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PROSPECTUS
JULY 5, 2000
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SUNAMERICA SERIES TRUST
-- Cash Management Portfolio
-- Corporate Bond Portfolio
-- Global Bond Portfolio
-- High-Yield Bond Portfolio
-- Worldwide High Income Portfolio
-- SunAmerica Balanced Portfolio
-- MFS Total Return Portfolio
-- Asset Allocation Portfolio
-- Telecom Utility Portfolio
-- Equity Income Portfolio
-- Equity Index Portfolio
-- Growth-Income Portfolio
-- Federated Value Portfolio
-- Davis Venture Value Portfolio
-- "Dogs" of Wall Street Portfolio
-- Alliance Growth Portfolio
-- Goldman Sachs Research Portfolio
-- MFS Growth and Income Portfolio
-- Putnam Growth Portfolio
-- Blue Chip Growth Portfolio
-- Real Estate Portfolio
-- Small Company Value Portfolio
-- MFS Mid-Cap Growth Portfolio
-- Aggressive Growth Portfolio
-- Growth Opportunities Portfolio
-- International Growth and Income Portfolio
-- Global Equities Portfolio
-- International Diversified Equities Portfolio
-- Emerging Markets Portfolio
-- Technology Portfolio
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.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
TRUST HIGHLIGHTS............................................ 3
Q&A....................................................... 3
ACCOUNT INFORMATION......................................... 34
ADDITIONAL INFORMATION ABOUT THE "DOGS" OF WALL STREET AND
GOLDMAN SACHS RESEARCH PORTFOLIOS......................... 35
Investment Strategy for the "Dogs" of Wall Street
Portfolio.............................................. 35
Investment Strategy for the Goldman Sachs Research
Portfolio.............................................. 35
MORE INFORMATION ABOUT THE PORTFOLIOS....................... 36
Investment Strategies..................................... 36
GLOSSARY.................................................... 45
Investment Terminology.................................... 45
Risk Terminology.......................................... 48
MANAGEMENT.................................................. 51
Investment Adviser and Manager............................ 51
Information about the Subadvisers......................... 52
Portfolio Management...................................... 53
Custodian, Transfer and Dividend-Paying Agent............. 65
FINANCIAL HIGHLIGHTS........................................ 66
FOR MORE INFORMATION........................................ 71
</TABLE>
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Q&A
FIXED INCOME PORTFOLIOS typically seek to provide high current income
consistent with the preservation of capital by investing in fixed
income securities.
YIELD is the annual dollar income received on an investment expressed
as a percentage of the current or average price.
INCOME is interest payments from bonds or dividends from stocks.
TOTAL RETURN is a measure of performance which combines all elements
of return including income and capital gain or loss; it represents the
change in value of an investment over a given period expressed as a
percentage of the initial investment.
"HIGH QUALITY" INSTRUMENTS have a very strong capacity to pay interest
and repay principal; they reflect the issuers' high creditworthiness
and low risk of default.
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TRUST HIGHLIGHTS
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The following questions and answers are designed to give you an
overview of SunAmerica Series Trust (the "Trust") and to provide you
with information about the Trust's thirty separate investment series
("Portfolios") and their investment goals and principal strategies.
More complete investment information is provided in the charts,
under "More Information About the Portfolios," which begin on page
35, and the glossary that follows on page 42.
Q: WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS AND PRINCIPAL INVESTMENT
STRATEGIES?
A: Each Portfolio operates as a separate mutual fund, with its own investment
goal and a principal strategy for pursuing it. A Portfolio's investment
goal may be changed without shareholder approval, but you will be notified
of any change. There can be no assurance that any Portfolio will meet its
investment goal or that the net return on an investment will exceed what
could have been obtained through other investment or savings vehicles.
FIXED INCOME PORTFOLIOS
<TABLE>
<CAPTION>
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
Cash Management high current yield while invests in a diversified selection
Portfolio preserving capital of money market instruments
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Corporate Bond high total return with invests primarily in investment
Portfolio only moderate price risk grade fixed income securities
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Global Bond Portfolio high total return, invests in high quality fixed
emphasizing current income securities of U.S. and
income and, to a lesser foreign issuers and transactions in
extent, capital foreign currencies
appreciation
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High-Yield Bond high current income and, invests primarily in intermediate
Portfolio secondarily, capital and long-term corporate
appreciation obligations, emphasizing
high-yield, high-risk fixed income
securities (junk bonds) with a
primary focus on "B" rated
high-yield bonds
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Worldwide High Income high current income and, invests primarily in high-yield,
Portfolio secondarily, capital high-risk fixed income securities
appreciation (junk bonds) of issuers located
throughout the world
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</TABLE>
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BALANCED PORTFOLIOS typically try to balance three different
investment goals: capital appreciation, income and capital
preservation by investing in a mixture of stocks, bonds and money
market instruments.
ASSET ALLOCATION is a varying combination, depending on market
conditions and risk level, of stocks, bonds, money market instruments
and other assets.
CAPITAL APPRECIATION/GROWTH is an increase in the market value of
securities held.
INDEX PORTFOLIOS typically are comprised of securities that make up or
replicate a target index; the primary objective is to mirror the
investment results of the index.
A "VALUE" PHILOSOPHY -- that of investing in securities that are
believed to be undervalued in the market -- often reflects a
contrarian approach in that the potential for superior relative
performance is believed to be highest when fundamentally solid
companies are out of favor. The selection criteria is usually
calculated to identify stocks of companies with solid financial
strength and generous dividend yields that have low price-earnings
ratios and have generally been overlooked by the market, or companies
undervalued within an industry or market capitalization category.
BALANCED OR ASSET ALLOCATION PORTFOLIOS
<TABLE>
<CAPTION>
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
SunAmerica Balanced conservation of maintains at all times a balanced
Portfolio principal and capital portfolio of stocks and bonds, with
appreciation at least 25% invested in fixed
income securities
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MFS Total Return reasonable current invests primarily in common stocks
Portfolio income, long-term and fixed income securities, with
capital growth and an emphasis on income-producing
conservation of capital securities that appear to have some
potential for capital enhancement
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Asset Allocation high total return invests in a diversified portfolio
Portfolio (including income and that may include common stocks and
capital gains) other securities with common stock
consistent with long- characteristics, bonds and other
term preservation of intermediate and long-term fixed
capital income securities and money market
instruments
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Telecom Utility high current income and invests primarily in equity and
Portfolio moderate capital debt securities of utility
appreciation companies
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</TABLE>
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
Equity Income long-term capital invests primarily in equity
Portfolio appreciation and income securities that are expected to pay
above-average dividends
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Equity Index Portfolio investment results that invests primarily in common stocks
correspond with the included in the S&P 500(R)
performance of the
Standard & Poor's 500(R)
Composite Stock Price
Index ("S&P 500(R)")
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Growth-Income growth of capital and invests primarily in common stocks
Portfolio income or securities that demonstrate the
potential for appreciation and/or
dividends
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Federated Value growth of capital and invests primarily in the securities
Portfolio income of high quality companies
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Davis Venture Value growth of capital invests primarily in common stocks
Portfolio of companies with market
capitalizations of at least $5
billion
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"Dogs" of Wall Street total return (including invests in thirty high dividend
Portfolio capital appreciation and yielding common stocks selected
current income) annually from the Dow Jones
Industrial Average and the broader
market (see page 35 for additional
information about the investment
strategy for the "Dogs" of Wall
Street Portfolio)
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Alliance Growth long-term growth of invests primarily in equity
Portfolio capital securities of a limited number of
large, carefully selected, high
quality U.S. companies that are
judged likely to achieve superior
earnings
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</TABLE>
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A "GROWTH" PHILOSOPHY -- that of investing in securities believed to
offer the potential for capital appreciation -- focuses on securities
of companies that are considered to have a historical record of
above-average growth rate, significant growth potential, above-average
earnings growth or value, the ability to sustain earnings growth, or
that offer proven or unusual products or services, or operate in
industries experiencing increasing demand.
MARKET CAPITALIZATION represents the total market value of the
outstanding securities of a corporation.
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
Goldman Sachs Research long-term growth of invests under normal circumstances,
Portfolio capital at least 90% of its total assets in
U.S. equity securities, including
securities of foreign issuers that
are traded in the U.S. Under normal
circumstances, the Portfolio will
only purchase equity securities that
are included in the Goldman Sachs
Global Investment Research Division's
U.S. Select List and will sell
securities that have been removed
from the U.S. Select List. (see page
35 for additional information about
the investment strategy for the
Goldman Sachs Research Portfolio)
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MFS Growth and Income reasonable current invests primarily in equity
Portfolio income and long-term securities
growth of capital and
income
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Putnam Growth long-term growth of invests primarily in common stocks or
Portfolio capital securities with common stock
characteristics that its Subadviser
believes have above-average growth
prospects
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Blue Chip Growth capital appreciation invests primarily in common stocks
Portfolio that demonstrate the potential for
capital appreciation, issued by
large-cap companies
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Real Estate Portfolio total return through a invests primarily in securities of
combination of growth companies principally engaged in or
and income related to the real estate industry
or that own significant real estate
assets or that primarily invest in
real estate financial instruments
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Small Company Value capital appreciation invests in a broadly diversified
Portfolio portfolio of equity securities of
small companies generally with market
capitalizations of less than $1
billion
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MFS Mid-Cap Growth long-term growth of invests primarily in equity
Portfolio capital securities of medium-sized companies
that its Subadviser believes have
above-average growth potential
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Aggressive Growth capital appreciation invests primarily in equity
Portfolio securities of high growth companies
including small and medium sized
growth companies with market
capitalizations of $1.5 billion to
$10 billion
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Growth Opportunities capital appreciation invests primarily in common stocks
Portfolio that demonstrate the potential for
capital appreciation, issued
generally by mid-cap companies
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Technology Portfolio long-term capital invests primarily in equity
appreciation securities that demonstrate the
potential for capital appreciation,
issued by companies the Subadvisor
believes are positioned to benefit
from involvement in technology and
technology-related industries
worldwide
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</TABLE>
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INTERNATIONAL PORTFOLIOS typically seek capital appreciation by investing
significantly in securities traded in markets outside the U.S.
AN "EMERGING MARKET" COUNTRY is generally a country with a low or middle income
economy or that is in the early stages of its industrialization cycle.
INTERNATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
International Growth growth of capital and, invests primarily in common stocks
and Income Portfolio secondarily, current traded on markets outside the U.S.
income
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Global Equities long-term growth of invests primarily in common stocks
Portfolio capital or securities with common stock
characteristics of U.S. and
foreign issuers that demonstrate
the potential for appreciation and
engages in transactions in foreign
currencies
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International long-term capital invests (in accordance with
Diversified Equities appreciation country and sector weightings
Portfolio determined by its Subadviser) in
common stocks of foreign issuers
that, in the aggregate, replicate
broad country and sector indices
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Emerging Markets long-term capital invests primarily in common stocks
Portfolio appreciation and other equity securities of
companies that its Subadviser
believes have above-average growth
prospects primarily in emerging
markets outside the U.S.
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</TABLE>
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS?
A: The following section describes the principal risks of each Portfolio, while
the charts beginning on page 35 describe various additional risks.
Risks of Investing in Equity Securities
The EQUITY INCOME, EQUITY INDEX, GROWTH-INCOME, FEDERATED VALUE, DAVIS
VENTURE VALUE, "DOGS" OF WALL STREET, ALLIANCE GROWTH, GOLDMAN SACHS
RESEARCH, MFS GROWTH AND INCOME, PUTNAM GROWTH, BLUE CHIP GROWTH, REAL
ESTATE, SMALL COMPANY VALUE, MFS MID-CAP GROWTH, AGGRESSIVE GROWTH, GROWTH
OPPORTUNITIES, TECHNOLOGY, INTERNATIONAL GROWTH AND INCOME, GLOBAL EQUITIES,
INTERNATIONAL DIVERSIFIED EQUITIES and EMERGING MARKETS PORTFOLIOS invest
primarily in equity securities. In addition, the SUNAMERICA BALANCED, MFS
TOTAL RETURN, ASSET ALLOCATION and TELECOM UTILITY PORTFOLIOS invest
significantly in equities. As with any equity fund, the value of your
investment in any of these Portfolios may fluctuate in response to stock
market movements. Growth stocks are historically volatile, which will
particularly affect the GROWTH-INCOME, ALLIANCE GROWTH, GOLDMAN SACHS
RESEARCH, MFS GROWTH AND INCOME, PUTNAM GROWTH, BLUE CHIP GROWTH, MFS
MID-CAP GROWTH, AGGRESSIVE GROWTH, GROWTH OPPORTUNITIES, TECHNOLOGY, and
INTERNATIONAL GROWTH AND INCOME PORTFOLIOS. You should be aware that the
performance of different types of equity stocks may rise or decline under
varying market conditions -- for example, "value" stocks may perform well
under circumstances in which "growth" stocks in general have fallen, or vice
versa. In addition, individual stocks selected for any of these Portfolios
may underperform the market generally.
Risks of Investing in Bonds
The CORPORATE BOND, GLOBAL BOND, HIGH-YIELD BOND, and WORLDWIDE HIGH INCOME
PORTFOLIOS invest primarily in bonds. In addition, the SUNAMERICA BALANCED,
MFS TOTAL RETURN, ASSET ALLOCATION and TELECOM UTILITY PORTFOLIOS invest
significantly in bonds. As with any bond fund, the value of your investment
in these Portfolios may go up or down in response to changes in interest
rates or defaults (or even the potential for future default) by bond
issuers. To the extent a Portfolio is invested in the bond market, movements
in the bond market generally may affect its performance. In addition,
individual bonds selected for any of these Portfolios may underperform the
market generally.
6
<PAGE> 7
Risks of Investing in Junk Bonds
The HIGH-YIELD BOND and WORLDWIDE HIGH INCOME PORTFOLIOS invest
predominantly in junk bonds, which are considered speculative. The CORPORATE
BOND, MFS TOTAL RETURN, ASSET ALLOCATION, EQUITY INCOME, REAL ESTATE, SMALL
COMPANY VALUE and MFS MID-CAP GROWTH PORTFOLIOS also invest significantly in
junk bonds. While the Adviser and Subadvisers each tries to diversify its
portfolio and to engage in a credit analysis of each junk bond issuer in
which it invests, junk bonds carry a substantial risk of default or changes
in the issuer's creditworthiness, or they may already be in default. A junk
bond's market price may fluctuate more than higher-quality securities and
may decline significantly. In addition, it may be more difficult for a
Portfolio to dispose of junk bonds or to determine their value. Junk bonds
may contain redemption or call provisions that, if exercised during a period
of declining interest rates, may force a Portfolio to replace the security
with a lower yielding security. If this occurs, it will result in a
decreased return for you.
Risks of Investing in Money Market Securities
While an investment in the CASH MANAGEMENT PORTFOLIO should present the
least market risk of any of the Portfolios since it invests only in
high-quality short-term debt obligations (money market securities), you
should be aware that an investment in the CASH MANAGEMENT PORTFOLIO is
subject to the risk that the value of its investments may be subject to
changes in interest rates. The CASH MANAGEMENT PORTFOLIO does not seek to
maintain a stable net asset value of $1.00.
Risks of Investing Internationally
Except for the CASH MANAGEMENT PORTFOLIO, all of the Portfolios may invest
internationally, including in "emerging market" countries. While investing
internationally may reduce your risk by increasing the diversification of
your investment, the value of your investment may be affected by fluctuating
currency values, changing local and regional economic, political and social
conditions, and greater market volatility, and, in addition, foreign
securities may not be as liquid as domestic securities. These risks affect
all the Portfolios except for the CASH MANAGEMENT PORTFOLIO and are primary
risks of the GLOBAL BOND, WORLDWIDE HIGH INCOME, INTERNATIONAL GROWTH AND
INCOME, GLOBAL EQUITIES, INTERNATIONAL DIVERSIFIED EQUITIES and EMERGING
MARKETS PORTFOLIOS.
Risks of Investing in Smaller Companies
Stocks of smaller companies may be more volatile than, and not as liquid as,
those of larger companies. This will particularly affect the SMALL COMPANY
VALUE, GROWTH-INCOME, ALLIANCE GROWTH, PUTNAM GROWTH, AGGRESSIVE GROWTH,
TECHNOLOGY, INTERNATIONAL GROWTH AND INCOME and EMERGING MARKETS PORTFOLIOS.
Risks of a "Passively Managed" Strategy
Each of the EQUITY INDEX and "DOGS" OF WALL STREET PORTFOLIOS will not
deviate from its strategy (except to the extent necessary to comply with
federal tax laws). If a Portfolio is committed to a strategy that is
unsuccessful, the Portfolio will not meet its investment goal. Because the
Portfolios will not use certain techniques available to other mutual funds
to reduce stock market exposure, the Portfolios may be more susceptible to
general market declines than other Portfolios.
Risks of Investing in Utility Securities
The TELECOM UTILITY PORTFOLIO invests primarily 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. Such utility
securities entail certain risks including: (i) utility companies' historic
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.
To attempt to reduce these risks, 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.
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<PAGE> 8
Risks of Investing in Real Estate Securities
The REAL ESTATE PORTFOLIO invests primarily in the real estate industry. A
Portfolio that invests primarily in the real estate industry is subject to
the risks associated with the direct ownership of real estate. The Portfolio
could also be subject to the risks 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. Most of the
Portfolio's investments are, and likely will continue to be, interests in
Real Estate Investment Trusts (REITs).
Risks of Investing in "Non-Diversified" Portfolios
The GLOBAL BOND, WORLDWIDE HIGH INCOME, "DOGS" OF WALL STREET, MFS MID-CAP
GROWTH and INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIOS are organized as
"non-diversified" Portfolios. A non-diversified Portfolio can invest a
larger portion of assets in the securities of a single company than can some
other mutual funds. By concentrating in a smaller number of securities, a
Portfolio's risk is increased because the effect of each security on the
Portfolio's performance is greater.
In addition, the GOLDMAN SACHS RESEARCH PORTFOLIO invests principally in
securities included in the Goldman Sachs Global Investment Research
Division's U.S. Select List which comprises approximately 25-35 equity
securities. As a result of the small universe of stocks in which the
Portfolio generally invests, it may be subject to greater risks than would a
more diversified fund.
Additional Principal Risks
Shares of the Portfolios are not bank deposits and are not guaranteed or
insured by any bank, government entity or the Federal Deposit Insurance
Corporation. As with any mutual fund, there is no guarantee that a Portfolio
will be able to achieve its investment goals. If the value of the assets of
a Portfolio goes down, you could lose money.
Q: HOW HAVE THE PORTFOLIOS PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Portfolios by showing changes in the Portfolios'
performance from calendar year to calendar year, and comparing the
Portfolios' average annual returns to those of an appropriate market index.
Fees and expenses incurred at the contract level are not reflected in the
bar charts and tables. If these amounts were reflected, returns would be
less than those shown. Of course, past performance is not necessarily an
indication of how a Portfolio will perform in the future. Performance
information is not included for Portfolios that have not been in existence
for at least one full calendar year.
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CASH MANAGEMENT PORTFOLIO
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<TABLE>
<S> <C>
1994 3.8%
1995 5.48%
1996 4.91%
1997 5.22%
1998 5.05%
1999 4.87%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
1.36% (quarter ended 06/30/95) and the lowest return for a quarter was 0.64%
(quarter ended 03/31/94). For the most recent calendar quarter ended 03/31/00,
the return was 1.29%.
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
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Cash Management Portfolio 4.87% 5.11% 4.57%
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</TABLE>
(1) Inception date for the Portfolio is February 9, 1993.
9
<PAGE> 10
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CORPORATE BOND PORTFOLIO
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<TABLE>
<S> <C>
1994 -3.19%
1995 17.78%
1996 4.49%
1997 10.90%
1998 6.05%
1999 -1.85%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
5.94% (quarter ended 06/30/95) and the lowest return for a quarter was -2.89%
(quarter ended 03/31/94). For the most recent calendar quarter ended 03/31/00,
the return was 1.44%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
Corporate Bond Portfolio -1.85% 7.27% 5.40%
------------------------------------------------------------------------------------------------
Lipper Corporate BBB Rated Index(2) -1.60% 7.35% 5.48%
------------------------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index(3) -1.94% 8.18% 6.11%
------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(4) -0.81% 7.74% 5.84%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is July 1, 1993. The since inception
returns for the comparative indices are as of the inception date month end.
(2) The Lipper Corporate BBB Rated Index is an average of variable annuity
accounts that include at least 65% of assets in corporate and government
debt issues in the top four grades.
(3) The Lehman Brothers Corporate Bond Index includes all publicly issued,
fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt.
(4) The Lehman Brothers Aggregate Index combines several Lehman Brothers
fixed-income indices to give a broad view of the bond market -- 70%
reflects the Government/Corporate Bond Index, 29% reflects the
Mortgage-Backed Securities Index and 1% reflects the Asset-Backed
Securities Index.
10
<PAGE> 11
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GLOBAL BOND PORTFOLIO
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<TABLE>
<S> <C>
1994 -4.65%
1995 17.64%
1996 9.36%
1997 10.03%
1998 10.87%
1999 8.09%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
5.66% (quarter ended 09/30/98) and the lowest return for a quarter was -3.97%
(quarter ended 03/31/94). For the most recent calendar quarter ended 03/31/00,
the return was 2.22%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
Global Bond Portfolio 8.09% 9.20% 6.99%
------------------------------------------------------------------------------------------------
J.P. Morgan Global Government Bond Index(2) 0.73% 9.77% 8.64%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is July 1, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) The J.P. Morgan Global Government Bond Index tracks the performance of
bonds throughout the world, including issues from Europe, Australia, the
Far East and the United States.
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HIGH-YIELD BOND PORTFOLIO
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<TABLE>
<S> <C>
1994 -5.52%
1995 14.24%
1996 14.57%
1997 14.42%
1998 -2.95%
1999 6.50%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
7.38% (quarter ended 09/30/97) and the lowest return for a quarter was -8.40%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 0.95%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
High-Yield Bond Portfolio 6.50% 9.13% 7.55%
------------------------------------------------------------------------------------------------
Merrill Lynch High-Yield Master Index(2) 1.55% 9.60% 9.07%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) The Merrill Lynch High-Yield Master Index includes publicly placed,
nonconvertible, coupon-bearing U.S. domestic debt with a maturity of at
least one year. Par amounts of all issues at the beginning and ending of
each reporting period must be at least $10,000. Issues included in the
index must have a rating that is less than investment grade but not in
default.
12
<PAGE> 13
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WORLDWIDE HIGH INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1995 -20.97%
1996 25.32%
1997 15.54%
1998 -17.07%
1999 19.31%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
12.07% (quarter ended 06/30/95) and the lowest return for a quarter was -24.35%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 2.44%.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------------
Worldwide High Income Portfolio 19.31% 11.62% 10.74%
--------------------------------------------------------------------------------------------------
First Boston High Yield Bond Index(2) 3.28% 9.07% 8.72%
--------------------------------------------------------------------------------------------------
J.P. Morgan EMBI Plus(3) 21.59% 16.54% 14.62%
--------------------------------------------------------------------------------------------------
Blended Index(4) 6.88% 12.31% 11.26%
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is October 28, 1994. The since inception
returns for the comparative indices are as of the inception date month end.
(2) The First Boston High Yield Bond Index is a trader-priced portfolio
constructed to mirror the public high-yield debt market. Securities in the
index are rated B or lower.
(3) The J.P. Morgan Emerging Markets Bond Index (EMBI) Plus is a
market-weighted index composed of all Brady Bonds outstanding; it includes
Argentina, Brazil, Mexico, Nigeria, the Philippines, and Venezuela.
(4) The Blended Index combines 50% of the First Boston High Yield Index and 50%
of the J.P. Morgan Emerging Markets Bond Index Plus.
13
<PAGE> 14
--------------------------------------------------------------------------------
SUNAMERICA BALANCED PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1997 24.48%
1998 24.61%
1999 21.40%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
15.55% (quarter ended 12/31/98) and the lowest return for a quarter was -5.24%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 4.23%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
-----------------------------------------------------------------------------------------
SunAmerica Balanced Portfolio 21.40% 22.67%
-----------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 26.60%
-----------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(3) -0.81% 6.60%
-----------------------------------------------------------------------------------------
Blended Index(4) 11.54% 17.41%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 3, 1996. The since inception
returns for the comparative indices are as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
(3) The Lehman Brothers Aggregate Index combines several Lehman Brothers
fixed-income indices to give a broad view of the bond market -- 70%
reflects the Government/Corporate Bond Index, 29% reflects the
Mortgage-Backed Securities Index and 1% reflects the Asset-Backed
Securities Index.
(4) The Blended Index consists of 55% S&P 500(R) Index, 35% Lehman Brothers
Aggregate Index, and 10% Treasury Bills. Treasury Bills are short-term
securities with maturities of one-year or less issued by the U.S.
Government.
14
<PAGE> 15
--------------------------------------------------------------------------------
MFS TOTAL RETURN PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1995 27.64%
1996 9.94%
1997 16.90%
1998 19.53%
1999 2.88%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
13.55% (quarter ended 12/31/98) and the lowest return for a quarter was -4.95%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 1.68%.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
MFS Total Return Portfolio(2) 2.88% 15.07% 14.46%
-------------------------------------------------------------------------------------------------
S&P 500(R)(3) 21.03% 28.56% 26.90%
-------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(4) -0.81% 7.74% 7.56%
-------------------------------------------------------------------------------------------------
Blended Index(5) 11.54% 18.77% 17.84%
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is October 28, 1994. The since inception
returns for the comparative indices are as of the inception date month end.
(2) Prior to January 1, 1999, the MFS Total Return Portfolio was named the
Balanced Phoenix Investment Counsel Portfolio.
(3) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
(4) The Lehman Brothers Aggregate Index combines several Lehman Brothers
fixed-income indices to give a broad view of the bond market -- 70%
reflects the Government/Corporate Bond Index, 29% reflects the
Mortgage-Backed Securities Index and 1% reflects the Asset-Backed
Securities Index.
(5) The Blended Index consists of 35% Lehman Brothers Aggregate Index, 55% S&P
500 Index, and 10% Treasury Bills. Treasury Bills are short-term securities
with maturities of one-year or less issued by the U.S. Government.
15
<PAGE> 16
--------------------------------------------------------------------------------
ASSET ALLOCATION PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -0.26%
1995 26.29%
1996 18.95%
1997 21.81%
1998 3.32%
1999 9.44%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
11.05% (quarter ended 06/30/97) and the lowest return for a quarter was -8.76%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 2.20%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
Asset Allocation Portfolio 9.44% 15.65% 12.77%
------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 28.56% 21.76%
------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(3) -0.81% 7.74% 5.84%
------------------------------------------------------------------------------------------------
Blended Index(4) 12.00% 20.09% 15.37%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is July 1, 1993. The since inception
returns for the comparative indices are as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
(3) The Lehman Brothers Aggregate Index combines several Lehman Brothers
fixed-income indices to give a broad view of the bond market--70% reflects
the Government/Corporate Bond Index, 29% reflects the Mortgage-Backed
Securities Index and 1% reflects the Asset-Backed Securities Index.
