit quality, i.e.,
the likelihood of timely payment for principal and interest. AAA is considered
the highest quality. AA is considered high quality. A is regarded as good
quality. BBB is considered to be investment grade and of satisfactory credit
quality. BB and B are considered to be non-investment grade and CCC is regarded
as speculative. Ratings in the long-term debt categories may include a plus(+)
or minus(-) designation which indicates where within the respective category the
issue is placed.
BankWatch rates the long-term debt securities issued by various entities
either AAA or AA. AAA is the highest category, which indicates the ability to
repay principal and interest on a timely basis is very high. AA is the second
highest category, which indicates a superior ability to repay principal and
interest on a timely basis with limited incremental risk versus issues rated in
the highest category. Ratings in the long-term debt categories may include a
plus (+) or minus (-) designation which indicates where within the respective
category the issue is placed.
INVESTMENT RESTRICTIONS
The Trust has adopted certain investment restrictions for each Portfolio
that cannot be changed without approval by a majority of its outstanding voting
securities. Such majority is defined as the vote of the lesser of (i) 67% or
more of the outstanding shares of the Portfolios present at a meeting, if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (ii) more than 50% of the outstanding shares of the Portfolios.
B-36
<PAGE> 76
INVESTMENT RESTRICTIONS OF THE CASH MANAGEMENT PORTFOLIO
The Cash Management Portfolio has adopted the following restrictions that
are fundamental policies. These fundamental policies, as well as the Cash
Management Portfolio's investment objective, cannot be changed without approval
by a majority of its outstanding voting securities. All percentage limitations
expressed in the following investment restrictions are measured immediately
after the relevant transaction is made. The Cash Management Portfolio may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer, provided that this limitation shall apply only to 75% of the
value of the Portfolio's total assets, and, provided further, that the
limitation shall not apply to obligations of the government of the U.S. or of
any corporation organized as an instrumentality of the U.S. under a general act
of Congress.
2. As to 75% of its total assets, purchase more than 10% of the
outstanding voting class of securities of an issuer.
3. Invest more than 25% of the Portfolio's total assets in the securities
of issuers in the same industry. Obligations of the U.S. Government, its
agencies and instrumentalities, are not subject to this 25% limitation on
industry concentration. In addition, the Portfolio may, if deemed advisable,
invest more than 25% of its assets in the obligations of domestic commercial
banks.
4. Make loans to others except for the purchase of the debt securities
listed above under its Investment Policies. The Portfolio may, however, enter
into repurchase agreements.
5. Borrow money, except from banks for temporary purposes, and then in an
amount not in excess of 5% of the value of the Portfolio's total assets.
Moreover, in the event that the asset coverage for such borrowings falls below
300%, the Portfolio will reduce within three days the amount of its borrowings
in order to provide for 300% asset coverage.
6. Sell securities short except to the extent that the Portfolio
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
B-37
<PAGE> 77
7. Act as underwriter of securities issued by others, engage in
distribution of securities for others, or make investments in other companies
for the purpose of exercising control or management.
In addition to the foregoing, the Cash Management Portfolio has adopted
the following non-fundamental policies (which may be changed by the Trustees
without shareholder approval). Under these restrictions, the Cash Management
Portfolio may not:
a. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 10% of the
Portfolio's total assets would be so invested.
b. Pledge or hypothecate its assets.
c. Invest in puts, calls, straddles, spreads or any combination thereof,
except as permitted by the Prospectus and Statement of Additional Information,
as amended from time to time.
d. Invest in securities of other investment companies except to the extent
permitted by applicable law and the Prospectus and Statement of Additional
Information, as amended from time to time.
e. Invest more than 5% of its assets (measured at the time of purchase) in
the securities of any one issuer (other than the U.S. Government); provided
however, that the Cash Management Portfolio may invest, as to 25% of its assets,
more than 5% of its assets in certain high quality securities (as defined in the
Rule) of a single issuer for a period of up to three business days.
Notwithstanding fundamental investment restriction Number 1 above, in order to
comply with Rule 2a-7 under the 1940 Act, the Cash Management Portfolio has
adopted this more restrictive policy The purchase by the Cash Management
Portfolio of securities that have "put" or "stand-by" commitment features are
not considered "puts" for purposes of non-fundamental investment restriction C
above.
INVESTMENT RESTRICTIONS OF THE GLOBAL BOND PORTFOLIO, CORPORATE
BOND PORTFOLIO, HIGH-YIELD BOND PORTFOLIO, WORLDWIDE HIGH INCOME
PORTFOLIO, SUNAMERICA BALANCED PORTFOLIO, BALANCED/PHOENIX
INVESTMENT COUNSEL PORTFOLIO, ASSET ALLOCATION PORTFOLIO, UTILITY
PORTFOLIO, GROWTH-INCOME PORTFOLIO, FEDERATED VALUE PORTFOLIO,
B-38
<PAGE> 78
VENTURE VALUE PORTFOLIO, ALLIANCE GROWTH PORTFOLIO,
GROWTH/PHOENIX INVESTMENT COUNSEL PORTFOLIO, PUTNAM GROWTH
PORTFOLIO, GLOBAL EQUITIES PORTFOLIO, INTERNATIONAL DIVERSIFIED
EQUITIES PORTFOLIO, AGGRESSIVE GROWTH PORTFOLIO, INTERNATIONAL
GROWTH AND INCOME PORTFOLIO, REAL ESTATE PORTFOLIO AND EMERGING
MARKETS PORTFOLIO
The Global Bond Portfolio, Corporate Bond Portfolio, High-Yield Bond
Portfolio, Worldwide High Income Portfolio, SunAmerica Balanced Portfolio,
Balanced/Phoenix Investment Counsel Portfolio, Asset Allocation Portfolio,
Utility Portfolio, Growth-Income Portfolio, Federated Value Portfolio, Venture
Value Portfolio, Alliance Growth Portfolio, Growth/Phoenix Investment Counsel
Portfolio, Putnam Growth Portfolio, Global Equities Portfolio, International
Diversified Equities Portfolio, International Growth and Income Portfolio, Real
Estate Portfolio and Emerging Markets Portfolio have each adopted the following
investment restrictions that are fundamental policies. These fundamental
policies cannot be changed without the approval of the holders of a majority of
the outstanding voting securities of the respective Portfolio. All percentage
limitations expressed in the following investment restrictions are measured
immediately after the relevant transaction is made. These Portfolios may not:
1. Other than the Global Bond, Worldwide High Income and International
Diversified Equities Portfolios, invest more than 5% of the value of the total
assets of a Portfolio in the securities of any one issuer, provided that this
limitation shall apply only to 75% of the value of the Portfolio's total assets
and, provided further, that the limitation shall not apply to obligations issued
or guaranteed by the government of the United States or of any of its agencies
or instrumentalities.
2. As to 75% of its total assets, purchase more than 10% of any class of
the outstanding voting securities of an issuer. This restriction does not apply
to the Global Bond, International Diversified Equities and Worldwide High Income
Portfolios.
3. Invest more than 25% of the Portfolio's total assets in the securities
of issuers in the same industry, except that the Utility Portfolio will invest
at least 25% of its total assets in the securities of utility companies and the
Real Estate Portfolio will invest at least 25% of its total assets in the
securities of
B-39
<PAGE> 79
real estate companies. Obligations of the U.S. Government, its agencies and
instrumentalities are not subject to this 25% limitation on industry
concentration. The Portfolio may, if deemed advisable, invest more than 25% of
its assets in the obligations of domestic commercial banks. With respect to the
Real Estate Portfolio, as to utility companies, the gas, electric, water and
telephone businesses will be considered separate industries.
4. Invest in real estate (including in the case of all Portfolios except
the Real Estate Portfolio limited partnership interests, but excluding in the
case of all Portfolios securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein); provided that a
Portfolio may hold or sell real estate acquired as a result of the ownership of
securities. This limitation shall not prevent a Portfolio from investing in
securities secured by real estate or interests therein.
5. Purchase commodities or commodity contracts; except that any Portfolio
may engage in transactions in put and call options on securities, indices and
currencies, forward and futures contracts on securities, indices and currencies,
put and call options on such futures contracts, forward commitment transactions,
forward foreign currency exchange contracts, interest-rate, mortgage and
currency swaps and interest-rate floors and caps.
6. Borrow money, except to the extent permitted by applicable law.
7. Purchase securities on margin.
8. Make loans to others except for (a) the purchase of debt securities;
(b) entering into repurchase agreements; and (c) the lending of its portfolio
securities.
