<PAGE> 1
As filed with the Securities and Exchange Commission on September 1, 1998
File Nos. 33-52742; 811-7238
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 _
Pre-Effective Amendment No. _
Post-Effective Amendment No. 16 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 _
Amendment No. 18 X
(Check appropriate box or boxes)
SUNAMERICA SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
1 SunAmerica Center
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
Los Angeles, CA 90067-6022
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
- ---
on (date) pursuant to paragraph (b)
- ---
60 days after filing pursuant to paragraph (a)
- ---
on (date) pursuant to paragraph (a) of Rule 485
- ---
X 75 days after filing pursuant to paragraph (a)(2)
- ---
--------------------
================================================================================
<PAGE> 2
SUNAMERICA SERIES TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(b)
Under the Securities Act of 1933
<TABLE>
<CAPTION>
PART A
Item No. Registration Statement Caption Caption in Prospectus
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis *
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant The Trust, Its Investment
Objectives and Policies;
Description of Securities
and Investment Techniques
5. Management of the Fund Management
6. Capital Stock and Other Securities Dividends, Distributions and
Federal Taxes; Shareholder
Voting Rights; Shareholder
Inquiries
7. Purchase of Securities Being Offered Purchases and Redemptions
8. Redemption or Repurchase Purchases and Redemptions
9. Pending Legal Proceedings *
PART B Caption in Statement
Item No. Registration Statement Caption of Additional Information
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History The Trust
13. Investment Objectives and Policies Investment Objectives and
Policies; Investment
Restrictions
14. Management of the Fund Trust Officers and Trustees
15. Contact Persons and Principal Holders The Trust
of Securities
16. Investment Advisory and Other Services Investment Advisory and
Management Agreement;
Subadvisory Agreements;
General Information
17. Brokerage Allocation and Other Practices Execution of Portfolio
Transactions
18. Capital Stock and Other Securities *
19. Purchase, Redemption and Pricing of Price of Shares
Securities Being Offered
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
20. Tax Status Dividends, Distributions and
Federal Taxes
21. Underwriters *
22. Calculation of Performance Data *
23. Financial Statements Financial Statements
</TABLE>
* Omitted from the Prospectus or Statement of Additional Information because
the item is not applicable.
PART C
The information required to be included in Part C is set forth under
the appropriate item, so numbered in Part C of this Registration Statement.
<PAGE> 4
PROSPECTUS -- NOVEMBER 15, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 25 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 CORPORATE BOND PORTFOLIO seeks high total return with only moderate price
risk by investing primarily in investment grade fixed income securities.
The GLOBAL BOND PORTFOLIO seeks 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 HIGH-YIELD BOND PORTFOLIO seeks high 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 current
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 may 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 397 days or less) in any combination.
The EQUITY INCOME PORTFOLIO seeks long-term capital appreciation and income by
primarily investing in equity securities that are expected to pay above-average
dividends.
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, EQUITY INCOME, REAL ESTATE, INTERNATIONAL GROWTH AND INCOME, SMALL
COMPANY VALUE 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, HIGH-RISK BONDS" FOR A
DISCUSSION OF THE RISKS ASSOCIATED WITH HIGH-YIELD, HIGH-RISK SECURITIES.
The EQUITY INDEX PORTFOLIO seeks to provide investment results that correspond
with the performance of the Standard & Poor's 500 Corporate Stock Price Index
("S&P 500").
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 growth of capital by investing primarily in
common stocks.
(Cover continued on next page)
------------------------
This prospectus contains information you should know before investing. Please
read it carefully before you invest and keep it for future reference.
Shares of the Portfolios are not bank deposits and are not guaranteed or insured
by any bank, government entity or the FDIC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
(Cover continued from previous page)
The "DOGS" OF WALL STREET PORTFOLIO seeks total return (including capital
appreciation and current income) primarily through the annual selection of
thirty high dividend yielding common stocks from the Dow Jones Industrial
Average and the broader market.
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 its
subadviser believes have the potential for appreciation.
The REAL ESTATE PORTFOLIO seeks 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 SMALL COMPANY VALUE PORTFOLIO seeks capital appreciation by investing in a
broadly diversified portfolio of equity securities of small capitalization
companies.
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 U.S.
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
its subadviser in common stocks of foreign issuers which, in the aggregate,
replicate broad country indices.
The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing
mainly in the common stocks and other equity securities of companies that its
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.
<PAGE> 6
- ---------------------------------------------------------
- ---------------------------------------------------------
TABLE OF CONTENTS
- ---------------------------------------------------------
- ---------------------------------------------------------
<TABLE>
<CAPTION>
TOPIC PAGE
----- ----
<S> <C> <C>
FINANCIAL HIGHLIGHTS...................... 4
THE TRUST, ITS INVESTMENT OBJECTIVES AND
POLICIES................................ 7
Cash Management Portfolio.......... 8
Corporate Bond Portfolio........... 8
Global 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......... 14
Equity Income Portfolio............ 15
Utility Portfolio.................. 14
Equity Index Portfolio............. 22
Growth-Income Portfolio............ 16
Federated Value Portfolio.......... 16
Venture Value Portfolio............ 17
"Dogs" of Wall Street Portfolio.... 18
Alliance Growth Portfolio.......... 20
Growth/Phoenix Investment Counsel
Portfolio.......................... 20
Putnam Growth Portfolio............ 20
Real Estate Portfolio.............. 20
Small Company Value Portfolio...... 18
Aggressive Growth Portfolio........ 21
International Growth and Income
Portfolio.......................... 22
Global Equities Portfolio.......... 23
International Diversified Equities
Portfolio.......................... 24
Emerging Markets Portfolio......... 24
DESCRIPTION OF SECURITIES AND INVESTMENT
TECHNIQUES.............................. 25
MANAGEMENT................................ 36
PORTFOLIO TURNOVER AND BROKERAGE.......... 44
DIVIDENDS, DISTRIBUTIONS AND FEDERAL
TAXES................................... 45
PRICE OF SHARES........................... 46
PURCHASES AND REDEMPTIONS................. 46
SHAREHOLDER VOTING RIGHTS................. 46
INDEPENDENT ACCOUNTANTS................... 47
GENERAL INFORMATION....................... 47
SHAREHOLDER INQUIRIES..................... 47
FINANCIAL INFORMATION..................... 47
</TABLE>
3
<PAGE> 7
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- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
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- --------------------------------------------------------------------------------
The following Financial Highlights for the Portfolios and periods set forth
below, except for the six months ended May 31, 1998 which is unaudited, have
been audited by PricewaterhouseCoopers 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 NET
ASSET NET REALIZED FROM FROM NET REALIZED ASSET ASSETS
VALUE INVEST- & UNREALIZED INVEST- INVEST- GAIN ON VALUE END OF
BEGINNING MENT GAIN (LOSS) ON MENT MENT INVEST- END OF TOTAL PERIOD
PERIOD ENDED OF PERIOD INCOME** INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN*** (000'S)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <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 2.00% $ 24,603
11/30/94 10.20 0.38 (0.02) 0.36 (0.09) -- 10.47 3.51 89,098
11/30/95 10.47 0.56 0.01 0.57 (0.34) -- 10.70 5.59 90,731
11/30/96 10.70 0.53 (0.02) 0.51 (0.45) -- 10.76 4.92 91,247
11/30/97 10.76 0.53 0.01 0.54 (0.56) -- 10.74 5.22 156,119
5/31/98# 10.74 0.25 0.01 0.26 (0.68) -- 10.32 2.47 256,449
- -----------------------------------------------------------------------------------------------------------------------------
Corporate Bond Portfolio
7/1/93-11/30/93 10.00 0.14 0.05 0.19 -- -- 10.19 1.90 11,667
11/30/94 10.19 0.52 (0.87) (0.35) (0.05) (0.04) 9.75 (3.41) 15,869
11/30/95 9.75 0.60 1.00 1.60 (0.53) -- 10.82 17.01 29,475
11/30/96 10.82 0.65 0.03 0.68 (0.41) -- 11.09 6.51 37,207
11/30/97 11.09 0.77 0.21 0.98 (0.53) -- 11.54 9.26 62,272
5/31/98# 11.54 0.39 0.09 0.48 (0.46) -- 11.56 4.18 99,855
- -----------------------------------------------------------------------------------------------------------------------------
Global Bond Portfolio
7/1/93-11/30/93 10.00 0.13 0.17 0.30 -- -- 10.30 3.00 25,010
11/30/94 10.30 0.53 (0.86) (0.33) (0.09) (0.05) 9.83 (3.18) 44,543
11/30/95 9.83 0.60 0.97 1.57 (0.38) -- 11.02 16.40 59,759
11/30/96 11.02 0.59 0.54 1.13 (0.75) -- 11.40 10.94 68,221
11/30/97 11.40 0.52 0.38 0.90 (0.75) (0.04) 11.51 8.43 89,043
5/31/98# 11.51 0.23 0.37 0.60 (0.79) (0.22) 11.10 5.39 99,194
- -----------------------------------------------------------------------------------------------------------------------------
High-Yield Bond Portfolio
2/9/93-11/30/93 10.00 0.76 0.36 1.12 -- -- 11.12 11.20 41,851
11/30/94 11.12 1.20 (1.65) (0.45) (0.29) (0.06) 10.32 (4.26) 55,803
11/30/95 10.32 1.11 0.12 1.23 (1.02) -- 10.53 12.64 82,174
11/30/96 10.53 0.98 0.48 1.46 (0.95) -- 11.04 14.86 113,229
11/30/97 11.04 1.04 0.48 1.52 (0.74) -- 11.82 14.53 195,639
05/31/98# 11.82 0.58 0.27 0.85 (0.66) (0.08) 11.93 7.28 289,830
- -----------------------------------------------------------------------------------------------------------------------------
Worldwide High Income Portfolio
10/28/94-11/30/94 10.00 0.04 (0.09) (0.05) -- -- 9.95 (0.50) 10,478
11/30/95 9.95 1.10 0.47 1.57 (0.10) -- 11.42 16.02 21,515
11/30/96 11.42 1.25 1.60 2.85 (0.87) (0.05) 13.35 26.87 49,204
11/30/97 13.35 0.98 0.68 1.66 (0.90) (0.91) 13.20 14.17 125,224
05/31/98# 13.20 0.53 0.33 0.86 (0.61) (0.74) 12.71 6.33 147,739
- -----------------------------------------------------------------------------------------------------------------------------
SunAmerica Balanced Portfolio
6/3/96-11/30/96 10.00 0.10 1.03 1.13 -- -- 11.13 11.30 10,224
11/30/97 11.13 0.23 2.15 2.38 (0.04) (0.02) 13.45 21.48 44,621
05/31/98# 13.45 0.14 1.50 1.64 (0.11) (0.36) 14.62 12.21 79,469
- -----------------------------------------------------------------------------------------------------------------------------
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<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME AVERAGE
TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED NET ASSETS NET ASSETS TURNOVER PER SHARE
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Management Portfolio
2/9/93-11/30/93 0.71%+++ 2.53%+++ --% N/A
11/30/94 0.70++ 3.73++ -- N/A
11/30/95 0.67 5.32 -- N/A
11/30/96 0.62 4.90 -- N/A
11/30/97 0.63 5.06 -- N/A
5/31/98# 0.62+ 5.25+ -- N/A
- ----------------------------------------------------------------------------------
Corporate Bond Portfolio
7/1/93-11/30/93 0.94+++ 3.92+++ 208 N/A
11/30/94 0.94++ 5.21++ 419 N/A
11/30/95 0.96++ 5.93++ 412 N/A
11/30/96 0.97 6.11 338 N/A
11/30/97 0.91 6.99 49 N/A
5/31/98# 0.78+ 6.75+ 12 N/A
- ----------------------------------------------------------------------------------------------
Global Bond Portfolio
7/1/93-11/30/93 1.35+++ 3.56+++ 84 N/A
11/30/94 1.06 5.29 347 N/A
11/30/95 0.95 5.89 339 N/A
11/30/96 0.89 5.44 223 N/A
11/30/97 0.90 4.70 360 N/A
5/31/98# 0.84+ 4.02+ 118 N/A
- ----------------------------------------------------------------------------------------------------------
High-Yield Bond Portfolio
2/9/93-11/30/93 0.94+++ 9.43+++ 229 N/A
11/30/94 0.92++ 11.07++ 225 N/A
11/30/95 0.80 10.80 174 N/A
11/30/96 0.77 9.41 107 N/A
11/30/97 0.75 9.26 243 N/A
05/31/98# 0.69+ 9.72+ 92 N/A
- ----------------------------------------------------------------------------------------------------------------------
Worldwide High Income Portfolio
10/28/94-11/30/94 1.60+++ 4.48+++ 2 N/A
11/30/95 1.30 10.46 176 N/A
11/30/96 1.18 10.45 177 N/A
11/30/97 1.10 7.58 146 N/A
05/31/98# 1.07 8.09+ 76 N/A
- -----------------------------------------------------------------------------------------------------------------------------
SunAmerica Balanced Portfolio
6/3/96-11/30/96 1.00+++ 1.92+++ 40 0.0600
11/30/97 1.00 1.82 143 0.0600
05/31/98# 0.82+ 1.97+ 64 N/A
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</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.