(4) The Blended Index consists of 40% Lehman Brothers Aggregate Index and 60%
S&P 500 Index.
16
<PAGE> 17
--------------------------------------------------------------------------------
TELECOM UTILITY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1997 25.73%
1998 14.04%
1999 1.78%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
12.85% (quarter ended 12/31/97) and the lowest return for a quarter was -6.67%
(quarter ended 03/31/99). For the most recent calendar quarter ended 03/31/00,
the return was 5.15%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
-----------------------------------------------------------------------------------------
Telecom Utility Portfolio(2) 1.78% 13.93%
-----------------------------------------------------------------------------------------
S&P 500(R)(3) 21.03% 26.60%
-----------------------------------------------------------------------------------------
Blended Index(4) 21.41% 28.64%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 3, 1996. The since inception
returns for the comparative indices are as of the inception date month end.
(2) Prior to July 5, 2000, the Telecom Utility Portfolio was named the Utility
Portfolio.
(3) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
(4) The Blended Index is comprised of 35% S&P Utility Index and 65% for the S&P
Communications Service Index, on a market capitalization weighted basis.
The S&P Utility Index is presently comprised of 40 stocks from the electric
and natural gas industries. The S&P Communications Service Index is
comprised of the companies listed in the telecommunications sectors of the
S&P 400, 500, and 600. Created in July of 1996, the S&P Communications
Service Index includes cellular and wireless service providers including
pagers, long distance providers and the telephone group companies (local
service providers).
17
<PAGE> 18
--------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1999 4.16%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
4.94% (quarter ended 12/31/99) and the lowest return for a quarter was -7.71%
(quarter ended 09/30/99). For the most recent calendar quarter ended 03/31/00,
the return was -2.48%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
-----------------------------------------------------------------------------------------
Equity Income Portfolio 4.16% 8.93%
-----------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 26.61%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is December 14, 1998. The since inception
return for the comparative index is as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
18
<PAGE> 19
--------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1999 17.14%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
14.57% (quarter ended 12/31/99) and the lowest return for a quarter was -7.18%
(quarter ended 09/30/99). For the most recent calendar quarter ended 03/31/00,
the return was 2.08%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
-----------------------------------------------------------------------------------------
Equity Index Portfolio 17.14% 24.75%
-----------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 26.61%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is December 14, 1998. The since inception
return for the comparative index is as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
19
<PAGE> 20
--------------------------------------------------------------------------------
GROWTH-INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -2.61%
1995 34.10%
1996 24.06%
1997 33.91%
1998 30.74%
1999 30.04%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
28.51% (quarter ended 12/31/98) and the lowest return for a quarter was -14.39%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 4.88%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
Growth-Income Portfolio 30.04% 30.52% 22.22%
------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 28.56% 21.37%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the Index will reflect
changes in larger companies more heavily than those in smaller companies.
20
<PAGE> 21
--------------------------------------------------------------------------------
FEDERATED VALUE PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1997 31.43%
1998 17.96%
1999 6.19%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
16.10% (quarter ended 12/31/98) and the lowest return for a quarter was -11.49%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was -2.23%.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR PAST ONE RETURN SINCE
ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
--------------------------------------------------------------------------------------
Federated Value Portfolio 6.19% 17.52%
--------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 26.60%
--------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 3, 1996. The since inception
return for the comparative index is as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
21
<PAGE> 22
--------------------------------------------------------------------------------
DAVIS VENTURE VALUE PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1995 37.45%
1996 24.76%
1997 34.32%
1998 13.73%
1999 16.11%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
21.07% (quarter ended 12/31/98) and the lowest return for a quarter was -14.87%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 9.85%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED PAST ONE PAST FIVE RETURN SINCE
DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Davis Venture Value Portfolio(2) 16.11% 24.92% 23.75%
----------------------------------------------------------------------------------------------------
S&P 500(R)(3) 21.03% 28.56% 26.90%
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is October 28, 1994. The since inception
return for the comparative index is as of the inception date month end.
(2) Prior to April 10, 2000, the Davis Venture Value Portfolio was named the
Venture Value Portfolio.
(3) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
22
<PAGE> 23
-----------------------------------------------------------------------------
"DOGS" OF WALL STREET PORTFOLIO
-----------------------------------------------------------------------------
<TABLE>
<S> <C>
1999 -7.08%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
15.56% (quarter ended 06/30/99) and the lowest return for a quarter was -9.92%
(quarter ended 09/30/99). For the most recent calendar quarter ended 03/31/00,
the return was -9.60%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
-----------------------------------------------------------------------------------------
"Dogs" of Wall Street Portfolio -7.08% -4.64%
-----------------------------------------------------------------------------------------
S&P 500(R)(2) 21.03% 20.50%
-----------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is April 1, 1998. The since inception
return for the comparative index is as of the inception date month end.
(2) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the Index will reflect
changes in larger companies more heavily than those of smaller companies.
23
<PAGE> 24
--------------------------------------------------------------------------------
ALLIANCE GROWTH PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -2.16%
1995 43.79%
1996 29.11%
1997 31.43%
1998 52.23%
1999 33.07%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
32.57% (quarter ended 12/31/98) and the lowest return for a quarter was -12.54%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 7.01%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER PAST ONE PAST FIVE RETURN SINCE
31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
Alliance Growth Portfolio 33.07% 37.66% 27.69%
------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Index(2) 33.16% 32.41% 23.75%
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) The Russell 1000 Growth Index consists of stocks with a
greater-than-average growth orientation. Companies in this index tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend
yields and higher forecasted growth values.
24
<PAGE> 25
--------------------------------------------------------------------------------
MFS GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -8.01%
1995 32.10%
1996 15.99%
1997 23.22%
1998 29.28%
1999 5.93%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
22.03% (quarter ended 12/31/98) and the lowest return for a quarter was -8.93%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 2.01%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER PAST ONE PAST FIVE RETURN SINCE
31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
MFS Growth and Income Portfolio(2) 5.93% 20.92% 15.05%
------------------------------------------------------------------------------------------------------------
S&P 500(R)(3) 21.03% 28.56% 21.37%
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) Prior to January 1, 1999 the MFS Growth and Income Portfolio was named the
Growth Phoenix Investment Counsel Portfolio.
(3) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
25
<PAGE> 26
--------------------------------------------------------------------------------
PUTNAM GROWTH PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -1.57%
1995 24.75%
1996 20.37%
1997 32.48%
1998 34.76%
1999 29.71%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
25.28% (quarter ended 12/31/98) and the lowest return for a quarter was -12.26%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 2.98%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER PAST ONE PAST FIVE RETURN SINCE
31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
Putnam Growth Portfolio(2) 29.71% 28.31% 20.01%
------------------------------------------------------------------------------------------------------------
S&P 500(R)(3) 21.03% 28.56% 21.37%
------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Index(4) 33.16% 32.41% 23.75%
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
returns for the comparative indices are as of the inception date month end.
(2) Prior to April 7, 1997, the Putnam Growth Portfolio was known as the
Provident Growth Portfolio, managed by Provident Investment Counsel.
(3) The S&P 500(R) Index tracks the performance of 500 stocks representing a
sampling of the largest foreign and domestic stocks traded publicly in the
United States. Because it is market-weighted, the index will reflect
changes in larger companies more heavily than those in smaller companies.
(4) The Russell 1000 Growth Index consists of stocks with a
greater-than-average growth orientation. Companies in this index tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend
yields and higher forecasted growth values.
26
<PAGE> 27
--------------------------------------------------------------------------------
REAL ESTATE PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1998 -14.11%
1999 -7.42%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
11.98% (quarter ended 06/30/99) and the lowest return for a quarter was -11.07%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 1.25%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAST ONE RETURN SINCE
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
Real Estate Portfolio -7.42% -2.92%
----------------------------------------------------------------------------------------------------------
Morgan Stanley REIT Index(2) -4.54% -2.30%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 2, 1997. The since inception
return for the comparative index is as of the inception date month end.
(2) The Morgan Stanley Real Estate Investment Trust (REIT) Index is a
capitalization-weighted index with dividends reinvested of mostly actively
traded real estate investment trusts and is designed to be a measure of
real estate equity performance. The index was developed with a base value
of 200 as of December 31, 1994.
27
<PAGE> 28
--------------------------------------------------------------------------------
SMALL COMPANY VALUE PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1999 6.15%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
19.24% (quarter ended 06/30/99) and the lowest return for a quarter was -14.29%
(quarter ended 03/31/99). For the most recent calendar quarter ended 03/31/00,
the return was 8.08%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAST ONE RETURN SINCE
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
Small Company Value Portfolio 6.15% 10.41%
----------------------------------------------------------------------------------------------------------
Russell 2000 Value Index(2) 21.25% 27.31%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is December 14, 1998. The since inception
return for the comparative index is as of the inception date month end.
(2) The Russell 2000 Value Index is a subset of the Russell 2000 Index that
includes companies with lower price-to-book ratios and lower forecasted
growth values. The Russell 2000 Index measures the performance of the 2,000
smallest companies in the broad equity market Russell 3000 Index, and
represents approximately 8% of the total market capitalization of the
Russell 3000 Index.
28
<PAGE> 29
--------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1997 12.35%
1998 17.43%
1999 84.66%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
53.68% (quarter ended 12/31/99) and the lowest return for a quarter was -17.31%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 8.30%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAST ONE RETURN SINCE
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
Aggressive Growth Portfolio 84.66% 30.10%
----------------------------------------------------------------------------------------------------------
Russell 2000 Index(2) 21.25% 11.15%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 3, 1996. The since inception
return for the comparative index is as of the inception date month end.
(2) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000
total market capitalization. The Index was developed with a base value of
$135,000 as of December 31, 1986.
29
<PAGE> 30
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1998 10.83%
1999 24.18%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
14.81% (quarter ended 12/31/98) and the lowest return for a quarter was -17.57%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 2.87%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAST ONE RETURN SINCE
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
International Growth and Income Portfolio 24.18% 15.87%
----------------------------------------------------------------------------------------------------------
MSCI EAFE Index(2) 27.31% 16.44%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 2, 1997. The since inception
return for the comparative index is as of the inception date month end.
(2) The Morgan Stanley Capital International (MSCI) Europe, Australia, and Far
East (EAFE) Index represents the foreign stocks of 20 developed market
countries in Europe, Australia and the Far East.
30
<PAGE> 31
--------------------------------------------------------------------------------
GLOBAL EQUITIES PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1994 -0.30%
1995 19.16%
1996 14.18%
1997 15.06%
1998 22.86%
1999 30.94%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
25.50% (quarter ended 12/31/98) and the lowest return for a quarter was -18.20%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 7.94%.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER PAST ONE PAST FIVE RETURN SINCE
31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
Global Equities Portfolio 30.94% 20.29% 16.99%
------------------------------------------------------------------------------------------------------------
MSCI World Index(2) 25.34% 20.25% 18.39%
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is February 9, 1993. The since inception
return for the comparative index is as of the inception date month end.
(2) The Morgan Stanley Capital International (MSCI) World Index measures the
performance of companies representative of the market structure of 22
developed market countries in North America, Europe and Asia/Pacific
regions.
31
<PAGE> 32
--------------------------------------------------------------------------------
INTERNATIONAL DIVERSIFIED EQUITIES PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1995 10.34%
1996 9.31%
1997 6.37%
1998 18.53%
1999 24.59%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
15.91% (quarter ended 03/31/98) and the lowest return for a quarter was -12.33%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was -3.69%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED PAST ONE PAST FIVE RETURN SINCE
DECEMBER 31, 1999) YEAR YEARS INCEPTION(1)
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
International Diversified Equities Portfolio 24.59% 13.63% 12.38%
----------------------------------------------------------------------------------------------------
MSCI EAFE Index(2) 27.31% 13.15% 11.75%
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is October 28, 1994. The since inception
return for the comparative index is as of the inception date month end.
(2) The Morgan Stanley Capital International (MSCI) Europe, Australia, and Far
East (EAFE) Index represents the foreign stocks of 20 developed market
countries in Europe, Australia and the Far East.
32
<PAGE> 33
--------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1998 -24.27%
1999 77.45%
</TABLE>
During the period shown in the bar chart, the highest return for a quarter was
38.80% (quarter ended 12/31/99) and the lowest return for a quarter was -22.17%
(quarter ended 09/30/98). For the most recent calendar quarter ended 03/31/00,
the return was 1.62%.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAST ONE RETURN SINCE
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR INCEPTION(1)
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio 77.45% 4.52%
----------------------------------------------------------------------------------------------------------
MSCI Emerging Markets Free Index(2) 66.42% -0.66%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is June 2, 1997. The since inception
return for the comparative index is as of the inception date month end.
(2) The Morgan Stanley Capital International (MSCI) Emerging Markets--Free
Index measures the performance of companies representative of the market
structure of 25 emerging market countries in Europe, Latin America, and the
Pacific Basin. The MSCI EMF Index excludes closed markets and those shares
in otherwise free markets which are not purchasable by foreigners.
33
<PAGE> 34
--------------------------------------------------------------------------------
ACCOUNT INFORMATION
--------------------------------------------------------------------------------
Shares of the Portfolios are not offered directly to the public. Instead, shares
are currently issued and redeemed only in connection with investments in and
payments under variable annuity contracts and variable life insurance policies
(Variable Contracts) of Anchor National Life Insurance Company, First SunAmerica
Life Insurance Company, AIG Life Insurance Company and American International
Life Assurance Company of New York (Life Companies), each of which is affiliated
with the Trust's investment adviser and manager, SunAmerica Asset Management
Corp. (SAAMCo). All shares of the Trust are owned by "Separate Accounts" of the
Life Companies. So if you would like to invest in a Portfolio, you must purchase
a Variable Contract from one of the Life Companies. You should be aware that the
contracts involve fees and expenses that are not described in this Prospectus,
and that the contracts also may involve certain restrictions and limitations.
Certain Portfolios may not be available in connection with a particular
contract. You will find information about purchasing a Variable Contract and the
Portfolios available to you in the prospectus that offers the contracts, which
accompanies this Prospectus.
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each Portfolio is
determined each business day at the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m., Eastern time) by dividing its net assets by
the number of its shares outstanding. Investments for which market quotations
are readily available are valued at market. All other securities and assets are
valued at "fair value" following procedures approved by the Trustees.
Certain of the Portfolios may invest to a large extent in securities that are
primarily listed on foreign exchanges that trade on weekends or other days when
the Trust does not price its shares. As a result, the value of these Portfolios'
shares may change on days when the Trust is not open for purchases or
redemptions.
BUY AND SELL PRICES The Separate Accounts buy and sell shares of a Portfolio at
NAV, without any sales or other charges.
EXECUTION OF REQUESTS The Trust is open on those days when the New York Stock
Exchange is open for regular trading. Buy and sell requests are executed at the
next NAV to be calculated after the request is accepted by the Trust. If the
order is received by the Trust before the Trust's close of business (generally
4:00 p.m., Eastern time), the order will receive that day's closing price. If
the order is received after that time, it will receive the next business day's
closing price.
During periods of extreme volatility or market crisis, a Portfolio may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to seven business days or longer, as allowed by federal
securities laws.
DIVIDEND POLICIES AND TAXES
DISTRIBUTIONS Each Portfolio annually declares and distributes substantially all
of its net investment income in the form of dividends and capital gains
distributions.
DISTRIBUTION REINVESTMENT The dividends and distributions will be reinvested
automatically in additional shares of the same Portfolio on which they were
paid.
TAXABILITY OF A PORTFOLIO Each Portfolio intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended. As long as each Portfolio is qualified as a regulated investment
company, it will not be subject to federal income tax on the earnings that it
distributes to its shareholders.
34
<PAGE> 35
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE "DOGS" OF WALL STREET AND GOLDMAN SACHS
RESEARCH PORTFOLIOS
--------------------------------------------------------------------------------
INVESTMENT STRATEGY FOR THE "DOGS" OF WALL STREET PORTFOLIO
The "DOGS" OF WALL STREET PORTFOLIO employs a passively managed "buy and hold"
strategy that annually selects the following 30 stocks: (1) the 10 highest
yielding common stocks in the Dow Jones Industrial Average and (2) the 20 other
highest yielding stocks of the 400 largest industrial companies in the U.S.
markets that have capitalizations of at least $1 billion and have received one
of the two highest rankings from an independently published common stock ranking
service on the basis of growth and stability of earnings and dividends. The
stocks in the Portfolio will not change over the course of the year, even if
there are adverse developments concerning a particular stock, an industry, the
economy or the stock market generally. The annual selection of the thirty stocks
that meet these criteria takes place no later than January 15th, on the basis of
information as of the preceding December 31st. Immediately after the Portfolio
buys and sells stocks, it will hold an equal value of each of the thirty stocks.
In other words, the Portfolio will invest 1/30 of its assets in each of the
stocks that make up its portfolio. Thereafter, when an investor purchases shares
of the Portfolio, the Adviser invests the additional funds in the selected
stocks based on each stock's respective percentage of the Portfolio's assets.
Due to purchases and redemptions of Portfolio shares during the year and changes
in the market value of the stocks held by the Portfolio, it is likely that the
weightings of the stocks in the Portfolio will fluctuate throughout the course
of the year. This may result in the Portfolio investing more than 25% of its
assets in the securities of issuers in the same industry, to the extent such
investments are selected according to the Portfolio's stock selection criteria.
INVESTMENT STRATEGY FOR THE GOLDMAN SACHS RESEARCH PORTFOLIO
Under normal circumstances, the Goldman Sachs Research Portfolio will generally
purchase a stock that has been added to, or sell a stock that has been removed
from, the U.S. Select List (as described below) at some point after publication
of that change, at the discretion of the Subadviser. Notification of changes to
the U.S. Select List is made to clients of Goldman, Sachs & Co. and to the
portfolio management team of the Goldman Sachs Research Portfolio at the same
time. The Subadviser expects the performance of the Goldman Sachs Research
Portfolio to be driven by sector and/or stock selection of the U.S. Select List.
In addition, the Subadviser may at times purchase supplemental securities that
are not included on the U.S. Select List.
Goldman Sachs has achieved world-wide recognition for its value-added research
products. The U.S. Select List was introduced on September 9, 1998 and comprises
approximately 25 to 35 equity securities that the Goldman Sachs U.S. Stock
Selection Committee expects, as a portfolio, to outperform its benchmark S&P
500(R) Index over the next 12 to 18 months. The U.S. Stock Selection Committee
currently comprises ten senior professionals, including the head of Global
Investment Research and the Director of U.S. Investment Research, as well as a
senior market strategist, economist, and sector specialists. The list is
consistent with overall investment policy and emphasizes strategically favored
economic sectors. The U.S. Select List is updated on a regular basis.
The U.S. Select List is not compiled with any particular client or product in
mind and is not (and will not be) compiled with the Goldman Sachs Research
Portfolio in mind. The performance of the U.S. Select List cannot be used to
predict the performance of the Goldman Sachs Research Portfolio, an actively
managed mutual fund. The performance of the Goldman Sachs Research Portfolio may
differ from that of the published U.S. Select List, for a variety of reasons,
including transaction costs, time delay between when a stock is added or removed
from the list and when it is bought or sold for the Goldman Sachs Research
Portfolio; modification in the stock weights in order to control risk; and the
Goldman Sachs Research Portfolio's investments in cash equivalents, options and
other securities and instruments that are not included in the U.S. Select List.
35
<PAGE> 36
--------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE PORTFOLIOS
--------------------------------------------------------------------------------
INVESTMENT STRATEGIES
Each Portfolio has its own investment goal and principal strategy for pursuing
it as described in the charts beginning on page 3. The charts below summarize
information about each Portfolio's investments. We have included a glossary to
define the investment and risk terminology used in the charts and throughout
this Prospectus. Unless otherwise indicated, investment restrictions, including
percentage limitations, apply at the time of purchase.