In addition to the foregoing, the Global Bond, Corporate Bond, High-Yield
Bond, Worldwide High Income, SunAmerica Balanced, Balanced/Phoenix Investment
Counsel, Asset Allocation, Utility, Growth-Income, Federated Value, Venture
Value, Alliance Growth, Growth/Phoenix Investment Counsel, Provident Growth,
Global Equities, International Diversified Equities, Aggressive Growth,
International Growth and Income Real Estate and Emerging Markets Portfolios have
each adopted the following non-fundamental policies
B-40
<PAGE> 80
(which may be changed by the Trustees without shareholder approval). Under these
restrictions, such Portfolios may not:
a. Enter into any repurchase agreement maturing in more than seven days or
investing in any other illiquid security if, as a result, more than 15% of a
Portfolio's total assets would be so invested.
b. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
c. Other than the Emerging Markets Portfolios, pledge, mortgage or
hypothecate its assets, except to the extent necessary to secure permitted
borrowings and, to the extent related to the segregation of assets in connection
with the writing of covered put and call options and the purchase of securities
or currencies on a forward commitment or delayed-delivery basis and collateral
and initial or variation margin arrangements with respect to forward contracts,
options, futures contracts and options on futures contracts. In addition, the
Corporate Bond, High-Yield Bond, Worldwide High Income, SunAmerica Balanced,
Aggressive Growth, Federated Value and Utility Portfolios may pledge assets in
reverse repurchase agreements.
d. Invest in companies for the purpose of exercising control or
management.
e. Engage in underwriting of securities issued by others, except to the
extent it may be deemed to be acting as an underwriter in the purchase and
resale of portfolio securities.
f. Sell securities short except to the extent permitted by applicable law.
g. Invest in puts, calls, straddles, spreads or any combination thereof,
except as permitted by the Prospectus and Statement of Additional Information,
as amended from time to time.
B-41
<PAGE> 81
TRUST OFFICERS AND TRUSTEES
The Trustees and executive officers of the Trust, their ages and principal
occupations for the past five years are set forth below. Each Trustee also
serves as a trustee of the Anchor Pathway Fund. Unless otherwise noted, the
address of each executive officer and trustee is 1 SunAmerica Center, Los
Angeles, California 90067-6022.
<TABLE>
<CAPTION>
Name, Age and Position(s) Principal Occupation(s) During Past
Held with the Trust Five Years
- ------------------------- -----------------------------------
<S> <C>
RICHARDS D. BARGER, 68, Senior Partner, Law Firm of Barger &
Trustee Wolen; former Director, Anchor
National Life Insurance Company
("Anchor National")(from 1980 to
1986).
JAMES K. HUNT, 45, Trustee, Executive Vice President, SunAmerica
Chairman and President* Investments, Inc. (1993 to present);
President, SunAmerica Corporate
Finance (since January 1994); Senior
Vice President, SunAmerica
Investments, Inc. (1990-1993).
NORMAN J. METCALFE, 54, Vice Chairman and Chief Financial
Trustee* Officer, The Irvine Company (March
1993 to Present); Executive Vice
President (1986-1992) and Director
(1984-1993), SunAmerica Inc.;
formerly, President, SunAmerica
Investments, Inc.(1988-1992); and
Executive Vice President and
Director, Anchor National (1986-
1992).
ALLAN L. SHER, 65, Director, Board of Governors,
Trustee American Stock Exchange (1991 to
present); Former Chairman and Chief
Executive Officer, Bateman Eichler,
Hill Richards (securities firm)
(1990-1992); Vice Chairman (1989-
1990), Senior Executive Vice
President (1985-1989) and Executive
Vice President (1983-1985), Drexel
Burnham Lambert Incorporated.
</TABLE>
B-42
<PAGE> 82
<TABLE>
<CAPTION>
Name, Age and Position(s) Principal Occupation(s) During Past
Held with the Trust Five Years
- ------------------------- -----------------------------------
<S> <C>
William M. Wardlaw, 50, Partner, Freeman Spogli & Co.,
Trustee Incorporated (privately owned
merchant banking firm) (1988-
Present); Managing Partner, Riordan
& McKinzie (law firm specializing in
corporate and securities law) (1984-
1988); Partner (1980-1984) and
Associate (1972-1980), O'Melveny &
Meyers (law firm).
SCOTT L. ROBINSON, 50, Senior Senior Vice President and
Vice President, Treasurer and Controller, SunAmerica Inc. (since
Controller 1991); Senior Vice President of
Anchor National (since 1988); Vice
President and Controller, SunAmerica
Inc. (1986-1991), (joined SunAmerica
Inc. in 1978).
</TABLE>
* A trustee who may be deemed to be an "interested person" of the Trust as
that term is defined in the 1940 Act.
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<PAGE> 83
Name, Age and Position(s) Principal Occupation(s) During Past
Held with the Trust Five Years
- ------------------------- -----------------------------------
SUSAN L. HARRIS, 39, Senior Vice President (since November
Vice President, Counsel and 1995), Secretary (since 1989) and General
Secretary Counsel Corporate Affairs (since December
1994), SunAmerica Inc.; Senior Vice
President and Secretary, Anchor National
(since 1990); Joined SunAmerica Inc. in
1985.
PETER C. SUTTON, 32 Vice President, SunAmerica Asset
Vice President Management Corp.(since September 1994;
Treasurer, SunAmerica Funds (since
February, 1996); Controller, SunAmerica
Mutual Funds (1993-1996); Assistant
Controller, SunAmerica Mutual Funds
(1990-1993).
The Trust pays no salaries or compensation to any of its officers, all of
whom are officers or employees of Anchor National Life Insurance Company or its
affiliates. An annual fee of $7,000, plus $500 for each meeting attended, and
expenses are paid to each Trustee who is not an officer or employee of Anchor
National Life Insurance Company or its affiliates for attendance at meetings of
the Board of Trustees. All other Trustees receive no remuneration from the
Trust.
The following table sets forth information summarizing the compensation of
each of the Trustees for his services as Trustee for the fiscal year ended
November 30, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension or Total
Retirement Compensation
Aggregate Benefits from Registrant
Compensation Accrued as and Fund
from Part of Fund Complex Paid to
Trustee Registrant Expenses Trustees*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Richards D. Barger $9,000 - $22,000
- --------------------------------------------------------------------------------
</TABLE>
B-44
<PAGE> 84
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pension or Total
Retirement Compensation
Aggregate Benefits from Registrant
Compensation Accrued as and Fund
from Part of Fund Complex Paid to
Trustee Registrant Expenses Trustees*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank L. Ellsworth** $9,000 - $22,000
- --------------------------------------------------------------------------------
Gordon F. Hampton** $8,500 - $20,250
- --------------------------------------------------------------------------------
Norman J. Metcalfe $8,500 - $20,250
- --------------------------------------------------------------------------------
</TABLE>
* Information is as of November 30, 1996 for the two Funds in the complex which
pay fees to these directors/trustees (the Trust and Anchor Pathway Fund).
** These individuals are no longer Trustees of the Trust.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Trust, on behalf of each Portfolio, entered into an Investment
Advisory and Management Agreement with SunAmerica Asset Management Corp. to
handle the management of the Trust and its day
to day affairs.
The Investment Advisory and Management Agreement (except with respect to
the SunAmerica Balanced, Utility, Federated Value and Aggressive Growth,
International Growth and Income, Real Estate and Emerging Markets Portfolios)
continues in effect from year to year, in accordance with its terms, unless
terminated, and may be renewed from year to year as to each Portfolio for so
long as such renewal is specifically approved at least annually by (i) the Board
of Trustees, or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of each relevant Portfolio, and (ii) the vote of a
majority of Trustees who are not parties to the Agreement or interested persons
(as defined in the 1940 Act) of any such party, cast in person, at a meeting
called for the purpose of voting on such approval. The Investment Advisory and
Management Agreement was last so approved by the Board of Trustees at a meeting
held on July 18, 1996. With respect to the SunAmerica Balanced, Utility,
Federated Value and Aggressive Growth Portfolios, the Agreement will continue in
effect until September 16, 1997, unless terminated, and may be renewed from year
to year thereafter in the manner set forth above. With respect to the
International Growth and Income Real Estate and Emerging Markets Portfolios, the
Agreement will continue in effect until ________, 1999, unless terminated, and
may be renewed from year to
B-45
<PAGE> 85
year thereafter in the manner set forth above. The Agreement also provides that
it may be terminated by either party without penalty upon 60 days' written
notice to the other party. The Agreement provides for automatic termination upon
assignment.