+ Annualized
++ During the periods indicated, 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 to
average net assets would have been as follows:
# Unaudited
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME
--------------------------------------- ------------------------------------------
1993 1994 1995 1996 1997 1998 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Management Portfolio............ 1.10% 0.78% 0.67% 0.62% 0.63% 0.62% 2.14% 3.65% 5.32% 4.90% 5.06% 5.25%
Corporate Bond Portfolio............. 1.81 1.09 0.97 0.97 0.91 0.78 3.05 5.06 5.92 6.11 6.99 6.75
Global Bond Portfolio................ 1.81 1.06 0.95 0.89 0.90 0.84 3.10 5.29 5.89 5.44 4.70 4.02
High-Yield Bond Portfolio............ 1.29 0.93 0.80 0.77 0.75 0.69 9.08 11.06 10.80 9.41 9.26 9.72
Worldwide High Income Portfolio...... -- 2.26 1.30 1.18 1.10 1.07 -- 3.82 10.46 10.45 7.58 8.07
SunAmerica Balanced Portfolio........ -- -- -- 1.43 1.00 0.82 -- -- -- 1.49 1.82 1.95
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 8
The following Financial Highlights for the Portfolios and periods set forth
below, except for the six months ended May 31, 1998 which is unaudited, have
been audited by PricewaterhouseCoopers 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 NET TOTAL DECLARED FROM NET NET NET
ASSET INVEST- REALIZED FROM FROM NET REALIZED ASSET ASSETS
VALUE MENT & UNREALIZED INVEST- INVEST- GAIN ON VALUE END OF
BEGINNING INCOME GAIN (LOSS) ON MENT MENT INVEST- END OF TOTAL PERIOD
PERIOD ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN*** (000'S)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <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 (0.40)% $ 1,516
11/30/95 9.96 0.34 2.23 2.57 (0.05) -- 12.48 25.89 32,429
11/30/96 12.48 0.34 1.31 1.65 (0.19) (0.31) 13.63 13.75 70,021
11/30/97 13.63 0.37 1.39 1.76 (0.23) (0.41) 14.75 13.52 95,721
05/31/98# 14.75 0.18 1.15 1.33 (0.31) (1.40) 14.37 9.06 115,048
- --------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Portfolio
7/1/93-11/30/93 10.00 0.08 0.28 0.36 -- -- 10.36 3.60 35,590
11/30/94 10.36 0.29 (0.25) 0.04 (0.05) (0.03) 10.32 0.30 106,856
11/30/95 10.32 0.42 2.24 2.66 (0.20) (0.04) 12.74 26.10 199,836
11/30/96 12.74 0.48 2.00 2.48 (0.31) (0.39) 14.52 20.27 316,388
11/30/97 14.52 0.44 2.55 2.99 (0.40) (0.90) 16.21 21.97 526,585
05/31/98# 16.21 0.24 0.93 1.17 (0.35) (1.61) 15.42 7.09 671,222
- --------------------------------------------------------------------------------------------------------------------------------
Utility Portfolio
6/3/96-11/30/96 10.00 0.24 0.51 0.75 -- -- 10.75 7.50 6,299
11/30/97 10.75 0.36 1.91 2.27 (0.09) (0.02) 12.91 21.26 24,366
05/31/98# 12.91 0.20 0.92 1.12 (0.16) (0.33) 13.54 8.60 42,601
- --------------------------------------------------------------------------------------------------------------------------------
Growth-Income Portfolio
2/9/93-11/30/93 10.00 0.12 0.49 0.61 -- -- 10.61 6.10 45,080
11/30/94 10.61 0.13 (0.36) (0.23) (0.04) (0.01) 10.33 (2.20) 84,899
11/30/95 10.33 0.17 3.31 3.48 (0.10) -- 13.71 33.89 171,281
11/30/96 13.71 0.18 3.48 3.66 (0.12) (0.43) 16.82 27.41 325,463
11/30/97 16.82 0.17 4.69 4.86 (0.13) (0.73) 20.82 30.11 622,062
05/31/98# 20.82 0.09 3.20 3.29 (0.13) (0.96) 23.02 15.82 832,054
- --------------------------------------------------------------------------------------------------------------------------------
Federated Value Portfolio
6/3/96-11/30/96 10.00 0.07 1.01 1.08 -- -- 11.08 10.80 12,460
11/30/97 11.08 0.13 2.72 2.85 (0.03) -- 13.90 25.75 59,024
05/31/98# 13.90 0.09 2.13 2.22 (0.06) (0.30) 15.76 16.02 107,670
- --------------------------------------------------------------------------------------------------------------------------------
Venture Value Portfolio
10/28/94-11/30/94 10.00 0.03 (0.25) (0.22) -- -- 9.78 (2.20) 4,449
11/30/95 9.78 0.17 3.55 3.72 (0.03) -- 13.47 38.17 154,908
11/30/96 13.47 0.18 3.46 3.64 (0.09) (0.12) 16.90 27.44 516,413
11/30/97 16.90 0.19 4.73 4.92 (0.09) (0.26) 21.47 29.62 1,140,053
05/31/98# 21.47 0.11 2.06 2.17 (0.12) (0.68) 22.84 10.10 1,519,053
- --------------------------------------------------------------------------------------------------------------------------------
"Dogs" of Wall Street Portfolio
4/01/98-5/31/98# 10.00 0.03 (0.29) (0.26) -- -- 9.74 (2.60) 14,025
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME AVERAGE
TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED NET ASSETS NET ASSETS TURNOVER PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced/Phoenix Investment Counsel Portfolio
10/28/94-11/30/94 1.00%++ 4.25%++ 10% N/A
11/30/95 0.98++ 3.08++ 153 N/A
11/30/96 0.84 2.74 194 0.0589
11/30/97 0.82 2.63 271 0.0526
05/31/98# 0.78+ 2.51+ 68 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Portfolio
7/1/93-11/30/93 0.99+++ 2.33+++ 71 N/A
11/30/94 0.94++ 2.71++ 152 N/A
11/30/95 0.81 3.62 207 N/A
11/30/96 0.74 3.66 200 0.0587
11/30/97 0.68 2.88 176 0.0591
05/31/98# 0.64+ 2.96+ 78 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Utility Portfolio
6/3/96-11/30/96 1.05+++ 4.41+++ 24 0.0439
11/30/97 1.05++ 3.15++ 77 0.0365
05/31/98# 1.05+ 2.94+ 40 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Growth-Income Portfolio
2/9/93-11/30/93 0.82+++ 1.59+++ 27 N/A
11/30/94 0.81++ 1.26++ 59 N/A
11/30/95 0.77 1.42 59 N/A
11/30/96 0.72 1.21 82 0.0597
11/30/97 0.65 0.89 44 0.0555
05/31/98# 0.60+ 0.81+ 31 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Federated Value Portfolio
6/3/96-11/30/96 1.05+++ 1.26+++ 30 0.0520
11/30/97 1.03 1.03 46 0.0494
05/31/98# 0.84+ 1.14+ 24 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Venture Value Portfolio
10/28/94-11/30/94 1.10+++ 3.93+++ -- N/A
11/30/95 1.00++ 1.43++ 18 N/A
11/30/96 0.85 1.21 22 0.0598
11/30/97 0.79 0.98 22 0.0599
05/31/98# 0.75+ 0.96+ 7 N/A
- --------------------------------------------------------------------------------------------------------------------------------
"Dogs" of Wall Street Portfolio
4/01/98-5/31/98# 0.85+++ 2.23+++ -- N/A
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</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 Sun America Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
+ Annualized
++ During the periods indicated, 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 to
average net assets would have been as follows:
# Unaudited
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------- ------------------------------------------
1993 1994 1995 1996 1997 1998 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced/Phoenix Investment Counsel
Portfolio........................... --% 6.82% 1.11% 0.84% 0.82% 0.78% --% (1.57)% 2.95% 2.74% 2.63% 2.51%
Asset Allocation Portfolio........... 1.67 0.94 0.81 0.74 0.68 0.64 1.65 2.71 3.62 3.66 2.88 2.96
Utility Portfolio.................... -- -- -- 1.93 1.24 1.05 -- -- -- 3.53 2.96 2.94
Growth-Income Portfolio.............. 1.40 0.89 0.77 0.72 0.65 0.60 1.01 1.18 1.42 1.21 0.89 0.81
Federated Value Portfolio............ -- -- -- 1.57 1.03 0.84 -- -- -- 0.74 1.03 1.14
Venture Value Portfolio.............. -- 3.89 1.02 0.85 0.79 0.75 -- 1.14 1.41 1.21 0.98 0.96
"Dogs" of Wall Street Portfolio...... -- -- -- -- -- 1.13 -- -- -- -- -- 1.95
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 9
The following Financial Highlights for the Portfolios and periods set forth
below, except for the six months ended May 31, 1998 which is unaudited, have
been audited by PricewaterhouseCoopers 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 NET TOTAL DECLARED FROM NET NET NET
ASSET INVEST- REALIZED FROM FROM NET REALIZED ASSET ASSETS
VALUE MENT & UNREALIZED INVEST- INVEST- GAIN ON VALUE END OF
BEGINNING INCOME GAIN (LOSS) ON MENT MENT INVEST- END OF TOTAL PERIOD
PERIOD ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN*** (000'S)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Growth Portfolio
2/9/93-11/30/93 $10.00 $0.05 $ 0.87 $ 0.92 $ -- $ -- $10.92 9.20% $ 23,256
11/30/94 10.92 0.04 (0.14) (0.10) (0.01) (0.17) 10.64 (0.93) 52,213
11/30/95 10.64 0.07 5.08 5.15 (0.03) (0.13) 15.63 48.91 167,870
11/30/96 15.63 0.08 4.07 4.15 (0.04) (1.01) 18.73 28.05 381,367
11/30/97 18.73 0.16 4.76 4.92 (0.05) (1.04) 22.56 27.80 704,533
05/31/98# 22.56 0.04 5.31 5.35 (0.06) (2.30) 25.55 23.85 1,029,515
- --------------------------------------------------------------------------------------------------------------------------------
Growth/Phoenix Investment Counsel Portfolio
2/9/93-11/30/93 10.00 0.17 0.61 0.78 -- -- 10.78 7.80 65,032
11/30/94 10.78 0.16 (0.87) (0.71) (0.06) -- 10.01 (6.64) 104,194
11/30/95 10.01 0.12 3.14 3.26 (0.13) -- 13.14 32.92 149,910
11/30/96 13.14 0.11 2.16 2.27 (0.11) (0.91) 14.39 18.40 186,368
11/30/97 14.39 0.11 2.48 2.59 (0.10) (1.26) 15.62 19.78 218,496
05/31/98# 15.62 0.02 1.94 1.96 (0.12) (2.76) 14.70 12.68 233,269
- --------------------------------------------------------------------------------------------------------------------------------
Putnam Growth Portfolio
2/9/93-11/30/93 10.00 0.02 0.02 0.04 -- -- 10.04 0.40 42,911
11/30/94 10.04 0.03 (0.01) 0.02 (0.01) -- 10.05 0.19 75,342
11/30/95 10.05 (0.01) 3.09 3.08 (0.03) -- 13.10 30.66 115,276
11/30/96 13.10 -- 2.61 2.61 -- -- 15.71 19.92 160,073
11/30/97 15.71 0.03 3.93 3.96 -- (0.52) 19.15 26.01 234,726
05/31/98# 19.15 0.01 3.01 3.02 (0.02) (3.08) 19.07 15.65 320,428
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate Portfolio
6/2/97-11/30/97 10.00 0.16 1.37 1.53 -- -- 11.53 15.30 29,565
05/31/98# 11.53 0.20 (0.41) (0.21) (0.16) (0.01) 11.15 (1.86) 53,271
- --------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Portfolio
6/3/96-11/30/96 10.00 0.02 0.34 0.36 -- -- 10.36 3.60 35,124
11/30/97 10.36 0.01 1.40 1.41 (0.01) -- 11.76 13.62 103,603
05/31/98# 11.76 0.02 0.29 0.31 -- -- 12.07 2.64 112,531
- --------------------------------------------------------------------------------------------------------------------------------
International Growth and Income Portfolio
6/2/97-11/30/97 10.00 0.03 0.38 0.41 -- -- 10.41 4.10 42,844
05/31/98# 10.41 0.10 1.91 2.01 (0.03) (0.06) 12.33 19.46 94,656
- --------------------------------------------------------------------------------------------------------------------------------
Global Equities Portfolio
2/9/93-11/30/93 10.00 0.03 0.96 0.99 -- -- 10.99 9.90 43,737
11/30/94 10.99 0.05 0.71 0.76 (0.01) (0.07) 11.67 6.87 136,758
11/30/95 11.67 0.12 1.64 1.76 (0.08) (0.29) 13.06 15.58 165,752
11/30/96 13.06 0.14 2.19 2.33 (0.14) (0.33) 14.92 18.21 246,482
11/30/97 14.92 0.09 1.79 1.88 (0.13) (0.69) 15.98 13.30 341,639
05/31/98# 15.98 0.04 2.85 2.89 (0.19) (1.36) 17.32 18.21 417,005
- --------------------------------------------------------------------------------------------------------------------------------
International Diversified Equities Portfolio
10/28/94-11/30/94 10.00 0.01 (0.23) (0.22) -- -- 9.78 (2.20) 12,438
11/30/95 9.78 0.07 0.38 0.45 (0.08) -- 10.15 4.63 48,961
11/30/96 10.15 0.05 1.43 1.48 (0.26) -- 11.37 14.85 157,008
11/30/97 11.37 0.09 0.28 0.37 (0.31) (0.10) 11.33 3.52 248,927
05/31/98# 11.33 0.08 2.16 2.24 (0.40) (0.15) 13.02 19.80 320,893
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio
6/2/97-11/30/97 10.00 0.06 (2.03) (1.97) -- -- 8.03 (19.70) 19,979
05/31/98# 8.03 0.03 (0.41) (0.38) (0.07) -- 7.58 (4.77) 29,046
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME AVERAGE
TO AVERAGE TO AVERAGE PORTFOLIO COMMISSION
PERIOD ENDED NET ASSETS NET ASSETS TURNOVER PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alliance Growth Portfolio
2/9/93-11/30/93 0.82%+++ 0.61%+++ 73% N/A
11/30/94 0.82++ 0.37++ 146 N/A
11/30/95 0.79 0.51 138 N/A
11/30/96 0.71 0.51 121 0.0649
11/30/97 0.65 0.37 110 0.0617
05/31/98# 0.59+ 0.34+ 44 N/A
- --------------------------------------------------------------------------------------------------------------------------------
2/9/93-11/30/93 0.82+++ 2.20+++ 165 N/A
11/30/94 0.81++ 1.52++ 211 N/A
11/30/95 0.76 1.01 229 N/A
11/30/96 0.74 0.82 164 0.0534
11/30/97 0.73 0.77 217 0.0530
05/31/98# 0.70+ 0.28+ 53 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Putnam Growth Portfolio
2/9/93-11/30/93 0.97+++ 0.32+++ 40 N/A
11/30/94 0.96++ 0.31++ 54 N/A
11/30/95 0.93 (0.05) 52 N/A
11/30/96 0.90 (0.02) 63 0.0443
11/30/97 0.91 0.18 125 0.0324
05/31/98# 0.87+ 0.13+ 30 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate Portfolio
6/2/97-11/30/97 1.25+++ 3.25+++ 7 0.0600
05/31/98# 1.01+ 3.49+ 8 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Aggressive Growth Portfolio
6/3/96-11/30/96 1.05+++ 0.46+++ 47 0.0600
11/30/97 0.90 (0.13) 221 0.0600
05/31/98# 0.84+ 0.31+ 155 N/A
- --------------------------------------------------------------------------------------------------------------------------------
International Growth and Income Portfolio
6/2/97-11/30/97 1.60+++ 0.61+++ 19 0.0030
05/31/98# 1.54+ 1.80+ 22 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Global Equities Portfolio
2/9/93-11/30/93 1.50+++ 0.38+++ 58 N/A
11/30/94 1.28 0.42 67 N/A
11/30/95 1.14 1.02 106 N/A
11/30/96 1.03 1.04 70 0.0256
11/30/97 0.95 0.58 115 0.0284
05/31/98# 0.89+ 0.51+ 40 N/A
- --------------------------------------------------------------------------------------------------------------------------------
International Diversified Equities Portfolio
10/28/94-11/30/94 1.70+++ 1.60+++ -- N/A
11/30/95 1.70++ 0.76++ 52 N/A
11/30/96 1.59 0.47 53 0.0023
11/30/97 1.35 0.82 56 0.0008
05/31/98# 1.27+ 1.36+ 29 N/A
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio
6/2/97-11/30/97 1.90+++ 1.33+++ 49 0.0011
05/31/98# 1.90+ 0.67+ 33 N/A
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</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.
+ Annualized
++ During the periods indicated, 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:
# Unaudited
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------- --------------------------------------------
1993 1994 1995 1996 1997 1998 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Growth Portfolio.......... 1.56% 0.96% 0.79% 0.71% 0.65% 0.59% (0.13)% 0.23% 0.51% 0.51% 0.37% 0.34%
Growth/Phoenix Investment Counsel
Portfolio......................... 1.28 0.87 0.76 0.74 0.73 0.70 1.74 1.46 1.01 0.82 0.77 0.28
Putnam Growth Portfolio............ 1.46 1.05 0.93 0.90 0.91 0.87 (0.17) 0.22 (0.05) (0.02) 0.18 0.13
Real Estate Portfolio.............. -- -- -- -- 1.36 1.01 -- -- -- -- 3.14 3.49
Aggressive Growth Portfolio........ -- -- -- 1.09 0.90 0.84 -- -- -- 0.42 (0.13) 0.31
International Growth and Income
Portfolio......................... -- -- -- -- 2.02 1.54 -- -- -- -- 0.19 1.80
Global Equities Portfolio.......... 2.52 1.28 1.14 1.03 0.95 0.89 (0.64) 0.42 1.02 1.04 0.58 0.51
International Diversified Equities
Portfolio......................... -- 3.50 2.09 1.59 1.35 1.27 -- (0.20) 0.37 0.47 0.82 1.36
Emerging Markets Portfolio......... -- -- -- -- 2.60 1.90 -- -- -- -- 0.63 0.67
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 10
- ---------------------------------------------------------
- ---------------------------------------------------------
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 various separate accounts
(the "Accounts") of Anchor National Life Insurance Company and First SunAmerica
Life Insurance Company (collectively referred to as the "Life Companies").
The Trust issues 25 separate series of shares ("Portfolios"), each of which
represents a separately 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, Corporate Bond
Portfolio, Global Bond Portfolio, High-Yield Bond Portfolio, Worldwide High
Income Portfolio, SunAmerica Balanced Portfolio, Balanced/ Phoenix Investment
Counsel Portfolio, Asset Allocation Portfolio, Equity Income Portfolio, Utility
Portfolio, Equity Index Portfolio, Growth-Income Portfolio, Federated Value
Portfolio, Venture Value Portfolio, "Dogs" of Wall Street Portfolio, Alliance
Growth Portfolio, Growth/Phoenix Investment Counsel Portfolio, Putnam Growth
Portfolio, Real Estate Portfolio, Small Company Value Portfolio, Aggressive
Growth Portfolio, Equity Index Portfolio, International Growth and Income
Portfolio, Global Equities Portfolio, International Diversified Equities
Portfolio 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." Some
Portfolios benefit from discretionary advisory services provided by separate
registered investment advisers (each a "Subadviser"). 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 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; First American Asset
Management ("First American") serves as subadviser for the Equity Income, Small
Company Value and Equity Index Portfolios; 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; and Putnam Investment
Management, Inc. ("Putnam") serves as subadviser for the Putnam Growth,
International Growth and Income and Emerging Markets Portfolios. There is no
subadviser for the Cash Management, High-Yield Bond, SunAmerica Balanced, "Dogs"
of Wall Street 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. All other investment practices may be changed
without a vote of the shareholders. See "Shareholder Voting Rights."