-------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
CASH HIGH-YIELD WORLDWIDE HIGH
MANAGEMENT CORPORATE BOND GLOBAL BOND BOND INCOME
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
What are the - Fixed income - Fixed income - Fixed income - Fixed income - Foreign
Portfolio's securities: securities: securities: securities: securities:
principal - U.S. treasury - corporate - U.S. and non- - junk bonds - emerging
investments? bills bonds U.S. government - convertible market
- agency discount - investment grade securities bonds government
notes fixed income - investment grade - preferred stocks securities
- commercial paper securities corporate bonds - zero coupon and - emerging market
- corporate debt - junk bonds - mortgage and deferred corporate debt
instruments (up to 35%) asset-backed interest bonds instruments
- Short-term - U.S. government securities - Eurobonds
investments securities - Short-term - Brady bonds
investments - Junk bonds
- Currency
transactions
- Foreign
securities
-----------------------------------------------------------------------------------------------------------------------------
In what other types N/A - Fixed income - Options and - Equity - Currency
of investments may securities: futures securities: transactions
the Portfolio - preferred - Forward - convertible - Illiquid
significantly securities commitments securities securities (up to
invest? - zero coupon, - Mortgage and - warrants 15%)
deferred interest-rate - Fixed income - Borrowing for
interest and PIK swaps securities: temporary or
bonds - Hybrid - U.S. emergency
(up to 35%) instruments government purposes
- Foreign - Deferred securities (up to 33 1/3%)
securities interest bonds - investment grade
- When-issued and - Inverse floaters bonds
delayed delivery - Illiquid - Foreign
transactions securities (up to securities
- Illiquid 15%) - PIK bonds
securities (up to - Pass-through - Short-term
15%) securities investments
- Pass-through - Borrowing for - Short sale risks
securities temporary or
- Convertible emergency
securities purposes
(up to 33 1/3%)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
CASH HIGH-YIELD WORLDWIDE HIGH
MANAGEMENT CORPORATE BOND GLOBAL BOND BOND INCOME
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
What other types of N/A - Short-term - Mortgage dollar - Borrowing for - Hybrid
investments may the investments rolls temporary or instruments
Portfolio use as - Defensive - Zero coupon, emergency - Options and
part of efficient investments deferred purposes Futures
portfolio - Options and interest and PIK (up to 33 1/3%) - Forward
management or to futures bonds - Illiquid commitments
enhance return? (up to 10%) - Firm commitments securities (up to
- Borrowing for and when-issued 15%)
temporary or or delayed -- - Loan
emergency delivery participations
purposes transactions - Short sales
(up to 33 1/3%) - Forward - Rights
- Securities commitments
lending (up to - Loan
33 1/3%) participations
- Securities
lending (up to
33 1/3%)
- Interest rate
swaps, caps,
floors and
collars
-----------------------------------------------------------------------------------------------------------------------------
What risks normally - Interest rate - Credit quality - Interest rate - Credit quality - Foreign exposure
affect the fluctuations - Interest rate fluctuations - Interest rate - Credit quality
Portfolio? - Security fluctuations - Credit quality fluctuations - Illiquidity
selection - Market - Currency - Security - Securities
volatility volatility selection selections
- Small and medium - Derivatives - Market - Market
sized companies - Market volatility volatility
- Security volatility - Currency
selection - Non-diversified volatility
status - Non-diversified
- Foreign exposure status
- Hedging
- Security
selection
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
BALANCED OR ASSET ALLOCATION PORTFOLIOS
----------------------------------------------------------------------------------------------------------------------
SUNAMERICA
BALANCED MFS TOTAL RETURN ASSET ALLOCATION TELECOM UTILITY
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What are the - Equity securities: - Equity securities - Equity securities: - Equity securities:
Portfolio's - common stocks (at least 40%, but not - common stocks - mid-cap stocks
principal - Fixed income more than 75%): - convertible - large-cap stocks
investments? securities: - common stocks securities - small-cap stocks
- U.S. government - convertible - warrants - REITs
securities securities - rights
- corporate debt - rights - Fixed income
instruments - Fixed income securities:
securities (at least - U.S. government
25%): securities
- U.S. government - investment grade
securities corporate bonds
- pass-through - preferred stocks
securities - junk bonds (up to
- corporate debt 25% of fixed income
instruments investments)
- preferred stocks - senior securities
- Loan participations - pass-through
- Equity swaps securities
- Emerging markets - REITs
- Registered
investment companies
- Foreign securities
- Hybrid Instruments:
- WEBs and SPDRs
- Illiquid securities
(up to 15%)
----------------------------------------------------------------------------------------------------------------------
In what other types - Equity securities: - Foreign securities: - Equity securities: - Equity securities:
of investments may - small-cap stocks (up to 20%): - small-cap stocks - convertible
the Portfolio (up to 20%) - Brady bonds - convertible securities
significantly - Short-term - depositary receipts securities - Fixed income
invest? investments - fixed income - Foreign securities: securities:
(up to 10%) securities (U.S. - ADRs, GDRs and EDRs - corporate bonds
- Defensive dollar denominated) - emerging markets - investment grade
investments - Junk bonds - Equity swaps fixed income
- Foreign securities (up to 20%) - Hybrid securities securities
- Illiquid securities - Securities lending - Currency - preferred stocks
(up to 15%) (up to 33 1/3%) transactions
- Futures
- Forward commitments
- Mortgage dollar
rolls
- Deferred interest
bonds
----------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
BALANCED OR ASSET ALLOCATION PORTFOLIOS
----------------------------------------------------------------------------------------------------------------------
SUNAMERICA
BALANCED MFS TOTAL RETURN ASSET ALLOCATION TELECOM UTILITY
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What other types of - Options and futures - Municipal bonds - Options and futures - Short-term
investments may the - Currency - Warrants - Short-term investments
Portfolio use as transactions - Zero-coupon, investments - Defensive
part of efficient - Borrowing for deferred interest and - Firm commitment investments
portfolio management temporary or PIK bonds when agreements - Options and futures
or to enhance emergency purposes issued and - When issued and - Borrowing for
return? (up to 33 1/3%) delayed-delivery delayed-delivery temporary or
- Securities lending transactions transactions emergency purposes
(up to 33 1/3%) - Hybrid instruments - Zero coupon bonds (up to 33 1/3%)
- Inverse floaters - Interest rate swaps, - Securities lending
- Options and futures caps, floors and (up to 33 1/3%)
- Currency collars
transactions - Securities lending
- Forward commitments (up to 33 1/3%)
- Registered - Loan participations
investment companies - Defensive
- Short-term investments
investments - Borrowing for
- Defensive temporary or emergency
investments purposes (up to
- Borrowing for 33 1/3%)
temporary or
emergency purposes
(up to 33 1/3%)
----------------------------------------------------------------------------------------------------------------------
What risks normally - Market volatility - Security selection - Market volatility - Market volatility
affect the - Interest rate - Market volatility - Securities selection - Utility industry
Portfolio? fluctuations - Foreign exposure - Interest rate
- Credit quality - Interest rate fluctuations
- Currency volatility fluctuations - Credit quality
- Foreign exposure - Illiquidity - Currency volatility
- Derivatives - Credit quality - Foreign exposure
- Hedging - Active trading - Derivatives
- Prepayment - Hedging
----------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
-----------------------------------------------------------------------------------------------------------------------------
DAVIS VENTURE
EQUITY INCOME EQUITY INDEX GROWTH-INCOME FEDERATED VALUE VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
What are the - Equity - Equity - Equity - Equity - Equity
Portfolio's securities: securities: securities: securities: securities:
principal - common stocks - common stocks - large-cap stocks - large-cap stocks - large-cap stocks
investments? - mid-cap stocks
-----------------------------------------------------------------------------------------------------------------------------
In what other types - Equity N/A - Foreign - Equity - Mid-cap stocks
of investments may securities: securities securities: - Foreign
the Portfolio - small-cap stocks (up to 25%) - mid-cap stocks securities
significantly - convertible - Foreign
invest? securities securities:
- Fixed income - ADRs
securities:
- U.S. government
securities
- preferred stocks
- Foreign
securities
(up to 25%)
-----------------------------------------------------------------------------------------------------------------------------
What other types of - Short-term - Short-term - Short-term - Short-term - Short-term
investments may the investments investments investments investments investments
Portfolio use as - Defensive - Defensive - Defensive - Defensive - Defensive
part of efficient investments investments investments investments investments
portfolio - Options and - Options and - Borrowing for - Options and - U.S. government
management or to futures futures temporary or futures securities
enhance return? - Borrowing for (up to 20%) emergency - Borrowing for
temporary or - Borrowing for purposes temporary or
emergency temporary or (up to 33 1/3%) emergency
purposes emergency - Options and purposes
(up to 33 1/3%) purposes futures (up to 33 1/3%)
- Securities (up to 33 1/3%) - Securities
lending - Securities lending
(up to 33 1/3%) lending (up to 33 1/3%)
- Illiquid (up to 33 1/3%)
securities - Illiquid
(up to 15%) securities
- Forward (up to 15%)
commitments - Foreign
- Registered securities
investment - Small-cap stocks
companies - Registered
- Firm commitments investment
- When issued and companies
delayed-delivery - Firm commitments
transactions - When issued and
- Junk bonds delayed-delivery
transactions
-----------------------------------------------------------------------------------------------------------------------------
What risks normally - Market - Market - Market - Market - Market
affect the volatility volatility volatility volatility volatility
Portfolio? - Securities - Passively- - Securities - Securities - Securities
selection managed strategy selection selection selection
- Active trading - Active trading - Active trading
- Growth stocks
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
---------------------------------------------------------------------------------------------------------------------------
GOLDMAN SACHS MFS GROWTH AND
"DOGS" OF WALL STREET ALLIANCE GROWTH RESEARCH INCOME
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
What are the - Equity securities: - Equity securities: - Equity securities: - Equity securities
Portfolio's - large-cap stocks - large-cap stocks - common stocks (at least 65%):
principal - warrants - common stocks
investments? - rights - convertible
- convertible securities
securities - Fixed income
- Equity swaps securities:
(up to 15%) - preferred stocks
- Preferred stocks - Foreign securities:
- depositary receipts
---------------------------------------------------------------------------------------------------------------------------
In what other types N/A - Foreign securities - Small-cap stocks - Foreign securities
of investments may (up to 25%) - Currency (up to 20%)
the Portfolio transactions - Securities lending
significantly - Futures (up to 33 1/3%)
invest? - Equity securities of
foreign issuers
- Hybrid instruments
(up to 15%);
- structured
securities
- SPDRs (up to 10%)
- Other registered
investment companies
(up to 10% and
including exchange-
traded funds)
- REITs
- U.S. government
securities
- Corporate debt
instruments
- Short-term
investments
---------------------------------------------------------------------------------------------------------------------------
What other types of - Short-term - Short-term - Options - Pass-through
investments may the investments investments - Currency securities
Portfolio use as - Defensive investments - Defensive transactions - Warrants
part of efficient - Borrowing for investments - Forward commitments - Zero-coupon,
portfolio management temporary or - Borrowing for - When-issued and deferred interest and
or to enhance emergency purposes temporary or delayed delivery PIK bonds
return? (up to 33 1/3%) emergency purposes - Borrowing for - Short sales
- Options and futures (up to 33 1/3%) temporary or emergency - when issued and
- Options and futures purposes (up to delayed-delivery
33 1/3%) transactions
- Short sales - Futures
(up to 25% and only - Currency
"against the box") transactions
- Securities lending - Forward commitments
(up to 33 1/3%) - Registered
- Repurchase investment companies
agreements - Illiquid securities
(up to 15%)
- Short-term
investments
- Defensive
investments
- Borrowing for
temporary or
emergency purposes
(up to 33 1/3%)
- Rights
- Emerging markets
---------------------------------------------------------------------------------------------------------------------------
What risks normally - Market volatility - Market volatility - Market volatility - Market volatility
affect the - Securities selection - Securities selection - Securities selection - Securities selection
Portfolio? - Non-diversified - Active trading - Credit quality - Medium sized
status - Growth stocks - Derivatives companies
- Illiquidity - Illiquidity - Growth stocks
- Passively managed - Interest rate
strategy fluctuation
- Small companies
- Real estate industry
- Foreign exposure
- Unseasoned companies
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY
PUTNAM GROWTH BLUE CHIP GROWTH REAL ESTATE VALUE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
What are the - Equity securities - Equity securities: - Equity securities: - Equity securities:
Portfolio's - large-cap stocks - mid-cap stocks - small-cap stocks
principal (at least 65%) - small-cap stocks
investments? - mid-cap stocks - Fixed income
securities:
- preferred stocks
- REITs
---------------------------------------------------------------------------------------------------------------------
In what other types N/A - Small-cap stocks - Convertible stocks - Fixed income
of investments may - Foreign securities - Foreign securities securities:
the Portfolio - Junk bonds - U.S. government
significantly (up to 5%) securities
invest? - Corporate bonds - corporate debt
instruments
- preferred stocks
- junk bonds
- Foreign securities
(up to 25%)
---------------------------------------------------------------------------------------------------------------------
What other types of - Short-term - Short-term - Short-term - Short-term
investments may the investments investments investments investments
Portfolio use as - Currency (up to 10%) - Defensive - Defensive
part of efficient transactions - Defensive investments investments
portfolio - Defensive instruments - U.S. government - Borrowing for
management or to investments - Options and futures securities temporary or
enhance return? - Borrowing for - Borrowing for emergency purposes
temporary or temporary or (up to 33 1/3%)
emergency purposes emergency purposes - Securities lending
- Options and futures (up to 33 1/3%) (up to 33 1/3%)
- Warrants - Securities lending - Illiquid securities
- Hybrid instruments (up to 33 1/3%) (up to 15%)
- Forward commitments
- Registered
investment companies
- Firm commitments
- When issued and
delayed-delivery
transactions
- REITs
- Convertible
securities
- Warrants
- Rights
---------------------------------------------------------------------------------------------------------------------
What risks normally - Market volatility - Market volatility - Market volatility - Market volatility
affect the - Securities - Securities - Securities - Securities
Portfolio? selection selection selection selection
- Growth stocks - Active trading - Real estate - Small companies
- Interest rate industry - Active trading
fluctuation - Small and medium
- Growth stocks sized companies
---------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------
MFS MID-CAP
GROWTH AGGRESSIVE GROWTH GROWTH OPPORTUNITIES TECHNOLOGY
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
What are the - Equity securities - Equity securities: - Equity securities: - Equity securities
Portfolio's (at least 65%): - small-cap stocks - mid-cap stocks - large-cap stocks
principal - common stocks - mid-cap stocks - mid-cap stocks
investments? - mid-cap stocks - convertible - small-cap stocks
- convertible securities - Foreign securities:
securities - warrants - ADRs, EDRs and GDRs
- Fixed income - Defensive
securities: investments
- preferred stocks - Options and futures
- Foreign securities:
- depositary receipts
--------------------------------------------------------------------------------------------------------------------------
In what other types - Foreign securities N/A - Small-cap stocks N/A
of investments may (up to 20%) - Large-cap stocks
the Portfolio - Junk bonds
significantly (up to 10%)
invest? - Securities lending
(up to 33 1/3%)
--------------------------------------------------------------------------------------------------------------------------
What other types of - Warrants - Borrowing for - Short-term - Warrants
investments may the - Rights temporary or emergency investments - Rights
Portfolio use as - Corporate debt purposes (up to 10%) - Illiquid securities
part of efficient instruments (up to 33 1/3%) - Defensive (up to 15%)
portfolio management - U.S. Government - Illiquid securities investments - Options and futures
or to enhance securities (up to 33 1/3%) - Options and futures
return? - Zero-coupon, - Short-term
deferred interest and investments
PIK bonds
- Short sales
- When issued and
delayed-delivery
transactions
- Options and futures
- Currency
transactions
- Forward commitments
- Registered
investment companies
- Illiquid securities
(up to 15%)
- Short-term
investments
- Defensive
investments
- Borrowing for
temporary or
emergency purposes
(up to 33 1/3%)
--------------------------------------------------------------------------------------------------------------------------
What risks normally - Market volatility - Market volatility - Market volatility - Market volatility
affect the - Securities selection - Securities selection - Securities selection - Securities selection
Portfolio? - Medium sized - Illiquidity - Small and medium - Technology sector
companies - Interest rate sized companies - IPO investing
- Foreign exposure fluctuations - Derivatives - Derivatives
- Emerging markets - Small and medium - Hedging - Active trading
- Growth stocks sized companies - Growth stocks - Growth stocks
- Non-diversified - Credit quality - Foreign exposure
status - Derivatives
- Active trading - Hedging
- Emerging markets
- Growth stocks
- Active trading
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIOS
----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL INTERNATIONAL
GROWTH AND INCOME GLOBAL EQUITIES DIVERSIFIED EQUITIES EMERGING MARKETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What are the - Equity securities: - Equity securities: - Equity securities - Equity securities:
Portfolio's - large-cap stocks - large-cap stocks - Foreign securities - small-cap stocks
principal (foreign) - mid-cap stocks - mid-cap stocks
investments? - Foreign securities - Foreign securities - Foreign securities
----------------------------------------------------------------------------------------------------------------------
In what other types - Equity securities: N/A - Equity securities: - Hybrid instruments
of investments may - mid-cap stocks - convertible - Equity swaps
the Portfolio (foreign) securities
significantly - Foreign securities: - Warrants
invest? - emerging markets - Rights
- Fixed income
securities:
- U.S. government
securities
- preferred stocks
----------------------------------------------------------------------------------------------------------------------
What other types of - Equity securities: - Short-term - Short-term N/A
investments may the - small-cap stocks investments investments
Portfolio use as (foreign) - Currency - Defensive
part of efficient - large-cap stocks transactions investments
portfolio management (U.S.) - Defensive - Currency
or to enhance - Currency investments transactions
return? transactions - Borrowing for - Illiquid securities
- Short-term temporary or emergency (up to 15%)
investments purposes (up to - Options and futures
33 1/3%) - Forward commitments
- Options and futures - Registered
investment companies
- Firm commitment
agreements
- Securities lending
(up to 33 1/3%)
----------------------------------------------------------------------------------------------------------------------
What risks normally - Currency volatility - Market volatility - Market volatility - Currency volatility
affect the - Foreign exposure - Securities selection - Foreign exposure - Foreign exposure
Portfolio? - Market volatility - Active trading - Non-diversified - Emerging markets
- Securities selection - Currency volatility status - Growth stocks
- Hedging - Foreign exposure - Emerging markets - Market volatility
- Growth stocks - Growth stocks - Securities selection
- Currency volatility
- Sector risk
----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 45
--------------------------------------------------------------------------------
GLOSSARY
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INVESTMENT TERMINOLOGY
BORROWING FOR TEMPORARY OR EMERGENCY PURPOSES involves the borrowing of cash or
securities by a Portfolio in limited circumstances, including to meet
redemptions. Borrowing will cost a Portfolio interest expense and other fees.
Borrowing may exaggerate changes in a Portfolio's net asset value and the cost
may reduce a Portfolio's return.
CURRENCY TRANSACTIONS include the purchase and sale of currencies to facilitate
the settlement of securities transactions and forward currency contracts, which
are used to hedge against changes in currency exchange rates.
DEFENSIVE INVESTMENTS include high quality fixed income securities, repurchase
agreements and other money market instruments. A Portfolio will make temporary
defensive investments in response to adverse market, economic, political or
other conditions. When a Portfolio takes a defensive position, it may miss out
on investment opportunities that could have resulted from investing in
accordance with its principal investment strategy. As a result, a Portfolio may
not achieve its investment goal.
EQUITY SECURITIES, such as COMMON STOCKS, represent shares of equity ownership
in a corporation. Common stocks may or may not receive dividend payments.
Certain securities have common stock characteristics, including certain
convertible securities such as CONVERTIBLE PREFERRED STOCK, CONVERTIBLE BONDS,
WARRANTS and RIGHTS, and may be classified as equity securities. Investments in
equity securities and securities with equity characteristics include:
- LARGE-CAP STOCKS are common stocks of large companies that generally have
market capitalizations of over $9.5 billion, although there may be some
overlap among capitalization categories. Market capitalization categories
may change based on market conditions or changes in market capitalization
classifications as defined by agencies such as Standard & Poor's (S&P),
the Frank Russell Company (Russell), Morningstar, Inc. (Morningstar) or
Lipper, Inc. (Lipper).
- MID-CAP STOCKS are common stocks of medium sized companies that generally
have market capitalizations ranging from $1.5 billion to $9.5 billion,
although there may be some overlap among capitalization categories.
Market capitalization categories may change based on market conditions or
changes in market capitalization classifications as defined by agencies
such as S&P, Russell, Morningstar or Lipper. With respect to the MFS
MID-CAP GROWTH PORTFOLIO, the Subadviser will consider companies with
market capitalizations equaling or exceeding $250 million but not
exceeding the top range of the Russell MidCap(TM) Growth Index to be
medium sized companies.
- SMALL-CAP STOCKS are common stocks of small companies that generally have
market capitalizations of $1.5 billion or less, although there may be
some overlap among capitalization categories. Market capitalization
categories may change based on market conditions or changes in market
capitalization classifications as defined by agencies such as S&P,
Russell, Morningstar, or Lipper.
- CONVERTIBLE SECURITIES are securities (such as bonds or preferred stocks)
that may be converted into common stock of the same or a different
company.
- WARRANTS are rights to buy common stock of a company at a specified price
during the life of the warrant.
- RIGHTS represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance before the
stock is offered to the general public.
EQUITY SWAPS are exchanges of the total return on a stock for the total return
on another asset, usually a diversified equity or fixed income index.
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. At the time of delivery of the securities, the value may be more or
less than the purchase price.
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<PAGE> 46
FIXED INCOME SECURITIES are broadly classified as securities that provide for
periodic payment, typically interest or dividend 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. The issuer of a SENIOR FIXED INCOME SECURITY is obligated to make
payments on this security ahead of other payments to security holders.
Investments in fixed income securities include:
- U.S. GOVERNMENT SECURITIES are issued or guaranteed by the U.S.
government, its agencies and instrumentalities. Some U.S. government
securities are issued or unconditionally guaranteed by the U.S. Treasury.
They are of the highest possible credit quality. While these securities
are subject to variations in market value due to fluctuations in interest
rates, they will be paid in full if held to maturity. Other U.S.
government securities are neither direct obligations of, nor 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.
- CORPORATE DEBT INSTRUMENTS (BONDS, NOTES AND DEBENTURES) are securities
representing a debt of a corporation. The issuer is obligated to repay a
principal amount of indebtedness at a stated time in the future and in
most cases to make periodic payments of interest at a stated rate.
- An INVESTMENT GRADE FIXED INCOME SECURITY is rated in one of the top four
rating categories by a debt rating agency (or is considered of comparable
quality by the Adviser or Subadviser). The two best-known debt rating
agencies are S&P and Moody's Investors Service, Inc.( Moody's).
INVESTMENT GRADE refers to any security rated "BBB" or above by S&P or
"Baa" or above by Moody's.
- A JUNK BOND is a high yield, high risk bond that does not meet the credit
quality standards of an investment grade security.
- PASS-THROUGH SECURITIES involve various debt obligations that are backed
by a pool of mortgages or other assets. Principal and interest payments
made on the underlying asset pools are typically passed through to
investors. Types of pass-through securities include mortgage-backed
securities, collateralized mortgage obligations, commercial
mortgage-backed securities, and asset-backed securities.
- PREFERRED STOCKS receive dividends at a specified rate and have
preference over common stock in the payment of dividends and the
liquidation of assets.
- ZERO-COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS. Zero coupon and
deferred interest bonds are debt obligations issued or purchased at a
significant discount from face value. A step-coupon bond is one in which
a change in interest rate is fixed contractually in advance.
Payable-in-kind ("PIK bonds") are debt obligations that provide that the
issuer thereof may, at its option, pay interest on such bonds in cash or
in the form of additional debt obligations.
FOREIGN SECURITIES are issued by companies located outside of the United States,
including emerging markets. Foreign securities may include foreign corporate and
government bonds, foreign equity securities, foreign investment companies,
passive foreign investment companies (PFICs), American Depositary Receipts
(ADRs) or other similar securities that represent interests in foreign equity
securities, such as European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). An EMERGING MARKET country is generally one with a low or
middle income or economy or that is in the early stages of its industrialization
cycle. For fixed income investments, an emerging market includes those where the
sovereign credit rating is below investment grade. Emerging market countries may
change over time depending on market and economic conditions and the list of
emerging market countries may vary by Adviser or Subadviser.
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<PAGE> 47
FORWARD COMMITMENTS are commitments to purchase or sell securities at a future
date. A Portfolio purchasing a forward commitment assumes the risk of any
decline in value of the securities beginning on the date of the agreement.
Similarly, a Portfolio selling such securities does not participate in further
gains or losses on the date of the agreement.
HYBRID INSTRUMENTS, such as INDEXED (i.e., Standard and Poor's Depositary
Receipts and World Equity Benchmark Shares) and STRUCTURED SECURITIES, can
combine the characteristics of securities, futures, and options. For example,
the principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an investment could be zero.
ILLIQUID/RESTRICTED SECURITIES are subject to legal or contractual restrictions
that may make them difficult to sell. A security that cannot easily be sold
within seven days will generally be considered illiquid. Certain restricted
securities (such as Rule 144A securities) are not generally considered illiquid
because of their established trading market.
INTEREST RATE SWAPS, CAPS, FLOORS AND COLLARS. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest, such as an exchange of fixed-rate payments for floating
rate payments. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payment 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 the 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.
INVERSE FLOATERS are leveraged inverse floating rate debt instruments. 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.
LOAN PARTICIPATIONS are investments in which a Portfolio acquires some or all of
the interest of a bank or other lending institution in a loan to a corporate
borrower. The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. As a
result, a Portfolio may be unable to sell such investments at an opportune time
or may have to resell them at less than fair market value.
OPTIONS AND FUTURES are contracts involving the right to receive or the
obligation to deliver assets or money depending on the performance of one or
more underlying assets or a market or economic index. An option gives its owner
the right, but not the obligation, to buy ("call") or sell ("put") a specified
amount of a security at a specified price within in a specified time period. A
futures contract is an exchange-traded legal contract to buy or sell a standard
quantity and quality of a commodity, financial instrument, index, etc. at a
specified future date and price.
REGISTERED INVESTMENT COMPANIES are investments by a Portfolio in other
investment companies which are registered in accordance with the federal
securities laws.
REITS (real estate investment trusts) are trusts that invest primarily in
commercial real estate or real estate related loans. The value of an interest in
a REIT may be affected by the value and the cash flows of the properties owned
or the quality of the mortgages held by the trust.
ROLL TRANSACTIONS involve the sale of mortgage or other asset-backed securities
("roll securities") with the commitment to purchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date.
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<PAGE> 48
SECURITIES LENDING involves a loan of securities by a Portfolio in exchange for
cash or collateral. A Portfolio earns interest on the loan while retaining
ownership of the security.
SHORT SALES: A short sale involves the selling of a security which the
Portfolio does not own in anticipation of a decline in the market value of the
security. In such transactions the Portfolio borrows the security for delivery
to the buyer and must eventually replace the borrowed security for return to the
lender. The Portfolio bears the risk that price at the time of replacement may
be greater than the price at which the security was sold. 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.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, repurchase agreements, commercial paper, bankers'
acceptances and certificates of deposit. These securities provide a Portfolio
with sufficient liquidity to meet redemptions and cover expenses.
RISK TERMINOLOGY
ACTIVE TRADING: A strategy used whereby the Portfolio may engage in frequent
trading of portfolio securities to achieve its investment goal. Active trading
may result in high portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by a
Portfolio. In addition, because a Portfolio may sell a security without regard
to how long it has held the security, active trading may have tax consequences
for certain shareholders, involving a possible increase in short-term capital
gains or losses. During periods of increased market volatility, active trading
may be more pronounced. In the "Financial Highlights" section we provide each
Portfolio's portfolio turnover rate for each of the last five fiscal years.
CREDIT QUALITY: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will be
more likely than a higher rated issuer to default or otherwise become unable to
honor its financial obligations. This type of issuer will typically issue JUNK
BONDS. In addition to the risk of default, junk bonds may be more volatile, less
liquid, more difficult to value and more susceptible to adverse economic
conditions or investor perceptions than other bonds.
CURRENCY VOLATILITY: The value of a Portfolio's foreign investments may
fluctuate due to changes in currency rates. A 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-U.S. dollar denominated securities.
DERIVATIVES: A derivative is any financial instrument whose value is based on,
and determined by, another security, index or benchmark (i.e., stock options,
futures, caps, floors, etc.). In recent years, derivative securities have become
increasingly important in the field of finance. Futures and options are now
actively traded on many different exchanges. Forward contracts, swaps, and many
different types of options are regularly traded outside of exchanges by
financial institutions in what are termed "over the counter" markets. Other more
specialized derivative securities often form part of a bond or stock issue. To
the extent a contract is used to hedge another position in the portfolio, the
Portfolio will be exposed to the risks associated with hedging as describe in
this glossary. To the extent an option or futures contract is used to enhance
return, rather than as a hedge, a Portfolio will be directly exposed to the
risks of the contract. Gains or losses from non-hedging positions may be
substantially greater than the cost of the position.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as in the U.S.
Foreign investments will also be affected by local political or economic
developments and governmental actions. Consequently, foreign securities may be
less liquid, more volatile and more difficult to price than U.S. securities.
These risks are heightened when an issuer is in an EMERGING
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<PAGE> 49
MARKET. Historically, the markets of EMERGING MARKET countries have been more
volatile than more developed markets; however, such markets can provide higher
rates of return to investors.
GROWTH STOCKS: Growth stocks can be volatile for several reasons. Since the
issuers usually reinvest a high portion of earnings in their own business,
growth stocks may lack the comfortable dividend yield associated with value
stocks that can cushion total return in a bear market. Also, growth stocks
normally carry a higher price/earnings ratio than many other stocks.
Consequently, if earnings expectations are not met, the market price of growth
stocks will often go down more than other stocks. However, the market frequently
rewards growth stocks with price increases when expectations are met or
exceeded.
HEDGING: Hedging is a strategy in which a Portfolio uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio of
securities. While hedging strategies can be very useful and inexpensive ways of
reducing risk, they are sometimes ineffective due to unexpected changes in the
market. Hedging also involves the risk that changes in the value of the
derivative will not match those of the instruments being hedged as expected, in
which case any losses on the instruments being hedged may not be reduced.
ILLIQUIDITY: There may not be a market for certain securities making it
difficult or impossible to sell at the time and the price that the seller would
like.
INTEREST RATE FLUCTUATIONS: The volatility of fixed income securities is due
principally to changes in interest rates. The market value of bonds and other
fixed income securities usually tends to vary inversely with the level of
interest rates. As interest rates rise the value of such securities typically
falls, and as interest rates fall, the value of such securities typically rise.
Longer-term and lower coupon bonds tend to be more sensitive to changes in
interest rates.
IPO INVESTING: A Portfolio's purchase of shares issued as part of, or a short
period after, companies' initial public offerings ("IPOs"), exposes it to the
risks associated with companies that have little operating history as public
companies, as well as to the risks inherent in those sectors of the market where
these new issuers operate. The market for IPO issuers has been volatile, and
share prices of newly-public companies have fluctuated in significant amounts
over short periods of time.
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Portfolio's portfolio.
NON-DIVERSIFIED STATUS: Portfolios registered as "non-diversified" investment
companies can invest a larger portion of their assets in the stock of a single
company than can diversified investment companies, and thus they can concentrate
in a smaller number of securities. A non-diversified investment company's risk
may increase because the effect of each security on the Portfolio's performance
is greater.
PASSIVELY MANAGED STRATEGY: A Portfolio following a passively managed strategy
will not deviate from its investment strategy. In the case of "Dogs" of Wall
Street Portfolio, this entails buying and holding thirty stocks selected through
objective selection criteria (except to the extent necessary to comply with
applicable federal tax laws). In other cases, it may involve a passively managed
strategy utilized to achieve investment results that correspond to a particular
market index. Such a Portfolio will not sell stocks in its portfolio and buy
different stocks over the course of a year, even if there are adverse
developments concerning a particular stock, company or industry. There can be no
assurance that the strategy will be successful.
PREPAYMENT: Prepayment risk is the possibility that the principal of the loans
underlying mortgage-backed or other pass-through securities may be prepaid at
any time. As a general rule, prepayments increase during a period of falling
interest rates and decrease during a period of rising interest rates. As a
result of prepayments, in periods of declining interest rates a Portfolio may be
required to reinvest its assets in securities with lower interest rates. In
periods of increasing interest rates, prepayments generally may decline, with
the effect that the securities subject to prepayment risk held by a Portfolio
may exhibit price characteristics of longer-term debt securities.
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<PAGE> 50
REAL ESTATE INDUSTRY: 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.
In addition, REITs are dependent upon management skill, may not be diversified
and are subject to project financing risks. Such trusts are also subject to
heavy cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code of 1986, as amended, and to maintain exemption from
registration under the 1940 Act.
SECURITIES SELECTION: A strategy used by a Portfolio, or securities selected by
its portfolio manager, may fail to produce the intended return.
SHORT SALE RISKS: 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.
SMALL AND MEDIUM SIZED COMPANIES: Companies with smaller market capitalizations
(particularly under $1.5 billion) tend to be at early stages of development with
limited product lines, market access for products, financial resources, access
to new capital, or depth in management. Consequently, the securities of smaller
companies may not be as readily marketable and may be subject to more abrupt or
erratic market movements. Securities of medium sized companies are also usually
more volatile and entail greater risks than securities of large companies.
TECHNOLOGY SECTOR: There are numerous risks and uncertainties involved in
investing in the technology sector. Historically, the price of securities in
this sector have tended to be volatile. A Portfolio that invests primarily in
technology-related issuers, bears an additional risk that economic events may
affect a substantial portion of the Portfolio's investments. In addition, at
times, equity securities of technology-related issuers may underperform relative
to other sectors.