The Investment Advisory and Management Agreement provides that the Adviser
shall act as investment adviser to the Trust, manage the Trust's investments,
administer its business affairs, furnish offices, necessary facilities and
equipment, provide clerical, bookkeeping and administrative services, and permit
any of the Adviser's officers or employees to serve without compensation as
Trustees or officers of the Trust if duly elected to such positions. Under the
Agreement, the Trust agrees to assume and pay certain charges and expenses of
its operations, including: direct charges relating to the purchase and sale of
portfolio securities, interest charges, fees and expenses of independent legal
counsel and independent accountants, cost of stock certificates and any other
expenses (including clerical expenses) of issue, sale, repurchase or redemption
of shares, expenses of registering and qualifying shares for sale, expenses of
printing and distributing reports, notices and proxy materials to shareholders,
expenses of data processing and related services, shareholder recordkeeping and
shareholder account service, expenses of printing and distributing prospectuses
and statements of additional information, expenses of annual and special
shareholders' meetings, fees and disbursements of transfer agents and
custodians, expenses of disbursing dividends and distributions, fees and
expenses of Trustees who are not employees of the Adviser or its affiliates,
membership dues in the Investment Company Institute or any similar organization,
all taxes and fees to Federal, state or other governmental agencies, insurance
premiums and extraordinary expenses such as litigation expenses.
Under the terms of the Advisory Agreement, the Adviser is not liable to
the Trust, or to any other person, for any act or omission by it or for any
losses sustained by the Trust or its shareholders, except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Each Portfolio pays its actual expenses for custodian services and a
portion of the Custodian's costs determined by the ratio of portfolio assets to
the total assets of the Trust, brokerage commissions or transaction costs, and
registration fees. Subject to supervision of the Board of Trustees, fees for
independent
B-46
<PAGE> 86
accountants, legal counsel, costs of reports of notices to shareholders will be
allocated based on the relative net assets of each Portfolio. With respect to
audit or legal fees clearly attributable to one Portfolio, they will be
assessed, subject to review by the Board of Trustees, against that Portfolio.
As compensation for its services, the Adviser receives from the Trust a
fee, accrued daily and payable monthly, based on the net assets of each
Portfolio. The following table sets forth the total advisory fees received by
the Adviser from each Portfolio pursuant to the Investment Advisory and
Management Agreement for the fiscal years ended November 30, 1996, 1995 and
1994.
Advisory Fees
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Portfolio 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management $694,655 $438,400 $324,890
- --------------------------------------------------------------------------------
Global Bond $458,390 $365,313 $291,574
- --------------------------------------------------------------------------------
Corporate Bond
(formerly, Fixed Income) $230,031 $144,546 $117,895
- --------------------------------------------------------------------------------
High-Yield Bond $638,948 $478,203 $390,246
- --------------------------------------------------------------------------------
Worldwide High Income $368,821 $143,765 $9,545**
- --------------------------------------------------------------------------------
SunAmerica Balanced $20,449* -- --
- --------------------------------------------------------------------------------
Balanced/Phoenix
Investment Counsel $354,683 $92,499 $745**
- --------------------------------------------------------------------------------
Asset Allocation $1,616,647 $1,000,248 $547,474
- --------------------------------------------------------------------------------
Utility $13,890* -- --
- --------------------------------------------------------------------------------
Growth-Income $1,476,902 $794,078 $475,666
- --------------------------------------------------------------------------------
Federated Value $23,973* -- --
- --------------------------------------------------------------------------------
Venture Value $2,305,064 $504,014 $1,592**
- --------------------------------------------------------------------------------
Alliance Growth $1,522,222 $635,979 $287,322
- --------------------------------------------------------------------------------
Growth/Phoenix
Investment Counsel $1,072,976 $835,634 $642,732
- --------------------------------------------------------------------------------
Provident Growth*** $1,073,769 $785,809 $532,538
- --------------------------------------------------------------------------------
Global Equities $1,627,510 $1,185,831 $884,882
- --------------------------------------------------------------------------------
International
Diversified Equities $1,025,593 $283,908 $10,202**
- --------------------------------------------------------------------------------
Aggressive Growth $65,277* -- --
- --------------------------------------------------------------------------------
</TABLE>
* For the period 6/3/96 (commencement of operations) through 11/30/96
** For the period 10/28/94 (commencement of operations) through 11/30/94
*** Until April 15, 1997, the Advisory Agreement with respect to the Putnam
Growth Portfolio provided for an advisory fee payable to the Adviser at the
following annual rates: .85% on the first $50 million of average daily net
assets; .80% on the next
B-47
<PAGE> 87
$100 million; .70% on the next $100 million; .65% on the next $100 million;
and .60% over $350 million. The Advisory Agreement relating to the Putnam
Growth Portfolio was amended as of ________, 1997 to provide for the
following annual fee rates: .85% on the first $150 million of average daily
net assets; .80% on the next $150 million; and .70% over $300 million.
Personal Trading. The Trust and the Adviser have adopted a written Code of
Ethics (the "Code") which prescribes general rules of conduct and sets forth
guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code is an individual who is a
trustee, director, officer, general partner or advisory person of the Trust or
the Adviser. The guidelines on personal securities trading include: (i)
securities being considered for purchase or sale, or purchased or sold, by any
Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii)
private placements, (iv) blackout periods, (v) short-term trading profits, (vi)
gifts, and (vii) services as a director. These guidelines are substantially
similar to those contained in the Report of the Advisory Group on Personal
Investing issued by the Investment Company Institute's Advisory Panel. The
Adviser reports to the Board of Trustees on a quarterly basis, as to whether
there were any violations of the Code by Access Persons of the Trust or any
Subadviser during the quarter.
The Subadvisers have adopted a written Code of Ethics, the provisions of
which are materially similar to those in the Code, and have undertaken to comply
with the provisions of the Code to the extent such provisions are more
restrictive. Further, the Subadvisers report to the Adviser on a quarterly
basis, as to whether there were any Code of Ethics violations by employees
thereof who may be deemed Access Persons of the Trust. In turn, the Adviser
reports to the Board of Trustees as to whether there were any violations of the
Code by Access Persons of the Trust or any Subadviser.
SUBADVISORY AGREEMENTS
Alliance Capital Management L.P. ("Alliance"), Goldman Sachs Asset
Management ("GSAM"), a separate division of Goldman, Sachs & Co., Goldman Sachs
Asset Management International, ("GSAM-International"), an affiliate of Goldman,
Sachs & Co., Morgan Stanley Asset Management Inc., Phoenix Investment Counsel,
Inc., Provident Investment Counsel, Inc., Davis Selected Advisers, L.P., Putnam
Management, Inc. and Federated Investment Counseling act as Subadvisers to
certain of the Trust's Portfolios pursuant to
B-48
<PAGE> 88
various Subadvisory Agreements with SAAMCo. Under the Subadvisory Agreements,
the Subadvisers manage the investment and reinvestment of the assets of the
respective Portfolios for which they are responsible. Each of the Subadvisers is
independent of SAAMCo and discharges its responsibilities subject to the
policies of the Trustees and the oversight and supervision of SAAMCo, which pays
the Subadvisers' fees.
The Adviser pays each Subadviser a monthly fee with respect to each
Portfolio for which the Subadviser performs services, computed on average daily
net assets, at the following annual rates:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Subadviser Portfolio Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Alliance Alliance Growth and .35% on the first $50 million
Growth-Income .30% on the next $100 million
Portfolios .25% on the next $150 million
.20% on the next $200 million
.15% thereafter
----------------------------------------------------------
Global Equities .50% on the first $50 million
Portfolio .40% on the next $100 million
.30% on the next $150 million
.25% thereafter
- --------------------------------------------------------------------------------
Davis Selected Venture Value and .45% on the first $100 million
Advisers, L.P. Real Estate .40% on the next $400 million
Portfolios .35% thereafter
- --------------------------------------------------------------------------------
Federated Corporate Bond .30% on the first $25 million
Investment Portfolio .25% on the next $25 million
Counseling .20% on the next $100 million
.15% thereafter
----------------------------------------------------------
Federated Value and .55% on the first $20 million
Utility Portfolios .35% on the next $30 million
.25% on the next $100 million
.20% on the next $350 million
.15% thereafter
- --------------------------------------------------------------------------------
GSAM Asset Allocation .40% on the first $50 million
Portfolio .30% on the next $100 million
.25% on the next $100 million
.20% thereafter
- --------------------------------------------------------------------------------
GSAM- Global Bond Portfolio .40% on the first $50 million
International .30% on the next $100 million
.25% on the next $100 million
.20% thereafter
- --------------------------------------------------------------------------------
Morgan Stanley International .65% on the first $350 million
Asset Management Diversified Equities .60% thereafter
Inc. and Worldwide High
Income Portfolios
- --------------------------------------------------------------------------------
</TABLE>
B-49
<PAGE> 89
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Phoenix Growth/Phoenix .35% on the first $50 million
Investment Investment Counsel .30% on the next $100 million
Counsel, Inc. and Balanced/Phoenix .25% on the next $150 million
Investment Counsel .20% on the next $200 million
Portfolios .15% thereafter
- --------------------------------------------------------------------------------
Putnam Putnam Growth .50% on the first $150 million
Management, Inc. Portfolio .45% on the next $150 million
.35% thereafter
- --------------------------------------------------------------------------------
Emerging Markets
Portfolio
- --------------------------------------------------------------------------------
International Growth
and Income Portfolio
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth the fees paid to the Subadvisers for the
fiscal years ended November 30, 1996, 1995 and 1994.