The Global Bond, Worldwide High Income, International Diversified Equities and
"Dogs" of Wall Street 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. See "Dividends, Distributions and Federal Taxes."
Each of the Utility and Real Estate Portfolios intends 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. See "Investment Objectives and Policies -- Non-Diversified Status" in
the Statement of Additional Information.
7
<PAGE> 11
The Portfolios' investment objectives are discussed below. Reference to
limitations and restrictions on Portfolio investment used herein apply at the
time of purchase unless otherwise indicated. Please also see 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. ("Thomson BankWatch"), 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 categories assigned
by S&P, Moody's, Fitch, Thomson BankWatch 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 397 days 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 consist 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.
CORPORATE BOND PORTFOLIO
The Corporate Bond Portfolio seeks 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 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.
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
8
<PAGE> 12
units consisting of bonds and equity equivalents; commercial paper rated 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, 1997 were: "AAA" 10.39%; "AA" 3.47%; "A" 21.23%; "BBB" 35.24%; "BB"
11.72%; and "B" 15.85%, and 2.10% in cash. 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.
GLOBAL BOND PORTFOLIO
The investment objective of the Global Bond Portfolio is to provide investors
with 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 fixed income securities markets and by
engaging in currency transactions to enhance returns and for the purpose of
hedging its investments.
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); (iii) corporate debt securities; (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; (v)
commercial paper; and (vi) mortgage-related and asset-backed securities.
All securities purchased by the Portfolio will be rated at least BBB by S&P or
Baa by Moody's. However, the Portfolio generally intends to invest at least 50%
of its total assets in securities having the highest applicable credit quality
rating. 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 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's duration is expected to be equal to
that of its benchmark, the J.P. Morgan Global Government Bond Index, plus or
minus 2-5 years. In addition, the Portfolio will normally 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,
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including the acquisition of debt obligations at a premium or discount,
transactions in options, futures contracts, options on futures and mortgage and
interest-rate swaps, caps, collars and floors. The Portfolio may also 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,
mortgage and interest-rate swaps, 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 U.S. dollar-denominated securities or securities of U.S. issuers.
The Portfolio may invest more than 25% of its total assets in the securities of
corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Portfolio's investments in such issuers will subject the
Portfolio, to a greater extent than if investment was more limited, to the risks
of adverse securities markets, exchange rates and social, political or economic
events which may occur in those countries. Not more than 25% of the Portfolio's
total assets will be invested in securities of issuers in any other single
foreign country. 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."
HIGH-YIELD BOND PORTFOLIO
The primary investment objective of the High-Yield Bond Portfolio is high
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. 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, 1997 were: "Aaa" -- 5.17%;
"Ba" 14.04%; "B" 62.04%; and "Caa" 11.45%; and the balance 7.3% in unrated bonds
which the adviser 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, High-Risk 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
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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 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 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
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<PAGE> 15
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. The weighted average
ratings by Moody's as a percentage of all bonds held by the Portfolio during the
fiscal year ended November 30, 1997 were: "Aaa" 0.11%; "Baa" 1.11%; "Ba" 41.32%;
"B" 44.20%; "Caa" 12.56%; and the balance 0.70% in unrated bonds. See "Risk
Factors Relating to High-Yield, High-Risk Bonds" and "Risks and Considerations
Applicable to Investment in Securities of Foreign Issuers" under "Description of
Securities and Investment Techniques."
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 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 depositary
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" 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 "Options on Securities and Securities Indices"
and "Futures Contracts and Options Thereon" 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 5
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, but not limited to, 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
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<PAGE> 16
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 investments in such
companies to no more than 20% of its total assets. See "Description of
Securities and Investment Techniques -- Investment in Small Cap 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 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 make investments 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
stock. 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 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
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<PAGE> 17
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,
1997, 5.3% of the Portfolio's bond holdings were below investment grade. See
"Description of Securities and Investment Techniques -- Corporate Debt
Instruments" and "Description of Securities and Investment Techniques -- Risk
Factors Relating to High-Yield, High-Risk 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 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 397 days 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, including issuers in
emerging countries (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,
1997 were: "AAA" 60.04%; "AA" 0.36%; "A" 6.46%; "BBB" 14.48%; "BB" 15.10%; "B"
2.04%; and CCC/NR 1.52%. 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.
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio seeks long-term growth of capital and income. Under
normal market conditions, the Portfolio invests at least 65% of its total assets
in equity securities of issuers believed by the Subadviser to be characterized
by sound management, the ability to finance expected growth and the ability to
pay above average dividends.
The Portfolio invests in equity securities that have relatively high dividend
yields and which, in the Subadviser's opinion, will result in a relatively
stable Portfolio dividend with a growth rate sufficient to
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<PAGE> 18
maintain the purchasing power of the income stream. Although the Subadviser
anticipates that higher yielding equity securities will generally represent the
core holdings of the Portfolio, the Portfolio may invest in lower yielding but
higher growth equity securities to the extent that the Subadviser believes such
investments are appropriate to achieve fund balance. All securities held by the
Portfolio will normally provide current income consistent with the Portfolio's
investment objective.
The "equity securities" in which the Portfolio may invest include corporate debt
obligations that are convertible into common stock. These convertible debt
obligations may include obligations rated as low as CCC by S&P or Caa by Moody's
or which have been assigned an equivalent rating by another nationally
recognized statistical rating organization. Debt obligations rated less than BBB
by S&P or Baa by Moody's are considered to be less than "investment grade" and
are sometimes referred to as "junk bonds." Obligations rated CCC by S&P or Caa
by Moody's are considered to be of poor standing and are predominantly
speculative. For a more detailed description of the risks involved with these
securities, see "Description of Securities and Investment Techniques --
Corporate Debt Instruments" and "-- Risk Factors Relating to High-Yield,
High-Risk Bonds." If the rating of an obligation is reduced below the categories
set forth above after purchase or is discontinued, the Portfolio is not required
to sell the obligation but may consider doing so.
Purchases of less than investment grade convertible debt obligations are
intended to advance the Portfolio's objective of long-term growth of capital
through the "upside" potential of the obligations' conversion features and to
advance the Portfolio's objective of income through receipt of interest payable
on the obligations. The Portfolio will not invest more than 25% of its total
assets in convertible debt obligations that are rated less than investment
grade.
The Portfolio also may invest up to 35% of its total assets in fixed income
securities including securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, nonconvertible preferred stocks,
nonconvertible corporate debt securities, and short-term obligations including
"cash items" such as rated commercial paper and variable amount master demand
notes; U.S. dollar-denominated time and savings deposits (including certificates
of deposit); bankers' acceptances; repurchase agreements collateralized by
eligible investments of the Portfolio securities of other mutual funds which
invest primarily in debt obligations with remaining maturities of 397 days or
less (which investments also are subject to the advisory fee); and other similar
high-quality short-term U.S. dollar-denominated obligations.
Subject to the limitations stated above, the Portfolio may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on a
U.S. stock exchange or represented by American Depositary Receipts ("ADRs").
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."
In addition, the Portfolio may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering up to
25% of the equity securities owned by the Portfolio and write call options on
stock indices related to such equity securities; (iv) purchase securities on a
when-issued or delayed delivery basis; and (v) engage in the lending of fund
securities. See "Description of Securities and Investment Techniques" for more
information on these securities and strategies.
For temporary defensive purposes, the Portfolio may, without limitation, hold
cash or invest in cash items of the kinds described above. The Portfolio also
may invest not more than 35% of its total assets in cash and cash items in order
to utilize assets awaiting normal investment.
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
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<PAGE> 19
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
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.
EQUITY INDEX PORTFOLIO
The Equity Index Portfolio seeks investment results that correspond to the
performance of the S&P 500. The Equity Index Portfolio invests primarily (at
least 65% of total assets) in common stocks included in the S&P 500. The
Subadviser believes that the Portfolio's objective can best be achieved by
investing in the common stocks of approximately 50% to 100% of the issues
included in the S&P 500, depending on the size of the Portfolio.
The Portfolio is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to replicate, as closely as
possible, the composition of the S&P 500. The Portfolio includes a stock in its
investment portfolio in the order of the stock's weighting in the S&P 500,
starting with the most heavily weighted stock. Thus, the proportion of Portfolio
assets invested in a stock or industry closely approximates the percentage of
the S&P 500 represented by that stock or industry. Portfolio turnover is
expected to be well below that of actively managed mutual funds. Inasmuch as the
common stock of the Adviser's parent company (SunAmerica, Inc.) and the
Subadviser's parent company (U.S. Bancorp) are included in the S&P 500, such
stocks may be purchased by the Portfolio consistent with its indexing-based
policies.
Because the Portfolio may not always hold all of the stocks included in the S&P
500, the Portfolio will not duplicate the S&P 500's performance precisely.
However, there will be a close correlation between the Portfolio's performance
and that of the S&P 500 in both rising and falling markets. The Portfolio will
attempt to achieve a correlation between the performance of its portfolio and
that of the S&P 500 of at least 95%, without taking into account expenses of the
Portfolio. A perfect correlation would be indicated by a figure of 100%, which
would be achieved if the Portfolio's net asset value, including the value of its
dividends and capital gains distributions, increased or decreased in exact
proportion to changes in the S&P 500. The Portfolio's ability to replicate the
performance of the S&P 500 may be affected by, among other things, changes in
securities markets, the manner in which S&P calculates the S&P 500, the amount
and timing of cash flows into and out of the Portfolio, commissions, sales
charges (if any) and other expenses. Although cash flows into and out of the
Portfolio will affect portfolio turnover rate and its ability to replicate the
S&P 500's performance, investment adjustments will be made, as practicably as
possible, to account for these circumstances. In the event the Portfolio is
unable to achieve this correlation over time, the
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<PAGE> 20
Board of Trustees of the Trust will consider alternative strategies for the
Portfolio.
The Portfolio also may invest up to 20% of its total assets, in the aggregate,
in stock index futures contracts, options on stock indices, options on stock
index futures, and index participation contracts based on the S&P 500. The
Portfolio will not invest in these types of contracts and options for
speculative purposes, but rather to maintain sufficient liquidity to meet
redemption requests; to increase the level of portfolio assets devoted to
replicating the composition of the S&P 500; and to reduce transaction costs. See
"Description of Securities and Investment Techniques" for more information on
these securities and strategies. In addition, the Portfolio may engage in
securities lending described under "Description of Securities and Investment
Techniques -- Securities Lending."
For temporary defensive purposes, the Portfolio may, without limitation, hold
cash or invest in cash items including rated commercial paper and variable
amount master demand notes; U.S. dollar-denominated time and savings deposits
(including certificates of deposit); bankers' acceptances; repurchase agreements
collateralized by eligible investments of a Portfolio; and other similar high-
quality short-term U.S. dollar-denominated obligations. The Portfolio may also
invest not more than 35% of its total assets in the above items in order to
utilize assets awaiting normal investment.
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 least BBB 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" typically have a market
capitalization in excess of $1 billion. The list is subject to continuous review
and modification.
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<PAGE> 21
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. These companies may offer greater potential for capital
appreciation but may also involve certain risks. See "Description of Securities
and Investment Techniques -- Investment in Small Cap Companies."
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 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.
"DOGS" OF WALL STREET PORTFOLIO
The investment objective of the "Dogs" of Wall Street Portfolio is to seek total
return (including capital appreciation and current income) through a passively
managed strategy involving the annual selection of thirty high dividend yielding
common stocks from the Dow Jones Industrial Average ("DJIA")(1) and the broader
market. The thirty stocks will consist of (1) the ten highest yielding stocks in
the DJIA and (2) the twenty other highest yielding stocks of the largest
industrial companies in the market (with market capitalizations of at least $1
billion) that have been assessed as being of high quality from the perspective
of historical earnings and dividend performance. The Adviser will rely on
independently published reports for purposes of selecting these twenty stocks.
The Adviser will employ the same methodology, using the same analytical
parameters and benchmarks, in selecting the thirty stocks each year.
- ---------------
(1) "Dow Jones Industrial Average" is a trademark of Dow Jones & Company, Inc.
("Dow Jones"). None of the Trust, the Portfolio or SAAMCo is affiliated
with, nor is the Trust or the Portfolio sponsored by, Dow Jones. Dow Jones
has not participated in any way in the creation of the Trust or the
Portfolio or in the selection of the stocks included in the Portfolio, nor
has Dow Jones viewed or approved any information included in this
Prospectus.
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<PAGE> 22
The Portfolio's stock selection criteria is designed to implement a "value"
oriented philosophy of investing principally in securities believed to be
undervalued in the market. This philosophy reflects a contrarian approach, in
that the potential for superior relative performance is believed to be the
highest when stocks of fundamentally solid companies are out of favor. The
selection criteria is calculated to identify stocks of large, well-known
companies with solid financial strength and generous dividend yields that have
low price-earnings ratios ("P/E ratios") and have been generally overlooked by
the market.
The Portfolio invests in the thirty common stocks selected according to the
methodology described above. The Adviser will annually rebalance the Portfolio's
holdings within the first several weeks of each year according to the same
selection criteria, based on information as of the preceding December 31. The
Adviser will rebalance the Portfolio's holdings to create equal weightings among
the thirty stocks by purchasing new stocks that meet the selection criteria,
selling stocks that no longer meet the selection criteria, and adjusting its
ownership of stocks that continue to meet the criteria in order to achieve the
proper weightings of each of the thirty stocks.
The Portfolio employs a buy and hold strategy over the course of each year,
which ignores market timing and rejects active management. The Adviser
anticipates that the thirty stocks held by the Portfolio will remain the same
throughout the course of a year, despite any adverse developments concerning a
particular stock, an industry, the economy or the stock market generally.
However, due to purchases and redemptions of Portfolio shares during the year
and changes in the market value of the stock positions held by the Portfolio, it
is likely that the weightings of the stock positions in the Portfolio will
fluctuate throughout the year.
As the Portfolio's shares are sold during the year, new cash received by the
Portfolio is first used to the extent necessary to meet redemption requests. The
balance of any such cash invested weekly (or more frequently as the Adviser
deems necessary) in the thirty stocks selected for the Portfolio as of its most
recent rebalancing in proportion to the current weightings of such stocks in the
Portfolio and without any intention to rebalance the Portfolio's holdings on an
interim basis. To the extent redemptions exceed available cash, the Portfolio
generally meets redemption requests by selling stocks on a pro rata basis
(subject to rounding and avoidance of odd lots), based on the current weightings
of such stocks in the Portfolio and without any intention to rebalance the
Portfolio's holdings on an interim basis.
The Adviser intends that the Portfolio be at all times fully invested in the
stocks that are selected using the criteria described above, but reserves the
right to deviate from the investment strategy to the extent necessary to comply
with federal tax laws applicable to the Portfolio. In order to enhance its
income, the Portfolio may lend its securities and enter into repurchase
agreements. It may also seek to equitize uninvested cash through the use of
options and futures strategies. See "Description of Securities and Investment
Techniques."
HISTORICAL PERFORMANCE INFORMATION
The following tables compare the actual performance of the S&P 500 and the
hypothetical performance of a model portfolio employing the same stock selection
criteria as the "Dogs" of Wall Street Portfolio, rebalanced annually, for the
historical periods indicated. The S&P 500 is used as the performance comparison
because (1) it is the performance benchmark against which the Portfolio will be
measured; and (2) it is the index most widely recognized as representative of
the performance of the U.S. stock market. The S&P 500 is a composite index
consisting of 500 common stocks that are traded on the New York Stock Exchange
("NYSE"), American Stock Exchange and NASDAQ National Market System. The
companies that are included in the S&P 500 are leading companies of important
industry segments within the U.S. economy.