UNSEASONED COMPANIES: Unseasoned companies are companies that have operated
less than three years. The securities of such companies may have limited
liquidity, which can result in their being priced higher or lower than might
otherwise be the case. In addition, investments in unseasoned companies are more
speculative and entail greater risk than do investments in companies with an
established operating record.
UTILITY INDUSTRY: Risks 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.
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MANAGEMENT
--------------------------------------------------------------------------------
INVESTMENT ADVISER AND MANAGER
SunAmerica Asset Management Corp. (SAAMCo) serves as investment adviser and
manager for all the Portfolios of the Trust. SAAMCo selects the Subadvisers for
Portfolios, manages the investments for certain Portfolios, provides various
administrative services and supervises the daily business affairs of each
Portfolio.
SAAMCo has received an exemptive order from the Securities and Exchange
Commission that permits SAAMCo, subject to certain conditions, to enter into
agreements relating to the Trust with Subadvisers approved by the Board of
Trustees without obtaining shareholder approval. The exemptive order also
permits 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 agreements with Subadvisers or continue the employment of
existing Subadvisers after events that would otherwise cause an automatic
termination of a subadvisory agreement. Shareholders will be notified of any
Subadviser changes. SAAMCo does not presently rely on this exemptive order with
respect to the Trust. Shareholders of a Portfolio have the right to terminate an
agreement with a Subadviser for that Portfolio at any time by a vote of the
majority of the outstanding voting securities of such Portfolio.
SAAMCo, located at The SunAmerica Center, 733 Third Avenue, New York, New York,
10017, is a corporation organized under the laws of the state of Delaware. In
addition to serving as investment adviser and manager of the Trust, SAAMCo
serves as adviser, manager and/or administrator for Anchor Pathway Fund, Anchor
Series Trust, Brazos Mutual Funds, Seasons Series Trust, SunAmerica Style Select
Series, Inc., SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money
Market Funds, Inc. and SunAmerica Strategic Investment Series, Inc.
For the fiscal year ended January 31, 2000, each Portfolio paid SAAMCo a fee
equal to the following percentage of average daily net assets:
<TABLE>
<CAPTION>
PORTFOLIO FEE
--------- ---
<S> <C>
Cash Management Portfolio.................... 0.49%
Corporate Bond Portfolio..................... 0.62%
Global Bond Portfolio........................ 0.69%
High-Yield Bond Portfolio.................... 0.62%
Worldwide High Income Portfolio.............. 1.00%
SunAmerica Balanced Portfolio................ 0.62%
MFS Total Return Portfolio................... 0.66%
Asset Allocation Portfolio................... 0.58%
Utility Portfolio............................ 0.75%
Equity Income Portfolio...................... 0.65%
Equity Index Portfolio....................... 0.40%
Growth-Income Portfolio...................... 0.53%
Federated Value Portfolio.................... 0.71%
Davis Venture Value Portfolio................ 0.71%
"Dogs" of Wall Street Portfolio.............. 0.60%
Alliance Growth Portfolio.................... 0.60%
MFS Growth and Income Portfolio.............. 0.70%
Putnam Growth Portfolio...................... 0.76%
Real Estate Portfolio........................ 0.80%
Small Company Value Portfolio................ 1.00%
MFS Mid-Cap Growth Portfolio................. 0.75%
Aggressive Growth Portfolio.................. 0.70%
International Growth and Income Portfolio.... 0.98%
Global Equities Portfolio.................... 0.72%
International Diversified Equities
Portfolio.................................. 1.00%
Emerging Markets Portfolio................... 1.25%
</TABLE>
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SAAMCo's fee with respect to the GOLDMAN SACHS RESEARCH, BLUE CHIP GROWTH,
GROWTH OPPORTUNITIES AND TECHNOLOGY PORTFOLIOS as a percentage of average daily
net assets, including breakpoints, is as follows:
<TABLE>
<CAPTION>
FEE
PORTFOLIO (INCLUDING BREAKPOINTS)
--------- -----------------------
<S> <C>
Goldman Sachs Research Portfolio............. 1.20%
Blue Chip Growth Portfolio................... 0.70% to $250 million
0.65% next $250 million
0.60% over $500 million
Growth Opportunities Portfolio............... 0.75% to $250 million
0.70% next $250 million
0.65% over $500 million
Technology Portfolio......................... 1.20%
</TABLE>
INFORMATION ABOUT THE SUBADVISERS
ALLIANCE CAPITAL MANAGEMENT L.P. (Alliance) is a Delaware limited partnership
with principal offices at 1345 Avenue of the Americas, New York, New York 10105.
Alliance is a major international investment manager whose clients primarily are
major corporate employee benefit funds, investment companies, foundations,
endowment funds and public employee retirement systems. Alliance serves as
investment manager of employee benefit fund assets for 31 of the Fortune 100
companies.
DAVIS SELECTED ADVISERS, L.P. (Davis Selected) is located at 2949 East Elvira
Road, Suite 101, Tucson, AZ 85706. Davis Selected provides advisory services to
other investment companies. 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.
FEDERATED INVESTMENT COUNSELING (Federated) is located at Federated Investors
Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. Federated and
its affiliate companies serves as investment adviser to a number of investment
companies and private accounts.
FIRST AMERICAN ASSET MANAGEMENT (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.
GOLDMAN SACHS ASSET MANAGEMENT (GSAM), a unit of the Investment Management
Division, a separate operating division of Goldman, Sachs & Co. (Goldman Sachs),
is located at 32 Old Slip, New York, NY 10005. Goldman Sachs registered as an
investment adviser in 1981. 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.
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL (GSAM-International), an affiliate
of Goldman Sachs, is located at Procession House, 55 Ludgate Hill, London
EC4M7JW, England. GSAM-International has been a member of the Investment
Management Regulatory Organization Limited, a United Kingdom self-regulatory
organization, since 1990 and a registered investment adviser since 1991. 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.
MASSACHUSETTS FINANCIAL SERVICES COMPANY (MFS) is America's oldest mutual fund
organization and, with its predecessor organizations, has a history of money
management dating from 1924 and the founding of the first mutual fund in the
United States. MFS is located at 500 Boylston Street, Boston, Massachusetts,
02116.
52
<PAGE> 53
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, D/B/A MORGAN STANLEY ASSET
MANAGEMENT (MSAM) offers investment management and fiduciary services to taxable
and tax-exempt funds and institutions, international organizations and
individuals investing in U.S. and international equity and fixed income
securities. MSAM is located at 1221 Avenue of the Americas, New York, New York
10020.
PUTNAM INVESTMENT MANAGEMENT, INC. (Putnam), is 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.
SAAMCo compensated the various Subadvisers out of the advisory fees that it
received from the respective Portfolios. SAAMCo may terminate any agreement with
another Subadviser without shareholder approval.
PORTFOLIO MANAGEMENT
The primary investment manager(s) and/or management team(s) for each portfolio
is set forth in the following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Management Portfolio SAAMCo - Fixed Income Investment The Fixed Income
Team Investment Team has
been responsible for
the management of this
portfolio since its
inception in 1993.
-----------------------------------------------------------------------------------------------------------------
Corporate Bond Portfolio Federated - Joseph M. Balestrino Mr. Balestrino joined
Co-Portfolio Manager and Federated in 1986 as a
Senior Vice President Project Manager in the
Product Design
Department and became
an Assistant Vice
President and
Investment Analyst in
1991. He became a Vice
President and portfolio
manager in 1995 and a
Senior Vice President
in 1998.
- Mark E. Durbiano Mr. Durbiano joined
Co-Portfolio Manager Federated in 1982 as an
Senior Vice President Investment Analyst and
became a Vice President
and portfolio manager
in 1988. He has been a
Senior Vice President
since 1996.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Bond Portfolio GSAM-International - Stephen C. Fitzgerald Mr. Fitzgerald,
Senior Portfolio Manager Managing Director and
Chief Investment
Officer for
International Fixed
Income in the London
office since November
1998, joined GSAM
International in 1992
as an Executive
Director and Portfolio
Manager.
- Andrew F. Wilson Mr. Wilson, a Managing
Senior Portfolio Manager Director and senior
portfolio manager for
international fixed
income in the London
office, joined GSAM
International in
December 1995 as an
Executive Director and
portfolio manager.
-----------------------------------------------------------------------------------------------------------------
High-Yield Bond Portfolio SAAMCo - John W. Risner Mr. Risner joined
Vice President and SAAMCo in 1997 as a
Portfolio Manager Vice President and
portfolio manager.
Prior to joining
SAAMCo, he served as
Senior Portfolio
Manager of the Value
Line Aggressive Income
Trust and the Value
Line Convertible Fund
from 1992 to 1997.
-----------------------------------------------------------------------------------------------------------------
Worldwide High Income MSAM - Robert Angevine Mr. Angevine is a
Portfolio Principal and Principal of MSAM and a
Co-Portfolio Manager portfolio manager of
MSAM's high-yield
investments. He joined
the firm in 1988 as a
portfolio manager.
- Gordon W. Loery Mr. Loery has been a
Co-Portfolio Manager Principal and portfolio
manager of MSAM since
1996. Mr. Loery joined
MSAM in 1990 as a fixed
income analyst.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- Stephen F. Esser Mr. Esser is a Managing
Managing Director and Director of MSAM and
Co-Portfolio has been a portfolio
Manager manager with MSAM's
affiliate Miller
Anderson & Sherrerd,
LLP since 1988.
- Abigail McKenna Ms. McKenna is a
Principal and Principal and portfolio
Co-Portfolio Manager manager of MSAM. She
was a Senior Portfolio
Manager at MetLife
Investment Management
Corp. from 1995 to 1996
and a Limited Partner
at Weiss Peck & Greer
from 1991 to 1995. Ms.
McKenna joined MSAM in
1996.
-----------------------------------------------------------------------------------------------------------------
SunAmerica Balanced SAAMCo - Francis D. Gannon Mr. Gannon has been a
Portfolio Senior Vice President and portfolio manager with
Portfolio Manager SAAMCo since 1996. He
joined SAAMCo in 1993
as an equity analyst.
-----------------------------------------------------------------------------------------------------------------
MFS Total Return Portfolio MFS - David M. Calabro Mr. Calabro joined MFS
Senior Vice President and in 1992 as a Vice
Portfolio Manager President and equity
analyst. He became a
portfolio manager in
1993 and was promoted
to Senior Vice
President in 1998.
- Geoffrey L. Kurinsky Mr. Kurinsky, the
Senior Vice President and manager of the
Portfolio Manager Portfolio's fixed
income securities,
joined MFS in 1987 as a
research analyst. He
became a Vice President
and portfolio manager
in 1989. In 1993, he
was promoted to Senior
Vice President.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- Constantinos G. Mokas Mr. Mokas, manager of
Vice President and the Portfolio's
Portfolio Manager convertible securities,
joined MFS in 1990 as a
research analyst. He
was promoted to
Assistant Vice
President in 1994, Vice
President in 1996 and
portfolio manager in
1998.
- Lisa B. Nurme Ms. Nurme, a manager of
Senior Vice President and the Portfolio's common
Portfolio Manager stock investments,
became a portfolio
manager in 1995 and was
promoted to Senior Vice
President in 1998.
- Kenneth J. Enright Mr. Enright, a manager
Vice President and of the Portfolio's
Portfolio Manager common stock portion,
joined MFS in 1986 as a
research analyst. He
became an Assistant
Vice President in 1987,
Vice President in 1988,
and portfolio manager
in 1993.
-----------------------------------------------------------------------------------------------------------------
Asset Allocation Portfolio GSAM - Eileen Rominger Ms. Rominger joined
Managing Director GSAM as a senior
and Senior Portfolio portfolio manager in
Manager 1999. From 1981 to 1999
(value portion) she was employed at
Oppenheimer Capital,
most recently as a
senior portfolio
manager.
- George D. Adler Mr. Adler joined GSAM
Vice President and Senior in 1997 as a portfolio
Portfolio Manager manager. From 1990 to
(growth portion) 1997, he was a
portfolio manager at
Liberty Investment
Management, Inc.
("Liberty").
- Robert G. Collins Mr. Collins joined GSAM
Vice President and Senior in 1997 as a portfolio
Portfolio Manager manager. From 1991 to
(growth portion) 1997, he was a
portfolio manager at
Liberty.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- Herbert E. Ehlers Mr. Ehlers joined GSAM
Managing Director and in 1997 as a senior
Senior Portfolio Manager portfolio manager and
(growth portion) Chief Investment
Officer of the Growth
Equity Team. From 1994
to 1997, he was the
Chief Investment
Officer and Chairman at
Liberty. He was a
portfolio manager and
president at Liberty's
predecessor firm, Eagle
Asset Management
("Eagle"), from 1984 to
1994.
- Gregory H. Ekizian Mr. Ekizian joined GSAM
Vice President and Senior in 1997 as a portfolio
Portfolio Manager manager and Co-Chair of
(growth portion) the Growth Equity
Investment Committee in
1997. From 1990 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- David G. Shell Mr. Shell joined GSAM
Vice President and Senior in 1997 as a Vice
Portfolio Manager President and portfolio
(growth portion) manager. From 1987 to
1997, he was a
portfolio manager at
Liberty and its
predecessor firm,
Eagle.
- Ernest C. Segundo, Jr. Mr. Segundo joined GSAM
Vice President and Senior in 1997 as a portfolio
Portfolio Manager manager. From 1992 to
(equity portion) 1997, he was a
portfolio manager at
Liberty.
- Jonathan A. Beinner Mr. Beinner has been
Managing Director and Managing Director of
Co-Head U.S. Fixed Income GSAM's U.S. Fixed
(fixed income portion) Income Department since
1997. He joined the
Fixed Income Group in
1990 as an associate
portfolio manager.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- C. Richard Lucy Mr. Lucy has been Co-
Managing Director (fixed Managing Director of
income portion) and Co-Head GSAM's Fixed Income
U.S. Fixed Income Department since 1997.
He joined the Fixed
Income Group in 1992
as a Vice President and
portfolio manager.
-----------------------------------------------------------------------------------------------------------------
Telecom Utility Portfolio Federated - Linda A. Duessel Ms. Duessel joined
Co-Portfolio Manager and Federated in 1991 as an
Senior Vice President Investment Analyst and
Assistant Vice
President. She became a
Vice President and
portfolio manager in
1995, and a Senior Vice
President in 2000.
- Steven J. Lehman Mr. Lehman joined
Co-Portfolio Manager and Federated in 1997 as a
Vice President Vice President and
portfolio manager. From
1985 to 1997, he served
as a portfolio manager
and Vice President at
First Chicago NBD.
-----------------------------------------------------------------------------------------------------------------
Equity Income Portfolio First American - Gerald C. Bren Mr. Bren joined First
Co-Portfolio Manager American in 1972 as an
investment analyst. He
became a portfolio
manager in 1987. He is
a Chartered Financial
Analyst.
- Cori B. Johnson Ms. Johnson joined
Portfolio Manager First American in 1991
as a securities
analyst. She became a
portfolio manager in
1993. She is a
Chartered Financial
Analyst.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Portfolio First American - James S. Rovner Mr. Rovner joined First
Portfolio Manager American in 1986 as a
portfolio manager and
has managed assets for
institutional and
individual clients for
over 15 years,
specializing in equity
and balanced investment
strategies.
- Evan C. Lundquist Mr. Lundquist joined
Portfolio Manager First American in 1998
as an analyst and
portfolio manager. He
has analytic
responsibilities for
paper/forest products,
metals and mining,
steel, engineering and
construction, and
building and appliances
industries.
-----------------------------------------------------------------------------------------------------------------
Growth-Income Portfolio Alliance - Michael R. Baldwin Mr. Baldwin joined the
Portfolio Manager and company in 1989 as a
Senior Vice President research analyst. He
became a portfolio
manager in 1991 and was
promoted to Senior Vice
President and Associate
Director of Research in
1996.
-----------------------------------------------------------------------------------------------------------------
Federated Value Portfolio Federated - Arthur J. Barry Mr. Barry joined
Co-Portfolio Manager and Federated in 1994 as an
Vice President Investment Analyst and
was promoted to an
Assistant Vice
President and portfolio
manager in April 1997.
He was then promoted to
Vice President in 1998.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- Michael P. Donnelly Mr. Donnelly joined
Co-Portfolio Manager and Federated in 1989 as an
Senior Vice President Investment Analyst. He
served as an Assistant
Vice President of an
affiliate of Federated
from 1992 to 1994, a
Vice President from
1994 to 1999, and a
Senior Vice President
since 1999.
-----------------------------------------------------------------------------------------------------------------
Davis Venture Value Davis Selected - Christopher C. Davis Mr. Davis has been
Portfolio Portfolio Manager employed by Davis
Selected since 1989 as
a research analyst,
assistant portfolio
manager, co-portfolio
manager, and portfolio
manager.
- Kenneth C. Feinberg Mr. Feinberg has been
Portfolio Manager employed by Davis
Selected since 1994 as
a research analyst,
assistant portfolio
manager, and portfolio
manager.
-----------------------------------------------------------------------------------------------------------------
"Dogs" of Wall Street SAAMCo - Francis D. Gannon See above.
Portfolio Senior Vice President and
Portfolio Manager
-----------------------------------------------------------------------------------------------------------------
Alliance Growth Portfolio Alliance - James G. Reilly Mr. Reilly joined the
Executive Vice President company in 1984 as a
and Portfolio Manager research analyst. He
became a portfolio
manager in 1993 and was
promoted to an
Executive Vice
President in 1999.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 61
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goldman Sachs Research GSAM - Melissa Brown Ms. Brown joined GSAM
Portfolio Vice President and Product as a portfolio manager
Manager for Quantitative in 1998. From 1994 to
Equities 1998, she was the
director of
Quantitative Equity
Research and served on
the Investment Policy
Committee at Prudential
Securities.
- Kent A. Clark Mr. Clark joined GSAM
Managing Director and as a portfolio manager
Director of Quantitative in the quantitative
Research equity management team
in 1992.
- Robert C. Jones Mr. Jones joined GSAM
Managing Director and as a portfolio manager
Head of Quantitative in 1989.
Equities
- Victor H. Pinter Mr. Pinter joined GSAM
Vice President and Head as a research analyst
of Portfolio Construction in 1990. He became a
portfolio manager in
1992.
-----------------------------------------------------------------------------------------------------------------
MFS Growth and Income MFS - John D. Laupheimer, Jr. Mr. Laupheimer joined
Portfolio Senior Vice President and MFS in 1981 as a
Portfolio Manager research analyst. He
became an Investment
Officer in 1988,
Assistant Vice
President in 1984, Vice
President in 1986,
portfolio manager in
1987, Senior Vice
President in 1995 and
Director of Equity
Research in 1999.
- Mitchell D. Dynan Mr. Dynan joined MFS in
Senior Vice President and 1986 as a research
Portfolio Manager analyst. He became an
Assistant Vice
President in 1987, Vice
President in 1988,
portfolio manager in
1995 and Senior Vice
President in 1999.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 62
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Putnam Growth Portfolio Putnam - C. Beth Cotner Ms. Cotner joined the
Managing Director and Chief company in 1995 as
Investment Officer Senior Vice President
and Senior Portfolio
Manager. Prior to that
time, she was an
Executive Vice
President of Kemper
Financial Services from
1984 to 1995.
- Richard England Mr. England joined the
Senior Vice President and company in 1992 as a
Senior Portfolio Manager Global Equity Analyst.
In 1994, he was
promoted to Associate
Director of Research
and then joined the
Growth Equity Team in
1996 as a Senior
Portfolio Manager.
- Manuel H. Weiss Mr. Weiss joined the
Senior Vice President and company in 1987 as a
Senior Portfolio Manager portfolio manager to
head the quantitative
effort in the
development of the Core
Growth Equity product.
- David J. Santos Mr. Santos joined the
Senior Vice President and company in 1986 as a
Portfolio Manager Pricing Operations
Manager and moved to
the investment
management side in
1991. He became a
portfolio manager in
1992.
-----------------------------------------------------------------------------------------------------------------
Blue Chip Growth Portfolio SAAMCo - Francis D. Gannon Mr. Gannon joined
Senior Vice President and SAAMCo as an equity
Portfolio Manager analyst in 1993 and has
been a portfolio
manager with the firm
since 1996.
-----------------------------------------------------------------------------------------------------------------
Real Estate Portfolio Davis Selected - Andrew A. Davis Mr. Davis has been
Portfolio Manager employed by Davis
Selected since 1994 as
a research analyst,
assistant portfolio
manager, co-portfolio
manager and portfolio
manager.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 63
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Value First American - Albin S. Dubiak Mr. Dubiak is the
Portfolio Portfolio Manager leader of the
Investment team that
manages this portfolio.
He joined First
American in 1969 as an
investment analyst and
became a portfolio
manager is 1985.
- Frank G. Magdalem Mr. Magdalem joined
Portfolio Manager First American in 1979
as an investment
analyst and became a
portfolio manager in
1991. He is a Chartered
Financial Analyst.
-----------------------------------------------------------------------------------------------------------------
MFS Mid-Cap Growth MFS - Mark Regan Mr. Regan joined MFS as
Portfolio Senior Vice President and a research analyst in
Portfolio Manager 1989. He was named
investment officer in
1990, Assistant Vice
President in 1991, Vice
President in 1992,
portfolio manager in
1998 and Senior Vice
President in 1999.
- David E. Sette-Ducati Mr. Sette-Ducati joined
Vice President and MFS in 1995 as a
Portfolio Manager research analyst. He
became an Investment
Officer in 1997, Vice
President in 1999, and
portfolio manager in
February 2000.
-----------------------------------------------------------------------------------------------------------------
Aggressive Growth Portfolio SAAMCo - Donna M. Calder Ms. Calder joined the
Vice President and firm in 1998 as a Vice
Portfolio Manager President and portfolio
manager. Prior to
joining SAAMCo, she was
the founder and General
Partner of Manhattan
Capital Partners, L.P.
from 1991 to 1995.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Opportunities SAAMCo - Brian Clifford Mr. Clifford has been a
Portfolio Portfolio Manager portfolio manager with
SAAMCo since joining
the firm in February
1998. From 1995 until
he joined SAAMCo, Mr.
Clifford was a
portfolio manager with
Morgan Stanley Dean
Witter.
-----------------------------------------------------------------------------------------------------------------
Technology Portfolio MSAM - Alexander L. Umansky Mr. Umansky joined MSAM
Vice President and as a compliance analyst
Portfolio Manager in 1994 and has been a
portfolio manager since
in 1999. From 1996 to
1999 he was a research
analyst in MSAM's
Institutional Equity
Group focusing
primarily on
technology.
- Stephen C. Sexauer Mr. Sexauer has been a
Principal and Portfolio portfolio manager with
Manager MSAM since joining the
firm in 1989. His
responsibilities also
include equity research
for telecommunication,
technology, finance and
utilities.
-----------------------------------------------------------------------------------------------------------------
International Growth and Putnam - Deborah F. Kuenstner Ms. Kuenster joined
Income Portfolio Chief Investment Officer Putnam as a Senior Vice
and Managing Director President and Senior
Portfolio Manager in
March 1997. Ms.
Kuenstner was Senior
Portfolio Manager at
Dupont Pension Fund
Management from 1989 to
1997.
- George W. Stairs Mr. Stairs joined
Senior Vice President and Putnam as a Global
Portfolio Manager Equity research analyst
in 1994. In 1997, he
became a Senior Vice
President and Portfolio
Manager. Mr. Stairs was
an Associate at Value
Quest Ltd. from 1992 to
1994.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
ADVISER/ PORTFOLIO MANAGER (AND/
SUBADVISER OR MANAGEMENT TEAM)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equities Portfolio Alliance - Stephen Beinhacker Mr. Beinhacker joined
Portfolio Manager, Director the company in 1992 as
and Senior Vice President Director of
International
Quantitative Stock
Analysis and portfolio
manager. He was
promoted to Senior Vice
President in 1998.
-----------------------------------------------------------------------------------------------------------------
International Diversified MSAM - Barton Biggs Mr. Biggs has been a
Equities Portfolio Chairman, Chief Chairman and a Director
Investment Officer, of MSAM since 1980 and
Managing Director and a Managing Director of
Co-Portfolio Manager Morgan Stanley & Co.
Incorporated since
1975.
- Ann Thivierge Ms. Thivierge joined
Managing Director and MSAM in 1986 and is
Co-Portfolio Manager currently a Managing
Director.
-----------------------------------------------------------------------------------------------------------------
Emerging Markets Portfolio Putnam - Thomas R. Haslett Mr. Haslett joined
Managing Director, Chief Putnam as Managing
Investment Officer and Co- Director, Chief
Portfolio Manager Investment Officer and
portfolio manager in
1996. He was a Managing
Director of Montgomery
Asset Management, Ltd.
from 1992 to 1996.
- J. Peter Grant Mr. Grant joined Putnam
Senior Vice President and in 1973 as a Vice
Co-Portfolio Manager President and research
analyst. He became a
portfolio manager in
1974 and a Senior Vice
President in 1997.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company, Boston, Massachusetts, acts as Custodian of
the Trust's assets as well as Transfer and Dividend Paying Agent and in so doing
performs certain bookkeeping, data processing and administrative services.
65
<PAGE> 66
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The following Financial Highlights tables for each Portfolio is intended to help
you understand the Portfolios' financial performance for the past 5 years.
Certain information reflects financial results for a single Portfolio share. The
total returns in each table represent the rate that an investor would have
earned on an investment in the Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with each Portfolio's financial statements, are
included in the Trust's annual report to shareholders, which is available upon
request.