Subadvisory Fees
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Subadviser Portfolio 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alliance $691,140 $306,832 $143,523
Alliance Growth
-----------------------------------------------------------
Growth-Income $673,445 $379,671 $232,937
-----------------------------------------------------------
Global $811,790 $616,892 $467,441
Equities
- --------------------------------------------------------------------------------
Davis Selected
Advisers, L.P. Venture Value $1,252,661 $281,866 $895*
- --------------------------------------------------------------------------------
Asset
GSAM Allocation $743,084 $485,722 $275,339
-----------------------------------------------------------
Corporate
Bond*** $55,524 $72,273 $58,947
- --------------------------------------------------------------------------------
GSAM
International Global Bond $238,488 $194,306 $155,506
- --------------------------------------------------------------------------------
Growth/Phoenix
Phoenix Investment
Investment Counsel $505,458 $399,134 $310,107
Counsel, Inc. -----------------------------------------------------------
Balanced/
Phoenix
Invest-ment $176,158 $46,249 $372*
Counsel
- --------------------------------------------------------------------------------
Provident
Investment Provident
Counsel, Inc.+ Growth $614,720 $452,955 $310,398
- --------------------------------------------------------------------------------
</TABLE>
B-50
<PAGE> 90
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Morgan Stanley Worldwide High
Asset Income $239,733 $93,447 $6,204*
Management -----------------------------------------------------------
Inc. International
Diversified
Equities $666,635 $184,540 $6,631*
- --------------------------------------------------------------------------------
Federated Corporate Bond $48,744**** -- --
Investment -----------------------------------------------------------
Counseling Federated $17,580** -- --
Value
-----------------------------------------------------------
Utility $10,186** -- --
- --------------------------------------------------------------------------------
</TABLE>
* For the period 10/28/94 (commencement of operations) through 11/30/94
** For the period 6/3/96 (commencement of operations) through 11/30/96
*** GSAM served as Subadviser for the Corporate Bond Portfolio from
7/1/93(commencement of operations) through 6/3/96
**** For the period 6/3/96 through 11/30/96
+ Until April 15, 1997, Provident Investment Counsel, Inc. served as
Subadviser to the Putnam Growth Portfolio (formerly named the Provident
Growth Portfolio). The Subadvisory fee was calculated at the following
annual rates: .50% on the first $50 million of average daily net assets;
.45% on the next $100 million; .35% on the next $100 million; .30% on the
next $100 million; .25% over $350 million.
The Subadvisory Agreements (with the exception of the SunAmerica Balanced,
Putnam Growth, Aggressive Growth, Federated Value, Utility International Growth
and Income, Real Estate and Emerging Markets Portfolios) continue in effect from
year to year, so long as such continuance is specifically approved at least
annually in accordance with the requirements of the 1940 Act. They were last so
approved on July 18, 1996. The Subadvisory Agreements with respect to Corporate
Bond, Federated Value and Utility Portfolios will expire on April 18, 1998. The
Subadvisory Agreements with respect to the Putnam Growth, International Growth
and Income, Real Estate and Emerging Markets Portfolios will expire on April __,
1999. Such agreements may be renewed from year to year thereafter, so long as
such continuance is approved at least annually in accordance with the
requirements of the 1940 Act. The Subadvisory Agreements provide that they will
terminate in the event of an assignment (as defined in the 1940 Act) or upon
termination of the Advisory Agreement. The Subadvisory Agreements may be
terminated by the Trust, the Adviser or the respective Subadviser upon 60 days'
prior notice.
B-51
<PAGE> 91
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Cash Management, Corporate Bond, High-Yield Bond, Federated Value and
Aggressive Growth Portfolios had capital loss carry-forwards of $68, $769,710,
$8,449,586, $16,874 and $248,317, respectively, at November 30, 1996. To the
extent not yet utilized, such losses will be available to each of the Portfolios
to offset future gains through 2002 and 2004. The utilization of such losses
will be subject to annual limitations under the Internal Revenue Code.
PRICE OF SHARES
Shares of the Trust are currently offered only to the Variable Separate
Account. Shares are valued each day as of the close of regular trading on the
New York Stock Exchange ("NYSE") (generally, 4:00 p.m., Eastern time). Each Fund
calculates the net asset value of each class of its shares separately by
dividing the total value of each class's net assets by the shares of such class
outstanding. The net asset value of a Fund's shares will also be computed on
each other day in which there is a sufficient degree of trading in such Fund's
securities that the net asset value of its shares might be materially affected
by changes in the values of the portfolio securities; provided, however, that on
such day the Trust receives a request to purchase or redeem such Fund's shares.
The days and times of such computation may, in the future, be changed by the
Trustees in the event that the portfolio securities are traded in significant
amounts in markets other than the NYSE, or on days or at times other than those
during which the NYSE is open for trading.
Stocks and convertible bonds and debentures traded on the NYSE are valued at
the last sale price on such exchange on the day of valuation, or if there is no
sale on the day of valuation, at the last-reported bid price. Non-convertible
bonds and debentures and other long-term debt securities normally are valued at
prices obtained for the day of valuation from a bond pricing service, when such
prices are available. In circumstances where the Adviser or Subadviser deems it
appropriate to do so, an over-the-counter or exchange quotation (at the mean of
representative quoted bid or asked prices for such securities or, if such prices
are not available, at prices for securities of comparable maturity, quality and
type) may be used. Securities traded primarily on securities exchanges outside
the United States are valued at the last sale
B-52
<PAGE> 92
price on such exchanges on the day of valuation, or if there is no sale on the
day of valuation, at the last-reported bid price. U.S. Treasury bills, and other
obligations issued by the U.S. Government, its agencies or instrumentalities,
certificates of deposit issued by banks, corporate short-term notes and other
short-term investments with original or remaining maturities in excess of 60
days are valued at the mean of representative quoted bid and asked prices for
such securities or, if such prices are not available, for securities of
comparable maturity, quality and type. Short-term securities with 60 days or
less to maturity are amortized to maturity based on their cost to the Trust if
acquired within 60 days of maturity or, if already held by the Trust on the 60th
day, are amortized to maturity based on the value determined on the 61st day.
Options on currencies purchased by a Portfolio are valued at their last bid
price in the case of listed options or at the average of the last bid prices
obtained from dealers in the case of OTC options. Futures contracts involving
foreign currencies traded on exchanges are valued at their last sale or
settlement price as of the close of such exchanges or if no sales are reported,
at the mean between the last reported bid and asked prices. Other securities are
valued on the basis of last sale or bid price (if a last sale price is not
available) in what is, in the opinion of the Adviser or Subadviser, the broadest
and most representative market, that may be either a securities exchange or the
over-the-counter market. Where quotations are not readily available, securities
are valued at fair value as determined in good faith by the Board of Trustees.
The fair value of all other assets is added to the value of securities to arrive
at the respective Portfolio's total assets.
A Portfolio's liabilities, including proper accruals of expense items, are
deducted from total assets. The net asset value of the respective Portfolio is
divided by the total number of shares outstanding to arrive at the net asset
value per share.
EXECUTION OF PORTFOLIO TRANSACTIONS
It is the policy of the Trust, in effecting transactions in portfolio
securities, to seek the best execution at the most favorable prices. The
determination of what may constitute best execution involves a number of
considerations, including the economic result to the Trust (involving both price
paid or received and any commissions and other costs), the efficiency with which
the transaction is effected where a large block is involved, the availability of
the broker to stand ready to execute potentially
B-53
<PAGE> 93
difficult transactions and the financial strength and stability of the broker.
Such considerations are judgmental and are considered in determining the overall
reasonableness of brokerage commissions paid.
A factor in the selection of brokers is the receipt of research services --
analyses and reports concerning issuers, industries, securities, economic
factors and trends -- and other statistical and factual information. Research
and other statistical and factual information provided by brokers is considered
to be in addition to and not in lieu of services required to be performed by the
Adviser or Subadviser.
The extent to which commissions may reflect the value of research services
cannot be presently determined. To the extent that research services of value
are provided by broker-dealers with or through whom the Adviser or Subadviser
places the Trust's portfolio transactions, the Adviser or Subadviser may be
relieved of expenses it might otherwise bear. Research services furnished by
broker-dealers could be useful and of value to the Adviser or Subadviser in
serving other clients as well as the Trust and research services obtained by the
Adviser or Subadviser as a result of the placement of portfolio brokerage of
other clients could be useful and of value in serving the Trust.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Trust has obtained exemptive orders from
the Securities and Exchange Commission (the "SEC"), permitting the Trust in
certain circumstances to deal with securities dealers (that may be deemed to be
affiliated persons of affiliated persons of the Trust solely because of a
subadvisory relationship with one or more Portfolios) as a principal in
purchases and sales of certain securities, and to pay commissions, fees or other
remuneration to such securities dealers in connection with the sale of
securities to or by any of the Portfolios on a securities exchange without
complying with certain of the requirements of Rule 17e-1 under the 1940 Act.