The Portfolio's actual performance may differ from that of the hypothetical
model for the following reasons: the Portfolio may not be fully invested at all
times; appreciation or depreciation in an individual stock's value may cause
stocks held by the Portfolio to be weighted unequally at any particular time;
cash surpluses and deficits from purchases and redemptions of Portfolio shares
may cause the Adviser to buy and sell stocks for the Portfolio between annual
rebalancings; the Adviser may modify slightly the Portfolio's investment
strategy as federal tax laws require; and the returns indicated in the
hypothetical model exclude commission costs, advisory fees, expenses and taxes
that would be borne by the Portfolio.
Because the returns for the model portfolio are hypothetical, they do not
represent actual trading or the impact that material economic and market factors
might have had on the Adviser's decision-making under actual circumstances.
However, except as described above, the Adviser can presently foresee no
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<PAGE> 23
circumstances that would cause deviation from the stock selection criteria used
in managing the Portfolio. All returns contained in the tables below reflect
reinvestment of dividends and other earnings. The results of the Portfolio's
strategy are based on statistical data gathered by the Adviser.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON OF S&P 500 AND HYPOTHETICAL RESULTS
OF THE STRATEGY FOR
"DOGS" OF WALL STREET PORTFOLIO
DECEMBER 31, 1988-DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following tables represent the hypothetical performance of "Dogs" of Wall
Street Portfolio obtained by applying its stock selection criteria retroactively
to December 31, 1987. The performance of the Portfolio's stock selection
criteria does not represent the performance of the Portfolio, nor does it
reflect the advisory fees, commissions, expenses or taxes which would be borne
by the Portfolio. The Portfolio's performance, as well as that of the S&P 500,
would be lower if such fees and expenses were deducted. Past performance of the
Portfolio's stock selection criteria is not predictive of future performance of
such criteria or of the Portfolio.
<TABLE>
<CAPTION>
ANNUAL RESULTS
"DOGS" OF
WALL STREET
YEAR ENDED S&P 500 STRATEGY
<S> <C> <C>
12/31/88............. 16.56% 34.4%
12/31/89............. 31.62% 32.3%
12/31/90............. -3.10% -1.1%
12/31/91............. 30.40% 39.3%
12/31/92............. 7.61% 11.9%
12/31/93............. 10.06% 12.7%
12/31/94............. 1.82% 10.2%
12/31/95............. 37.55% 36.8%
12/31/96............. 22.95% 20.8%
12/31/97............. 33.35% 31.2%
</TABLE>
<TABLE>
<CAPTION>
SUMMARY RESULTS
"DOGS" OF
WALL STREET
YEAR ENDED S&P 500 STRATEGY
<S> <C> <C>
Arithmetic average... 18.83% 22.85%
Standard deviation of
return............. 14.42% 13.82%
1-yr................. 33.35% 31.20%
3-yr compounded*..... 31.14% 29.43%
5-yr compounded*..... 20.25% 21.91%
7-yr compounded*..... 19.74% 22.74%
10-yr compounded*.... 18.03% 22.13%
</TABLE>
* Quoted return is for the most recent period ended December 31, 1997
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 from time to time purchase preferred stocks and debt securities.
Each Portfolio's Subadviser considers the factors that it believes affect
potential 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 the 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
20
<PAGE> 24
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.
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.
Risk Factors Applicable to The Real Estate Portfolio -- The Real Estate
Portfolio will generally not purchase securities rated BB by S&P or Ba by
Moody's 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.
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 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
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<PAGE> 25
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, as amended (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.
SMALL COMPANY VALUE PORTFOLIO
The Small Company Value Portfolio seeks capital appreciation. Under normal
market conditions, Small Company Value Portfolio invests at least 65% of its
total assets in equity securities of small capitalization companies. For these
purposes, small capitalization companies are deemed those with market
capitalizations of less than $1 billion at the time of purchase. In selecting
equity securities, the Subadviser utilizes a value-based selection discipline,
investing in equity securities it believes are undervalued relative to other
securities in the same industry or market at the time of purchase. In assessing
relative value, the Subadviser will consider such factors as ratios of market
price to earnings, market price to book value, market price to assets, estimated
earnings growth rate, cash flow and liquidation value.
The Portfolio also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of $1 billion or more
and in fixed income securities including securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities, nonconvertible preferred
stocks, nonconvertible corporate debt securities, and short-term obligations
including "cash items" such as rated commercial paper and variable amount master
demand notes; U.S. dollar-denominated time and savings deposits (including
certificates of deposit); bankers' acceptances; repurchase agreements
collateralized by eligible investments of the Portfolio; securities of other
mutual funds which invest primarily in debt obligations with remaining
maturities of 397 days or less (which investments also are subject to the
advisory fee); and other similar high-quality short-term U.S. dollar-
denominated obligations.
Subject to the limitations states above, the Portfolio may invest up to 25% of
its total assets in securities of foreign issuers which are either listed on a
U.S. stock exchange or represented by ADRs. 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."
In addition, the Portfolio may (i) enter into repurchase agreements; (ii) in
order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering up to
25% of the equity securities owned by the Portfolio; (iv) purchase securities on
a when-issued or delayed delivery basis; and (v) engage in the lending of fund
securities. See "Description of Securities and Investment Techniques" for more
information on these securities and strategies.
For temporary defensive purposes, the Portfolio may without limitation hold cash
or invest in cash items of the kinds described above. The Portfolio also may
invest not more than 35% of its total assets in cash and cash items in order to
utilize assets awaiting normal investment.
AGGRESSIVE GROWTH PORTFOLIO
The Aggressive Growth Portfolio seeks capital appreciation as its investment
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 -- Investment in Small Cap 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.
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
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<PAGE> 26
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 U.S.
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 U.S.
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 objective, 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 capitalizations 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 -- Investment in Small
Cap Companies."
GLOBAL EQUITIES PORTFOLIO
The investment objective of the Global Equities Portfolio is 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. or 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. or
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).
The Portfolio may, from time to time, 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.
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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 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 then
used 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. Notwithstanding the foregoing, the Portfolios may seek to
gain exposure to certain foreign markets where direct investment may be
difficult or impracticable through investment in domestic closed-end mutual
funds which invest predominately in such markets.
The Portfolio may also engage in certain options transactions and enter into
financial futures contracts and related options for hedging purposes.
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 U.S. 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
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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, 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.
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
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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.
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 no more than 10% of its total net assets 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 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. The
Equity Index and Small Company Value Portfolios may invest up to 5% of their net
assets in less than investment grade convertible debt obligations. The Equity
Income Portfolio may invest up to 25% of its net assets in less than investment
grade convertible debt obligations. Bonds rated Ca by Moody's are described as
"speculative in a high degree; often in default or
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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.
In the case of corporate debt obligations which are convertible into common
stock, these risks may be present in a greater degree where the principal amount
of the obligation is greater than the current market value of the common stock
into which it is convertible.
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 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
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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 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
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(although, like many bonds, mortgage-backed bonds may be callable by the issuer
prior to maturity).
The Corporate Bond, Global 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 Corporate Bond, Global Bond, High-Yield Bond, SunAmerica
Balanced, 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
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 397 days of the
date of 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
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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 397 days 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 397
days, they are also considered short-term debt securities.
ZERO-COUPON, PAY-IN-KIND AND DEFERRED INTEREST BONDS -- The Corporate Bond,
Global 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 as well as 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 in a segregated account. Each
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 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, certain 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 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 "Investment Objectives and
Policies -- Illiquid Securities" in the Statement of Additional Information for
a further discussion of investments in such securities.
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FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED AND DELAYED-DELIVERY
TRANSACTIONS -- Each Portfolio (except Equity Index 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 Corporate Bond, Global 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.
STRUCTURED SECURITIES -- The Global Bond, Worldwide High Income, Asset
Allocation, International Growth and Income 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
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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.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS -- The Worldwide High Income
Portfolio may invest a portion of its assets in "loan participations." By
purchasing a loan participation, the Portfolio acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Portfolio may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods or services. These claims may also be purchased at a time when the company
is in default. Certain of the loan participations acquired by the Portfolio may
involve credit facilities or other standby financing commitments which obligate
the Portfolio to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Portfolio may be unable
to sell such investments at an opportune time or may have to resell them at less
than fair market value.
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) 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
money, 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 and 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 will maintain a segregated account of cash or
other liquid assets securing the borrowing for the benefit of the lenders. 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.
INVESTMENT IN SMALL CAP COMPANIES -- The SunAmerica Balanced, Venture Value,
Small Company Value and Aggressive Growth Portfolios and certain other
Portfolios may invest in small companies having market capitalizations of under
$1 billion. While such companies may realize more substantial growth than
larger, more established companies, they may also be subject to some
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additional risks. The securities of these small companies may not be readily
marketable, making it difficult to dispose of shares when desirable. 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 then 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. In addition, 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.
RISKS AND CONSIDERATIONS APPLICABLE TO INVESTMENT IN SECURITIES OF FOREIGN
ISSUERS -- There are elements of risk and opportunity involved, when investments
in foreign issuers are made, which 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 (except the
Cash Management and Equity Index 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, among other things, on 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
nondollar 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.
AMERICAN DEPOSITARY RECEIPTS -- Certain of the Portfolios may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Because ADRs
trade on U.S. securities exchanges,
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the Portfolios' Subadvisers do not treat them as foreign securities.
Nonetheless, they are subject to many of the risks of foreign securities such as
changes in exchange rates and more limited information about foreign issuers.
FOREIGN CURRENCY TRANSACTIONS -- Currency exchange rate fluctuations are a major
area of risk and opportunity for the Global Bond, Worldwide High Income,
International Growth and Income, Global Equities, International Diversified
Equities and Emerging Markets Portfolios, and is of some risk to the other
Portfolios. Each Portfolio (other than the Cash Management and Equity Index
Portfolios), 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 (other than the Cash Management and Equity Index Portfolios and
except as described below), 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 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, Real Estate,
International Growth and Income, Global Equities, International Diversified
Equities 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.
EURO CONVERSION -- Effective January 1, 1999, several European countries will
irrevocably fix their existing national currencies to a new single European
currency unit, the "euro." Certain European investments may be subject to
additional risks as a result of this conversion. These risks include adverse tax
and accounting consequences, as well as difficulty in processing transactions.
The Adviser is aware of such potential problems and is coordinating efforts to
prevent or alleviate their adverse impact on the Portfolios. There can be no
assurance that a Portfolio will not suffer any adverse consequences as a result
of the euro conversion.
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. The
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Small Company Value and Equity Income Portfolio may each write covered call
options covering up to 25% of the equity securities it owns. Each Portfolio may
also write call and put options on any securities index composed of securities
in which it may invest. The Small Company Value Portfolio does not intend to
write call and put options on securities indices. 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. None of the
Equity Income, Small Company Value and Equity Index Portfolios will invest more
than 5% of the value of their total assets in purchased options, provided that
options which are "in the money" at the time of purchase may be excluded from
this 5% limitation. A call option is "in the money" if the exercise price is
lower than the current market price of the underlying security or index, and a
put option is "in the money" if the exercise price is higher than the current
market price.
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 or will have an absolute and immediate right to acquire such
security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Portfolio
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in liquid
assets. A put option written by a Portfolio is covered if the Portfolio
maintains liquid assets with a value equal to the exercise price in a segregated
account, or else holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held (i) is equal
to or greater than the exercise price of the put written or (ii) is less than
the exercise price of the put written if the difference is maintained by the
Portfolio in liquid assets. Put and call options written by a Portfolio may also
be covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations.
Each Portfolio (other than the Cash Management, Equity Income, Small Company
Value and Equity Index Portfolios) 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 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 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
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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. The Equity Index Portfolio will use futures
contracts and related options as a means of gaining exposure to securities in
the S&P 500.
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.
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
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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.
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MANAGEMENT
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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., an investment grade financial services company
with assets held at December 31, 1997, of approximately $52 billion. SAAMCo is
engaged in providing investment advice and management services to the Trust,
other mutual funds and private accounts. As of February 28, 1998, SAAMCo
managed, advised and/or administered assets of approximately $13.7 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 SEC 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 this section.
The annual rates of the investment advisory fees which apply to the CASH
MANAGEMENT PORTFOLIO are 0.55% on the first $100 million of assets, 0.50% on the
next $200 million and 0.45% on assets over $300 million.
The annual rates of the investment advisory fees which apply to the CORPORATE
BOND PORTFOLIO are 0.70% on the first $50 million of assets, 0.60% on the next
$100 million, 0.55% on the next $100 million and 0.50% on assets over $250
million.
The annual rates of the investment advisory fees which apply to both the GLOBAL
BOND AND ASSET ALLOCATION PORTFOLIOS are 0.75% on the first $50 million of
assets, 0.65% on the next
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$100 million, 0.60% on the next $100 million and 0.55% on assets over $250
million.
The annual rates of the investment advisory fees which apply to the HIGH-YIELD
BOND PORTFOLIO are 0.70% on the first $50 million of assets, 0.65% on the next
$100 million, 0.60% on the next $100 million and 0.55% 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% of assets.
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 0.70% on
the first $50 million of assets, 0.65% on the next $100 million, 0.60% on the
next $150 million, 0.55% on the next $200 million, and 0.50% on assets over $500
million.
The annual rates of the investment advisory fees which apply to the UTILITY AND
FEDERATED VALUE PORTFOLIOS are 0.75% on the first $150 million of assets, 0.60%
on the next $350 million and 0.50% on assets over $500 million.
The annual rate of the investment advisory fees which apply to the EQUITY INCOME
PORTFOLIO is 0.65% of assets.
The annual rate of the investment advisory fees which apply to the SMALL COMPANY
VALUE PORTFOLIO is 1.00% of assets.
The annual rate of the investment advisory fees which applies to the "DOGS" OF
WALL STREET PORTFOLIO is 0.60% of assets.
The annual rates of the investment advisory fees which apply to the VENTURE
VALUE AND REAL ESTATE PORTFOLIOS are 0.80% on the first $100 million of assets,
0.75% on the next $400 million and 0.70% on assets over $500 million.
The annual rates of the investment advisory fees which apply to the PUTNAM
GROWTH PORTFOLIO are 0.85% on the first $150 million of assets, 0.80% on the
next $150 million and 0.70% on assets over $300 million.
The annual rates of the investment advisory fees which apply to the AGGRESSIVE
GROWTH PORTFOLIO are 0.75% on the first $100 million of assets, 0.675% on the
next $150 million, 0.625% on the next $250 million and 0.60% on assets over $500
million.
The annual rate of the investment advisory fees which apply to the EQUITY INDEX
PORTFOLIO is 0.40% of assets.
The annual rates of the investment advisory fees which apply to the
INTERNATIONAL GROWTH AND INCOME PORTFOLIO are 1.00% on the first $150 million of
assets, 0.90% on the next $150 million and 0.80% 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 0.90% on the first $50 million of assets, 0.80% on the
next $100 million, 0.70% on the next $150 million and 0.65% on Assets over $300
million.
For the fiscal year ended November 30, 1997, the following Portfolios paid to
SAAMCo a fee equal to the following percentage of average daily net assets: Cash
Management Portfolio -- 0.54%, Corporate Bond Portfolio -- 0.70%, Global Bond
Portfolio -- 0.72%, High-Yield Bond Portfolio -- 0.66%, Worldwide High Income
Portfolio -- 1.00%, SunAmerica Balanced Portfolio -- 0.70%, Balanced/ Phoenix
Investment Counsel Portfolio -- 0.68%, Asset Allocation Portfolio -- 0.61%,
Utility Portfolio -- 0.75%, Growth-Income Portfolio -- 0.60%, Venture Value
Portfolio -- 0.74%, Alliance Growth Portfolio -- 0.59%, Growth/Phoenix
Investment Counsel Portfolio -- 0.65%, Putnam Growth Portfolio -- 0.83%,
Aggressive Growth Portfolio -- 0.75%, Global Equities Portfolio -- 0.76%,
Federated Value Portfolio -- 0.75% and International Diversified Equities
Portfolio -- 1.00%. For the period June 2, 1997 (commencement of operations)
through November 30, 1997, the following Portfolios paid to SAAMCo a fee equal
to the following percentage of average daily net assets: Real Estate
Portfolio -- 0.69%, International Growth and Income Portfolio -- 0.58% and
Emerging Markets Portfolio -- 0.55%.
The advisory fees for the Putnam Growth Portfolio for the fiscal year ended
November 30, 1997 was calculated at the annual rate set forth in the Statement
of Additional Information under "Investment Advisory and Management
Agreement -- Advisory Fees."