<TABLE>
<CAPTION>
NET NET TOTAL DIVIDENDS DIVIDENDS NET NET
ASSET INVEST- NET REALIZED FROM DECLARED FROM FROM NET ASSET ASSETS
VALUE MENT & UNREALIZED INVEST- NET REALIZED VALUE END OF
PERIOD BEGINNING INCOME GAIN (LOSS) ON MENT INVESTMENT GAIN ON END OF TOTAL PERIOD
ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN*** (000'S)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Management Portfolio
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
11/30/98 10.74 0.54 (0.02) 0.52 (0.68) -- 10.58 5.05 223,640
1/31/99# 10.58 0.08 0.01 0.09 -- -- 10.67 0.85 277,370
1/31/00 10.67 0.51 -- 0.51 (0.24) -- 10.94 4.85 466,588
Corporate Bond Portfolio
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
11/30/98 11.54 0.77 (0.02) 0.75 (0.46) -- 11.83 6.61 143,561
1/31/99# 11.83 0.12 0.04 0.16 -- -- 11.99 1.35 158,804
1/31/00 11.99 0.81 (1.15) (0.34) (0.53) -- 11.12 (2.75) 184,309
Global Bond Portfolio
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
11/30/98 11.51 0.49 0.78 1.27 (0.79) (0.22) 11.77 11.75 115,428
1/31/99# 11.77 0.07 0.11 0.18 -- -- 11.95 1.53 122,306
1/31/00 11.95 0.42 (0.66) (0.24) (0.47) (0.41) 10.83 (1.86) 127,145
High-Yield Bond Portfolio
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
11/30/98 11.82 1.14 (1.24) (0.10) (0.66) (0.08) 10.98 (1.26) 284,580
1/31/99# 10.98 0.18 (0.02) 0.16 -- -- 11.14 1.46 293,037
1/31/00 11.14 1.09 (0.55) 0.54 (1.14) -- 10.54 5.09 310,032
Worldwide High Income Portfolio
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
11/30/98 13.20 1.07 (2.61) (1.54) (0.61) (0.74) 10.31 (13.74) 121,290
1/31/99# 10.31 0.16 (0.35) (0.19) -- -- 10.12 (1.84) 116,977
1/31/00 10.12 1.13 0.67 1.80 (1.33) -- 10.59 19.22 124,404
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES TO INCOME TO
PERIOD AVERAGE NET AVERAGE PORTFOLIO
ENDED ASSETS NET ASSETS TURNOVER
---------- --------------------------------------
<S> <C> <C> <C>
11/30/95 0.67% 5.32% --%
11/30/96 0.62 4.90 --
11/30/97 0.63 5.06 --
11/30/98 0.58 4.97 --
1/31/99 0.62+ 5.02+ --
1/31/00 0.53 4.82 --
11/30/95 0.96++ 5.93++ 412
11/30/96 0.97 6.11 338
11/30/97 0.91 6.99 49
11/30/98 0.77 6.61 15
1/31/99 0.80+ 6.16+ 4
1/31/00 0.71 7.05 37
11/30/95 0.95 5.89 339
11/30/96 0.89 5.44 223
11/30/97 0.90 4.70 360
11/30/98 0.85 4.27 210
1/31/99 0.97+ 3.65+ 30
1/31/00 0.84 3.68 189
11/30/95 0.80 10.80 174
11/30/96 0.77 9.41 107
11/30/97 0.75 9.26 243
11/30/98 0.69 9.75 128
1/31/99 0.72+ 9.71+ 17
1/31/00 0.67 10.00 105
11/30/95 1.30 10.46 176
11/30/96 1.18 10.45 177
11/30/97 1.10 7.58 146
11/30/98 1.08@ 8.90 158
1/31/99 1.11+@ 9.57+@ 12
1/31/00 1.12@ 10.68@ 116
</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 the
insurance companies. If such expenses had been included, total return
would have been lower for each period presented.
# The Portfolio changed its fiscal year ended from November 30 to January
31.
+ Annualized
@ Net of custody credits of 0.01%, 0.01% and 0.02%, for the periods ending
November 30, 1998, January 31, 1999 and January 31, 2000, respectively.
++ During the below stated periods, the investment adviser waived a
portion of or all fees and assumed a portion of or all expenses for the
portfolios. If all fees and expenses had been incurred by the
portfolios, the ratio of expenses to average net assets and the ratio
of net investment income (loss) to average net assets would have been
as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------------- ---------------------------------------------
11/95 11/96 11/97 11/98 1/99+ 1/00 11/95 11/96 11/97 11/98 1/99+ 1/00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------- ---------------------------------------------
Cash Management....... 0.67% 0.62% 0.63% 0.58% 0.62% 0.53% 5.32% 4.90% 5.06% 4.97% 5.02% 4.82%
Corporate Bond........ 0.97 0.97 0.91 0.77 0.80 0.71 5.92 6.11 6.99 6.61 6.16 7.05
Global Bond........... 0.95 0.89 0.90 0.85 0.97 0.84 5.89 5.44 4.70 4.27 3.65 3.68
High-Yield Bond....... 0.80 0.77 0.75 0.69 0.72 0.67 10.80 9.41 9.26 9.75 9.71 10.00
Worldwide High
Income.............. 1.30 1.18 1.10 1.08 1.11 1.12 10.46 10.45 7.58 8.90 9.57 10.68
</TABLE>
66
<PAGE> 67
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET NET TOTAL DIVIDENDS DIVIDENDS NET NET
ASSET INVEST- NET REALIZED FROM DECLARED FROM FROM NET ASSET ASSETS
VALUE MENT & UNREALIZED INVEST- NET REALIZED VALUE END OF
PERIOD BEGINNING INCOME GAIN (LOSS) ON MENT INVESTMENT GAIN ON END OF TOTAL PERIOD
ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN*** (000'S)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
11/30/98 13.45 0.30 2.33 2.63 (0.11) (0.36) 15.61 19.81 149,242
1/31/99# 15.61 0.05 1.58 1.63 -- -- 17.24 10.44 194,878
1/31/00 17.24 0.36 1.80 2.16 (0.12) (0.22) 19.06 12.76 509,054
MFS Total Return Portfolio
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
11/30/98 14.75 0.36 1.56 1.92 (0.31) (1.40) 14.96 13.54 131,440
1/31/99# 14.96 0.06 0.82 0.88 -- -- 15.84 5.88 145,332
1/31/00 15.84 0.48 (0.38) 0.10 (0.29) (1.77) 13.88 0.29 208,919
Asset Allocation Portfolio
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
11/30/98 16.21 0.48 0.08 0.56 (0.35) (1.61) 14.81 2.85 713,045
1/31/99# 14.81 0.07 0.15 0.22 -- -- 15.03 1.49 724,516
1/31/00 15.03 0.40 0.37 0.77 (0.48) (0.80) 14.52 5.51 699,063
Telecom 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
11/30/98 12.91 0.42 1.62 2.04 (0.16) (0.33) 14.46 15.98 68,049
1/31/99# 14.46 0.08 0.03 0.11 -- -- 14.57 0.76 77,323
1/31/00 14.57 0.48 0.23 0.71 (0.24) (0.62) 14.42 5.01 120,159
Equity Income Portfolio
12/14/98-
1/31/99 10.00 0.03 0.54 0.57 (0.03) -- 10.54 5.70 5,287
1/31/00 10.54 0.22 (0.08) 0.14 (0.18) (0.25) 10.25 1.29 6,670
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES TO INCOME TO
PERIOD AVERAGE NET AVERAGE PORTFOLIO
ENDED ASSETS NET ASSETS TURNOVER
---------- --------------------------------------
<S> <C> <C> <C>
6/3/96
11/30/96 1.00%+++ 1.92%+++ 40%
11/30/97 1.00 1.82 143
11/30/98 0.78 2.10 111
1/31/99 0.74+@ 1.73+@ 26
1/31/00 0.66 2.01 197
11/30/95 0.98++ 3.08++ 153
11/30/96 0.84 2.74 194
11/30/97 0.82 2.63 271
11/30/98 0.77 2.43 106
1/31/99 0.81+ 2.40+ 86
1/31/00 0.75@ 3.18@ 116
11/30/95 0.81 3.62 207
11/30/96 0.74 3.66 200
11/30/97 0.68 2.88 176
11/30/98 0.64 3.15 156
1/31/99 0.66+ 2.60+ 30
1/31/00 0.63 2.70 191
6/3/96
11/30/96 1.05+++ 4.41+++ 24
11/30/97 1.05++ 3.15++ 77
11/30/98 1.01 3.04 72
1/31/99 0.93+ 3.02+ 12
1/31/00 0.84 3.31 121
12/14/98-
1/31/99 0.95+++ 1.87+++ 14
1/31/00 0.95++ 2.05++ 34
</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 the
insurance companies. If such expenses had been included, total return
would have been lower for each period presented.
# The Portfolio changed its fiscal year ended from November 30 to January
31.
+ Annualized
@ Net of custody credits of 0.01%
++ During the below stated periods, the investment adviser waived a
portion of or all fees and assumed a portion of or all expenses for the
portfolios. If all fees and expenses had been incurred by the
portfolios, the ratio of expenses to average net assets and the ratio
of net investment income (loss) to average net assets would have been
as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
-------------------------------------------- ---------------------------------------------
11/95 11/96 11/97 11/98 1/99+ 1/00 11/95 11/96 11/97 11/98 1/99+ 1/00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------- ---------------------------------------------
SunAmerica Balanced.... --% 1.43% 1.00% 0.78% 0.74% 0.66% --% 1.49% 1.82% 2.10% 1.73% 2.01%
MFS Total Return....... 1.11 0.84 0.82 0.77 0.81 0.75 2.95 2.74 2.63 2.43 2.40 3.18
Asset Allocation....... 0.81 0.74 0.68 0.64 0.66 0.63 3.62 3.66 2.88 3.15 2.60 2.70
Telecom Utility........ -- 1.93 1.24 1.01 0.93 0.84 -- 3.53 2.96 3.04 3.02 3.31
Equity Income.......... -- -- -- -- 3.47 1.56 -- -- -- -- (0.65) 1.44
</TABLE>
67
<PAGE> 68
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET NET TOTAL DIVIDENDS DIVIDENDS NET
ASSET INVEST- NET REALIZED FROM DECLARED FROM FROM NET ASSET
VALUE MENT & UNREALIZED INVEST- NET REALIZED VALUE
PERIOD BEGINNING INCOME GAIN (LOSS) ON MENT INVESTMENT GAIN ON END OF TOTAL
ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN***
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Index Portfolio
12/14/98-
1/31/99 $10.00 $0.01 $ 1.17 $ 1.18 $(0.03) $ -- $11.15 11.81%
1/31/00 11.15 0.12 0.67 0.79 (0.06) -- 11.88 7.05
Growth-Income Portfolio
11/30/95 10.33 0.17 3.31 3.48 (0.10) -- 13.71 33.89
11/30/96 13.71 0.18 3.48 3.66 (0.12) (0.43) 16.82 27.41
11/30/97 16.82 0.17 4.69 4.86 (0.13) (0.73) 20.82 30.11
11/30/98 20.82 0.17 4.33 4.50 (0.13) (0.96) 24.23 21.91
1/31/99# 24.23 0.02 3.63 3.65 -- -- 27.88 15.06
1/31/00 27.88 0.16 4.75 4.91 (0.15) (1.40) 31.24 18.37
Federated Value Portfolio
6/3/96-
11/30/96 10.00 0.07 1.01 1.08 -- -- 11.08 10.80
11/30/97 11.08 0.13 2.72 2.85 (0.03) -- 13.90 25.75
11/30/98 13.90 0.17 2.35 2.52 (0.06) (0.30) 16.06 18.22
1/31/99# 16.06 0.02 0.54 0.56 -- -- 16.62 3.49
1/31/00 16.62 0.20 (0.14) 0.06 (0.12) (0.69) 15.87 0.17
Davis Venture Value Portfolio
11/30/95 9.78 0.17 3.55 3.72 (0.03) -- 13.47 38.17
11/30/96 13.47 0.18 3.46 3.64 (0.09) (0.12) 16.90 27.44
11/30/97 16.90 0.19 4.73 4.92 (0.09) (0.26) 21.47 29.62
11/30/98 21.47 0.20 2.23 2.43 (0.12) (0.68) 23.10 11.36
1/31/99# 23.10 0.03 1.25 1.28 -- -- 24.38 5.54
1/31/00 24.38 0.13 3.06 3.19 (0.20) (0.93) 26.44 13.42
"Dogs" of Wall Street Portfolio
4/1/98-
11/30/98 10.00 0.11 (0.30) (0.19) -- -- 9.81 (1.90)
1/31/99# 9.81 0.02 (0.23) (0.21) -- -- 9.60 (2.14)
1/31/00 9.60 0.21 (1.12) (0.91) (0.05) (0.26) 8.38 (10.02)
<CAPTION>
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES TO INCOME TO
PERIOD PERIOD AVERAGE NET AVERAGE PORTFOLIO
ENDED (000'S) ASSETS NET ASSETS TURNOVER
---------- ---------------------------------------------------
<S> <C> <C> <C> <C>
12/14/98-
1/31/99 $ 11,168 0.55%+++ 0.75%+++ --%
1/31/00 63,487 0.55++ 1.02++ 1
11/30/95 171,281 0.77 1.42 59
11/30/96 325,463 0.72 1.21 82
11/30/97 622,062 0.65 0.89 44
11/30/98 1,019,590 0.60 0.78 53
1/31/99# 1,206,113 0.60+ 0.55+ 16
1/31/00 1,828,340 0.56 0.56 43
6/3/96-
11/30/96 12,460 1.05+++ 1.26+++ 30
11/30/97 59,024 1.03 1.03 46
11/30/98 145,900 0.83 1.13 51
1/31/99# 159,176 0.86+ 0.75+ 4
1/31/00 208,488 0.77 1.17 34
11/30/95 154,908 1.00++ 1.43++ 18
11/30/96 516,413 0.85 1.21 22
11/30/97 1,140,053 0.79 0.98 22
11/30/98 1,725,411 0.75 0.89 25
1/31/99# 1,840,354 0.77+ 0.86+ 5
1/31/00 2,303,994 0.74 0.51 23
4/1/98-
11/30/98 65,283 0.85+++ 2.04+++ --
1/31/99# 78,062 0.85+ 0.93+ 58
1/31/00 98,924 0.67 2.11 51
</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 the
insurance companies. If such expenses had been included, total return
would have been lower for each period presented.
# The Portfolio changed its fiscal year ended from November 30 to January
31.
+ Annualized
++ During the below stated periods, the investment adviser waived a
portion of or all fees and assumed a portion of or all expenses for the
portfolios. If all fees and expenses had been incurred by the
portfolios, the ratio of expenses to average net assets and the ratio
of net investment income (loss) to average net assets would have been
as follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------------- ---------------------------------------------
11/95 11/96 11/97 11/98 1/99+ 1/00 11/95 11/96 11/97 11/98 1/99+ 1/00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------- ---------------------------------------------
Equity Index ......... --% --% --% --% 1.80% 0.85% --% --% --% --% 0.50% 0.72%
Growth-Income......... 0.77 0.72 0.65 0.60 0.60 0.56 1.42 1.21 0.89 0.78 0.55 0.56
Federated Value....... -- 1.57 1.03 0.83 0.86 0.77 -- 0.74 1.03 1.13 0.75 1.17
Davis Venture Value... 1.02 0.85 0.79 0.75 0.77 0.74 1.41 1.21 0.98 0.89 0.86 0.51
"Dogs" of Wall
Street................ -- -- -- 0.92 0.85 0.67 -- -- -- 1.97 0.93 2.11
</TABLE>
68
<PAGE> 69
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET NET TOTAL DIVIDENDS DIVIDENDS NET
ASSET INVEST- NET REALIZED FROM DECLARED FROM FROM NET ASSET
VALUE MENT & UNREALIZED INVEST- NET REALIZED VALUE
PERIOD BEGINNING INCOME GAIN (LOSS) ON MENT INVESTMENT GAIN ON END OF TOTAL
ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN***
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Growth Portfolio
11/30/95 $10.64 $ 0.07 $ 5.08 $ 5.15 $(0.03) $(0.13) $15.63 48.91%
11/30/96 15.63 0.08 4.07 4.15 (0.04) (1.01) 18.73 28.05
11/30/97 18.73 0.16 4.76 4.92 (0.05) (1.04) 22.56 27.80
11/30/98 22.56 0.07 7.77 7.84 (0.06) (2.30) 28.04 35.92
1/31/99# 28.04 0.00 7.22 7.22 -- -- 35.26 25.75
1/31/00 35.26 (0.04) 4.46 4.42 (0.05) (3.05) 36.58 14.09
MFS Growth and Income Portfolio
11/30/95 10.01 0.12 3.14 3.26 (0.13) -- 13.14 32.92
11/30/96 13.14 0.11 2.16 2.27 (0.11) (0.91) 14.39 18.40
11/30/97 14.39 0.11 2.48 2.59 (0.10) (1.26) 15.62 19.78
11/30/98 15.62 0.02 2.61 2.63 (0.12) (2.76) 15.37 17.82
1/31/99# 15.37 0.01 1.60 1.61 -- -- 16.98 10.47
1/31/00 16.98 0.10 0.11 0.21 (0.03) (3.81) 13.35 1.77
Putnam Growth Portfolio
11/30/95 10.05 (0.01) 3.09 3.08 (0.03) -- 13.10 30.66
11/30/96 13.10 -- 2.61 2.61 -- -- 15.71 19.92
11/30/97 15.71 0.03 3.93 3.96 -- (0.52) 19.15 26.01
11/30/98 19.15 0.01 4.15 4.16 (0.02) (3.08) 20.21 22.56
1/31/99# 20.21 (0.01) 3.33 3.32 -- -- 23.53 16.43
1/31/00 23.53 (0.02) 3.76 3.74 (0.01) (0.78) 26.48 16.51
Real Estate Portfolio
6/2/97-
11/30/97 10.00 0.16 1.37 1.53 -- -- 11.53 15.30
11/30/98 11.53 0.45 (1.93) (1.48) (0.16) (0.01) 9.88 (13.04)
1/31/99# 9.88 0.09 (0.36) (0.27) -- -- 9.61 (2.73)
1/31/00 9.61 0.39 (1.14) (0.75) (0.33) -- 8.53 (8.03)
Small Company Value Portfolio
12/14/98-
1/31/99 10.00 -- 0.05 0.05 (0.02) -- 10.03 0.49
1/31/00 10.03 (0.04) 0.58 0.54 -- (0.05) 10.52 5.37
<CAPTION>
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES TO INCOME TO
PERIOD PERIOD AVERAGE NET AVERAGE PORTFOLIO
ENDED (000'S) ASSETS NET ASSETS TURNOVER
---------- ---------------------------------------------------
<S> <C> <C> <C> <C>
11/30/95 $ 167,870 0.79% 0.51% 138%
11/30/96 381,367 0.71 0.51 121
11/30/97 704,533 0.65 0.37 110
11/30/98 1,396,140 0.58 0.27 90
1/31/99# 1,864,924 0.63+ (0.01)+ 11
1/31/00 2,875,413 0.63 (0.11) 77
11/30/95 149,910 0.76 1.01 229
11/30/96 186,368 0.74 0.82 164
11/30/97 218,496 0.73 0.77 217
11/30/98 238,298 0.70 0.17 105
1/31/99# 266,069 0.75+ 0.38+ 76
1/31/00 337,222 0.75 0.66 64
11/30/95 115,276 0.93 (0.05) 52
11/30/96 160,073 0.90 (0.02) 63
11/30/97 234,726 0.91 0.18 125
11/30/98 398,863 0.86 0.09 75
1/31/99# 494,813 0.86+ (0.19)+ 10
1/31/00 783,896 0.80 (0.09) 76
6/2/97-
11/30/97 29,565 1.25+++ 3.25+++ 7
11/30/98 59,102 0.95 4.21 26
1/31/99# 58,504 1.01+ 5.63+ 6
1/31/00 53,766 0.92 4.24 61
12/14/98-
1/31/99 5,024 1.40+++ 0.12+++ 6
1/31/00 5,226 1.40++ (0.40)++ 65
</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 the
insurance companies. If such expenses had been included, total return
would have been lower for each period presented.
# The Portfolio changed its fiscal year ended from November 30 to January
31.
+ Annualized
++ During the below stated periods, the investment adviser waived a portion
of or all fees and assumed a portion of or all expenses for the
portfolios. If all fees and expenses had been incurred by the
portfolios, the ratio of expenses to average net assets and the ratio of
net investment income (loss) to average net assets would have been as
follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------------- ---------------------------------------------
11/95 11/96 11/97 11/98 1/99+ 1/00 11/95 11/96 11/97 11/98 1/99+ 1/00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------- ---------------------------------------------
Alliance Growth....... 0.79% 0.71% 0.65% 0.58% 0.63% 0.63% 0.51% 0.51% 0.37% 0.27% (0.01)% (0.11)%
MFS Growth and
Income................ 0.76 0.74 0.73 0.70 0.75 0.75 1.01 0.82 0.77 0.17 0.38 0.66
Putnam Growth......... 0.93 0.90 0.91 0.86 0.86 0.80 (0.05) (0.02) 0.18 0.09 (0.19) (0.09)
Real Estate........... -- -- 1.36 0.95 1.01 0.92 -- -- 3.14 4.21 5.63 4.24
Small Company Value... -- -- -- -- 3.87 2.25 -- -- -- -- (2.35) (1.25)
</TABLE>
69
<PAGE> 70
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET NET TOTAL DIVIDENDS DIVIDENDS NET
ASSET INVEST- NET REALIZED FROM DECLARED FROM FROM NET ASSET
VALUE MENT & UNREALIZED INVEST- NET REALIZED VALUE
PERIOD BEGINNING INCOME GAIN (LOSS) ON MENT INVESTMENT GAIN ON END OF TOTAL
ENDED OF PERIOD (LOSS)** INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN***
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MFS Mid-Cap Growth Portfolio
4/1/99-
1/31/00 $10.00 $(0.01) $ 5.84 $ 5.83 $ -- $(0.23) $15.60 58.26%
Aggressive Growth Portfolio
6/3/96-
11/30/96 10.00 0.02 0.34 0.36 -- -- 10.36 3.60
11/30/97 10.36 0.01 1.40 1.41 (0.01) -- 11.76 13.62
11/30/98 11.76 0.04 0.52 0.56 -- -- 12.32 4.76
1/31/99# 12.32 -- 3.20 3.20 -- -- 15.52 25.97
1/31/00 15.52 -- 8.59 8.59 (0.03) (1.36) 22.72 60.62
International Growth and Income Portfolio
6/2/97-
11/30/97 10.00 0.03 0.38 0.41 -- -- 10.41 4.10
11/30/98 10.41 0.13 0.86 0.99 (0.03) (0.06) 11.31 9.58
1/31/99# 11.31 -- 0.40 0.40 (0.02) (0.19) 11.50 3.56
1/31/00 11.50 0.15 1.97 2.12 (0.45) (0.89) 12.28 17.99
Global Equities Portfolio
11/30/95 11.67 0.12 1.64 1.76 (0.08) (0.29) 13.06 15.58
11/30/96 13.06 0.14 2.19 2.33 (0.14) (0.33) 14.92 18.21
11/30/97 14.92 0.09 1.79 1.88 (0.13) (0.69) 15.98 13.30
11/30/98 15.98 0.07 2.40 2.47 (0.19) (1.36) 16.90 15.34
1/31/99# 16.90 0.00 1.71 1.71 -- -- 18.61 10.12
1/31/00 18.61 0.06 4.00 4.06 (0.21) (1.37) 21.09 23.67
International Diversified Equities Portfolio
11/30/95 9.78 0.07 0.38 0.45 (0.08) -- 10.15 4.63
11/30/96 10.15 0.05 1.43 1.48 (0.26) -- 11.37 14.85
11/30/97 11.37 0.09 0.28 0.37 (0.31) (0.10) 11.33 3.52
11/30/98 11.33 0.15 1.93 2.08 (0.40) (0.15) 12.86 18.33
1/31/99# 12.86 (0.01) 0.22 0.21 -- -- 13.07 1.63
1/31/00 13.07 0.13 1.91 2.04 (0.21) (0.08) 14.82 15.85
Emerging Markets Portfolio
6/2/97-
11/30/97 10.00 0.06 (2.03) (1.97) -- -- 8.03 (19.70)
11/30/98 8.03 0.04 (1.78) (1.74) (0.07) -- 6.22 (21.86)
1/31/99# 6.22 0.01 -- 0.01 (0.01) -- 6.22 0.20
1/31/00 6.22 (0.03) 4.81 4.78 -- -- 11.00 76.86
<CAPTION>
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES TO INCOME TO
PERIOD PERIOD AVERAGE NET AVERAGE PORTFOLIO
ENDED (000'S) ASSETS NET ASSETS TURNOVER
---------- -------------------------------------------------
<S> <C> <C> <C> <C>
4/1/99-
1/31/00 $ 81,636 1.15%+++@ (0.13)%+++@ 108%
6/3/96-
11/30/96 35,124 1.05+++ 0.46+++ 47
11/30/97 103,603 0.90 (0.13) 221
11/30/98 133,183 0.83 0.32 268
1/31/99# 182,313 0.82+ 0.13+ 29
1/31/00 450,073 0.75 0.02 131
6/2/97-
11/30/97 42,844 1.60+++ 0.61+++ 19
11/30/98 128,344 1.46 1.12 51
1/31/99# 142,497 1.46+ (0.10) 10
1/31/00 253,962 1.21 1.16 75
11/30/95 165,752 1.14 1.02 106
11/30/96 246,482 1.03 1.04 70
11/30/97 341,639 0.95 0.58 115
11/30/98 420,358 0.88 0.46 92
1/31/99# 463,138 0.86+ (0.04)+ 12
1/31/00 632,495 0.84 0.30 94
11/30/95 48,961 1.70++ 0.76++ 52
11/30/96 157,008 1.59 0.47 53
11/30/97 248,927 1.35 0.82 56
11/30/98 354,174 1.26 1.18 40
1/31/99# 373,785 1.26+ (0.43)+ 7
1/31/00 464,988 1.22 0.95 65
6/2/97-
11/30/97 19,979 1.90+++ 1.33+++ 49
11/30/98 31,685 1.90++ 0.61++ 96
1/31/99# 32,708 1.90+++ 0.60+++ 22
1/31/00 102,740 1.90@ (0.41)@ 145
</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 the
insurance companies. If such expenses had been included, total return
would have been lower for each period presented.
# The Portfolio changed its fiscal year ended from November 30 to January
31.
+ Annualized
@ Net of custody credits of 0.02% and 0.01% on the MFS Mid-Cap Growth and
Emerging Markets Portfolios, respectively.
++ During the below stated periods, the investment adviser waived a portion
of or all fees and assumed a portion of or all expenses for the
portfolios. If all fees and expenses had been incurred by the
portfolios, the ratio of expenses to average net assets and the ratio of
net investment income (loss) to average net assets would have been as
follows:
<TABLE>
<CAPTION>
EXPENSES NET INVESTMENT INCOME (LOSS)
--------------------------------------------- ---------------------------------------------
11/95 11/96 11/97 11/98 1/99+ 1/00 11/95 11/96 11/97 11/98 1/99+ 1/00
--------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MFS Mid-Cap Growth............ --% --% --% --% --% 1.17% --% --% --% --% --% (0.15)%
Aggressive Growth............. -- 1.09 0.90 0.83 0.82 0.75 -- 0.42 (0.13) 0.32 0.13 0.02
International Growth and
Income........................ -- -- 2.02 1.46 1.46 1.21 -- -- 0.19 1.12 (0.10) 1.16
Global Equities............... 1.14 1.03 0.95 0.88 0.86 0.84 1.02 1.04 0.58 0.46 (0.04) 0.30
International Diversified
Equities...................... 2.09 1.59 1.35 1.26 1.26 1.22 0.37 0.47 0.82 1.18 (0.43) 0.95
Emerging Markets.............. -- -- 2.60 2.01 2.29 1.90 -- -- 0.63 0.50 0.21 (0.41)
</TABLE>
70
<PAGE> 71
--------------------------------------------------------------------------------
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 investment
strategies that significantly affected a Portfolio's performance for the
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
at no charge by calling (800) 445-7862 or by writing the Trust at P.O. Box
54299, Los Angeles, California 90054-0299.