B-54
<PAGE> 94
Subject to the above considerations, the Adviser or a Subadviser may use
broker-dealer affiliates of the Adviser or a Subadviser, as a broker for any
Portfolio. In order for such broker-dealer to effect any portfolio transactions
for a Portfolio, the commissions, fees or other remuneration received by the
broker-dealer must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow such broker-dealer to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees of the Trust, including a majority of the
non-interested Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to such
broker-dealers are consistent with the foregoing standard. These types of
brokerage transactions are also subject to such fiduciary standards as may be
imposed upon the broker-dealers by applicable law.
The following tables set forth the brokerage commissions paid by the
Portfolios and the amounts of the brokerage commissions which were paid to
affiliated broker-dealers of such Portfolios for the fiscal years ended November
30, 1996, 1995 and 1994.
B-55
<PAGE> 95
1996 Brokerage Commissions
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage paid
Aggregate Amount paid to to Affiliated
Portfolio Brokerage Affiliated Broker-Dealers
Commissions Broker-Dealers
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- --------------------------------------------------------------------------------
Global Bond -- -- --
- --------------------------------------------------------------------------------
Corporate Bond -- -- --
- --------------------------------------------------------------------------------
High-Yield Bond $753 -- --
- --------------------------------------------------------------------------------
Worldwide High Income
-- -- --
- --------------------------------------------------------------------------------
SunAmerica Balanced* $10,184 -- --
- --------------------------------------------------------------------------------
Balanced/Phoenix
Investment Counsel $99,713 -- --
- --------------------------------------------------------------------------------
Asset Allocation $256,864 $23,078 8.98%
- --------------------------------------------------------------------------------
Utility* $9,359 -- --
- --------------------------------------------------------------------------------
Growth-Income $469,309 -- --
- --------------------------------------------------------------------------------
Federated Value* $14,785 -- --
- --------------------------------------------------------------------------------
Venture Value $413,771 $3,792 0.92%
- --------------------------------------------------------------------------------
Alliance Growth $672,137 -- --
- --------------------------------------------------------------------------------
Growth/Phoenix
Investment Counsel $483,274 -- --
- --------------------------------------------------------------------------------
Putnam Growth $144,932 -- --
- --------------------------------------------------------------------------------
Global Equities $1,022,821 -- --
- --------------------------------------------------------------------------------
International
Diversified Equities $256,477 -- --
- --------------------------------------------------------------------------------
Aggressive Growth* $34,130 -- --
- --------------------------------------------------------------------------------
</TABLE>
* For the period 6/3/96 (commencement of operation) through November 30, 1996.
B-56
<PAGE> 96
1995 Brokerage Commissions
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount paid to Percentage
Affiliated paid to
Aggregate Broker- Affiliated
Brokerage Dealers Broker-
Portfolio Commissions Dealers
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- --------------------------------------------------------------------------------
Corporate Bond* $562 $562 100%
- --------------------------------------------------------------------------------
Global Bond -- -- --
- --------------------------------------------------------------------------------
High-Yield Bond $9,100 -- --
- --------------------------------------------------------------------------------
Worldwide High
Income -- -- --
- --------------------------------------------------------------------------------
Balanced/Phoenix
Investment Counsel $49,029 -- --
- --------------------------------------------------------------------------------
Asset Allocation* $331,914 $35,946 10.83%
- --------------------------------------------------------------------------------
Growth-Income $262,353 -- --
- --------------------------------------------------------------------------------
Alliance Growth $353,849 -- --
- --------------------------------------------------------------------------------
Growth/Phoenix
Investment Counsel $548,063 -- --
- --------------------------------------------------------------------------------
Putnam Growth $118,520 -- --
- --------------------------------------------------------------------------------
Venture Value $184,729 -- --
- --------------------------------------------------------------------------------
Global Equities $630,010 -- --
- --------------------------------------------------------------------------------
International
Diversified
Equities $117,482 -- --
- --------------------------------------------------------------------------------
</TABLE>
* For the fiscal year ended November 30, 1995, the percentage of the aggregate
dollar amount of the transactions involving the payment of commissions
effected through affiliated brokers with respect to the Corporate Bond
Portfolio and Asset Allocation Portfolio were 10.34% and 100%, respectively.
B-57
<PAGE> 97
1994 Brokerage Commissions
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount paid Percentage
to Paid to
Aggregate Affiliated Affiliated
Brokerage Broker- Broker-
Portfolio Commissions Dealer Dealer
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- --------------------------------------------------------------------------------
Corporate Bond -- -- --
- --------------------------------------------------------------------------------
Global Bond -- -- --
- --------------------------------------------------------------------------------
High-Yield Bond $4,927 -- --
- --------------------------------------------------------------------------------
Worldwide High
Income* -- -- --
- --------------------------------------------------------------------------------
Balanced/Phoenix
Investment
Counsel* $1,586 -- --
- --------------------------------------------------------------------------------
Asset Allocation $130,727 $10,637 8.1%
- --------------------------------------------------------------------------------
Growth-Income $187,474 $15,012** 8.0%
- --------------------------------------------------------------------------------
Alliance Growth $195,332 $4,162** 2.1%
- --------------------------------------------------------------------------------
Growth/Phoenix
Investment
Counsel $484,811 $8,300 1.7%
- --------------------------------------------------------------------------------
Provident Growth $118,276 $3,963** 3.4%
- --------------------------------------------------------------------------------
Venture Value* $4,404 -- --
- --------------------------------------------------------------------------------
Global Equities $350,958 $17,858** 5.1%
- --------------------------------------------------------------------------------
International
Diversified
Equities* $24,476 $6,194 25.3%
- --------------------------------------------------------------------------------
</TABLE>
* For the period 10/28/94 (commencement of operations) through 11/30/94
** All brokerage commissions paid were directed to broker-dealers for research
services provided.
The policy of the Trust with respect to brokerage is reviewed by the
Board of Trustees from time to time. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be modified.
B-58
<PAGE> 98
The Adviser and the Subadvisers and their respective affiliates may
manage, or have proprietary interests in, accounts with similar or dissimilar or
the same investment objectives as one or more Portfolios of the Trust. Such
account may or may not be in competition with a Portfolio for investments.
Investment decisions for such accounts are based on criteria relevant to such
accounts; portfolio decisions and results of the Portfolio's investments may
differ from those of such other accounts. There is no obligation to make
available for use in managing the Portfolio any information or strategies used
or developed in managing such accounts. In addition, when two or more accounts
seek to purchase or sell the same assets, the assets actually purchased or sold
may be allocated among accounts on a good faith equitable basis at the
discretion of the account's adviser. In some cases, this system may adversely
affect the price or size of the position obtainable for a Portfolio.
If determined by the Adviser or Subadviser to be beneficial to the
interests of the Trust, partners and/or employees of the Adviser or Subadvisers
may serve on investment advisory committees, which will consult with the Adviser
regarding investment objectives and strategies for the Trust. In connection with
serving on such a committee, such persons may receive information regarding a
Portfolio's proposed investment activities which is not generally available to
unaffiliated market participants, and there will be no obligation on the part of
such persons to make available for use in managing the Portfolio any information
or strategies known to them or developed in connection with their other
activities.
It is possible that a Portfolio's holdings may include securities of
entities for which a subadviser or its affiliate performs investment banking
services as well as securities of entities in which a subadviser or its
affiliate makes a market. From time to time, such activities may limit a
Portfolio's flexibility in purchases and sales of securities. When a subadviser
or its affiliate is engaged in an underwriting or other distribution of
securities of an entity, the subadviser may be prohibited from purchasing or
recommending the purchase of certain securities of that entity for the
Portfolio.
B-59
<PAGE> 99
GENERAL INFORMATION
Custodian - State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Trust's custodian.
In this capacity, State Street maintains the portfolio securities held by the
Trust, administers the purchase and sale of portfolio securities and performs
certain other duties. State Street also serves as transfer agent and dividend
disbursing agent for the Trust.
Independent Accountants - Price Waterhouse LLP, 1177 Avenue of the
Americas, New York, New York 10036, is the Trust's independent accountants.
Price Waterhouse LLP performs an annual audit of the Trust's financial
statements and provides tax consulting, tax return preparation and accounting
services relating to filings with the SEC.
Reports to Shareholders - Persons having a beneficial interest in the
Trust are provided at least semi-annually with reports showing the investments
of the Portfolios, financial statements and other information.