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%, "Dogs" of
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Wall Street Portfolio -- 0.85%, Utility Portfolio -- 1.05%, Federated Value
Portfolio -- 1.05%, Real Estate Portfolio -- 1.25%, International Growth and
Income Portfolio -- 1.60%, Emerging Markets Portfolio -- 1.90%, Equity Index
Portfolio -- 0.55%, Equity Income Portfolio -- 0.95% and Small Company Value
Portfolio -- 1.40%. 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. For the fiscal year ended November 30, 1997, such recoupments were
as follows: SunAmerica Balanced Portfolio -- 0.02%; Federated Value
Portfolio -- 0.05%; and Aggressive Growth Portfolio -- 0.01%.
The term "Assets" means the average daily net assets of the Portfolio. The
investment advisory fees are accrued daily and paid monthly.
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 an Executive 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.
The Domestic Equity Investment Team is responsible for managing the AGGRESSIVE
GROWTH PORTFOLIO, the equity component of the SUNAMERICA BALANCED PORTFOLIO and
the "DOGS" OF WALL STREET PORTFOLIO. The Team is composed of eight investment
professionals and traders, some of whom may focus more heavily on particular
Portfolios or particular aspects of the domestic equity markets. Donna Calder
has supervisory responsibility for the Aggressive Growth Portfolio. Ms. Calder
is a Vice President of SAAMCo and has been a portfolio manager with the firm
since March 1998. Prior to joining SAAMCo, Ms. Calder was the Founder and
General Partner of Manhattan Capital Partners, L.P. Francis D. Gannon has
supervisory responsibility for the equity component of the SunAmerica Balanced
Portfolio and the "Dogs" of Wall Street Portfolio. Mr. Gannon joined SAAMCo as
an equity analyst in 1993.
SUBADVISERS AND PORTFOLIO MANAGEMENT -- 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.
Alliance Capital Management L.P. The Subadviser for the Growth-Income, Alliance
Growth and Global Equities Portfolios is Alliance. 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 totaling over $218.7 billion as of
December 31, 1997. Alliance serves its clients, who primarily are major
corporate employee benefit funds, investment companies, foundations, endowment
funds and public employee retirement systems. As of December 31, 1997, Alliance
was retained as an investment manager of employee benefit fund assets for 28 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 and Alliance Growth
Portfolios is 0.35% on the first $50 million of Assets, 0.30% on the next $100
million, 0.25% on the next $150 million, 0.20% on the next $200 million and
0.15% on Assets over $500 million; and with respect to the Global Equities
Portfolio is 0.50% on the first $50 million of Assets, 0.40% on the next $100
million, 0.30% on the next $150 million and 0.25% on Assets over $300 million.
For the fiscal year ended November 30, 1997, 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 -- 0.25%,
Alliance Growth Portfolio -- 0.24%, and Global Equities Portfolio -- 0.36%.
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 and joined the company in 1984.
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Michael R. Baldwin and Bruce W. Calvert have served as co-portfolio managers of
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 and joined the
company in 1989. Mr. Calvert is Vice Chairman and Chief Investment Officer, and
joined Alliance in 1973. Mr. Pelensky is a Vice President of Alliance and joined
the company in 1994. Prior to joining Alliance, Mr. Pelensky was a portfolio
manager and analyst with Affinity Investment Advisors and BEA Associates.
Mr. Pelensky has also served as co-portfolio manager of the domestic equity
component of the GLOBAL EQUITIES PORTFOLIO since June 30, 1995 and Stephen
Beinhacker has served as co-portfolio manager of the foreign equity component of
the Global Equities Portfolio since February 1997. Mr. Beinhacker is a Director
and Vice President of Alliance and joined the company in 1992.
Davis Selected Advisers, L.P. The Subadviser of the Venture Value and Real
Estate Portfolios is Davis Selected, 124 East Marcy Street, Santa 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 February 28,
1998, Davis Selected had over $16.58 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 0.45% on the first $100 million of Assets, 0.40% on the next $400
million and 0.35% on Assets over $500 million. For the fiscal year ended
November 30, 1997, SAAMCo paid to Davis Selected, with respect to the Venture
Value and Real Estate Portfolios, a fee equal to 0.39% and 0.22%, respectively,
of each Portfolio's average daily net assets.
Christopher C. Davis has served as portfolio manager of the VENTURE VALUE
PORTFOLIO since October 1994. He has been employed by Davis Selected since
September, 1989 as a research analyst, assistant portfolio manager, co-portfolio
manager, and portfolio manager, working side by side with Shelby M.C. Davis.
Andrew A. Davis has served as the primary portfolio manager of the REAL ESTATE
PORTFOLIO since October 1994. 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.
Federated Investment Counseling. The Subadviser for the Corporate Bond, Utility
and Federated Value Portfolios is Federated, 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 $139.5 billion invested across more
than 300 funds under management and/or administration as of December 31, 1997
Federated Investors is one of the largest mutual fund investment managers in the
U.S.
The portion of the annual investment advisory fees received by SAAMCo which is
paid to Federated with respect to the Corporate Bond Portfolio is 0.30% on the
first $25 million of Assets, 0.25% on the next $25 million, 0.20% on the next
$100 million and 0.15% on Assets over $150 million; and with respect to each of
the Utility and Federated Value Portfolios is 0.55% on the first $20 million of
Assets, 0.35% on the next $30 million, 0.25% on the next $100 million, 0.20% on
the next $350 million and 0.15% on Assets over $500 million. For the fiscal year
ended November 30, 1997, 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 -- 0.55%, Federated Value -- 0.46%, and
Corporate Bond Portfolio -- 0.27%.
Joseph M. Balestrino and Mark E. Durbiano have served as co-portfolio managers
of the CORPORATE BOND PORTFOLIO since May 1996. 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
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Advisers since January 1996. From 1988 through 1995, Mr. Durbiano was a Vice
President of Federated Advisers. Mr. Durbiano is a Chartered Financial Analyst.
Linda A. Duessel has served as portfolio manager of the UTILITY PORTFOLIO since
June 1996. Ms. Duessel joined Federated Investors in 1991, and has been a Vice
President of Federated Advisers since 1995. She was an Assistant Vice President
of Federated Advisers from 1991 until 1995. Ms. Duessel is a Certified Public
Accountant and a Chartered Financial Analyst.
Scott B. Schermerhorn and Michael P. Donnelly have served as co-portfolio
managers of the FEDERATED VALUE PORTFOLIO since May 1996 and October 1997,
respectively. 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. Mr. Donnelly joined Federated Investors in 1989 as an Investment Analyst
and has been a Vice President of Federated Investors since 1994. He served as an
Assistant Vice President of an affiliate of Federated Investors from 1992 to
1994. Mr. Donnelly is a Chartered Financial Analyst.
First American Asset Management. The Subadviser for the Equity Income, Small
Company Value and Equity Index Portfolios is First American, a division of U.S.
Bank National Association. First American is located at 601 Second Avenue South,
Minneapolis, Minnesota 55402. First American has acted as an investment adviser
to First American Investment Funds, Inc. since its inception in 1987 and has
acted as investment adviser to First American Funds, Inc. since 1982 and to
First American Strategy Funds, Inc. since 1996. As of July 31, 1998, First
American was managing accounts with an aggregate value of approximately $77
billion, including mutual fund assets of approximately $31 billion. U.S.
Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402, is the holding
company for First American.
The portion of the annual investment advisory fees received by SAAMCo which is
paid to First American with respect to the Equity Income Portfolio is 0.30% of
all assets; with respect to the Equity Index Portfolio is 0.125% of all assets;
and with respect to the Small Company Value Portfolio is 0.80% of all assets.
The EQUITY INCOME PORTFOLIO is managed by a committee comprised of Gerald C.
Bren, James Doak, Albin S. Dubiak, Cori B. Johnson, John M. Murphy, Roland P.
Whitcomb and Glenn E. Johnson, whose backgrounds are set forth below. The SMALL
COMPANY VALUE FUND PORTFOLIO is managed by a committee comprised of Albin S.
Dubiak, John D. Grangaard, Michael K. Sabbann, Douglas K. Rose, Robert L. Buss,
Anthony W. Hipple and Frank G. Magdalen, whose backgrounds also are set forth
below.
James Doak joined First American in 1982 after serving for two years as vice
president of INA Capital Advisors and ten years as Vice President of
Loomis-Sayles & Co. He has managed assets for individual and institutional
clients, specializing in equity investments. Mr. Doak received his bachelor's
degree from Brown University and his master's degree in business administration
from Wharton School of Business. He is a Chartered Financial Analyst.
John M. Murphy, Jr. is Chief Investment Officer of First American, having joined
the Subadviser in 1984. He has more than 30 years in the investment management
field and served with Investment Advisers, Inc. and Blyth, Eastman, Dillon & Co.
before joining First American. Mr. Murphy received his bachelor's degree from
Regis College.
Gerald C. Bren joined First American in 1972 as an investment analyst. Mr. Bren
received his master's degree in business administration from the University of
Chicago. He is a Chartered Financial Analyst.
Albin S. Dubiak began his investment career as a security trader with The First
National Bank of Chicago in 1963 before joining First American as an investment
analyst in 1969. Mr. Dubiak received his bachelor's degree from Indiana
University and his master's degree in business administration from the
University of Arizona.
Cori B. Johnson joined First American in 1991 as a securities analyst. Ms.
Johnson received her bachelor's degree from Concordia College and her master's
degree in business administration from the University of Minnesota. She is a
Chartered Financial Analyst.
Roland P. Whitcomb, Jr. joined First American in 1986 after serving as an
account executive with Smith Barney & Co. since 1979. Mr. Whitcomb received his
bachelor's degree from the University of Chicago. He is a Chartered Financial
Analyst.
Douglas K. Rose joined First American in 1996 and has 10 years of investment
industry experience. Mr. Rose has analytic responsibilities for the business
services, environmental services, leisure and restaurant/lodging industries. Mr.
Rose holds a
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bachelor's degree from the University of Nebraska, and a master's degree in
business administration from the University of Minnesota. He is a Chartered
Financial Analyst.
Robert L. Buss joined First American in 1989 and has nine years of investment
industry experience. In 1996, Mr. Buss began analytical work in the equity
research area covering electric equipment, machinery and diversified
manufacturing. Mr. Buss holds a bachelor's degree in economics from the
University of Minnesota.
Anthony W. Hipple is primarily responsible for portfolio analytics and
screening. Mr. Hipple joined First American in 1996 and has four years of
investment industry experience. Mr. Hipple holds a bachelor's degree from the
University of Northern Iowa and a master's degree in business administration
from the University of Iowa.
Frank G. Magdalen joined First American in 1979 and has 24 years of investment
industry experience. Prior to joining First American, he was with the First
Interstate and Farmers Group. Mr. Magdalen received his bachelor's degree from
the University of Portland and his master's degree in business administration
from the University of Southern California. He is a Chartered Financial Analyst
and past president of the Portland Society of Financial Analysts.
Glenn E. Johnson joined First American in 1989 and has 13 years of investment
industry experience. Prior to joining First American, he was an analyst with
Piper Jaffray Inc. Mr. Johnson received his bachelor's degree and his master's
degree in business administration from the University of Minnesota. He is a
Chartered Financial Analyst.
Michael K. Sabbann joined First American in 1998 and has 11 years of investment
industry experience. Mr. Sabbann is responsible for analyzing and recommending
equity investments in small market capitalization companies for the Small
Company Value Portfolio. Mr. Sabbann received an MBA from the University of
Minnesota's Carlson School of Business in 1986 and a BA in chemistry from the
University of Minnesota in 1979. He is a Certified Financial Analyst.
John D. Grangaard joined First American in 1998 and has a diverse background
with 18 years of experience in the financial industry. Mr. Grangaard's
responsibilities include analysis for the financial industry in managing the
Small Company Value Portfolio. His professional responsibilities have included
work in securities analysis, corporate finance and banking, venture capital,
asset liability management and strategic planning. Mr. Grangaard holds a B.A. in
English from Yale University, an MBA in finance from the University of Minnesota
and a JD from the University of North Dakota.
The EQUITY INDEX PORTFOLIO is managed by James S. Rovner and Evan C. Lundquist.
James S. Rovner joined First American in 1986 and has managed assets for
institutional and individual clients for over 15 years, specializing in equity
and balanced investment strategies. Mr. Rovner received his bachelor's degree
and his master's degree in business administration from the University of
Wisconsin. He is a Chartered Financial Analyst.
Evan C. Lundquist joined First American in 1993 and has four years of investment
industry experience. Mr. Lundquist has analytic responsibilities for
paper/forest products, metals and mining, steel, engineering and construction,
and building and appliances industries. Mr. Lundquist received his bachelor's
degree from St. Mary's College.
Goldman Sachs Asset Management. The Subadviser for the Asset Allocation
Portfolio is GSAM, a separate operating division of Goldman, Sachs & Co.
Goldman Sachs Asset Management-International. 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 February 23, 1998, GSAM, together with its affiliates,
acted as investment adviser, administrator or distributor for approximately $148
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 Organization Limited, a United Kingdom self-regulatory organization.
GSAM and GSAM-International are able to draw on the research and
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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 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 0.40% on the
first $50 million of Assets, 0.30% on the next $100 million, 0.25% on the next
$100 million and 0.20% on Assets over $250 million. For the fiscal year ended
November 30, 1997, SAAMCo paid to GSAM, with respect to the Asset Allocation
Portfolio, a fee equal to 0.26% of average daily net assets. 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 0.40% on the first
$50 million of Assets, 0.30% on the next $100 million, 0.25% on the next $100
million and 0.20% on Assets over $250 million. For the fiscal year ended
November 30, 1997, SAAMCo paid to GSAM-International, with respect to the Global
Bond Portfolio, a fee equal to 0.36% of the Portfolio's average daily net
assets.
Greg Gigliotti, Vice President of GSAM, Thomas S. Price, Vice President of GSAM,
Lawrence S. Sibley, Vice President of GSAM and Karma Wilson, Vice President of
GSAM serve as co-portfolio managers of the equity portion of the ASSET
ALLOCATION PORTFOLIO. Mr. Gigliotti joined GSAM in 1997. From 1996 to 1997 he
was a Vice President and senior analyst at Franklin Mutual Advisors, Inc., the
asset management division of Franklin Resources, Inc. From 1989 to 1996 he was a
Vice President and senior analyst at Heine Securities Corporation which was
purchased by Franklin Resources, Inc. Mr. Price joined GSAM in 1997. From 1996
to 1997 he was a Vice President and senior analyst at Franklin Mutual Advisors,
Inc., the asset management division of Franklin Resources, Inc. From 1993 to
1996 he was a Vice President and senior analyst at Heine Securities Corporation
which was purchased by Franklin Resources, Inc. Mr. Sibley joined GSAM in 1997.
From 1994 to 1997 he headed Institutional Equity Sales at J.P. Morgan Securities
and from 1987 to 1994, he was a principal of Sanford C. Bernstein & Co. in its
Institutional Sales Department. Ms. Wilson joined GSAM in 1994. Prior to 1994,
she was an investment analyst with Bankers Trust Australia Ltd. Before 1992 she
was employed at Authur Andersen LLP.
Jonathan A. Beinner and Richard C. Lucy have served as co-portfolio managers of
the fixed income portion of the Asset Allocation Portfolio since its inception
date of July 1, 1993. Mr. Beinner is a Managing Director of Goldman, Sachs and
Co. -- Head of GSAM's U.S. Fixed Income Department, where he joined the Funds
Group in 1990. Mr. Lucy is a Vice President of Goldman, Sachs and Co.'s Fixed
Income Department, where he joined the Funds Group in 1992.
Stephen C. Fitzgerald and Andrew F. Wilson serve as co-portfolio managers of the
GLOBAL BOND PORTFOLIO. Mr. Fitzgerald has served as co-portfolio manager since
the inception date of July 1, 1993 and Mr. Wilson has served as co-portfolio
manager since December 1, 1995. Mr. Fitzgerald, an Executive Director and Chief
Investment Officer for international fixed income in the London office, joined
GSAM-International in 1992. Mr. Wilson, an Executive Director and Portfolio
Manager for international fixed income in the London office, joined
GSAM-International in December 1995. Prior to joining GSAM-International, Mr.
Wilson spent three years as an Assistant Director of Rothschild Asset
Management, where he was responsible for managing global and international bond
portfolios, with specific focus on the U.S., Canadian, Australian and Japanese
economies.