Information about the Portfolios (including the SAI) can be reviewed and copied
at the Public Reference Room of the Securities and Exchange Commission,
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
Securities and Exchange Commission's web-site at http://www.sec.gov and copies
may be obtained upon payment of a duplicating fee by electronic request at the
following e-mail address: [email protected], or by writing the Public Reference
Section of the Securities and Exchange Commission, 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.
INVESTMENT COMPANY ACT
- File No. 811-7238
71
<PAGE> 72
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")
dated July 5, 2000. This Statement of Additional Information incorporates the
Prospectus by reference. The Trust's audited financial statements are
incorporated into this Statement of Additional Information by reference to its
2000 annual report to shareholders. You may request a copy of the Prospectus
and/or annual report at no charge by calling (800) 445-7862 or writing the Trust
at the address below. Capitalized terms used herein but not defined have the
meanings assigned to them in the Prospectus.
P.O. Box 54299
Los Angeles, California 90054-0299
(800) 445-SUN2
July 5, 2000
<PAGE> 73
TABLE OF CONTENTS
TOPIC PAGE
THE TRUST........................................................... B-3
INVESTMENT OBJECTIVES AND POLICIES.................................. B-3
SUPPLEMENTAL INVESTMENT/RISK CHARTS................................. B-4
SUPPLEMENTAL GLOSSARY............................................... B-8
SUPPLEMENTAL INFORMATION ABOUT DERIVATIVES AND THEIR USE............ B-40
SUPPLEMENTAL INFORMATION CONCERNING HIGH-YIELD, HIGH RISK
BONDS AND SECURITIES RATINGS........................................ B-42
SUPPLEMENTAL INFORMATION CONCERNING UTILITY COMPANIES............... B-46
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS.................... B-48
INVESTMENT RESTRICTIONS............................................. B-51
TRUST OFFICERS AND TRUSTEES......................................... B-56
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT........................ B-58
SUBADVISORY AGREEMENTS.............................................. B-64
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.......................... B-67
SHARES OF THE TRUST................................................. B-69
PRICE OF SHARES..................................................... B-70
EXECUTION OF PORTFOLIO TRANSACTIONS................................. B-71
GENERAL INFORMATION................................................. B-78
FINANCIAL STATEMENTS................................................ B-79
B-2
<PAGE> 74
THE TRUST
The Trust commenced operations on February 9, 1993 with the Cash
Management, High-Yield Bond, Growth-Income, Alliance Growth, Growth/Phoenix
Investment Counsel, Provident Growth and the Global Equities Portfolios. The
Fixed Income, Global Bond and Asset Allocation Portfolios commenced operations
on July 1, 1993. The Trustees subsequently approved the addition of the
following Portfolios: (a) Balanced/Phoenix Investment Counsel, International
Diversified Equities, Worldwide High Income, and Venture Value Portfolios
effective October 21, 1994; (b) SunAmerica Balanced, Aggressive Growth,
Federated Value, and Federated Utility Portfolios effective June 1, 1996; (c)
Emerging Markets, International Growth and Income, and Real Estate Portfolios
effective April 7, 1997; (d) "Dogs" of Wall Street Portfolio effective February
1, 1998; (e) Equity Income, Equity Index, and Small Company Value Portfolios
effective September 1, 1998; (f) and the MFS Mid-Cap Growth Portfolio effective
January 1, 1999; and (g) Goldman Sachs Research, Blue Chip Growth, Growth
Opportunities and Technology Portfolios effective July 5, 2000. Effective
January 12, 1999, the Trust's fiscal year end changed from November 30 to
January 31.
The Trustees approved the renaming of the following Portfolios: (a)
Fixed Income Portfolio to Corporate Bond Portfolio effective June 1, 1996; (b)
Federated Utility Portfolio to Utility Portfolio effective June 3, 1996; (c)
Provident Growth Portfolio to Putnam Growth Portfolio effective April 7, 1997;
(d) the Growth/Phoenix Investment Counsel Portfolio and Balanced/Phoenix
Investment Counsel Portfolio to MFS Growth and Income Portfolio and MFS Total
Return Portfolio, respectively effective January 1, 1999; (e) Venture Value
Portfolio to Davis Venture Value Portfolio, effective April 10, 2000; and (f)
Utility Portfolio to Telecom Utility Portfolio effective July 5, 2000.
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, First SunAmerica Life Insurance
Company, a New York corporation, AIG Life Insurance Company, a Delaware
corporation and American Life Assurance Company of New York, 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, which is a wholly-owned subsidiary of
SunAmerica Inc., a Delaware corporation, which in turn is a wholly-owned
subsidiary of American International Group, Inc. ("AIG"), a Delaware
corporation. AIG Life Insurance Company and American Life Assurance Company of
New York are also wholly-owned subsidiaries of AIG.
INVESTMENT OBJECTIVES AND POLICIES
The investment goal and principal investment strategy for each of the
Portfolios, along with certain types of investments the Portfolios make under
normal market conditions and for efficient
B-3
<PAGE> 75
portfolio management, are described under "More Information About the Portfolios
- Investment Strategies" in the Prospectus. The following charts and information
supplements the information contained in the prospectus and also provides
information concerning investments the Portfolios make on a periodic basis
which includes infrequent investments or investments in which the Portfolios
reserve the right to invest. We have also included a supplemental glossary to
define investment and risk terminology used in the charts below that does not
otherwise appear in the Prospectus under the section entitled "Glossary." In
addition, the supplemental glossary also provides additional and/or more
detailed information about certain investment and risk terminology that appears
in the Prospectus under the section entitled "Glossary." Unless otherwise
indicated, investment restrictions, including percentage limitations, apply at
the time of purchase.
SUPPLEMENTAL INVESTMENT/RISK CHARTS
FIXED INCOME PORTFOLIOS
<TABLE>
<CAPTION>
CASH MANAGEMENT CORPORATE BOND GLOBAL BOND HIGH-YIELD BOND WORLDWIDE HIGH
INCOME
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In what other - Borrowing for - Hybrid N/A - Options - U.S.
types of temporary or instruments and futures government
investments may emergency - Warrants - Hybrid securities
the Portfolio purposes (up to 10%) securities - Loan
periodically (up to 5%) - Rights participations
invest? (up to 10%)
- Illiquid securities - Dollar rolls
(up to 10%) - Firm
commitment
agreements
- Interest rate
swaps, caps,
floors and
collars
- Registered
investment
companies
- REITs
- Currency
transactions
What other types - Credit quality - Derivatives - Illiquidity - Currency - Currency
of risks may - Foreign exposure - Prepayment volatility volatility
potentially or - Hedging - Foreign - Foreign exposure - Illiquidity
periodically - Active trading exposure - Illiquidity
affect the - Illiquidity - Active trading
portfolio? - Prepayment
- Emerging
markets
- Currency
volatility
- Real estate
industry
</TABLE>
B-4
<PAGE> 76
BALANCED OR ASSET ALLOCATION PORTFOLIOS
<TABLE>
<CAPTION>
SUNAMERICA BALANCED MFS TOTAL RETURN ASSET ALLOCATION TELECOM UTILITY
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In what other N/A N/A - Borrowing - U.S. government
types of for temporary or securities
investments may emergency purposes
the Portfolio (up to 33 1/3%) - Junk bonds
periodically - Warrants
invest? - Rights
- Foreign
securities
- Zero
coupon bonds
- Deferred
interest bonds
- Pay-in-kind bonds
- Firm commitment
agreements
- When-issued and
delayed delivery
transactions
- Illiquid
securities (up to
15%)
- Registered
investment
companies
What other types - Emerging markets N/A - Prepayment - Securities
of risks may - Emerging markets selection
potentially or - Illiquidity - Derivatives
periodically - Foreign exposure
affect the - Hedging
portfolio? - Active trading
- Credit quality
- Interest
rate fluctuations
- Illiquidity
- Real estate industry
- Small and
medium sized
companies
- Emerging markets
- Value investing
</TABLE>
B-5
<PAGE> 77
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
EQUITY INCOME EQUITY INDEX GROWTH-INCOME FEDERATED VALUE DAVIS VENTURE VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In what other types of N/A N/A - Short sales - U.S. government - Equity securities
investments may the - Convertible securities - small-cap
Portfolio periodically securities - Corporate bonds stocks
invest? - Warrants - Investment grade - Fixed income
- Preferred stocks fixed income securities
- Illiquid securities securities - investment
(up to 15%) - Preferred stocks grade
- Currency - Small-cap stocks corporate bonds
transactions - Warrants - Options
- Illiquid - Illiquid securities
securities (up to (up to 15%)
15%) - Registered
- Registered investment companies
investment (up to 10%)
companies - Currency transactions
- Firm commitment - Borrowing for
agreements temporary or
- When-issued and emergency purposes
delayed delivery (up to 33 1/3%)
transactions
- REITs
- Zero coupon bonds
- Convertible
securities
- Deferred interest
bonds
What other types of risks N/A N/A - Foreign exposure - Securities - Foreign exposure
may potentially or selection - Hedging
periodically affect the - Derivatives - Illiquidity
portfolio? - Foreign exposure - Interest rate
- Hedging fluctuations
- Active trading
- Credit quality
- Illiquidity
- Emerging markets
- Small and medium
sized companies
- Real estate
industry
- Value investing
- Sector risk
</TABLE>
B-7
<PAGE> 78
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
"DOGS" OF WALL STREET ALLIANCE GROWTH GOLDMAN SACHS MFS GROWTH AND INCOME
RESEARCH
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In what other - Illiquid securities - Short sales - Short-term N/A
types of (up to 15%) - Convertible investments
investments may securities - Defensive investments
the Portfolio - Illiquid securities
periodically (up to 15%)
invest? - Forward commitments
- Currency transactions
What other types N/A - Foreign exposure N/A N/A
of risks may
potentially or
periodically
affect the
portfolio?
</TABLE>
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
PUTNAM GROWTH BLUE CHIP GROWTH REAL ESTATE SMALL COMPANY VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In what other - Illiquid securities - Illiquid securities - Fixed income N/A
types of (up to 15%) (up to 15%) securities:
investments may - Fixed income - investment grade
the Portfolio securities corporate bonds
periodically - Options
invest? - Registered
investment companies
- Securities lending
- Illiquid securities
- Currency transactions
- Borrowing for
temporary or
emergency purposes
(up to 33 1/3%)
What other types N/A - Interest rate - Foreign exposure N/A
of risks may fluctuations - Hedging
potentially or - Small sized companies - Illiquidity
periodically - Illiquidity - Interest rate
affect the - Foreign exposure fluctuations
portfolio? - Currency volatility - Credit quality
- Derivatives
- Hedging
- Emerging Markets
</TABLE>
B-8
<PAGE> 79
EQUITY PORTFOLIOS
<TABLE>
<CAPTION>
MFS MID-CAP GROWTH AGGRESSIVE GROWTH GROWTH OPPORTUNITIES TECHNOLOGY
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In what other N/A - U.S. government - Borrowing for - Fixed income
types of securities temporary or securities:
investments may - Corporate debt emergency purposes - U.S. government
the Portfolio instruments (up to 33 1/3%) securities
periodically - Preferred stocks - Illiquid securities - corporate
invest? - Rights (up to 15%) debt
- Defensive investments instruments
- Foreign securities - Currency transactions
- Forward commitments - Forward commitments
- Currency transactions - Borrowing for
- Securities lending temporary or
(up to 33 1/3%) emergency purposes
- REITs (up to 33 1/3%)
- Registered - Short-term investment
investment companies - Defensive investments
- Firm commitment
agreements
- When-issued and
delayed delivery
transactions
What other types - Credit quality N/A N/A - Interest rate
of risks may fluctuations
potentially or - Illiquidity
periodically - Foreign exposure
affect the - Currency volatility
portfolio? - Derivatives
- Hedging
- Emerging Markets
</TABLE>
INTERNATIONAL PORTFOLIOS
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH GLOBAL EQUITIES INTERNATIONAL EMERGING MARKETS
AND INCOME DIVERSIFIED EQUITIES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In what other - Equity securities: - Short sales - Borrowing for - Hybrid instruments
types of - convertible - Convertible temporary or - Structured notes
investments may securities securities emergency purposes - Swaps
the Portfolio - warrants - Illiquid securities (up to 33 1/3%) - Illiquid securities
periodically - Fixed income (up to 15%) (up to 15%)
invest? securities - Borrowing for
- investment temporary or
grade emergency purposes
securities (up to 33 1/3%)
- Hybrid instruments - Currency transactions
- Illiquid securities - Forward commitment
(up to 15%)
- Forward commitment
What other types - Derivatives - Illiquidity - Credit quality - Derivative
of risks may - Growth stocks - Illiquidity - Growth stocks
potentially or - Illiquidity - Derivatives - Illiquidity
periodically - Small and medium - Hedging - Small and medium
affect the sized companies sized companies
portfolio?
</TABLE>
B-9
<PAGE> 80
SUPPLEMENTAL GLOSSARY
SHORT-TERM INVESTMENTS, including both U.S. and non-U.S. dollar denominated
money market instruments, are invested in for reasons that may include (a) for
liquidity purposes (to meet redemptions and expenses); (b) to generate a return
on idle cash held by a Portfolio during periods when an Adviser/Subadviser is
unable to locate favorable investment opportunities; or (c) for temporary
defensive purposes. The CASH MANAGEMENT PORTFOLIO invests principally in
short-term investments. Common short-term investments include, but are not
limited to:
Money Market Securities - Money Market securities may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, repurchase agreements, commercial paper, bankers'
acceptances, time deposits and certificates of deposit.
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. 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 principal
amount of these obligations owned by the CASH MANAGEMENT PORTFOLIO is fully
insured by the FDIC.
Commercial Paper - Short-term notes (up to 12 months) issued
by corporations or governmental bodies, including variable amount master
demand notes. The CASH MANAGEMENT PORTFOLIO may purchase commercial paper
only if judged by 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 and by 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
B-10
<PAGE> 81
purchase commercial paper described in (b) above if such paper would in the
aggregate exceed 15% of its total assets after such purchase.
Extendable Commercial Notes ("ECNs") - ECNs are very similar
to commercial paper except that with ECNs the issuer has the option to
extend maturity to 390 days. ECNs are issued at a discount rate with an
initial redemption of not more than 90 days from the date of issue. The
issuer of an ECN has the option to extend maturity to 390 days. If ECNs are
not redeemed by the issuer on the initial redemption date the issuer will
pay a premium (step-up) rate based on the ECNs' credit rating at the time.
The CASH MANAGEMENT PORTFOLIO may purchase ECNs only if judged by the
Adviser to be of suitable investment quality. This includes ECNs that are
(a) rated in the two highest categories by Standard & Poor's and by
Moody's, or (b) other ECNs 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 ECNs 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 ECNs described in (b) above if
such paper would in the aggregate exceed 15% of its total assets after such
purchase.
Variable Amount Master Demand Notes permit a 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. The CASH MANAGEMENT PORTFOLIO'S 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/Subadviser, 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/Subadviser 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 a
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/Subadviser has reason to believe that the borrower could not make
timely repayment upon demand.
Corporate Bonds and Notes - A Portfolio may purchase corporate
obligations that mature or that may be redeemed in 397 days or less. These
obligations originally may have
B-11
<PAGE> 82
been issued with maturities in excess of such period. 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.
Government Securities - Debt securities maturing within one
year of the date of purchase include adjustable-rate mortgage securities
backed by GNMA, FNMA, FHLMC and other non-agency issuers. Although certain
floating or variable rate obligations (securities whose coupon rate changes
at least annually and generally more frequently) have maturities in excess
of one year, they are also considered short-term debt securities. See "U.S.
Government Securities," above.
Repurchase Agreements. A Portfolio will enter into repurchase
agreements involving only securities in which it could otherwise invest and
with selected banks and securities dealers whose financial condition is
monitored by the Adviser/Subadviser, subject to the guidance of the Board
of Trustees. In such agreements, the seller agrees to repurchase the
security at a mutually agreed-upon time and price. The period of maturity
is usually quite short, either overnight or a few days, although it may
extend over a number of months. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return
effective for the period of time a Portfolio's money is invested in the
security. Whenever a Portfolio enters into a repurchase agreement, it
obtains appropriate collateral. The instruments held as collateral are
valued daily and if the value of the instruments declines, the Portfolio
will require additional collateral. 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. In
addition, if bankruptcy proceedings are commenced with respect to the
seller of the security, realization of the collateral by the Portfolio may
be delayed or limited. The Trustees have established guidelines to be used
by the Adviser/Subadviser in connection with transactions in repurchase
agreements and will regularly monitor each Portfolio's use of repurchase
agreements. A Portfolio will not invest in repurchase agreements maturing
in more than seven days if the aggregate of such investments along with
other illiquid securities exceeds 15% (10% with respect to the CASH
MANAGEMENT PORTFOLIO) of the value of its net assets. However, there is no
limit on the amount of a Portfolio's net assets that may be subject to
repurchase agreements having a maturity of seven days or less for temporary
defensive purposes.
MORTGAGE-BACKED SECURITIES include investments in mortgage-related
securities, including certain U.S. government securities such as GNMA, FNMA or
FHLMC certificates (as defined below), and private mortgage-related securities,
which represent an undivided ownership interest in a pool of mortgages. The
mortgages backing these securities include conventional thirty-year fixed-rate
mortgages, fifteen-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. The U.S. government or the issuing agency guarantees
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the payment of interest and principal of these securities. However, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates. These certificates are in
most cases pass-through instruments, through which the holder receives a share
of all interest and principal payments, including prepayments, on the mortgages
underlying the certificate, net of certain fees.
The yield on mortgage-backed securities is based on the average expected
life of the underlying pool of mortgage loans. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through certificates.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. Thus, the
actual life of any particular pool will be shortened by any unscheduled or early
payments of principal and interest. Principal prepayments generally result from
the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages. The occurrence of prepayments is affected by a wide range
of economic, demographic and social factors and, accordingly, it is not possible
to predict accurately the average life of a particular pool. Yield on such pools
is usually computed by using the historical record of prepayments for that pool,
or, in the case of newly-issued mortgages, the prepayment history of similar
pools. The actual prepayment experience of a pool of mortgage loans may cause
the yield realized by the Portfolio to differ from the yield calculated on the
basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as does the value of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a comparable basis with other debt securities because of the
prepayment feature of pass-through securities. The reinvestment of scheduled
principal payments and unscheduled prepayments that the Portfolio receives may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Portfolio. Monthly interest payments received by the Portfolio have
a compounding effect, which may increase the yield to shareholders more than
debt obligations that pay interest semi-annually. Because of those factors,
mortgage-backed securities may be less effective than U.S. Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Accelerated prepayments adversely affect yields for pass-through
securities purchased at a premium (i.e., at a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not have been fully amortized at the time the obligation is repaid. The
opposite is true for pass-through securities purchased at a discount. A
Portfolio may purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates, the
most widely available mortgage-backed securities:
GNMA Certificates. GNMA Certificates are mortgage-backed
securities that evidence an undivided interest in a pool or pools of
mortgages. GNMA Certificates that a
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Portfolio may purchase are the modified pass-through type, which entitle
the holder to receive timely payment of all interest and principal payments
due on the mortgage pool, net of fees paid to the issuer and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest
on securities backed by a pool of mortgages insured by the Federal Housing
Administration ("FHA") or the FMHA, or guaranteed by the Veterans
Administration. The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The
GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosure will usually result in the return of the greater part
of principal investment long before the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee, except to the extent that a Portfolio has purchased the
certificates at a premium in the secondary market.
FHLMC Certificates. The FHLMC issues two types of mortgage
pass-through securities: mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs") (collectively, "FHLMC
Certificates"). PCs resemble GNMA Certificates in that each PC represents a
pro rata share of all interest and principal payments made and owed on the
underlying pool. The FHLMC guarantees timely monthly payment of interest
(and, under certain circumstances, principal) of PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The expected average
life of these securities is approximately ten years. The FHLMC guarantee is
not backed by the full faith and credit of the U.S. Government.
FNMA Certificates. The FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates
represent a pro rata share of all interest and principal payments made and
owed on the underlying pool. FNMA guarantees timely payment of interest and
principal on FNMA Certificates. The FNMA guarantee is not backed by the
full faith and credit of the U.S. Government.
Other types of mortgage-backed securities include:
Conventional Mortgage Pass-Through Securities represent
participation interests in pools of mortgage loans that are issued by
trusts formed by originators of the institutional investors in mortgage
loans (or represent custodial arrangements administered by such
institutions). These originators and institutions include commercial banks,
savings and loans
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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 REMICs
and, in either case, are generally not subject to any significant amount of
federal income tax at the entity level.
The mortgage pools underlying Conventional Mortgage
Pass-Throughs consist of conventional mortgage loans evidenced by
promissory notes secured by first mortgages or first deeds of trust or
other similar security instruments creating a first lien on residential or
mixed residential and commercial properties. Conventional Mortgage
Pass-Throughs (whether fixed or adjustable rate) provide for monthly
payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees or other amount paid to any
guarantor, administrator and/or servicer of the underlying mortgage loans.
A trust fund with respect to which a REMIC election has been made may
include regular interests in other REMICs, which in turn will ultimately
evidence interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of
interest than government and government-related pools because of the
absence of any direct or indirect government or agency payment 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.
Collateralized Mortgage Obligations ("CMOs") are fully
collateralized bonds that are the general obligations of the issuer thereof
(e.g., the U.S. government, a U.S. government instrumentality, or a private
issuer). Such bonds generally are secured by an assignment to a trustee
(under the indenture pursuant to which the bonds are issued) of collateral
consisting of a pool of mortgages. Payments with respect to the underlying
mortgages generally are made to the trustee under the indenture. Payments
of principal and interest on the underlying mortgages are not passed
through to the holders of the CMOs as such (i.e., the character of payments
of principal and interest is not passed through, and therefore payments to
holders of CMOs attributable to interest paid and principal repaid on the
underlying mortgages do not necessarily constitute income and return of
capital, respectively, to such holders), but such payments are dedicated to
payment of interest on and repayment of principal of the CMOs.
Principal and interest on the underlying mortgage assets may
be allocated among the several classes of 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
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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 that 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 accrue interest at a specified rate only
until all other certificates having an earlier final distribution date have
been retired and are converted thereafter to an interest-paying security,
and planned amortization class ("PAC") certificates, which are parallel pay
CMOs which generally require that specified amounts of principal be applied
on each payment date to one or more classes of CMOs (the "PAC
Certificates"), even though all other principal payments and prepayments of
the mortgage assets are then required to be applied to one or more other
classes of the certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
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 to
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.
Stripped Mortgage-Backed Securities ("SMBS") are often
structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. SMBS
have greater market volatility than other types of U.S. government
securities in which a Portfolio invests. A common type of SMBS has one
class receiving some of the interest and all or most of the principal (the
"principal only" class) from the mortgage pool, while the other class will
receive all or most of the interest (the "interest only" class). The yield
to maturity on an interest only class is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal
payments, including principal prepayments, on the underlying pool of
mortgage assets, and a rapid rate of principal payment may have a material
adverse effect on a Portfolio's yield. While interest-only and
principal-only securities are generally regarded as being illiquid, such
securities may be deemed to be liquid if they can be disposed of promptly
in the ordinary course of business at a value reasonably close to that used
in the calculation of a Portfolio's net asset value per share. Only
government interest-only and principal-only securities backed by fixed-rate
mortgages and determined to be liquid under guidelines and standards
established by the Trustees may be considered liquid securities not subject
to a Portfolio's limitation on investments in illiquid securities.
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ASSET-BACKED 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.
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 servicer 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.
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 that 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.
MUNICIPAL BONDS. Fixed income securities include, among other things,
municipal bonds which are issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax ("Municipal Bonds"). Municipal Bonds include debt
securities which pay interest income that is subject to the alternative minimum
tax. A Portfolio may invest in Municipal Bonds whose issuers pay interest on the
Bonds from revenues from projects such as multifamily housing, nursing homes,
electric utility systems, hospitals or life care facilities.
U.S. TREASURY INFLATION PROTECTION SECURITIES 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
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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 include investments 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"). Investments in Loans are expected
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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
Adviser/Subadviser to be creditworthy. When the Portfolio purchases Assignments
from Lenders it will acquire direct rights against the borrower on the Loan.
Because Assignments are arranged through private negotiations between potential
assignees and potential assignors, however, the rights and obligations acquired
by the Portfolio as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender. Because there is no liquid
market for such securities, the Portfolio anticipates that such securities could
be sold only to a limited number of institutional investors. The lack of a
liquid secondary market may have an adverse impact on the value of such
securities and the Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Portfolio
to assign a value to these securities for purposes of valuing the Portfolio and
calculating its net asset value.
The MFS TOTAL RETURN 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 revolving credit facilities or other standby financing
commitments that 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 there may be no liquid market
for such securities, as described above.
SHORT SALES are effected by selling a security that 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
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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 the 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.
INVERSE FLOATERS are leveraged inverse floating rate debt instruments. 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.
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 that 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 that 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 that 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
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obtain the right of registration at the expense of the issuer (except in the
case of "Rule 144A securities," as described below).
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).
Commercial paper issues in which a Portfolio may invest include securities
issue by major corporations without registration under the Securities Act in
reliance on the exemption from such registration afforded by Section 3(a)(3)
thereof, and commercial paper issued in reliance on the so-called private
placement exemption from registration 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.
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
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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. Equity REITs may be affected by changes in the value of the
underlying property owned by the trusts, while Mortgage REITs may be affected by
the quality of credit extended. Equity and Mortgage REITs are dependent upon
management skill, may not be diversified and are subject to project financing
risks. Such trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code of 1986, 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.
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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. When-issued or
delayed-delivery transactions call for the purchase or sale of securities at an
agreed-upon price on a specified future date. Although a Portfolio will enter
into such transactions for the purpose of acquiring securities for its portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement. When such transactions are
negotiated, the price (which is generally expressed in yield terms) is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. During the period between commitment by a Portfolio
and settlement (generally within two months but not to exceed 120 days), no
payment is made for the securities purchased by the purchaser, and no interest
accrues to the purchaser from the transaction. Such securities are subject to
market fluctuation, and the value at delivery may be less than the purchase
price. A Portfolio will maintain a segregated account with its custodian,
consisting of cash or liquid securities at least equal to the value of purchase
commitments until payment is made. A Portfolio will likewise segregate liquid
assets in respect of securities sold on a delayed delivery basis.
A Portfolio will engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When a Portfolio engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Portfolio losing
the
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opportunity to obtain a price and yield considered to be advantageous. If a
Portfolio chooses to (i) dispose of the right to acquire a when-issued security
prior to its acquisition or (ii) dispose of its right to deliver or receive
against a firm commitment, it may incur a gain or loss. (At the time a Portfolio
makes a commitment to purchase or sell a security on a when-issued or firm
commitment basis, it records the transaction and reflects the value of the
security purchased, or if a sale, the proceeds to be received in determining its
net asset value.)
To the extent a Portfolio engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Portfolio enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and firm commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser/Subadviser before settlement of a purchase
will affect the value of such securities and may cause a loss to a Portfolio.