Shareholder and Trustee Responsibility - Shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. The risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Trust and provides that notice of the disclaimer
must be given in each agreement, obligation or instrument entered into or
executed by the Trust or Trustees. The Declaration of Trust provides for
indemnification of any shareholder held personally liable for the obligations of
the Trust and also provides for the Trust to reimburse the shareholder for all
legal and other expenses reasonably incurred in connection with any such claim
or liability.
Under the Declaration of Trust, the trustees or officers are not liable
for actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
provides indemnification to its trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
B-60
<PAGE> 100
Registration Statement - A registration statement has been filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
and the 1940 Act. The Prospectus and this Statement of Additional Information do
not contain all information set forth in the registration statement, its
amendments and exhibits thereto, that the Trust has filed with the Securities
and Exchange Commission, Washington, D.C., to all of which reference is hereby
made.
FINANCIAL STATEMENTS
Set forth following this Statement of Additional Information are the
audited financial statements of the Trust with respect to the fiscal year ended
November 30, 1996.
B-61
<PAGE> 101
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements.
Set forth in Part B of Registrant's Statement of Additional
Information are the audited financial statements of SunAmerica
Series Trust with respect to Registrant's fiscal year ended November
30, 1996. The Financial Highlights are set forth in Part A of the
Prospectus under the caption "Financial Highlights." No financial
statements are included in Part C.
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their
filing do not exist.
(b) Exhibits.
(1) Declaration of Trust, as amended. Incorporated herein by
reference to Post-Effective Amendment No. 6 to the
Registrant's Registration Statement on Form N-1A (File No.
2-85370) filed on February 29, 1996.
(2) By-Laws. Incorporated herein by reference to Post- Effective
Amendment No. 6 to the Registrant's Registration Statement on
Form N-1A (File No. 2- 85370) filed on February 29, 1996.
(3) Voting Trust Agreement. Inapplicable.
(4) Share of Beneficial Interest. Inapplicable.
(5)(a) Investment Advisory and Management Agreement between
Registrant and SunAmerica Asset Management Corp.*
(5)(b) Subadvisory Agreements.*
- -------------------
*To be filed by amendment.
<PAGE> 102
(6) Distribution Agreement. Inapplicable.
(7) Bonus, Profit Sharing, Pension or Similar Contracts.
Inapplicable.
(8) Custodian Contract. Incorporated herein by reference to
Post-Effective Amendment No. 10 to the Registrant's
Registration Statement on Form N-1A (File No. 2-85370) filed
on February 28, 1997.
(9) Fund Participation Agreement between Registrant and Anchor
National Life Insurance Company, on behalf of itself and
Variable Separate Account. Incorporated herein by reference to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File No. 2-85370) filed
on February 29, 1996.
(10) Opinion and Consent of Counsel. Incorporated herein by
reference to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File No.
2-85370) filed on February 28, 1997.
(11) Consent of Independent Accountants.
(12) Financial Statements Omitted from Item 23. Inapplicable.
(13) Initial Capitalization Agreement. Inapplicable.
(14) Model Plan. Inapplicable.
(15) Rule 12b-1 Plan. Inapplicable.
(16) Performance Computations. Inapplicable.
(17) Powers of Attorney. Incorporated herein by reference to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File No. 2-85370) filed
on February 29, 1996.
(27) Financial Data Schedules.
Item 25. Persons Controlled by or Under Common Control with
Registrant.
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<PAGE> 103
Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A (File No. 2-85370) filed on November 3, 1992.
Item 26. Number of Holders of Securities.
As of February 26, 1997, the number of record holders of SunAmerica Series
Trust was as follows:
Title of Class Number of Record Holders
Shares of Beneficial Interest 3*
* Held by Variable Separate Account of Anchor National Life Insurance
Company, FS Variable Separate Account of First SunAmerica Life Insurance
Company and Variable Annuity Account Four of Anchor National Life
Insurance Company.
Item 27. Indemnification.
Article VI of the Registrant's By-Laws relating to the indemnification of
officers and trustees is quoted below:
ARTICLE VI
INDEMNIFICATION
The Trust shall provide any indemnification required by applicable
law and shall indemnify trustees, officers, agents and employees as
follows:
(a) the Trust shall indemnify any director or officer of the Trust who was
or is a party or is threatened to be made a party of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than action by or in the right of
the Trust) by reason of the fact that such Person is or was such Trustee
or officer or an employee or agent of the Trust, or is or was serving at
the request of the Trust as a director, officer, employee or agent of
another corporation, partnership, joint venture, Trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such
Person in connection with such action, suit or proceeding, provided such
Person acted in good faith and in a manner such Person reasonably believed
to be in or not opposed to the best interests of the Trust, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such Person's conduct was unlawful. The termination
C-3
<PAGE> 104
of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the Person did not reasonably believe
his or her actions to be in or not opposed to the best interests of the
Trust, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such Person's conduct was unlawful.
(b) The Trust shall indemnify any Trustee or officer of the Trust who was
or is a part or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Trust to
procure a judgment in its favor by reason of the fact that such Person is
or was such Trustee or officer or an employee or agent of the Trust, or is
or was serving at the request of the Trust as a director, officer,
employee or agent of another corporation, partnership, joint venture,
Trust or other enterprise, against expenses (including attorneys' fees),
actually and reasonably incurred by such Person in connection with the
defense or settlement of such action or suit if such Person acted in good
faith and in a manner such Person reasonably believed to be in or not
opposed to the best interests of the Trust, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
Person shall have been adjudged to be liable for negligence or misconduct
in the performance of such Person's duty to the Trust unless and only to
the extent that the court in which such action or suit was brought, or any
other court having jurisdiction in the premises, shall determine upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such Person is fairly and reasonably entitled
to indemnity for such expenses which such court shall deem proper.
(c) To the extent that a Trustee or officer of the Trust has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subparagraphs (a) or (b) above or in defense of
any claim, issue or matter therein, such Person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred by such Person in connection therewith, without the necessity for
the determination as to the standard of conduct as provided in
subparagraph (d).
(d) Any indemnification under subparagraph (a) or (b) (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case
upon a determination that indemnification of the Trustee or officer is
proper in view of
C-4
<PAGE> 105
the standard of conduct set forth in subparagraph (a) or (b). Such
determination shall be made (i) by the Board by a majority vote of a
quorum consisting of Trustees who were disinterested and not parties to
such action, suit or proceedings, or (ii) if such a quorum of
disinterested Trustees so directs, by independent legal counsel in a
written opinion, and any determination so made shall be conclusive and
binding upon all parties.
(e) Expenses incurred in defending a civil or criminal action, writ or
proceeding may be paid by the Trust in advance of the final disposition of
such action, suit or proceeding, as authorized in the particular case,
upon receipt of an undertaking by or on behalf of the Trustee or officer
to repay such amount unless it shall ultimately be determined that such
Person is entitled to be indemnified by the Trust as authorized herein.
Such determination must be made by disinterested Trustees or independent
legal counsel.
Prior to any payment being made pursuant to this paragraph, a majority of
quorum of disinterested, non-party Trustees of the Trust, or an
independent legal counsel in a written opinion, shall determine, based on
a review of readily available facts that there is reason to believe that
the indemnitee ultimately will be found entitled to indemnification.
(f) Agents and employees of the Trust who are not Trustees or officers of
the Trust may be indemnified under the same standards and procedures set
forth above, in the discretion of the Board.
(g) Any indemnification pursuant to this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
and shall continue as to a Person who has ceased to be a Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a Person.
(h) Nothing in the Declaration or in these By-Laws shall be deemed to
protect any Trustee or officer of the Trust against any liability to the
Trust or to its Shareholders to which such Person would otherwise be
subject by reason of willful malfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Person's
office.
(i) The Trust shall have power to purchase and maintain insurance on
behalf of any Person against any liability asserted against or incurred by
such Person, whether or not the Trust would have the power to indemnify
such Person
C-5
<PAGE> 106
against such liability under the provisions of this Article. Nevertheless,
insurance will not be purchased or maintained by the Trust if the purchase
or maintenance of such insurance would result in the indemnification of
any Person in contravention of any rule or regulation and/or
interpretation of the Securities and Exchange Commission.
* * * * * * * * * * * * * *
The Investment Advisory and Management Agreement provides that in
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of office on the part of
the Investment Adviser (and its officers, directors, agents, employees,
controlling persons, shareholders and any other person or entity
affiliated with the Investment Adviser to perform or assist in the
performance of its obligations under each Agreement) the Investment
Adviser shall not be subject to liability to the Trust or to any
shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services, including without limitation, any
error of judgment or mistake of law or for any loss suffered by any of
them in connection with the matters to which each Agreement relates,
except to the extent specified in Section 36(b) of the Investment Company
Act of 1940 concerning loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services. Certain of the
Subadvisory Agreements provide for similar indemnification of the
Subadviser by the Investment Adviser.