Morgan Stanley Asset Management Inc. The Subadviser of the Worldwide High
Income and International Diversified Equities Portfolios is MSAM, 1221 Avenue of
the Americas, New York, New York 10020. MSAM is a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co., and provides a broad range of portfolio
management services to customers in the United States and abroad. As of February
28, 1998, MSAM, together with its affiliated institutional investment management
companies, had approximately $154.6 billion of assets under management
(inclusive of assets under fiduciary advisory control).
Morgan Stanley Dean Witter & Co. is a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
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 0.65% on Assets up to $350 million and 0.60%
on Assets thereafter. For the fiscal year ended November 30, 1997, SAAMCo paid
to MSAM, with respect to the International Diversified Equities Portfolio and
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Worldwide High Income Portfolio, a fee equal to 0.65% of each Portfolio's
average daily net assets.
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.
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 of the
Portfolio since July 1, 1995. Mr. Biggs is Chairman and Chief Investment Officer
of MSAM and a Director of Morgan Stanley Dean Witter & Co. He joined Morgan
Stanley in 1973 as a General Partner and Managing Director and is a member of
Morgan Stanley Dean Witter & Co.'s Board of Directors and of the Management
Committee. Ms. Bovich is a Managing Director of MSAM and is responsible for
product development, portfolio management and communication of asset allocation
strategy. She joined MSAM, as a Principal in 1993. Prior to joining MSAM, 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 MSAM
and joined the company in 1986 as an Analyst. From 1992 through 1996 she served
as a Vice President of MSAM.
Phoenix Investment Counsel, Inc. The Subadviser of the Growth/Phoenix
Investment Counsel and Balanced/Phoenix Investment Counsel Portfolios is
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 December 31, 1997,
Phoenix Duff & Phelps through its affiliated companies, had over $46.4 billion
in total assets under management for all its clients. Phoenix, the subadviser,
had in excess of $22.2 billion under management as of December 31, 1997.
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 0.35% on the first $50
million of Assets, 0.30% on the next $100 million; 0.25% on the next $150
million; 0.20% on the next $200 million and 0.15% on Assets over $500 million.
For the fiscal year ended November 30, 1997, SAAMCo paid to Phoenix, with
respect to the Balanced/Phoenix Investment Counsel and Growth/Phoenix Investment
Counsel Portfolios, a fee equal to 0.33% and 0.30%, respectively, of each
Portfolio's average daily net assets.
The Large Cap Growth Equity Investment Team is responsible for managing the
GROWTH/PHOENIX INVESTMENT COUNSEL PORTFOLIO. The Team is composed of 20
investment professionals and traders, some of whom may focus more heavily on
particular Portfolios or particular aspects of the domestic equity markets.
Pierre Trinque has supervisory responsibilities for the GROWTH/PHOENIX
INVESTMENT COUNSEL PORTFOLIO. Mr. Trinque has been with Phoenix since 1985.
The Large Cap Growth Equity Investment Team is responsible for managing the
equity component of the BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO. The Team
is composed of 20 investment professionals and traders, some of whom may focus
more heavily on particular Portfolios or particular aspects of the domestic
equity markets. Pierre Trinque has supervisory responsibilities for the equity
component of the BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO. Mr. Trinque has
been with Phoenix since 1985. The Fixed Income Team is responsible for managing
the fixed component of the BALANCED/ PHOENIX INVESTMENT COUNSEL PORTFOLIO. The
Team is composed of 16 investment professionals and traders, some of whom may
focus more heavily on particular Portfolios or particular sectors of the fixed
income markets. Christopher J. Kelleher has supervisory responsibilities for the
fixed component of the BALANCED/PHOENIX INVESTMENT COUNSEL PORTFOLIO. Mr.
Kelleher has been with Phoenix since 1980.
Putnam Investment Management, Inc. The Subadviser of the Putnam Growth,
International Growth and Income and Emerging Markets Portfolios is Putnam, 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 $256 billion as of February 28, 1998. Putnam is
a subsidiary of Putnam Investments, Inc., which, other than a minority interest
owned by employees, is wholly owned by Marsh & McLennan Companies, Inc., a
publicly owned holding company whose principal
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<PAGE> 47
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 0.50% on the first
$150 million of Assets, 0.45% on the next $150 million of Assets and 0.35% 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, 1997, with
respect to the International Growth and Income and Emerging Markets Portfolios,
and for the period April 15, 1997 through November 30, 1997, with respect to the
Putnam Growth Portfolio, SAAMCo paid to Putnam, a fee equal to 0.32%, 0.50% and
0.33%, respectively. For the period December 1, 1996 through April 14, 1997,
SAAMCo paid to the Portfolio's predecessor subadviser, Provident Investment
Counsel, Inc., with respect to the Provident Growth Portfolio a fee equal to
0.15% 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 0.65% on the first $150 million of Assets, 0.55% on the next
$150 million of Assets and 0.45% on Assets over $300 million. The portion of the
annual investment 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, 0.95% on the next $150 million of Assets and 0.85% on Assets over $300
million.
C. Beth Cotner, Richard England, Manuel H. Weiss and David Santos have served as
co-portfolio managers of the PUTNAM GROWTH PORTFOLIO since April 1997. Ms.
Cotner, a Senior Vice President of Putnam 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 of Putnam has
been an investment professional with Putnam since 1992. Mr. Weiss, a Senior Vice
President of Putnam has been an investment professional with Putnam since 1987.
Mr. Santos, a Vice President of Putnam has been an investment professional with
Putnam since 1986.
Deborah F. Kuenstner and George W. Stairs have served as co-portfolio managers
of the INTERNATIONAL GROWTH AND INCOME PORTFOLIO since March 1998. Ms. Kuenstner
is a Senior Vice President of Putnam. Prior to March 1997, she was Senior
Portfolio Manager at Dupont Pension Fund Management. Mr. Stairs is a Senior Vice
President of Putnam. Prior to July 1994, he was an Associate at Value Quest Ltd.
Thomas R. Haslett, Managing Director of Putnam and J. Peter Grant, Senior Vice
President of Putnam, serve as co-portfolio managers of the EMERGING MARKETS
PORTFOLIO. Mr. Haslett has been an investment professional with Putnam since
1996. Prior to December 1996, he was a Managing Director of Montgomery Asset
Management, Ltd. Mr. Grant has been an investment professional with Putnam since
1973.
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 Equity Income, Small
Company Value, "Dogs" of Wall Street, and Equity Index Portfolios) are contained
in the section entitled "Financial Highlights." The portfolio turnover rates for
the following Portfolios are not expected to exceed the stated percentages:
"Dogs" of Wall Street Portfolio -- 25%; Equity Income Portfolio -- 30%; Equity
Index Portfolio -- 10%; and Small Company Value Portfolio -- 40%. 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 Code, however, the contract owners 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).
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<PAGE> 48
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.
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- ---------------------------------------------------------
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; and (b) 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 intends to meet these qualification requirements.
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 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.
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. The Real Estate
Portfolio may invest in REITs that hold residual interests in real estate
mortgage investment conduits ("REMICs"). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Portfolio's
income from a REIT that is attributable to the REIT's residual interest in a
REMIC (referred to in the Code as an "excess inclusion") will be subject to
federal income tax. These regulations are also expected to provide that excess
inclusion income of a regulated investment company, such as the Portfolio, will
be allocated to shareholders of the regulated investment company in proportion
to the dividends received by such shareholders, with the same consequences as if
the shareholders held the related REMIC residual interest directly.
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
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<PAGE> 49
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. Recently enacted legislation provides
that the Portfolio may make a "mark-to-market" election with respect to any
stock it holds of a PFIC, if such stock is marketable (as defined for purposes
of such legislation). 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. Such mark-to-market gain will be treated as ordinary
income. 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 its
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.
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- ---------------------------------------------------------
PRICE OF SHARES
- ---------------------------------------------------------
- ---------------------------------------------------------
The Portfolios are open for business on any day the 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 on the NYSE
(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.
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- ---------------------------------------------------------
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, will 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
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<PAGE> 50
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.
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- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------
- ---------------------------------------------------------
PricewaterhouseCoopers LLP has been selected as independent accountants for the
Trust.
- ---------------------------------------------------------
- ---------------------------------------------------------
GENERAL INFORMATION
- ---------------------------------------------------------
- ---------------------------------------------------------
YEAR 2000 READINESS
Many services provided to the Trust and its shareholders by the Adviser rely on
both the smooth functioning of the Adviser's computer and computer-based systems
as well as those of its outside service providers. Many computer and
computer-based systems cannot distinguish the year 2000 from the year 1900
because of the way systems encode and calculate dates. This Year 2000 Issue
potentially could have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing and account services. The Adviser
recognizes the importance of the Year 2000 Issue and is taking appropriate steps
necessary in preparation of the year 2000. The Adviser fully anticipates that
its systems and those of its outside service providers will be adapted in time
for the year 2000, and to further this goal it has coordinated a plan to repair,
adapt or replace systems that are not Year 2000 compliant, and has obtained
similar assurances from its outside service providers. The Adviser expects to
complete its plan significantly by the end of the 1998 calendar year and then
perform appropriate systems testing during the 1999 calendar year.
- ---------------------------------------------------------
- ---------------------------------------------------------
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.
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<PAGE> 51
FOR MORE INFORMATION
The following documents contain more information about the Portfolios and are
available free of charge upon request:
ANNUAL/SEMI-ANNUAL REPORTS. Contain financial statements, performance data
and information on portfolio holdings. The annual report also contains a
written analysis of market conditions and Portfolio performance for the
Portfolios' most recently completed fiscal year.
STATEMENT OF ADDITIONAL INFORMATION ("SAI"). Contains additional
information about the Portfolios' policies, investment restrictions and
business structure. This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Portfolios
by contacting:
SunAmerica Series Trust
P.O. Box 54299
Los Angeles, CA 90054-0299
1-800-445-SUN2
or
by calling your broker or financial advisor.
Information about the Portfolios (including the SAI) can be reviewed and copied
at the Public Reference Room of the Securities and Exchange Commission ("SEC"),
Washington, D.C. Call (800) SEC-0330 for information on the operation of the
Public Reference Room. Information about the Portfolios is also available on the
SEC's web-site at http://www.sec.gov and copies may be obtained upon payment of
a duplicating fee by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
<PAGE> 52
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
November 15, 1998
<PAGE> 53
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
INVESTMENT RESTRICTIONS OF THE CASH MANAGEMENT PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
TRUST OFFICERS AND TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-33
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-35
SUBADVISORY AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-38
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
PRICE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
EXECUTION OF PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-43
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-48
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-49
</TABLE>
B-2
<PAGE> 54
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.
Shares of the Trust are held by separate accounts of 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. Certain of the other Portfolios may also invest their
assets to varying degrees in money market instruments. The money market
instruments that such Portfolios may invest in include the following:
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 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
B-3
<PAGE> 55
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% of the Cash Management Portfolio's assets 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 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 a
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.
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Bankers' Acceptances. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank
and of the drawer to pay the full amount of the instrument upon
maturity.
Variable Amount Master Demand Notes. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because
master demand notes are direct lending arrangements between a
Portfolio and the issuer, they are not normally traded. Although there
is no secondary market in the notes, a Portfolio may demand payment of
principal and accrued interest at any time. While the notes are not
typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail,
financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. The Adviser or Subadviser
will consider the earning power, cash flow, and other liquidity ratios
of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand.
Corporate Bonds and Notes. The Cash Management Portfolio may purchase
corporate obligations that mature or that may be redeemed in 397 days
or less. These obligations originally may have been issued with
maturities in excess of 397 days. 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.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
The Equity Income, Small Company Value and Equity Index Portfolios may
invest in U.S. Treasury inflation-protection securities, which are issued by
the United States Department of Treasury ("Treasury") with a nominal return
linked to the inflation rate in prices. The index used to measure inflation
is the non-seasonally adjusted U.S. City Average All Items Consumer Price
Index for All Urban Consumers ("CPI-U").
The value of the principal is adjusted for inflation, and pays
interest every six months. The interest payment is equal to a fixed percentage
of the inflation-adjusted value of the principal. The final payment of
principal of the security will not be less than the original par amount of the
security at issuance.
The principal of the inflation-protection security is indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index
ratio for any date is the ratio of the reference CPI applicable to such date
to the reference CPI applicable to the original issue date. Semiannual coupon
interest is determined by multiplying the inflation-adjusted principal amount
by one-half of the stated rate of interest on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever is
larger, is paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than the
original principal value of the security, an additional amount is paid at
maturity so that the additional amount plus the inflation-adjusted principal
equals the original principal amount. Some inflation-protection securities may
be stripped into principal and interest components. In the case of a stripped
security, the holder of the stripped principal component would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to
the first day of the month and the reference CPI applicable to the first day of
the following month.
Any revisions the Bureau of Labor Statistics (or successor agency)
makes to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In
the case that the CPI-U for a particular month is not reported by the last day
of the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued
series with the new price index series. Determinations of the Secretary of the
Treasury in this regard are final.
Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
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 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
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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 Global Bond Portfolio, Asset Allocation
Portfolio, Emerging Markets Portfolio, Worldwide High Income Portfolio and the
International Growth and 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
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.
A 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
certain 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 Portfolios 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 paper and obligations issued or guaranteed by the U.S.
government or any of its political subdivisions, agencies or instrumentalities)
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and preferred stock. These fixed-income securities may have equity features,
such as conversion rights or warrants, and the Portfolios may invest up to 10%
of their total assets in equity features, such as conversion rights or
warrants, and the Portfolios may invest up to 10% of their total assets in
equity securities other than preferred stock (e.g., common stock, warrants and
rights and limited partnership interests). The Portfolios may not invest more
than 5% of their 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. Certain of the Portfolios
may invest their assets, to varying degrees, 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 150 countries which are considered to be emerging countries.
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. Not withstanding the foregoing, with respect to
Emerging Markets Portfolios, in addition to the exclusions listed above, the
following countries should also be excluded from the countries considered
emerging markets: Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom.
In selecting emerging country debt securities for investment by a
Portfolio, the Subadviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
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 Portfolios expect that their
investments in emerging country debt securities will be made primarily in some
or all of the following emerging countries:
<TABLE>
<S> <C> <C>
Argentina Indonesia Poland
Brazil Malaysia Portugal
Chile Mexico South Africa
Czech Republic Morocco Thailand
Egypt Pakistan Turkey
Greece Peru Uruguay
Hungary Philippines Venezuela
</TABLE>
As opportunities to invest in debt securities in other emerging
countries develop, the Portfolios expect to expand and further diversify the
emerging countries in which they invest. While the Portfolios generally are
not restricted in the portion of their assets which may be invested in a single
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country or region, it is anticipated that, under normal circumstances, each
Portfolio's assets will be invested in at least three countries.
A 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 deemed to be
"investment companies" as defined in the Investment Company Act of 1940, as
amended, (the "1940 Act"). As a result, a Portfolio's investment in such
securities may be limited by certain investment restrictions contained in the
1940 Act.
A 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. A 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 (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in
Argentina, Brazil, Bulgaria, Costa Rica, Croatia, the Dominican Republic,
Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines,
Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have been issued only
relatively recently, and for that reason do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds. Brady Bonds are often viewed as
having three or four valuation components: the collateralized repayment of
principal at final maturity; the collateralized interest payments; the
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the
"residual risk"). In light of the residual risk of Brady Bonds and the history
of defaults of countries issuing Brady Bonds with respect to commercial bank
loans by public and private entities, investments in Brady Bonds may be viewed
as speculative.
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Emerging country debt securities held by a 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 a Portfolio will
generally be listed but not traded on a securities exchange, and non-U.S.
dollar-denominated securities held by the Portfolios may or may not be listed or
traded on a securities exchange. A 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 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 judgment in a court outside the United States.
GLOBAL FIXED-INCOME SECURITIES. Certain of the Portfolios may invest
their assets, to varying degrees, in global fixed-income securities. These 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 a
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. A
Portfolio may also invest in obligations issued or guaranteed by U.S.
government agencies or instrumentalities where a Portfolio must look
principally to the issuing or guaranteeing agency for ultimate repayment.
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 & Poor's or IBCA Ltd.
In selecting securities for this portion of a portfolio, the
Subadviser of the Portfolio evaluates the currency, market and individual
features of the securities being considered for investment. The Subadviser
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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 a 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 each Portfolio's assets will be
invested by ranking such countries in order of highest real yield. In this
portion of its portfolio, each 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 each Portfolio's investments among markets as necessary when changes
to real yields and inflation estimates significantly alter the relative
rankings of the countries and market sectors.