When-issued transactions and firm commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Portfolio might sell securities in
its portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Portfolio might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields. An example of a
when-issued or delayed delivery security is a "to be announced" or "TBA"
mortgage-backed security. A TBA mortgage-backed security transaction arises when
a mortgage-backed security is purchased or sold with the specific pools to be
announced on a future settlement date, with no definitive maturity date. The
actual principal amount and maturity date will be determined upon settlement
date.
HYBRID INSTRUMENTS, including indexed or structured securities, combine the
elements of futures contracts or options with those of debt, preferred equity or
a depository instrument. Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices (collectively
"Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including,
but not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity.
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Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Portfolio may wish to take advantage of expected declines
in interest rates in several European countries, but avoid the transactions
costs associated with buying and currency-hedging the foreign bond positions.
One solution would be to purchase a U.S. dollar-denominated Hybrid Instrument
whose redemption price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, the Portfolio could limit the downside risk of the security
by establishing a minimum redemption price so that the principal paid at
maturity could not be below a predetermined minimum level if interest rates were
to rise significantly. The purpose of this arrangement, known as a structured
security with an embedded put option, would be to give the Portfolio the desired
European bond exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no guarantee that the
strategy will be successful and the Portfolio could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with the
issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors unrelated to the operations or credit quality of
the issuer of the Hybrid Instrument, which may not be readily foreseen by the
purchaser, such as economic and political events, the supply and demand for the
Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments may
bear interest at above market rates but bear an increased risk of principal loss
(or gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is
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structured so that a given change in a Benchmark or Underlying Asset is
multiplied to produce a greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. Under certain conditions, the redemption (or sale)
value of such an investment could be zero. In addition, because the purchase and
sale of Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a transaction
between the Portfolio and the issuer of the Hybrid Instrument, the
creditworthiness of the counterparty or issuer of the Hybrid Instrument would be
an additional risk factor the Portfolio would have to consider and monitor.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, the
Securities and Exchange Commission (the "SEC"), which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Portfolio. Accordingly, a Portfolio that so invests will limit its
investments in Hybrid Instruments to 10% of its total assets.
Hybrid Instruments include:
Structured investments which are 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 typically
involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. Investments in Structured
Securities are generally of 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.
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.
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WEBs. World Equity Benchmark Shares ("WEBS") are shares of an investment
company that invests substantially all of its assets in securities included
in the MSCI indices for specified countries. The market prices of WEBS are
expected to fluctuate in accordance with both changes in the net asset
values of their underlying indices and supply and demand of WEBS on the
American Stock Exchange. In the event substantial market or other
disruptions affecting WEBS should occur in the future, the liquidity and
value of Portfolio's shares could also be substantially and adversely
affected, and the Fund's ability to provide investment results
approximating the performance of securities in the EAFE Index could be
impaired.
SPDRs. Standard & Poor's Depositary Receipts ("SPDRs") are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a
trust established to accumulate and hold a portfolio of common stocks
intended to track the price performance and dividend yield of the S&P 500.
SPDRs may be used for several reasons, including but not limited to
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk, as the price
movement of the instrument does not perfectly correlate with the price
action of the underlying index.
INTEREST-RATE SWAPS, MORTGAGE SWAPS, CAPS, FLOORS AND COLLARS. Entering
into interest-rate swaps or mortgage swaps or purchasing interest-rate caps,
floors or collars is often done to protect against interest rate fluctuations
and hedge against fluctuations in the fixed income market. A Portfolio will
generally 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. 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. Portfolios will enter into
interest-rate swaps only 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
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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.
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 Standard & Poor's or Aa or P-1 or better by Moody's, or is determined
to be of equivalent quality by the applicable Subadviser.
EQUITY SWAPS are typically entered into for the purpose of investing in a
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise
impracticable. The counterparty to an equity swap contract will typically be a
bank, investment banking firm or broker/dealer. The counterparty will generally
agree to pay the Portfolio the amount, if any, by which the notional amount of
the equity swap contract would have increased in value had it been invested in
the particular stocks, plus the dividends that would have been received on those
stocks. The Portfolio will agree to pay to the counterparty a floating rate of
interest on the notional amount of the equity swap contract plus the amount, if
any, by which that notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the Portfolio on any equity
swap contract should be the gain or loss on the notional amount plus dividends
on the stocks less the interest paid by the Portfolio on the notional amount.
A Portfolio will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. Payments
may be made at the conclusion of an equity swap contract or periodically during
its term. Equity swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps is
limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to an equity swap defaults, the
Portfolio's risk of loss consists of the net amount of payment that the
Portfolio is contractually entitled to receive, if any. The net amount of the
excess, if any, of the Portfolio's obligations over its entitlements with
respect to each equity swap will be accrued on a daily basis and an amount of
cash or liquid assets, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the
Portfolio's custodian. Inasmuch as these transactions are entered into for
hedging purposes or are offset by segregated cash or liquid assets, as permitted
by applicable law, the Portfolio believes that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to the Portfolio's borrowing restrictions.
SECURITIES LENDING. Consistent with applicable regulatory requirements,
each Portfolio except the CASH MANAGEMENT PORTFOLIO may lend portfolio
securities in amounts up to 331/3% of total assets to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by the
Portfolio and are at all times secured by cash or equivalent collateral. In
lending its portfolio securities, a Portfolio receives income while retaining
the securities' potential for capital
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appreciation. The advantage of such loans is that a Portfolio continues to
receive the interest and dividends on the loaned securities while at the same
time earning interest on the collateral, which will be invested in high-quality
short-term debt securities, including repurchase agreements. A loan may be
terminated by the borrower on one business day's notice or by a Portfolio at any
time. If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Portfolio could use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. 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/Subadviser to be creditworthy. On termination of the loan, the borrower
is required to return the securities to a Portfolio; and any gain or loss in the
market price of the loaned security during the loan would inure to the
Portfolio. Each such Portfolio will pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities or may share the
interest earned on collateral with the borrower.
Since voting or consent rights accompany loaned securities pass to the
borrower, each such Portfolio will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights if
the matters involved would have a material effect on the Portfolio's investment
in the securities that are the subject of the loan.
BORROWING. All of the Portfolios (except the CASH MANAGEMENT PORTFOLIO) are
authorized to borrow money to the extent permitted by applicable law. The 1940
Act permits each Portfolio to borrow up to 33 1/3% of its total assets from
banks for temporary or emergency purposes. In seeking to enhance performance, a
Portfolio may borrow for investment purposes and may pledge assets to secure
such borrowings. The CASH MANAGEMENT PORTFOLIO may not borrow money except 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/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.
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REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements may be entered
into with brokers, dealers, domestic and foreign banks or other financial
institutions that have been determined by the Adviser/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
with the Custodian a separate account with a segregated portfolio of cash or
liquid securities in an amount at least equal to its purchase obligations under
these agreements (including accrued interest). In the event that the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of time
to determine whether to enforce the Portfolio's repurchase obligation, and the
Portfolio's use of proceeds of the agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings and are subject to the percentage limitations on borrowings. See
"Investment Restrictions."
ROLL TRANSACTIONS involve the sale of mortgage or other asset-backed
securities ("roll securities") with the commitment to purchase 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. The 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. The 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 that matures on or before the forward
settlement date of the dollar roll transaction. A Portfolio will enter only into
covered rolls. 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.
Roll transactions involve certain risks, including the following: 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 that the Portfolio is required to
repurchase may be worth less than an instrument that the Portfolio originally
held. Successful use of roll transactions will depend upon the
Adviser/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.
SECTOR RISK. Companies with similar characteristics may be grouped together
in broad categories called sectors. Sector risk is the possibility that a
certain sector may underperform other sectors or the market as a whole. As a
Portfolio allocates more of its portfolio holdings to a
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particular sector, the Portfolio's performance will be more susceptible to any
economic, business or other developments which generally affect that sector.
STANDBY COMMITMENTS. Standby commitments are put options that entitle
holders to same day settlement at an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise. A Portfolio may acquire standby commitments to enhance the liquidity
of portfolio securities, but only when the issuers of the commitments present
minimal risk of default. Ordinarily, the Portfolio may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. A Portfolio may purchase standby
commitments separate from or in conjunction with the purchase of securities
subject to such commitments. In the latter case, the Portfolio would pay a
higher price for the securities acquired, thus reducing their yield to maturity.
Standby commitments will not affect the dollar-weighted average maturity of the
Portfolio, or the valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. The
Adviser/Subadviser may rely upon its evaluation of a bank's credit in
determining whether to support an instrument supported by a letter of credit.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Portfolios; and the possibility that the maturities of the underlying securities
may be different from those of the commitments.
VALUE INVESTING. Due to their relatively low valuations, value stocks are
typically less volatile than growth stocks. For instance, the price of a value
stock may experience a smaller increase on a forecast of higher earnings, a
positive fundamental development, or positive market development. Further, value
stocks tend to have higher dividends than growth stocks. This means they depend
less on price changes for returns and may lag behind growth stocks in an "up"
market.
WARRANTS 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 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, "DOGS" OF
WALL STREET, MFS MID-CAP GROWTH and INTERNATIONAL DIVERSIFIED EQUITIES
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 that may be
invested in the securities of any one issuer. However, in spite of the
flexibility under the 1940 Act, the Portfolios
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would still have to meet quarterly diversification requirements under 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.
ADRS, GDRS, AND EDRS. Foreign securities include, among other things,
American Depositary Receipts ("ADRs") and other Depositary Receipts, including
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and
others (which, together with ADRs, GDRs and EDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent that such Depositary
Receipts become available. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer (the "underlying
issuer") and deposited with the depositary. ADRs include American Depositary
Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored
ADRs are established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Holders of
unsponsored Depositary Receipts generally bear all the costs associated with
establishing the unsponsored Depositary Receipt. The depositary of unsponsored
Depositary Receipts is under no obligation to distribute shareholder
communications received from the underlying issuer or to pass through to the
holders of the unsponsored Depositary Receipt voting rights with respect to the
deposited securities or pool of securities. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities to
which they may be connected. Generally, Depositary Receipts in registered form
are designed for use in the U.S. securities market and Depositary Receipts in
bearer form are 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.
BRADY BONDS. Foreign securities include, among other things, Brady Bonds
which are securities created through the exchange of existing commercial bank
loans to public and private entities in certain emerging markets for new bonds
in connection with debt restructurings under a debt restructuring 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, Dominican Republic, Ecuador,
Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the Phillippines, Poland,
Slovenia, Uruguay and Venezuela. Brady Bonds have been issued only 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, why 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
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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.
OPTIONS AND FUTURES are contracts involving the right to receive or the
obligation to deliver assets or money depending on the performance of one or
more underlying assets or a market or economic index. An option gives its owner
the right, but not the obligation, to buy ("call") or sell ("put") a specified
amount of a security at a specified price within in a specified time period. A
futures contract is an exchange-traded legal contract to buy or sell a standard
quantity and quality of a commodity, financial instrument, index, etc. at a
specified future date and price. Options and Futures (defined below) are
generally used for either hedging or income enhancement purposes.
Options can either purchased or written (i.e., sold). 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. After any such sales up to 25% of a Portfolio's total
assets may be subject to calls. All call options written by a Portfolio must be
"covered," which means that a Portfolio will own the securities subject to the
option as long as the option is outstanding. The purpose of writing covered call
options is to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, a Portfolio may forego the opportunity to profit from an
increase in the market price of the underlying security.
A put option written by a Portfolio obligates 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 must be "covered," which means that the Portfolio will deposit 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 following is more detailed information concerning options, futures and
options on futures:
Options on Securities. When a Portfolio writes (i.e., sells) a
call option ("call") on a security it receives a premium and agrees to sell
the underlying security to a purchaser of a corresponding call on the same
security during the call period (usually not more than 9 months) at a fixed
price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. A Portfolio has
retained the risk of loss should the price of the underlying security
decline during the call period, which may be offset to some extent by the
premium.
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To terminate its obligation on a call it has written, a
Portfolio may purchase a corresponding call in a "closing purchase
transaction." A profit or loss will be realized, depending upon whether the
net of the amount of the option transaction costs and the premium received
on the call written was more or less than the price of the call
subsequently purchased. A profit may also be realized if the call expires
unexercised, because a Portfolio retains the underlying security and the
premium received. If a Portfolio could not effect a closing purchase
transaction due to lack of a market, it would hold the callable securities
until the call expired or was exercised.
When a Portfolio purchases a call (other than in a closing
purchase transaction), it pays a premium and has the right to buy the
underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price. A Portfolio
benefits only if the call is sold at a profit or if, during the call
period, the market price of the underlying investment is above the sum of
the call price plus the transaction costs and the premium paid and the call
is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and a Portfolio
will lose its premium payment and the right to purchase the underlying
investment.
A put option on securities gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying investment at
the exercise price during the option period. Writing a put covered by
segregated liquid assets equal to the exercise price of the put has the
same economic effect to a Portfolio as writing a covered call. The premium
a Portfolio receives from writing a put option represents a profit as long
as the price of the underlying investment remains above the exercise price.
However, a Portfolio has also assumed the obligation during the option
period to buy the underlying investment from the buyer of the put at the
exercise price, even though the value of the investment may fall below the
exercise price. If the put expires unexercised, a Portfolio (as the writer
of the put) realizes a gain in the amount of the premium. If the put is
exercised, a Portfolio must fulfill its obligation to purchase the
underlying investment at the exercise price, which will usually exceed the
market value of the investment at that time. In that case, a Portfolio may
incur a loss, equal to the sum of the sale price of the underlying
investment and the premium received minus the sum of the exercise price and
any transaction costs incurred.
A Portfolio may effect a closing purchase transaction to
realize a profit on an outstanding put option it has written or to prevent
an underlying security from being put. Furthermore, effecting such a
closing purchase transaction will permit a Portfolio to write another put
option to the extent that the exercise price thereof is secured by the
deposited assets, or to utilize the proceeds from the sale of such assets
for other investments by the Portfolio. A Portfolio will realize a profit
or loss from a closing purchase transaction if the cost of the transaction
is less or more than the premium received from writing the option.
When a Portfolio purchases a put, it pays a premium and has
the right to sell the underlying investment to a seller of a corresponding
put on the same investment during the
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put period at a fixed exercise price. Buying a put on an investment a
Portfolio owns enables the Portfolio to protect itself during the put
period against a decline in the value of the underlying investment below
the exercise price by selling such underlying investment at the exercise
price to a seller of a corresponding put. If the market price of the
underlying investment is equal to or above the exercise price and as a
result the put is not exercised or resold, the put will become worthless at
its expiration date, and the Portfolio will lose its premium payment and
the right to sell the underlying investment pursuant to the put. The put
may, however, be sold prior to expiration (whether or not at a profit).
Buying a put on an investment a Portfolio does not own permits
the Portfolio either to resell the put or buy the underlying investment and
sell it at the exercise price. The resale price of the put will vary
inversely with the price of the underlying investment. If the market price
of the underlying investment is above the exercise price and as a result
the put is not exercised, the put will become worthless on its expiration
date. In the event of a decline in the stock market, a Portfolio could
exercise or sell the put at a profit to attempt to offset some or all of
its loss on its portfolio securities.
When writing put options on securities, to secure its
obligation to pay for the underlying security, a Portfolio will deposit in
escrow liquid assets with a value equal to or greater than the exercise
price of the underlying securities. A Portfolio therefore forgoes the
opportunity of investing the segregated assets or writing calls against
those assets. As long as the obligation of a Portfolio as the put writer
continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring a Portfolio to take delivery
of the underlying security against payment of the exercise price. A
Portfolio has no control over when it may be required to purchase the
underlying security, since it may be assigned an exercise notice at any
time prior to the termination of its obligation as the writer of the put.
This obligation terminates upon expiration of the put, or such earlier time
at which a Portfolio effects a closing purchase transaction by purchasing a
put of the same series as that previously sold. Once a Portfolio has been
assigned an exercise notice, it is thereafter not allowed to effect a
closing purchase transaction.
The purchase of a spread option gives a Portfolio the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Portfolio does
not own, but which is used as a benchmark. The risk to a Portfolio in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect a Portfolio against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between high quality and
lower quality securities. Such protection is provided only during the life
of the spread option.
Options on Foreign Currencies. Puts and calls are also written
and purchased on foreign currencies. A call written on a foreign currency
by a Portfolio is "covered" if the
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Portfolio owns the underlying foreign currency covered by the call or has
an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in
a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A put option is "covered" if the
Portfolio deposits with its custodian cash or liquid securities with a
value at least equal to the exercise price of the put option. A call
written by a Portfolio on a foreign currency is for cross-hedging purposes
if it is not covered, but is designed to provide a hedge against a decline
in the U.S. dollar value of a security the Portfolio owns or has the right
to acquire and which is denominated in the currency underlying the option
due to an adverse change in the exchange rate. In such circumstances, a
Portfolio collateralizes the option by maintaining in a segregated account
with the Trust's custodian, cash or liquid securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
As with other kinds of option transactions, the writing of an
option on currency will constitute only a partial hedge, up to the amount
of the premium received. A Portfolio could be required to purchase or sell
currencies at disadvantageous exchange rates, thereby incurring losses. 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 a Portfolio's position, the Portfolio may forfeit the
entire amount of the premium plus related transaction costs.
Options on Securities Indices. Puts and calls on broadly-based
securities indices are similar to puts and calls on securities except that
all settlements are in cash and gain or loss depends on changes in the
index in question (and thus on price movements in the securities market
generally) rather than on price movements in individual securities or
Futures. When a Portfolio buys a call on a securities index, it pays a
premium. During the call period, upon exercise of a call by a Portfolio, a
seller of a corresponding call on the same investment will pay the
Portfolio an amount of cash to settle the call if the closing level of the
securities index upon which the call is based is greater than the exercise
price of the call. That cash payment is equal to the difference between the
closing price of the index and the exercise price of the call times a
specified multiple (the "multiplier") which determines the total dollar
value for each point of difference. When a Portfolio buys a put on a
securities index, it pays a premium and has the right during the put period
to require a seller of a corresponding put, upon the Portfolio's exercise
of its put, to deliver to the Portfolio an amount of cash to settle the put
if the closing level of the securities index upon which the put is based is
less than the exercise price of the put. That cash payment is determined by
the multiplier, in the same manner as described above as to calls.
Yield curve options. 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 not anticipated. Yield curve
options are
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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. Portfolio that may enter into yield curve options
transactions will cover such transactions as described above.
Reset Options are options on U.S. Treasury securities which
provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of each such
option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the
case of a put), a specified type of U.S. Treasury security at any time up
to a stated expiration date for, in certain instances, on such date). In
contrast to other types of options, however, the price at which the
underlying security may be purchased or sold under a "reset" option is
determined at various intervals during the term of the option, and such
price fluctuates from interval to interval based on changes in the market
value of the underlying security. As a result, the strike price of a
"reset" option, at the time of exercise, may be less advantageous than if
the strike price had been fixed at the initiation of the option. In
addition, the premium paid for the purchase of the option may be determined
at the termination, rather than the initiation, of the option. If the
premium for a reset option written by the Series is pad at termination, the
Series assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on
its obligation to pay the premium at the termination of the option.
Conversely, where the Series purchases a reset option, it could be required
to pay a higher premium than would have been the case at the initiation of
the option.
Futures. Interest rate futures contracts, foreign currency
futures contracts and stock and bond index futures contracts, including
futures on U.S. government securities (together, "Futures") are used
primarily for hedging purposes and from time to time for income
enhancement. Upon entering into a Futures transaction, a Portfolio will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). Futures are also often used to adjust
exposure to various equity or fixed income markets or as a substitute for
investments in underlying cash markets. The initial margin will be
deposited with the Trust's custodian in an account registered in the
futures broker's name; however the futures broker can gain access to that
account only under specified conditions. As the Future is marked to market
to reflect changes in its market value, subsequent margin payments, called
variation margin, will be paid to or by the futures broker on a daily
basis. Prior to expiration of the Future, if a Portfolio elects to close
out its position by taking an opposite position, a final determination of
variation margin is made, additional cash is required to be paid by or
released to the Portfolio, and any loss or gain is realized for tax
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purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold
generally for hedging purposes to attempt to protect against the effects of
interest rate changes on a Portfolio's current or intended investments in
fixed-income securities. For example, if a Portfolio owned long-term bonds
and interest rates were expected to increase, that Portfolio might sell
interest rate futures contracts. Such a sale would have much the same
effect as selling some of the long-term bonds in that Portfolio's
portfolio. However, since the Futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique
allows a Portfolio to hedge its interest rate risk without having to sell
its portfolio securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase
at approximately the same rate, thereby keeping the net asset value of that
Portfolio from declining as much as it otherwise would have. On the other
hand, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases
of long-term bonds at higher prices. Since the fluctuations in the value of
the interest rate futures contracts should be similar to that of long-term
bonds, a Portfolio could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had
stabilized. At that time, the interest rate futures contracts could be
liquidated and that Portfolio's cash reserves could then be used to buy
long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts
are used for hedging purposes to attempt to protect a Portfolio's current
or intended investments from broad fluctuations in stock or bond prices.
For example, a Portfolio may sell stock or bond index futures contracts in
anticipation of or during a market decline to attempt to offset the
decrease in market value of the Portfolio's securities portfolio that might
otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the Futures
position. When a Portfolio is not fully invested in the securities market
and anticipates a significant market advance, it may purchase stock or bond
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the
Portfolio intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be
closed out.
Foreign currency futures contracts are generally entered into
for hedging or income enhancement purposes to attempt to protect a
Portfolio's current or intended investments from fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the
cost of foreign-denominated securities to be acquired, even if the value of
such securities in the currencies in which they are denominated remains
constant. For example, a Portfolio may sell futures contracts on a foreign
currency when it holds securities denominated in such
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currency and it anticipates a decline in the value of such currency
relative to the dollar. In the event such decline occurs, the resulting
adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the Futures contracts. However, if
the value of the foreign currency increases relative to the dollar, the
Portfolio's loss on the foreign currency futures contract may or may not be
offset by an increase in the value of the securities since a decline in the
price of the security stated in terms of the foreign currency may be
greater than the increase in value as a result of the change in exchange
rates.
Conversely, a Portfolio could protect against a rise in the
dollar cost of foreign-denominated securities to be acquired by purchasing
Futures contracts on the relevant currency, which could offset, in whole or
in part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. When a Portfolio purchases
futures contracts under such circumstances, however, and the price of
securities to be acquired instead declines as a result of appreciation of
the dollar, the Portfolio will sustain losses on its futures position,
which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired.
Options on Futures include options on interest rate futures
contracts, stock and bond index futures contracts and foreign currency
futures contracts.
The writing of a call option on a Futures contract constitutes
a partial hedge against declining prices of the securities in the
portfolio. If the Futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the portfolio holdings. The writing of a put option on a
Futures contract constitutes a partial hedge against increasing prices of
the securities or other instruments required to be delivered under the
terms of the Futures contract. If the Futures price at expiration of the
put option is higher than the exercise price, a Portfolio will retain the
full amount of the option premium that provides a partial hedge against any
increase in the price of securities the Portfolio intends to purchase. If a
put or call option a Portfolio has written is exercised, the Portfolio will
incur a loss, which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its Options
on Futures positions, a Portfolio's losses from exercised Options on
Futures may to some extent be reduced or increased by changes in the value
of portfolio securities.
A Portfolio may purchase Options on Futures for hedging
purposes, instead of purchasing or selling the underlying Futures contract.
For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, a Portfolio could, in lieu of selling a Futures
contract, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the option. If
the market decline does not occur, the Portfolio will suffer a loss equal
to the price of the put. Where it is projected that the value of
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securities to be acquired by a Portfolio will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, a Portfolio could purchase call Options on Futures, rather than
purchasing the underlying Futures contract. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on
the call. However, if the market declines, the Portfolio will suffer a loss
equal to the price of the call but the securities the Portfolio intends to
purchase may be less expensive.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS ("Forward Contracts") involves
bilateral obligations of one party to purchase, and another party to sell, a
specific currency at a future date (which may be any fixed number of days from
the date of the contract agreed upon by the parties), at a price set at the time
the contract is entered into. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. No price is paid or received upon the purchase or sale of a
Forward Contract. Portfolios may use Forward Contracts to reduce certain risks
of their respective investments and/or to attempt to enhance return.
Forward Contracts are generally used to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Portfolio owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase.
Forward Contracts may also be entered into with respect to specific
transactions. For example, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in (or affected by fluctuations in,
in the case of ADRs) a foreign currency, or when a Portfolio anticipates receipt
of dividend payments in a foreign currency, the Portfolio may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such payment by entering into a Forward Contract, for a fixed amount of U.S.
dollars per unit of foreign currency, for the purchase or sale of the amount of
foreign currency involved in the underlying transaction. A Portfolio will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
Forward Contracts are also used to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when a
Portfolio believes that foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
of that foreign currency approximating the value of some or all of the portfolio
securities denominated in (or affected by fluctuations in, in the case of ADRs)
such foreign currency, or when a Portfolio believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
Forward Contract to buy that foreign currency for a fixed dollar amount. In this
situation a Portfolio may, in the alternative, enter into a Forward Contract to
sell a different foreign
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currency for a fixed U.S. dollar amount where the Portfolio believes that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which portfolio securities of the Portfolio are denominated ("cross-hedged").
A Portfolio may also hedge investments denominated in a foreign currency by
entering into forward currency contracts with respect to a foreign currency that
is expected to correlate to the currency in which the investments are
denominated ("proxy hedging").
The Portfolios will cover outstanding forward currency contracts by
maintaining either liquid portfolio securities denominated in the currency
underlying the forward contract or the currency being hedged, or by owning a
corresponding opposite forward position (long or short position, as the case may
be) in the same underlying currency with the same maturity date
("Covering/Closing Forwards"). To the extent that a Portfolio is not able to
cover its forward currency positions with either underlying portfolio securities
or with Covering/Closing Forwards, or to the extent to any portion of a position
is either not covered by a corresponding opposite position or is "out of the
money" in the case where settlement prices are different on the short and long
positions, the Trust's custodian will place cash or liquid securities in a
separate account of the Portfolio having a value equal to the aggregate amount
of the Portfolio's commitments under Forward Contracts entered into with respect
to position hedges and cross-hedges. If the value of the securities placed in a
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Portfolio's commitments with respect to such contracts. As an alternative
to maintaining all or part of the separate account, a Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the Forward
Contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the Forward Contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency a Portfolio is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Portfolio is obligated
to deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Portfolio to sustain
losses on these contracts and transactions costs.
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At or before the maturity of a Forward Contract requiring a Portfolio to
sell a currency, the Portfolio may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Portfolio
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and offsetting contract.
The cost to a Portfolio of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a Forward
Contract.