SunAmerica Inc., the parent of Anchor National Life Insurance
Company, provides, without cost to the Fund, indemnification of individual
trustees. By individual letter agreement, SunAmerica Inc. indemnifies each
trustee to the fullest extent permitted by law against expenses and
liabilities (including damages, judgments, settlements, costs, attorney's
fees, charges and expenses) actually and reasonably incurred in connection
with any action which is the subject of any threatened, asserted, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise and whether formal or informal
to which any trustee was, is or is threatened to be made a party by reason
of facts which include his being or having been a trustee, but only to the
extent such expenses and liabilities are not covered by insurance.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to trustees, officers
and controlling persons of the Registrant
C-6
<PAGE> 107
pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a trustee, officer or controlling person of
the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and other Connections of Investment Adviser.
SunAmerica Asset Management Corp. ("SAAMCo"), the Investment Adviser of
the Trust, is primarily in the business of providing investment
management, advisory and administrative services. Reference is made to the
most recent Form ADV and schedules thereto of SAAMCo on file with the
Commission (File No. 801-19813) for a description of the names and
employment of the directors and officers of SAAMCo and other required
information.
Alliance Capital Management L.P., Federated Investment Counseling, Goldman
Sachs Asset Management, Goldman Sachs Asset Management International,
Phoenix Investment Counsel, Inc., Provident Investment Counsel, Inc.,
Davis Selected Advisers, L.P., Morgan Stanley Asset Management Inc. and
Federated Investment Counseling, the Subadvisers of certain of the
Portfolios of the Trust, are primarily engaged in the business of
rendering investment advisory services. Reference is made to the most
recent Form ADV and schedules thereto on file with the Commission for a
description of the names and employment of the directors and officers of
Alliance Capital Management L.P., Goldman Sachs Asset Management, Goldman
Sachs Asset Management International, Phoenix Investment Counsel, Inc.,
Provident Investment Counsel, Inc., Davis Selected Advisers, L.P. Morgan
Stanley Asset Management Inc. and Federated Investment Counseling, and
other required information:
File No.
Alliance Capital Management L.P. 801-32361
Federated Investment Counseling 801-34611
C-7
<PAGE> 108
Goldman Sachs Asset Management 801-16048
Goldman Sachs Asset Management Int'l. 801-38157
Phoenix Investment Counsel, Inc. 801-5995
Provident Investment Counsel, Inc. 801-11303
Davis Selected Advisers, L.P. 801-31648
Morgan Stanley Asset Management Inc. 801-15757
Federated Investment Counseling 801-34611
Item 29. Principal Underwriters.
There is no Principal Underwriter for the Registrant.
Item 30. Location of Accounts and Records.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian, transfer agent and dividend paying
agent. It maintains books, records and accounts pursuant to the
instructions of the Trust.
SunAmerica Asset Management Corp., is located at The
SunAmerica Center, 733 Third Avenue, New York, New York 10017-
3204. Alliance Capital Management L.P. is located at 1345
Avenue of the Americas, New York, New York 10105. Goldman
Sachs Asset Management and Goldman Sachs Asset Management
International are located at 85 Broad Street, 12th Floor, New
York, New York 10005. Morgan Stanley Asset Management Inc.,
is located at 1221 Avenue of the Americas, 22nd Floor, New
York, New York 10020. Phoenix Investment Counsel, Inc. is
located at One American Row, Hartford, Connecticut 06115.
Provident Investment Counsel, Inc. is located at 300 No. Lake
Avenue, Penthouse Suite, Pasadena, California 91101-4922.
Davis Selected Advisers, L.P. is located at 124 East Marcy
Street, Santa Fe, New Mexico 87501. Federated Investment
Counseling is located at Federated Investors Tower, 1001
Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. Each of
the Investment Adviser and Subadvisers maintain the books,
accounts and records required to be maintained pursuant to
Section 31(a) of the Investment Company Act of 1940 and the
rules promulgated thereunder.
Item 31. Management Services.
None.
Item 32. Undertakings.
Registrant hereby undertakes to:
(c) furnish an investor to whom a prospectus is delivered with a copy of
Registrant's latest annual report to shareholders, upon request and
without charge.
C-8
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, Registrant has duly caused the Post-Effective Amendment No. 11 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 28th
day of February, 1997.
SUNAMERICA SERIES TRUST
By:/s/Peter C. Sutton
Peter C. Sutton
Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Post-Effective Amendment No. 11 to Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<S> <C> <C>
* Trustee, Chairman and February 28, 1997
James K. Hunt President
(Principal Executive Officer)
* Senior Vice President, February 28, 1997
Scott L. Robinson Treasurer and Controller
(Principal Financial
and Accounting Officer)
* Trustee February 28, 1997
Richards D. Barger
* Trustee February 28, 1997
Norman J. Metcalfe
*By: /s/Robert M. Zakem
Robert M. Zakem
Attorney-in-Fact
</TABLE>
<PAGE> 110
Exhibit Index
Exhibit No. Description
----------- -----------
(11) Consent of Independent Accountants.
(27) Financial Data Schedules.
<PAGE> 1
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 10, 1997, relating to the financial statements and financial highlights
of SunAmerica Series Trust, which appears in such Statement of Additional
Information. We also consent to the reference to us under the heading "General
Information -- Independent Accountants" in such Statement of Additional
Information and to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 21, 1997
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<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
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<INVESTMENTS-AT-VALUE> 249,986,707
<RECEIVABLES> 1,283,559
<ASSETS-OTHER> 11,461
<OTHER-ITEMS-ASSETS> 184,293
<TOTAL-ASSETS> 251,466,020
<PAYABLE-FOR-SECURITIES> 4,617,059
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 366,955
<TOTAL-LIABILITIES> 4,984,014
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 201,906,166
<SHARES-COMMON-STOCK> 16,515,390
<SHARES-COMMON-PRIOR> 12,693,039
<ACCUMULATED-NII-CURRENT> 2,209,001
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,975,206
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 30,391,633
<NET-ASSETS> 246,482,006
<DIVIDEND-INCOME> 3,650,127
<INTEREST-INCOME> 575,056
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<EXPENSES-NET> (2,096,422)
<NET-INVESTMENT-INCOME> 2,128,761
<REALIZED-GAINS-CURRENT> 12,796,915
<APPREC-INCREASE-CURRENT> 19,314,155
<NET-CHANGE-FROM-OPS> 34,239,831
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<DISTRIBUTIONS-OF-GAINS> (4,480,000)
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<ACCUMULATED-GAINS-PRIOR> 4,154,885
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 2,096,422
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<PER-SHARE-GAIN-APPREC> 2.19
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<AVG-DEBT-PER-SHARE> 0
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<NAME> SUNAMERICA SERIES TRUST ALLIANCE GROWTH
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<PERIOD-START> DEC-01-1995
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<INVESTMENTS-AT-VALUE> 380,374,514
<RECEIVABLES> 4,132,931
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<OTHER-ITEMS-ASSETS> 893
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<OTHER-ITEMS-LIABILITIES> 425,926
<TOTAL-LIABILITIES> 3,154,602
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<PAID-IN-CAPITAL-COMMON> 290,961,176
<SHARES-COMMON-STOCK> 20,365,649
<SHARES-COMMON-PRIOR> 10,739,380
<ACCUMULATED-NII-CURRENT> 1,193,834
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,987,346
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 67,224,317
<NET-ASSETS> 381,366,673
<DIVIDEND-INCOME> 2,624,079
<INTEREST-INCOME> 273,003
<OTHER-INCOME> 0
<EXPENSES-NET> (1,697,644)
<NET-INVESTMENT-INCOME> 1,199,438
<REALIZED-GAINS-CURRENT> 22,227,082
<APPREC-INCREASE-CURRENT> 46,786,487
<NET-CHANGE-FROM-OPS> 70,213,007
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (483,000)
<DISTRIBUTIONS-OF-GAINS> (13,185,000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,394,232
<NUMBER-OF-SHARES-REDEEMED> (6,661,296)
<SHARES-REINVESTED> 893,333
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<ACCUMULATED-NII-PRIOR> 477,396
<ACCUMULATED-GAINS-PRIOR> 12,945,264
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,522,222
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<GROSS-EXPENSE> 1,697,644
<AVERAGE-NET-ASSETS> 237,452,095
<PER-SHARE-NAV-BEGIN> 15.63
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 4.07
<PER-SHARE-DIVIDEND> (0.04)
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<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
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<INVESTMENTS-AT-VALUE> 186,310,923
<RECEIVABLES> 294,665
<ASSETS-OTHER> 10,368
<OTHER-ITEMS-ASSETS> 1,900
<TOTAL-ASSETS> 186,617,856
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 250,278
<TOTAL-LIABILITIES> 250,278
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141,611,796
<SHARES-COMMON-STOCK> 12,955,501
<SHARES-COMMON-PRIOR> 11,411,801
<ACCUMULATED-NII-CURRENT> 1,322,795
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,104,014
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,328,973
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<EXPENSES-NET> (1,202,838)
<NET-INVESTMENT-INCOME> 1,327,266