In addition, the Global Bond Portfolio may invest in trust preferred
securities. A trust preferred or capital security is a long dated bond (for
example, 30 years) with preferred features. The preferred features are that
payment of interest can be deferred for a specified period without initiating a
default event. From a bondholder's viewpoint, the securities are senior in claim
to standard preferred but are junior to other bondholders. From the issuer's
viewpoint, the securities are attractive because their interest is deductible
for tax purposes like other types of debt instruments.
CORPORATE ASSET-BACKED SECURITIES. These securities, issued by trusts
and special purpose corporations, are backed by a pool of assets, such as
credit card and automobile loan receivables, representing the obligations of a
number of different parties.
Corporate asset-backed securities present certain risks. For
instance, in the case of credit card receivables, these securities may not have
the benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
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Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A
Portfolio will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
SHORT SALES. Each Portfolio (other than the Cash Management and
"Dogs" of Wall Street Portfolios) may make short sales, including "short sales
against the box." A short sale is effected by selling a security which a
Portfolio does not own. A short sale is against the box to the extent that a
Portfolio contemporaneously owns, or has the right to obtain without payment,
securities identical to those sold short. A short sale against the box of an
"appreciated financial position" (E.G., appreciated stock) generally is treated
as a sale by the Portfolio for federal income tax purposes. A Portfolio
generally will recognize any gain (but not loss) for federal income tax
purposes at the time that it makes a short sale against the box. 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, a Portfolio
will need to arrange through a broker to borrow the securities and, in so
doing, a Portfolio will become obligated to replace the securities borrowed
at their market price at the time of replacement, whatever that price may be.
A 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.
A Portfolio's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral in the form of cash
or liquid securities held in a segregated account in the name of the broker.
In addition, such Portfolio will place in a segregated account 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 a Portfolio involve
certain risks and special considerations. Possible losses from short 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.
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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 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
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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, 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. A Portfolio 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 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 of U.S. and foreign
securities dealers make active markets in these securities.
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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 Portfolio will receive a premium from writing a put or call option,
which increases the Portfolio's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which
the Portfolio has written a call option falls or remains the same, the
Portfolio will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in the
value of the securities it owns. If the value of the index rises, however, the
Portfolio will realize a loss in its call option position, which will reduce
the benefit of any unrealized appreciation in the Portfolio's stock
investments. By writing a put option, the Portfolio assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Portfolio correlate with changes in the value of the index, writing
covered put options on indices will increase the Portfolio's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
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 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 in a segregated account. 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.
The purchase of call options on stock indices may be used by a
Portfolio to attempt to reduce the risk of missing a broad market advance, or
an advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid, and related transaction costs,
if the value of the index does not rise. The purchase of call options on stock
indices when the Portfolio is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs, and
involves risks
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of loss and of increased volatility similar to those involved in purchasing
calls on securities the Portfolio owns.
A Portfolio also may purchase put options on stock indices to hedge
its investments against a decline in value. By purchasing a put option on a
stock index, the Portfolio will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of the
Portfolio's investments does not decline as anticipated, or if the value of the
option does not increase, the Portfolio's loss will be limited to the premium
paid for the option, plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Portfolio's
security holdings.
YIELD CURVE OPTIONS. Certain Portfolios may purchase or write yield
curve options for other than hedging purposes (I.E., in an effort to increase
their current income) if, in the judgment of the Subadviser, the particular
Portfolio will be able to profit from movements in the spread between the yields
of the underlying securities. The trading of yield curve options is subject to
all of the risks associated with the trading of other types of options. In
addition, however, such options present risk of loss even if the yield of one of
the underlying securities remains constant, if the spread moves in a direction
or to an extent which was not anticipated. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed. Because
these securities are traded over-the-counter, the Securities and Exchange
Commission ("SEC") has taken the position that yield curve options are illiquid
and, therefore, cannot exceed the SEC illiquidity ceiling. Each Portfolio that
may enter into yield curve options transactions will cover such transactions as
described in the Prospectus.
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 (including,
in the case of the International Growth and Income, Emerging Markets and Global
Equities Portfolios, 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
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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 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 and as described above under "Emerging Country
Fixed-Income Securities," 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 150 countries which, in the opinion of the Subadviser,
are generally considered to be emerging or developing countries by the
international financial community. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand, Singapore (with the exception of the Emerging Markets and Putnam
Portfolios) and most nations located in Western Europe. Not withstanding the
foregoing with respect to the Emerging Markets Portfolio, the Subadviser
believes that in addition to the exclusions listed above, the following
countries should also be excluded from the countries considered emerging
markets: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
the Netherlands, Norway, Spain, Sweden and Switzerland.
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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 equity securities, the Portfolio initially intends to
invest primarily in some or all of the following countries:
<TABLE>
<S> <C> <C> <C>
Argentina Indonesia Portugal Thailand
Brazil Mexico South Africa Turkey
India Philippines South Korea
</TABLE>
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, or has its 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 (other than the Cash Management 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").
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
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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 (other than Cash Management 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 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.
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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 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 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 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, Small
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Company Value, Real Estate, Equity Income 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 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
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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 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 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
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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, 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 loan
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.
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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 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
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<PAGE> 76
payable on the next 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 Bond, SunAmerica Balanced,
Utility, Federated Value, Aggressive Growth, Real Estate, International Growth
and Income, 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.
NON-DIVERSIFIED STATUS. The Global Bond, Worldwide High Income,
International Diversified Equities and "Dogs" of Wall Street Portfolios have
registered as "non-diversified" investment companies. As a result, under the
1940 Act, the Portfolios are limited only by their own investment restrictions
as to the percentage of their assets which may be invested in the securities of
any one issuer. However, in spite of the flexibility under the 1940 Act, the
Portfolios would still have to meet quarterly diversification requirements
under the Internal Revenue Code of 1986, as amended (the "Code") in order for
the Portfolios to qualify as a regulated investment company. As a result of
the Code's diversification requirements, the Portfolios may not have the
latitude to take full advantage of the relative absence of 1940 Act
diversification requirements.
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
will normally be evidenced by many of
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<PAGE> 77
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. 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.
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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.
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
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principal is extremely strong. AA - High grade. Very strong capacity to pay
interest and repay principal. Generally, 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 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
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<PAGE> 80
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.
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.
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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.
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 CORPORATE BOND PORTFOLIO, GLOBAL BOND
PORTFOLIO, HIGH-YIELD BOND PORTFOLIO, WORLDWIDE HIGH INCOME PORTFOLIO,
SUNAMERICA BALANCED PORTFOLIO, BALANCED/PHOENIX INVESTMENT COUNSEL
PORTFOLIO, ASSET
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ALLOCATION PORTFOLIO, EQUITY INCOME PORTFOLIO, UTILITY PORTFOLIO,
GROWTH-INCOME PORTFOLIO, SMALL COMPANY VALUE, FEDERATED VALUE PORTFOLIO,
VENTURE VALUE PORTFOLIO, "DOGS" OF WALL STREET PORTFOLIO, ALLIANCE
GROWTH PORTFOLIO, PUTNAM GROWTH PORTFOLIO, GROWTH/PHOENIX INVESTMENT
COUNSEL PORTFOLIO, EQUITY INDEX PORTFOLIO, REAL ESTATE PORTFOLIO,
AGGRESSIVE GROWTH PORTFOLIO, INTERNATIONAL GROWTH AND INCOME
PORTFOLIO, GLOBAL EQUITIES PORTFOLIO, INTERNATIONAL DIVERSIFIED
EQUITIES PORTFOLIO AND EMERGING MARKETS PORTFOLIO
The Corporate Bond Portfolio, Global Bond Portfolio, High-Yield Bond
Portfolio, Worldwide High Income Portfolio, SunAmerica Balanced Portfolio,
Balanced/Phoenix Investment Counsel Portfolio, Asset Allocation Portfolio,
Equity Income Portfolio, Utility Portfolio, Growth-Income Portfolio, Small
Company Value Portfolio, Federated Value Portfolio, Venture Value Portfolio,
"Dogs" of Wall Street Portfolio, Alliance Growth Portfolio, Putnam Growth
Portfolio, Growth/Phoenix Investment Counsel Portfolio, Equity Index Portfolio,
Real Estate Portfolio, Aggressive Growth Portfolio, International Growth and
Income Portfolio, Global Equities Portfolio, International Diversified
Equities 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, "Dogs" of
Wall Street 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, "Dogs" of
Wall Street 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, the Real Estate Portfolio will invest at least 25% of its total
assets in the securities of real estate companies and the "Dogs" of Wall Street
Portfolio may invest more than 25% of its assets in the securities of issuers
in the same industry to the extent such investments would be selected according
to stock selection criteria. 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
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commercial banks. With respect to all Portfolios other than the Utility
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, Equity Income, Small Company Value and Equity Index
Portfolios 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 or evidences of interest therein on margin,
except that the Portfolios may obtain such short-term credit as may be
necessary for the clearance of any transaction.
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, Equity Income, Growth-Income,
Small Company Value, Federated Value, Venture Value, "Dogs" of Wall Street,
Alliance Growth, Growth/Phoenix Investment Counsel, Putnam Growth, Global
Equities, International Diversified Equities, Aggressive Growth, International
Growth and Income, Real Estate, Equity Index and Emerging Markets Portfolios
have each adopted the following non-fundamental policies (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 Portfolio, pledge, mortgage or
hypothecate its assets, except to the extent necessary to secure permitted
borrowings and, to the extent related to the
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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.
h. Issue any senior securities except as permitted by the 1940 Act,
other than, with respect to Equity Income, Small Company Value and Equity Index
Portfolios, as set forth in investment restriction number 6 and except to the
extent that issuing options or purchasing securities on a when-issued basis may
be deemed to constitute issuing a senior security.
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 and Seasons Series
Trust. 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 Five Years
- ------------------------- -----------------------------------------------
Held with the Trust
- -------------------
<S> <C>
RICHARDS D. BARGER,* 70, Trustee Senior Partner, Law Firm of Barger & Wolen; Trustee,
Anchor Pathway ("APF") and Seasons Series Trust
("Seasons").
JAMES K. HUNT, * 47, Executive Vice President, SunAmerica Investments, Inc.
Trustee, Chairman and President (1993 to present); President, SunAmerica Corporate
Finance (since January 1994); Senior Vice President,
SunAmerica Investments, Inc. (1990-1993); Trustee, APF
and Seasons.
</TABLE>
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<PAGE> 85
<TABLE>
<CAPTION>
Name, Age and Position(s) Principal Occupation(s) During Past Five Years
- ------------------------- -----------------------------------------------
Held with the Trust
- -------------------
<S> <C>
NORMAN J. METCALFE, * 55, Trustee Vice Chairman and Chief Financial Officer, The Irvine
Company (March 1993 to Present); Director, SunAmerica
Inc. (1984-1993); Trustee, APF and Seasons
ALLAN L. SHER, 66, Director, Board of Governors, American Stock Exchange
Trustee (1991 to present); Trustee, APF and Seasons
WILLIAM M. WARDLAW, 51, Partner, Freeman Spogli & Co., Incorporated (privately
Trustee owned merchant banking firm) (1988-Present); Trustee,
APF and Seasons.
SCOTT L. ROBINSON, 52, Senior Vice President and Controller, SunAmerica Inc.
Senior Vice President, Treasurer and (since 1991); Senior Vice President of Anchor National
Controller (since 1988); Senior Vice President, Treasurer and
Controller, APF and Seasons; Joined SunAmerica Inc. in
1978.
SUSAN L. HARRIS, 41, Senior Vice President (since November 1995), Secretary
Vice President, Counsel and Secretary (since 1989) and General Counsel-Corporate Affairs (since
December 1994), SunAmerica Inc.; Senior Vice President
and Secretary, Anchor National (since 1990); Vice President,
Counsel and Secretary, APF and Seasons; Joined SunAmerica Inc.
in 1985.
PETER C. SUTTON, 34 Senior Vice President, SAAMCo (since April 1997); Treasurer
The SunAmerica Center (since February 1996), SunAmerica Mutual Funds ("SAMF"),
733 Third Avenue Anchor Series Trust ("AST") and Style Select Series, Inc.;
New York, NY 10017-3204 Vice President and Assistant Treasurer, APF (since October
Vice President and Assistant Treasurer 1994) and Seasons (since April 1997); Formerly, Vice President,
SAAMCo (1994-1997); Controller, SAMF and AST (1993-1996);
Assistant Controller, SAMF and AST (1990-1993); Joined SAAMCo
in 1990.
ROBERT M. ZAKEM, 40 Senior Vice President and General Counsel, SAAMCo (since April
The SunAmerica Center 1993); Executive Vice President, General Counsel and Director,
733 Third Avenue Sun America Capital Services, Inc. ("SACS") (since February
New York, NY 10017-3204 1993); Vice President, General Counsel and Assistant Secretary,
Vice President and Assistant Secretary SunAmerica Fund Services, Inc. ("SAFS") (since January 1994);
Vice President, and Assistant Secretary, APF (since September
1993) and Seasons (since April 1997).
</TABLE>
* A trustee who may be deemed to be an "interested person" of the Trust as that
term is defined in the 1940 Act.
B-34
<PAGE> 86
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, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PENSION OR TOTAL COMPENSATION
RETIREMENT FROM REGISTRANT AND
AGGREGATE BENEFITS ACCRUED FUND COMPLEX PAID
COMPENSATION AS PART OF FUND TO TRUSTEES*
FROM REGISTRANT EXPENSES
TRUSTEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richards D. Barger $9,000 - $23,000
- --------------------------------------------------------------------------------------------------
Frank L. Ellsworth $2,250 - $5,500
- --------------------------------------------------------------------------------------------------
William M. Wardlaw $6,250 - $15,250
- --------------------------------------------------------------------------------------------------
Norman J. Metcalfe $9,000 $23,000
- --------------------------------------------------------------------------------------------------
Allan L. Sher $6,750 - $17,500
- --------------------------------------------------------------------------------------------------
</TABLE>
* Information is as of November 30, 1997 for the two funds in the
complex which pay fees to these Trustees (the Trust and Anchor Pathway
Fund).
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 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
B-35
<PAGE> 87
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.
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 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.
The Investment Advisory and Management Agreement, after initial
approval with respect to each Portfolio, continues in effect for a period of
two years, in accordance with its terms, unless terminated, and thereafter 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 Agreement provides that it may be
terminated by either party without penalty upon the specified written notice
contained in the Agreement. The Agreement also provides for automatic
termination upon assignment.
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.
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, 1997, 1996 and
1995.
B-36
<PAGE> 88
ADVISORY FEES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management $718,297 $694,655 $438,400
- --------------------------------------------------------------------------------------------------------
Corporate Bond (formerly, Fixed
Income)
$325,988 $230,031 $144,546
- --------------------------------------------------------------------------------------------------------
Global Bond $550,533 $458,390 $365,313
- --------------------------------------------------------------------------------------------------------
High-Yield Bond $1,000,566 $638,948 $478,203
- --------------------------------------------------------------------------------------------------------
Worldwide High Income
$915,682 $368,821 $143,765
- --------------------------------------------------------------------------------------------------------
SunAmerica Balanced
$178,845 $20,449* --
- --------------------------------------------------------------------------------------------------------
Balanced/Phoenix Investment
Counsel $558,675 $354,683 $92,499
- --------------------------------------------------------------------------------------------------------
Asset Allocation $2,556,963 $1,616,647 $1,000,248
- --------------------------------------------------------------------------------------------------------
Utility $100,647 $13,890* --
- --------------------------------------------------------------------------------------------------------
Growth-Income $2,784,063 $1,476,902 $794,078
- --------------------------------------------------------------------------------------------------------
Federated Value $237,339 $23,973* --
- --------------------------------------------------------------------------------------------------------
Venture Value $5,952,702 $2,305,064 $504,014
- --------------------------------------------------------------------------------------------------------
Alliance Growth $3,145,937 $1,522,222 $635,979
- --------------------------------------------------------------------------------------------------------
Growth/Phoenix Investment
Counsel $1,299,894 $1,072,976 $835,634
- --------------------------------------------------------------------------------------------------------
Putnam Growth**
(formerly Provident Growth) $1,565,910 $1,073,769 $785,809
- --------------------------------------------------------------------------------------------------------
Global Equities $2,337,577 $1,627,510 $1,185,831
- --------------------------------------------------------------------------------------------------------
International Diversified Equities
$2,127,386 $1,025,593 $283,908
- --------------------------------------------------------------------------------------------------------
Aggressive Growth $506,503 $65,277* --
- --------------------------------------------------------------------------------------------------------
Real Estate* $58,800 -- --
- --------------------------------------------------------------------------------------------------------
International Growth and
Income* $125,310 -- --
- --------------------------------------------------------------------------------------------------------
Emerging Markets* $99,436 -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
|
For the fiscal year ended November 30, 1997, the Adviser voluntarily waived
fees or reimbursed expenses as follows: Utility Portfolio - $25,537. For the
period June 2, 1997 (commencement of operations) through November 30, 1997, the
Adviser voluntarily waived fees or reimbursed expenses of each of the following
Portfolios: Real Estate Portfolio - $7,874; International Growth and Income
Portfolio - $52,507; and Emerging Markets Portfolio - $55,614. Certain
Portfolios had recoupments for the fiscal year ended November 30, 1997, and
such recoupments, which are not included as part of the advisory fee in the
above advisory fee table, were as follows: SunAmerica Balanced Portfolio -
$9,879; Federated Value Portfolio - $16,677; and Aggressive Growth Portfolio -
$3,186.
B-37
<PAGE> 89
* For the period 6/2/97 (commencement of operations) through
11/30/97
** 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 $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 April 15, 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, with exception
to Putnam, 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., Management Group of U.S. Bank National Association ("First
American") and Federated Investment Counseling act as Subadvisers to certain of
the Trust's Portfolios pursuant to various Subadvisory Agreements with SAAMCo.
B-38
<PAGE> 90
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 Growth-Income and Alliance .35% on the first $50 million
Growth Portfolios .30% on the next $100 million
.25% on the next $150 million
.20% on the next $200 million
.15% thereafter
-----------------------------------------------------------------------
Global Equities Portfolio .50% on the first $50 million
.40% on the next $100 million
.30% on the next $150 million
.25% thereafter
- -----------------------------------------------------------------------------------------------
Davis Selected Venture Value and Real Estate .45% on the first $100 million
Advisers, L.P. Portfolios .40% on the next $400 million
.35% thereafter
- -----------------------------------------------------------------------------------------------
Federated Investment Corporate Bond .30% on the first $25 million
Counseling Portfolio .25% on the next $25 million
.20% on the next $100 million
.15% thereafter
-----------------------------------------------------------------------
Federated Value and Utility .55% on the first $20 million
Portfolios .35% on the next $30 million
.25% on the next $100 million
.20% on the next $350 million
.15% thereafter
- -----------------------------------------------------------------------------------------------
GSAM Asset Allocation Portfolio .40% on the first $50 million
.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
- -----------------------------------------------------------------------------------------------
First American Equity Income Portfolio .30%
Small Company Value Portfolio .80%
Equity Index Portfolio .125%
- -----------------------------------------------------------------------------------------------
</TABLE>
B-39
<PAGE> 91
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SUBADVISER PORTFOLIO FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Morgan Stanley Asset International Diversified Equities .65% on the first $350 million
Management Inc. and Worldwide High Income .60% thereafter
Portfolios
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Phoenix Investment Growth/Phoenix Investment Counsel .35% on the first $50 million
Counsel and Balanced/ Phoenix Investment .30% on the next $100 million
Counsel Portfolios .25% on the next $150 million
.20% on the next $200 million
.15% thereafter.
- -----------------------------------------------------------------------------------------------
Putnam Investment Putnam Growth Portfolio .50% on the first $150 million
Management, Inc. .45% on the next $150 million
.35% thereafter
-----------------------------------------------------------------------
Emerging Markets Portfolio 1.00% on the first $150 million
.95% on the next $150 million
.85% thereafter
-----------------------------------------------------------------------
International Growth and Income .65% on the first $150 million
Portfolio .55% on the next $150 million
.45% thereafter
- -----------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the fees paid to the Subadvisers for the
fiscal years ended November 30, 1997, 1996 and 1995.
SUBADVISORY FEES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SUBADVISER PORTFOLIO 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alliance Growth
$1,280,957 $691,140 $306,832
----------------------------------------------------------------------------------
Alliance Growth-Income
$1,161,812 $673,445 $379,671
----------------------------------------------------------------------------------
Global Equities
$1,109,352 $811,790 $616,892
- -----------------------------------------------------------------------------------------------------------
Davis Selected Venture Value
Advisers, L.P. $3,126,351 $1,252,661 $281,866
----------------------------------------------------------------------------------
Real Estate $33,075++ -- --
- -----------------------------------------------------------------------------------------------------------
Asset Allocation
GSAM $1,088,896 $743,084 $485,722
- -----------------------------------------------------------------------------------------------------------
</TABLE>
B-40
<PAGE> 92
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
SUBADVISER PORTFOLIO 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GSAM Global Bond
International $281,015 $238,488 $194,306
- --------------------------------------------------------------------------------------------------------
Growth/Phoenix $599,956 $505,458 $399,134
Phoenix Investment Investment Counsel
Counsel, Inc. -------------------------------------------------------------------------------
Balanced/Phoenix
Investment Counsel
$271,312 $176,158 $46,249
- --------------------------------------------------------------------------------------------------------
Provident Investment
Counsel, Inc.+ Provident Growth
$284,164++ $614,720 $452,955
- --------------------------------------------------------------------------------------------------------
Worldwide High
Morgan Stanley Asset Income $595,193 $239,733 $93,447
Management -------------------------------------------------------------------------------
Inc. International
Diversified Equities
$1,382,736 $666,635 $184,540
- --------------------------------------------------------------------------------------------------------
Federated Corporate Bond $128,651 $48,744** --
Investment -------------------------------------------------------------------------------
Counseling Federated Value
$146,523 $17,580* --
-------------------------------------------------------------------------------
Utility $73,542 $10,186* --
- --------------------------------------------------------------------------------------------------------
Putnam Investment International Growth and
Management, Inc. Income $81,451+++ -- --
-------------------------------------------------------------------------------
Emerging Markets
$79,549+++ -- --
-------------------------------------------------------------------------------
Putnam Growth $618,584 -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period 6/3/96 (commencement of operations) 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.
++ For the period 12/1/96 through 4/14/97 (termination of operations)
+++ For the period 6/2/97 (commencement of operations) through 11/30/97
The Subadvisory Agreements, after initial approval with respect to a
Portfolio, continue in effect for a period of two years, in accordance with
their terms, unless terminated, and may thereafter be renewed from year to year
as to a Portfolio for so long as such continuance is specifically 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
B-41
<PAGE> 93
termination of the Advisory Agreement. The Subadvisory Agreements may be
terminated by the Trust, the Adviser or the respective Subadviser upon the
specified written notice contained in the Agreement.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Cash Management, Corporate Bond, Aggressive Growth and Emerging
Markets Portfolios had capital loss carry-forwards of $684, $273,407,
$2,868,661 and $927,325, respectively, at November 30, 1997. To the extent not
yet utilized, such losses will be available to each of the Portfolios to offset
future gains through 2004 and 2005. The utilization of such losses will be
subject to annual limitations under the Code.
PRICE OF SHARES
Shares of the Trust are currently offered only to the Variable
Separate Account. The Trust is open for business on any day the New York Stock
Exchange ("NYSE") is open for business. Shares are valued each day as of the
close of regular trading on the NYSE (generally, 4:00 p.m., Eastern time). Each
Portfolio calculates the net asset value of its shares separately by dividing
the total value of it's net assets by the shares outstanding. The net asset
value of a Portfolio's shares will also be computed on each other day in which
there is a sufficient degree of trading in such portfolio'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 Portfolio'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 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
B-42
<PAGE> 94
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 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
B-43
<PAGE> 95
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 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.
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, 1997, 1996 and 1995.
1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID TO
PORTFOLIO BROKERAGE AFFILIATED AFFILIATED
COMMISSIONS BROKER-DEALERS BROKER-DEALERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- -------------------------------------------------------------------------------------------------------
Global Bond -- -- --
- -------------------------------------------------------------------------------------------------------
Corporate Bond -- -- --
- -------------------------------------------------------------------------------------------------------
High-Yield Bond $90 -- --
- -------------------------------------------------------------------------------------------------------
Worldwide High Income
-- -- --
- -------------------------------------------------------------------------------------------------------
</TABLE>
B-44
<PAGE> 96
<TABLE>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SunAmerica Balanced $73,801 -- --
- ------------------------------------------------------------------------------------------------------
Balanced/Phoenix Investment $153,408 -- --
Counsel
- ------------------------------------------------------------------------------------------------------
Asset Allocation $618,233 $77,151 12.48%
- ------------------------------------------------------------------------------------------------------
Utility $40,772 -- --
- ------------------------------------------------------------------------------------------------------
Growth-Income $547,081 -- --
- ------------------------------------------------------------------------------------------------------
Federated Value $77,121 -- --
- ------------------------------------------------------------------------------------------------------
Venture Value $634,966 $87,696 [13.81%]
- ------------------------------------------------------------------------------------------------------
Alliance Growth $1,020,216 -- --
- ------------------------------------------------------------------------------------------------------
Growth/Phoenix Investment $731,747 $1,220 .17%
Counsel
- ------------------------------------------------------------------------------------------------------
Putnam Growth
(formerly Provident Growth) $241,968 $920 .38%
- ------------------------------------------------------------------------------------------------------
Real Estate* $53,466 -- --
- ------------------------------------------------------------------------------------------------------
Global Equities $1,376,002 -- --
- ------------------------------------------------------------------------------------------------------
International Diversified $269,652 -- --
Equities
- ------------------------------------------------------------------------------------------------------
Aggressive Growth $251,919 -- --
- ------------------------------------------------------------------------------------------------------
International Growth and Income * $120,957 -- --
- ------------------------------------------------------------------------------------------------------
Emerging Markets* $80,600 -- --
- ------------------------------------------------------------------------------------------------------
</TABLE>
* For the period June 2, 1997 (commencement of operations) through
November 30, 1997.
1996 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID
PORTFOLIO BROKERAGE AFFILIATED TO AFFILIATED
COMMISSIONS BROKER-DEALERS BROKER-DEALERS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- --------------------------------------------------------------------------------------------------------
Global Bond -- -- --
- --------------------------------------------------------------------------------------------------------
Corporate Bond -- -- --
- --------------------------------------------------------------------------------------------------------
High-Yield Bond $753 -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
B-45
<PAGE> 97
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 -- --
(formerly Provident
Growth)
- ----------------------------------------------------------------------------------------------------
Global Equities $1,022,821 -- --
- ----------------------------------------------------------------------------------------------------
International Diversified
Equities $256,477 -- --
- ----------------------------------------------------------------------------------------------------
Aggressive Growth* $34,130 -- --
- ----------------------------------------------------------------------------------------------------
</TABLE>
* For the period 6/3/96 (commencement of operations) through November
30, 1996.
1995 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID
BROKERAGE AFFILIATED TO AFFILIATED
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER-DEALERS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management -- -- --
- ----------------------------------------------------------------------------------------------------------
Corporate Bond* $562 $562 100%
- ----------------------------------------------------------------------------------------------------------
Global Bond -- -- --
- ----------------------------------------------------------------------------------------------------------
High-Yield Bond $9,100 -- --
- ----------------------------------------------------------------------------------------------------------
Worldwide High Income
-- -- --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
B-46
<PAGE> 98
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 -- --
(formerly Provident Growth)
- ----------------------------------------------------------------------------------------------------------
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.
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.
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
B-47
<PAGE> 99
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.
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 and Legal Counsel - PricewaterhouseCoopers,
LLP 1177 Avenue of the Americas, New York, New York 10036, is the Trust's
independent accountants. PricewaterhouseCoopers, 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. The
firms of Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, NY
10022 and Blazzard, Grodd & Hasenauer, P.C., Suite 213, Oceanwalk Mall, 101
North Ocean Drive, Hollywood, Florida 33019, have been selected as legal
counsel to the Trust.
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.
B-48
<PAGE> 100
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.
Registration Statement - A registration statement has been filed with
the SEC 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 SEC, 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, 1997.
B-49
<PAGE> 101
PART C
OTHER INFORMATION
Item 23. Exhibits.
Exhibits.
(a) 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.
(b) 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.
(c) Instruments Defining Rights of Security Holders.
Inapplicable.
(d)(1) Investment Advisory and Management Agreement between
Registrant and SunAmerica Asset Management Corp.
Incorporated herein by reference to Post-Effective
Amendment No. 12 to the Registrant's Registration Statement
on Form N-1A filed on May 7, 1997.
(d)(2) Subadvisory Agreements. Incorporated herein by reference to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (file No. 3-85370)
filed on February 29, 1996 and also incorporated herein by
reference to Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-1A filed on
May 7, 1997.
(e) Underwriting Contracts. Inapplicable.
<PAGE> 102
(f) Bonus or Profit Sharing Contracts. Inapplicable.
(g) Custodian Agreements. 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.
(h)(1) Other Material Contracts. 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.
(2) Transfer Agency and Service Agreement filed between the
Registrant and State Street Bank and Trust Company.
Incorporated herein by reference to Post-Effective Amendment
No. 12 to the Registrant's Registration Statement on Form N-1A
filed on May 7, 1997.
(i) Legal Opinion. Inapplicable.
(j) Other Opinions. Consent of Independent Accountants.
Incorporated herein by reference to Post-Effective Amendment
No. 15 to the Registrant's Registration Statement on
Form N-1A filed on March 27, 1998.
(k) Omitted Financial Statements. Inapplicable.
(l) Initial Capital Agreements. Inapplicable.
(m) Rule 12b-1 Plan. Inapplicable.
(n) Financial Data Schedule. Incorporated herein by reference to
Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form N-1A filed on March 27, 1998.
(o) Rule 18-3f Plan. Inapplicable.
- ---------------------
Item 24. Persons Controlled by or Under Common Control with the Fund.
Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A (File No. 2-85370) filed on November 3, 1992.
C-2
<PAGE> 103
Item 25. 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 an 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 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.
C-3
<PAGE> 104
(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 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
C-4
<PAGE> 105
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 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
C-5
<PAGE> 106
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 or 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 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
C-6
<PAGE> 107
is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 26. Business and Other Connections of the 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,
First American Asset Management Group, Goldman Sachs Asset Management,
Goldman Sachs Asset Management International, Phoenix Investment
Counsel, Inc., Putnam Investment Management, 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., Putnam Investment Management, 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
First American Asset Management, Inc. 801-24113
Goldman Sachs Asset Management 801-16048
Goldman Sachs Asset Management Int'l. 801-38157
Phoenix Investment Counsel, Inc. 801-5995
Putnam Investment Management, Inc. 801-7974
Davis Selected Advisers, L.P. 801-31648
Morgan Stanley Asset Management Inc. 801-15757
Item 27. Principal Underwriters.
There is no Principal Underwriter for the Registrant.
Item 28. Location of Accounts and Records.
C-7
<PAGE> 108
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. First American Asset Management Group is located at
U.S. Bancorp, 601 Second Avenue South, Minneapolis, Minnesota 55402.
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. Putnam Investment Management, Inc., is located at
One Post Office Square, Boston, Massachusetts 02109. Davis Selected
Advisers, L.P. is located at 124 East Marcy Street, Sante 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 29. Management Services.
None.
Item 30. Undertakings.
None.
C-8
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, Registrant
has duly caused the Post-Effective Amendment No. 16 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 1st
day of September, 1998.
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. 16 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
- ------------------------------ President
James K. Hunt (Principal Executive Officer) September 1, 1998
* Senior Vice President,
- ------------------------------ Treasurer and Controller
Scott L. Robinson (Principal Financial
and Accounting Officer) September 1, 1998
* Trustee September 1, 1998
- ------------------------------
Richards D. Barger
* Trustee September 1, 1998
- ------------------------------
Norman J. Metcalfe
* Trustee September 1, 1998
- ------------------------------
Allan L. Sher
* Trustee September 1, 1998
- ------------------------------
William M. Wardlaw
*By: /s/ Robert M. Zakem September 1, 1998
-------------------------
Robert M. Zakem
Attorney-in-Fact
</TABLE>
<PAGE> 110
SUNAMERICA SERIES TRUST
EXHIBIT INDEX
None