<REALIZED-GAINS-CURRENT> 16,211,284
<APPREC-INCREASE-CURRENT> 10,855,495
<NET-CHANGE-FROM-OPS> 27,066,779
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,265,000)
<DISTRIBUTIONS-OF-GAINS> (10,645,000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,516,917
<NUMBER-OF-SHARES-REDEEMED> (2,922,221)
<SHARES-REINVESTED> 949,004
<NET-CHANGE-IN-ASSETS> 36,457,095
<ACCUMULATED-NII-PRIOR> 1,261,039
<ACCUMULATED-GAINS-PRIOR> 10,537,220
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 1,202,838
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<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 2.16
<PER-SHARE-DIVIDEND> (0.11)
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<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 116,201,171
<INVESTMENTS-AT-VALUE> 161,536,664
<RECEIVABLES> 691,261
<ASSETS-OTHER> 8,873
<OTHER-ITEMS-ASSETS> 79
<TOTAL-ASSETS> 162,236,877
<PAYABLE-FOR-SECURITIES> 1,964,853
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,979
<TOTAL-LIABILITIES> 2,163,832
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 109,285,958
<SHARES-COMMON-STOCK> 10,189,121
<SHARES-COMMON-PRIOR> 8,800,227
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,451,594
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,335,493
<NET-ASSETS> 160,073,045
<DIVIDEND-INCOME> 723,018
<INTEREST-INCOME> 432,804
<OTHER-INCOME> 0
<EXPENSES-NET> (1,179,277)
<NET-INVESTMENT-INCOME> (23,455)
<REALIZED-GAINS-CURRENT> 8,612,831
<APPREC-INCREASE-CURRENT> 17,288,052
<NET-CHANGE-FROM-OPS> 25,877,428
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,113,284
<NUMBER-OF-SHARES-REDEEMED> (2,724,390)
<SHARES-REINVESTED> 0
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
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<NAME> SUNAMERICA SERIES TRUST GROWTH & INCOME
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 006
<NAME> SUNAMERICA SERIES TRUST HIGH YIELD BOND
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 007
<NAME> SUNAMERICA SERIES TRUST CASH MANAGEMENT
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 008
<NAME> SUNAMERICA SERIES TRUST ASSET ALLOCATION PORTFOLIO
<S> <C>
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 009
<NAME> SUNAMERICA SERIES TRUST GLOBAL BOND
<S> <C>
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 010
<NAME> SUNAMERICA SERIES TRUST CORPORATE BOND
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 011
<NAME> SUNAMERICA SERIES TRUST BALANCED PHOENIX
<S> <C>
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 012
<NAME> SUNAMERICA SERIES TRUST VENTURE VALUE
<S> <C>
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<PER-SHARE-NII> 0.18
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<PER-SHARE-DIVIDEND> (0.09)
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<PER-SHARE-NAV-END> 16.90
<EXPENSE-RATIO> 0.85
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 013
<NAME> SUNAMERICA SERIES TRUST WORLDWIDE HIGH INCOME
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 45,982,637
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<RECEIVABLES> 2,858,236
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<SHARES-COMMON-PRIOR> 1,884,528
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<NET-INVESTMENT-INCOME> 3,853,929
<REALIZED-GAINS-CURRENT> 2,579,387
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,700,000)
<DISTRIBUTIONS-OF-GAINS> (100,000)
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<NUMBER-OF-SHARES-SOLD> 4,060,525
<NUMBER-OF-SHARES-REDEEMED> (2,425,678)
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<NET-CHANGE-IN-ASSETS> 27,689,417
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 368,821
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 436,372
<AVERAGE-NET-ASSETS> 36,882
<PER-SHARE-NAV-BEGIN> 11.42
<PER-SHARE-NII> 1.25
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> (0.87)
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<PER-SHARE-NAV-END> 13.35
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 014
<NAME> SUNAMERICA SERIES TRUST INTERNATIONAL DIVERSIFIED EQUITIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 151,854,179
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<TOTAL-ASSETS> 164,239,771
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<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 13,810,494
<SHARES-COMMON-PRIOR> 4,824,929
<ACCUMULATED-NII-CURRENT> 4,077,453
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<ACCUMULATED-NET-GAINS> 1,101,846
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 157,008,393
<DIVIDEND-INCOME> 1,830,322
<INTEREST-INCOME> 283,647
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<EXPENSES-NET> (1,632,594)
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<NUMBER-OF-SHARES-SOLD> 12,354,619
<NUMBER-OF-SHARES-REDEEMED> (3,499,995)
<SHARES-REINVESTED> 130,941
<NET-CHANGE-IN-ASSETS> 108,047,734
<ACCUMULATED-NII-PRIOR> (346,916)
<ACCUMULATED-GAINS-PRIOR> (586,233)
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<GROSS-ADVISORY-FEES> 1,025,593
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,632,594
<AVERAGE-NET-ASSETS> 102,559
<PER-SHARE-NAV-BEGIN> 10.15
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 1.43
<PER-SHARE-DIVIDEND> (0.26)
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<PER-SHARE-NAV-END> 11.37
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 015
<NAME> SUNAMERICA SERIES TRUST UTILITY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> JUN-03-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 6,136,436
<INVESTMENTS-AT-VALUE> 6,424,127
<RECEIVABLES> 82,770
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<ACCUMULATED-NII-CURRENT> 81,475
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 287,830
<NET-ASSETS> 6,298,647
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<EXPENSES-NET> (19,446)
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<NUMBER-OF-SHARES-REDEEMED> (17,033)
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<NET-CHANGE-IN-ASSETS> 6,298,647
<ACCUMULATED-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 35,662
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> .51
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<PER-SHARE-NAV-END> 10.75
<EXPENSE-RATIO> 1.05
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 016
<NAME> SUNAMERICA SERIES TRUST SUNAMERICA BALANCED
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> JUN-03-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 9,164,380
<INVESTMENTS-AT-VALUE> 9,987,188
<RECEIVABLES> 259,301
<ASSETS-OTHER> 214
<OTHER-ITEMS-ASSETS> 2,409
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17,318
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,316,155
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<ACCUMULATED-NII-CURRENT> 56,068
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 822,808
<NET-ASSETS> 10,223,794
<DIVIDEND-INCOME> 22,547
<INTEREST-INCOME> 62,733
<OTHER-INCOME> 0
<EXPENSES-NET> (29,212)
<NET-INVESTMENT-INCOME> 56,068
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<APPREC-INCREASE-CURRENT> 822,808
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<NUMBER-OF-SHARES-SOLD> 1,113,491
<NUMBER-OF-SHARES-REDEEMED> (194,594)
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<NET-CHANGE-IN-ASSETS> 10,223,794
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 41,704
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 1.03
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<PER-SHARE-NAV-END> 11.13
<EXPENSE-RATIO> 1.00
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 017
<NAME> SUNAMERICA SERIES TRUST FEDERATED VALUE
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> JUN-03-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 11,119,437
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<OTHER-ITEMS-ASSETS> 941
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<SENIOR-LONG-TERM-DEBT> 0
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<PAID-IN-CAPITAL-COMMON> 11,245,757
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<ACCUMULATED-NII-CURRENT> 40,137
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<ACCUMULATED-NET-GAINS> (22,475)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,196,109
<NET-ASSETS> 12,459,528
<DIVIDEND-INCOME> 64,547
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<OTHER-INCOME> 0
<EXPENSES-NET> (33,563)
<NET-INVESTMENT-INCOME> 40,137
<REALIZED-GAINS-CURRENT> (22,475)
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<NUMBER-OF-SHARES-SOLD> 1,158,140
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<PER-SHARE-NII> 0.07
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892538
<NAME> SUNAMERICA SERIES TRUST
<SERIES>
<NUMBER> 018
<NAME> SUNAMERICA SERIES TRUST AGGRESSIVE GROWTH
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> NOV-03-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 31,810,867
<INVESTMENTS-AT-VALUE> 34,902,080
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<TOTAL-LIABILITIES> 113,059
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,699,261
<SHARES-COMMON-STOCK> 3,389,423
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 39,730
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<ACCUMULATED-NET-GAINS> (705,902)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,091,213
<NET-ASSETS> 35,124,302
<DIVIDEND-INCOME> 26,838
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<OTHER-INCOME> 0
<EXPENSES-NET> (91,389)
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<REALIZED-GAINS-CURRENT> (705,902)
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<NUMBER-OF-SHARES-SOLD> 4,051,127
<NUMBER-OF-SHARES-REDEEMED> (661,704)
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<ACCUMULATED-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 10.00
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<PER-SHARE-NAV-END> 10.36
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</TABLE>