Although a Portfolio values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Portfolio may convert foreign currency from time to time,
and investors should be aware of the costs of currency conversion. Foreign
exchange dealers do not charge a fee for conversion, but they do seek to realize
a profit based on the difference between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
PORTFOLIO TRADING. A Portfolio may engage in portfolio trading when it is
believed by the Manager that the sale of a security owned and the purchase of
another security of better value can enhance principal and/or increase income. A
security may be sold to avoid any prospective decline in market value in light
of what is evaluated as an expected rise in prevailing yields, or a security may
be purchased in anticipation of a market rise (a decline in prevailing yields).
A security also may be sold and a comparable security purchased coincidentally
in order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities.
In addition, each Portfolio may invest in securities and other instruments
that do not presently exist but may be developed in the future, provided that
each such investment is consistent with the Portfolio's investment objectives,
policies and restrictions and is otherwise legally permissible under federal and
state laws. The Prospectus and SAI, as appropriate, will be amended or
supplemented as appropriate to discuss any such new investments.
SUPPLEMENTAL INFORMATION ABOUT DERIVATIVES AND THEIR USE
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The Trust's custodian, or a securities depository acting for the custodian,
will act as the Portfolio's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Portfolio has
written options or as to other acceptable escrow securities, so that no margin
will be required for such transaction. OCC will release the securities on the
expiration of the option or upon a Portfolio's entering into a closing
transaction.
An option position may be closed out only on a market that provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise by a Portfolio of puts on securities will result in the sale of related
investments, increasing portfolio turnover. Although such exercise is within a
Portfolio's control, holding a put might cause the Portfolio to sell the related
investments for reasons that would not exist in the absence of the put. A
Portfolio will pay a brokerage commission each time it buys a put or call, sells
a call, or buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those that would
apply to direct purchases or sales of such underlying investments. Premiums paid
for options are small in relation to the market value of the related
investments, and consequently, put and call options offer large amounts of
leverage. The leverage offered by trading in options could result in a
Portfolio's net asset value being more sensitive to changes in the value of the
underlying investments.
In the future, each Portfolio may employ derivatives and strategies that
are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Portfolio's investment objectives,
legally permissible and adequately disclosed.
Regulatory Aspects of Derivatives. Each Portfolio that utilizes such
instruments must operate within certain restrictions as to its long and short
positions in Futures and options thereon under a rule (the "CFTC Rule") adopted
by the Commodity Futures Trading Commission (the "CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Portfolio from registration with
the CFTC as a "commodity pool operator" (as defined in the CEA) if it complies
with the CFTC Rule. In particular, the Portfolio may (i) purchase and sell
Futures and options thereon for bona fide hedging purposes, as defined under
CFTC regulations, without regard to the percentage of the Portfolio's assets
committed to margin and option premiums, and (ii) enter into non-hedging
transactions, provided that the Portfolio may not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing Futures positions and option premiums would
exceed 5% of the fair value of its portfolio, after taking into account
unrealized profits and unrealized losses on any such transactions. Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
Transactions in options by a Portfolio are subject to limitations
established by each of the exchanges governing the maximum number of options
that may be written or held by a single investor or group of investors acting in
concert, regardless of whether the options were written or purchased on the same
or different exchanges or are held in one or more accounts or through one or
more exchanges or brokers. Thus, the number of options a Portfolio may write or
hold may be
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affected by options written or held by other entities, including other
investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a Portfolio purchases a
Future, the Portfolio will maintain, in a segregated account or accounts with
its custodian bank, cash or liquid securities in an amount equal to the market
value of the securities underlying such Future, less the margin deposit
applicable to it.
Possible Risk Factors in Derivatives. Participation in the options or
Futures markets and in currency exchange transactions involves investment risks
and transaction costs to which a Portfolio would not be subject absent the use
of these strategies. If the Adviser/Subadviser's predictions of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to a Portfolio may leave the Portfolio in a
worse position than if such strategies were not used. There is also a risk in
using short hedging by selling Futures to attempt to protect against decline in
value of the portfolio securities (due to an increase in interest rates) that
the prices of such Futures will correlate imperfectly with the behavior of the
cash (i.e., market value) prices of the Portfolio's securities. The ordinary
spreads between prices in the cash and Futures markets are subject to
distortions due to differences in the natures of those markets. First, all
participants in the Futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close Futures contracts through offsetting
transactions, which could distort the normal relationship between the cash and
Futures markets. Second, the liquidity of the Futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the Futures markets could be reduced, thus producing distortion. Third, from
the point-of-view of speculators, the deposit requirements in the Futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the Futures markets may
cause temporary price distortions.
If a Portfolio establishes a position in the debt securities markets as a
temporary substitute for the purchase of individual debt securities (long
hedging) by buying Futures and/or calls on such Futures or on debt securities,
it is possible that the market may decline; if the Adviser/Subadviser then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Portfolio will
realize a loss that is not offset by a reduction in the price of the debt
securities purchased.
SUPPLEMENTAL INFORMATION CONCERNING HIGH-YIELD, HIGH-RISK BONDS AND SECURITIES
RATINGS.
HIGH-YIELD, HIGH-RISK BONDS may 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
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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
defaults on its obligations to pay interest or principal or enters 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.
SunAmerica Asset Management Corp. ("SAAMCo" or 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.
The following are additional restrictions and/or requirements concerning
the ratings of securities:
- 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 Standard & Poor's (for
example, commercial paper rated P-1 and A-1 by Moody's and
Standard & Poor's, 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 Standard & Poor's, provided the
issuer has commercial paper rated in the highest rating category
by Moody's and Standard & Poor's.
- The CORPORATE BOND PORTFOLIO will generally invest in debt
securities and preferred stocks rated below investment grade only
to the extent that the Subadviser believes
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that lower credit quality of such securities is offset by more
attractive yields, and only up to 35% of net assets. There is no
limit with respect to the rating categories for securities in
which the Portfolio may invest.
- All securities purchased by the GLOBAL BOND PORTFOLIO will be
rated, at the time of investment, at least BBB by Standard &
Poor's 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. Unrated
securities will be determined by the Subadvisers to be of
comparable quality. The debt securities in which the Portfolio
will invest may have fixed, variable or floating interest rates.
If a security satisfies the Portfolio's minimum rating
requirement at the time of purchase and is subsequently
downgraded below such rating, the Portfolio will not be required
to dispose of such security. This is so even if the downgrade
causes the average credit quality of the Portfolio to be lower
than that stated in the Prospectus. Furthermore, during this
period, the subadviser will only buy securities at or above the
Portfolio's average rating requirement.
- The HIGH-YIELD BOND PORTFOLIO may invest without limitation in
bonds rated as low as Ca by Moody's or C by Standard & Poor's (or
unrated but considered by the Subadviser of equivalent quality).
In addition, the Portfolio may invest up to 10% of its total
assets in bonds rated C by Moody's or D by Standard & Poor's.
- From time to time, a portion of the WORLDWIDE HIGH INCOME
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 Standard
& Poor's ("junk bonds").
- The SUNAMERICA BALANCED PORTFOLIO may invest up to 10% of the
value of its total assets (measured at the time of investment) in
securities rated as low as BBB by Standard & Poor's or Baa by
Moody's.
- The MFS TOTAL RETURN PORTFOLIO may invest in fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's or
Fitch Investors Services, Inc. ("Fitch") and comparable unrated
securities. The Portfolio may also invest up to 20% in securities
rated Baa or lower by Moody's or BB or lower by Standard & Poor's
or Fitch and comparable unrated securities ("junk bonds").
- The ASSET ALLOCATION PORTFOLIO'S fixed income investments will
consist primarily of "investment grade" bonds; that is, bonds
that are rated BBB or better by Standard & Poor's 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 Standard & Poor's or Ca by Moody's.
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Securities rated BBB or below by Standard & Poor's or Baa or
below by Moody's are considered to have speculative
characteristics.
- The EQUITY INCOME PORTFOLIO may invest up to 25% of its assets in
convertible debt obligations rated as low as CCC by Standard &
Poor's or Caa by Moody's or that have been assigned an equivalent
rating by another nationally recognized statistical rating
organization.
- The FEDERATED VALUE PORTFOLIO may not invest in junk bonds. The
fixed income securities in which the Federated Value Portfolio
may invest must be rated, at the time of purchase, BBB or better
by Standard & Poor's, 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 ALLIANCE GROWTH PORTFOLIO and PUTNAM GROWTH PORTFOLIO may
invest in convertible securities rated below BBB by Standard &
Poor's or Baa by Moody's or be determined by the Subadviser to be
of comparable quality (i.e., junk bonds).
- The REAL ESTATE PORTFOLIO will not invest more than 5% of its
assets in junk bonds.
- The SMALL COMPANY VALUE PORTFOLIO may invest up to 5% of its net
assets in less than investment grade debt obligations.
- The MFS MID-CAP GROWTH PORTFOLIO may invest up to 20% of its net
assets in non-convertible fixed income securities rated Baa or
lower by Moody's or BB or lower by Standard & Poor's or Fitch and
comparable unrated securities.
- 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
Standard & Poor's.
- 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 TELECOM UTILITY PORTFOLIO, EQUITY INDEX PORTFOLIO,
GROWTH-INCOME PORTFOLIO, DAVIS VENTURE VALUE PORTFOLIO, "DOGS" OF
WALL STREET PORTFOLIO, MFS GROWTH AND INCOME PORTFOLIO,
AGGRESSIVE GROWTH PORTFOLIO, INTERNATIONAL DIVERSIFIED EQUITIES
PORTFOLIO, TECHNOLOGY PORTFOLIO AND GLOBAL EQUITIES PORTFOLIO
may not invest in junk bonds.
U.S. CORPORATE HIGH-YIELD FIXED INCOME SECURITIES offer a yield above
that generally available on U.S. corporate debt securities in the four highest
rating categories of the recognized rating services, including debt obligations
(e.g., bonds, debentures, notes, equipment lease
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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) and preferred
stock. These fixed income securities may have equity features, such as
conversion rights or warrants, and Portfolios may invest up to 10% of their
total assets in equity features, such as conversion rights or warrants, subject
to the following:
- The CORPORATE BOND, HIGH-YIELD BOND AND WORLDWIDE HIGH INCOME
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 CASH MANAGEMENT, GLOBAL BOND, WORLDWIDE HIGH INCOME, EQUITY
INCOME, EQUITY INDEX, DAVIS VENTURE VALUE, "DOGS" OF WALL STREET,
GLOBAL EQUITY, AND EMERGING MARKETS PORTFOLIOS may not invest in
warrants.
- The CASH MANAGEMENT, GLOBAL BOND, TELECOM UTILITY, EQUITY INCOME,
EQUITY INDEX, GROWTH-INCOME, FEDERATED VALUE, DAVIS VENTURE
VALUE, "DOGS" OF WALL STREET AND ALLIANCE GROWTH PORTFOLIOS will
not invest in rights.
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.
SUPPLEMENTAL INFORMATION CONCERNING UTILITY COMPANIES
CERTAIN RISK FACTORS AFFECTING UTILITY COMPANIES. The Telecom 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, that an investor
should take into account when investing in those securities. Factors that may
adversely affect utility companies include: difficulty in financing large
construction programs during inflationary periods; technological innovations
that may cause existing plants, equipment, or products to become less
competitive or obsolete; the impact of natural or man-made disaster (especially
on regional utilities); increased costs or reductions in production due to the
unavailability of appropriate types of fuels; seasonally or occasionally reduced
availability or higher cost of natural gas; and reduced demand due to energy
conservation among consumers. These revenues of domestic and foreign utility
companies generally reflect the economic growth and developments in the
geographic areas in which they do business. Furthermore, utility securities tend
to be interest rate sensitive.
In addition, most utility companies in the United States and in foreign
countries are subject to government regulation. Generally, the purpose of such
regulation is to ensure desirable 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. Utility
regulators permit utilities to diversify outside of their
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original geographic regions and their traditional lines of business. While the
Subadviser of the relevant Portfolio believes 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 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 that 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 that 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 that affect specific utility
industries:
Electric. The electric utility industry is composed of companies
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 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 that 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 that 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
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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.
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 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
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issues rated A-1 that are 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.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet the issuer's obligations
in a timely manner. Fitch short-term ratings are as follows: F-1+ Exceptionally
Strong Credit Quality - Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment. F-1 Very Strong Credit Quality
-Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. F-2 Good Credit Quality Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings. F-3 Fair Credit Quality -Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near-term adverse changes could cause these securities to be
rated below investment grade. F-5 Weak Credit Quality - Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions. D Default - Issues assigned this rating are in actual or
imminent payment default. LOC - The symbol LOC indicates that the rating is
based on a letter of credit issued by a commercial bank.
Thomson BankWatch, Inc. ("BankWatch") short-term ratings apply only to
unsecured instruments that have a maturity of one year or less. These short-term
ratings specifically assess the
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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 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 indicates the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics,
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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 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
B-52
<PAGE> 123
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: (a) for the purchase of the debt securities
listed above under its Investment Policies; or (b) as otherwise permitted by
exemptive order of the SEC.
5. Borrow money, except 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.
B-53
<PAGE> 124
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 (in accordance
with Rule 2a-7 under the 1940 Act) 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, GLOBAL BOND, HIGH-YIELD
BOND, WORLDWIDE HIGH INCOME, SUNAMERICA BALANCED, MFS TOTAL RETURN, ASSET
ALLOCATION, TELECOM UTILITY, EQUITY INCOME, EQUITY INDEX, GROWTH-INCOME,
FEDERATED VALUE, DAVIS VENTURE VALUE, "DOGS" OF WALL STREET, ALLIANCE
GROWTH, GOLDMAN SACHS RESEARCH, MFS GROWTH AND INCOME, PUTNAM GROWTH, BLUE
CHIP GROWTH, REAL ESTATE, SMALL COMPANY VALUE, MFS MID-CAP GROWTH,
AGGRESSIVE GROWTH, GROWTH OPPORTUNITIES, INTERNATIONAL GROWTH AND INCOME,
GLOBAL EQUITIES, INTERNATIONAL DIVERSIFIED EQUITIES, EMERGING MARKETS AND
TECHNOLOGY PORTFOLIOS
The Corporate Bond, Global Bond, High-Yield Bond, Worldwide High Income,
SunAmerica Balanced, MFS Total Return, Asset Allocation, Telecom Utility, Equity
Income, Equity Index, Growth-Income, Federated Value, Davis Venture Value,
"Dogs" of Wall Street, Alliance Growth, Goldman Sachs Research, MFS Growth and
Income, Putnam Growth, Blue Chip Growth, Real
B-54
<PAGE> 125
Estate, Small Company Value, MFS Mid-Cap Growth, Aggressive Growth, Growth
Opportunities, International Growth and Income, Global Equities, International
Diversified Equities, Emerging Markets and Technology Portfolios 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, MFS Mid-Cap Growth 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, Worldwide High Income, "Dogs" of Wall Street, MFS Mid-Cap
Growth and International Diversified Equities Portfolios.
3. Invest more than 25% of the Portfolio's total assets in the securities
of issuers in the same industry, except that the Telecom 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, the Technology Portfolio will invest at
least 25% of its assets in the securities of issuers in the technology industry
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 commercial
banks. With respect to all Portfolios other than the Telecom 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 Equity Income, Equity Index, Real Estate and Small Company Value 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
B-55
<PAGE> 126
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 or
regulatory approval.
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; (c) the lending of its portfolio
securities; and (d) as otherwise permitted by exemptive order of the SEC.
In addition to the foregoing, the Corporate Bond, Global Bond, High-Yield
Bond, Worldwide High Income, SunAmerica Balanced, MFS Total Return, Asset
Allocation, Telecom Utility, Equity Income, Equity Index, Growth-Income,
Federated Value, Davis Venture Value, "Dogs" of Wall Street, Alliance Growth,
Goldman Sachs Research, MFS Growth and Income, Putnam Growth, Blue Chip Growth,
Real Estate, Small Company Value, MFS Mid-Cap Growth, Aggressive Growth, Growth
Opportunities, International Growth and Income, Global Equities, International
Diversified Equities, Emerging Markets and Technology 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 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,
Telecom Utility, Federated Value and Aggressive Growth Portfolios may pledge
assets in reverse repurchase agreements.
d. Invest in companies for the purpose of exercising control or management.
e. Engage in underwriting of securities issued by others, except to the
extent it may be deemed to be acting as an underwriter in the purchase and
resale of portfolio securities.
f. Sell securities short except to the extent permitted by applicable law.
g. Invest in puts, calls, straddles, spreads or any combination thereof,
except as permitted by the Prospectus and Statement of Additional Information,
as amended from time to time.
B-56
<PAGE> 127
h. Issue any senior securities except as permitted by the 1940 Act, other
than, with respect to Equity Income, Equity Index and Small Company Value
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>
JAMES K. HUNT, *48, Executive Vice President, SunAmerica
Trustee, Chairman and President Investments, Inc. (1993 to present); President,
SunAmerica Corporate Finance (since January
1994); Trustee, Anchor Pathway Fund ("APF") and
Seasons Series Trust ("Seasons").
MONICA C. LOZANO, 43 Associate Publisher, La Opinion (newspaper
Trustee publishing concern) since 1995: Director, First
3257 Purdue Avenue Interstate Bank of California from 1994-1996;
Los Angeles, CA 90066 Editor, La Opinion, from 1991-1995.
ALLAN L. SHER, 68, Retired; Trustee, APF and Seasons.
Trustee
WILLIAM M. WARDLAW, 53, Principal, Freeman Spogli & Co. (investment
Trustee banking) (1988-present); Vice President and
Director, MCC International Holdings
(cable) (since April 1998); Trustee, APF and
Seasons.
</TABLE>
B-57
<PAGE> 128
<TABLE>
<CAPTION>
Name, Age and Position(s) Principal Occupation(s) During Past Five Years
------------------------- ----------------------------------------------
Held with the Trust
-------------------
<S> <C>
PETER C. SUTTON, 35 Senior Vice President, SAAMCo (since April
Vice President, Treasurer and Controller 1997); Treasurer (since February 1996),
SunAmerica Equity Funds, SunAmerica Income
The SunAmerica Center Funds and SunAmerica Money Market Funds, Inc.
733 Third Avenue ("SunAmerica Mutual Funds" or "SAMF"),
New York, NY 10017-3204 Anchor Series Trust ("AST") and Style Select
Series, Inc. ("Style Select"); Vice President and
Assistant Treasurer, Brazos Mutual Funds (since
May 1999); Vice President, Treasurer and Controller,
APF and Seasons (since February 2000); 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, 42 Senior Vice President, General Counsel and
Vice President and Assistant Secretary Assistant Secretary, SAAMCo (since April 1993);
Secretary and Chief Compliance Officer, SAMF
The SunAmerica Center and AST (since 1993), Style Select (since 1996);
733 Third Avenue Executive Vice President, General Counsel and
New York, NY 10017-3204 Director, SunAmerica Capital Services, Inc. (since
February 1993); Vice President, General Counsel
and Assistant Secretary, SunAmerica Fund Services,
Inc. (since January 1994); Vice President and
Assistant Secretary, APF (since September 1993) and
Seasons (since April 1997).
MALLARY REZNIK, 32 Secretary, Seasons Series Trust and Anchor Pathway
SECRETARY Fund (since May 2000); Associate Counsel, SunAmerica
Inc. (since January 1998); Staff Attorney, Transamerica
Life Companies (1995-1998).
</TABLE>
* A trustee who may be deemed to be an "interested person" of the Trust as
that term is defined in the 1940 Act.
The Trustees of the Trust are responsible for the overall supervision of
the operation of the Trust and each Portfolio and perform various duties imposed
on directors/trustees of investment companies by the 1940 Act and under the
Trust's Declaration of Trust. 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
January 31, 2000.
B-58
<PAGE> 129
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS FROM REGISTRANT AND
COMPENSATION ACCRUED AS PART OF FUND COMPLEX PAID TO
TRUSTEE FROM REGISTRANT FUND EXPENSES TRUSTEES*
------- --------------- ------------- ---------
<S> <C> <C> <C>
William M. Wardlaw $6,750 -- $18,000
Allan L. Sher $6,750 -- $18,000
Monica C. Lozano $6,750 -- $18,000
</TABLE>
* Complex includes SAST, Seasons and APF.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Trust, on behalf of each Portfolio, entered into an Investment Advisory
and Management Agreement with SAAMCo to handle the management of the Trust and
its day to day affairs. The Adviser is a wholly-owned subsidiary of American
International Group, Inc. ("AIG"), the leading U.S.-based international
insurance organization.
AIG, a Delaware corporation, is a holding company which through its
subsidiaries is primarily engaged in a broad range of insurance and insurance
related activities and financial services in the United States and abroad. AIG,
through its subsidiaries, is also engaged in a range of financial services
activities. AIG's asset management operations are carried out primarily by AIG
Global Investment Group, Inc., a direct wholly owned subsidiary of AIG, and its
affiliates (collectively, "AIG Global"). AIG Global manages the investment
portfolios of various AIG subsidiaries, as well as third party assets, and is
responsible for product design and origination, marketing and distribution of
third party asset management products, including offshore and private investment
funds and direct investment. AIG Capital Management Corp., an indirect
wholly-owned subsidiary of AIG Global Investment Group, Inc., serves as
investment adviser to The AIG Money Market Fund, a separate series of The
Advisors' Inner Circle Fund, a registered investment company. In addition, AIG
Global Investment Corp., an AIG Global group company, serves as the
sub-investment adviser to an unaffiliated registered investment company. AIG
companies do not otherwise provide investment advice to any registered
investment companies.
The Investment Advisory and Management Agreement provides that the Adviser
shall act as investment adviser to the Trust, manage the Trust's investments,
administer its business affairs, furnish offices, necessary facilities and
equipment, provide clerical, bookkeeping and administrative services, and permit
any of the Adviser's officers or employees to serve without compensation as
Trustees or officers of the Trust if duly elected to such positions. Under the
Agreement, the Trust agrees to assume and pay certain charges and expenses of
its operations, including: direct charges relating to the purchase and sale of
portfolio securities, interest charges, fees and expenses of independent legal
counsel and independent accountants, cost of stock certificates and any other
expenses (including clerical expenses) of issue, sale, repurchase or redemption
of shares, expenses
B-59
<PAGE> 130
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 at the following annual rates:
<TABLE>
<CAPTION>
PORTFOLIO FEE RATE
--------- --------
<S> <C>
Alliance Growth Portfolio* .70% to $50MM
.65% next $100MM
.60% over $150MM
</TABLE>
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<PAGE> 131
<TABLE>
<CAPTION>
PORTFOLIO FEE RATE
--------- --------
<S> <C>
Growth-Income Portfolio .70% to $50MM
.65% next $100MM
.60% next $150MM
.55% next $200MM
.50% over $500MM
Putnam Growth Portfolio .85% to $150MM
.80% next $150MM
.70% over $300MM
Global Equities Portfolio .90% to $50MM
.80% next $100MM
.70% next $150MM
.65% over $300MM
Davis Venture Value Portfolio .80% to $100MM
.75% next $400MM
.70% over $500MM
Asset Allocation Portfolio .75% to $50MM
.65% next $100MM
.60% next $100MM
.55% over $250MM
Global Bond Portfolio .75% to $50MM
.65% next $100MM
.60% next $100MM
.55% over $250MM
High-Yield Bond Portfolio .70% to $50MM
.65% next $100MM
.60% next $100MM
.55% over $250MM
Corporate Bond Portfolio .70% to $50MM
.60% next $100MM
.55% next $100MM
.50% over $250MM
International Diversified Equities Portfolio 1.00% of Net Assets
Worldwide High Income Portfolio 1.00% of Net Assets
Cash Management Portfolio .55% to $100MM
.50% next $200MM
.45% over $300MM
Federated Value Portfolio .75% to $150MM
.60% next $350MM
.50% over $500MM
</TABLE>
B-61
<PAGE> 132
<TABLE>
<CAPTION>
PORTFOLIO FEE RATE
--------- --------
<S> <C>
Telecom Utility Portfolio .75% to $150MM
.60% next $350MM
.50% over $500MM
Aggressive Growth Portfolio .75% to $100MM
.675% next $150MM
.625% next $250MM
.600% over $500MM
SunAmerica Balanced Portfolio .70% to $50MM
.65% next $100MM
.60% next $150MM
.55% next $200MM
.50% over $500MM
International Growth and Income Portfolio 1.00% to $150MM
.90% next $150MM
.80% over $300MM
Emerging Markets Portfolio 1.25% of Net Assets
Real Estate Portfolio .80% to $100MM
.75% next $400MM
.70% over $500MM
"Dogs" of Wall Street Portfolio .60% of Net Assets
MFS Growth and Income Portfolio** .70% to $600MM
.65% next $900MM
.60% over $1.5B
MFS Total Return Portfolio** .70% to $50MM
.65% over $50MM
MFS Mid-Cap Growth .75% to $600MM
.70% next $900MM
.65% over $1.5B
Equity Income Portfolio .65% of Net Assets
Equity Index Portfolio .40% of Net Assets
Small Company Value Portfolio 1.00% of Net Assets
Goldman Sachs Research Portfolio 1.15% of Net Assets
Blue Chip Growth Portfolio .70% to $250MM
.65% next $250MM
.60% over $500MM
Growth Opportunities Portfolio .75% to $250MM
.70% next $250MM
.65% over $500MM
</TABLE>
B-62
<PAGE> 133
<TABLE>
<CAPTION>
PORTFOLIO FEE RATE
--------- --------
<S> <C>
Technology Portfolio 1.20% of Net Assets
</TABLE>
-----------------
* Prior to January 1, 1999, the Advisory Agreement with respect to the Alliance
Growth Portfolio provided for an advisory fee payable by the Portfolio to the
Adviser at the following annual rates: .70% on the first $50 million; .65% on
the next $100 million; .60% over $150 million; .55% on the next $200 million and
.50% thereafter.
** Prior to January 1, 1999, the Advisory Agreement with respect to the MFS
Total Return Portfolio (formerly the Balanced/Phoenix Investment Counsel
Portfolio) and the MFS Growth and Income Portfolio (formerly the Growth/Phoenix
Investment Counsel Portfolio) provided for an advisory fee payable by each
Portfolio to the Adviser at the following annual rates: .70% on the first $50
million; .65% on the next $100 million; .60% on the next $150 million; .55% on
the next $200 million; .50% over $500 million.
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, 1998 and 1997 and for the
period December 1, 1998 through January 31, 1999 (new fiscal year end), as well
as for the fiscal year ended January 31, 2000
ADVISORY FEES
<TABLE>
<CAPTION>
PORTFOLIO 2000 1999+ 1998 1997
--------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash Management $ 2,237,779 $ 224,945 $ 1,059,551 $ 718,297
Corporate Bond $ 1,095,735 $ 161,457 $ 654,148 $ 325,988
Global Bond $ 871,938 $ 139,771 $ 728,940 $ 550,533
High-Yield Bond $ 1,927,896 $ 305,048 $ 1,667,268 $ 1,000,566
Worldwide High Income $ 1,192,526 $ 198,398 $ 1,333,369 $ 915,682
SunAmerica Balanced $ 2,096,493 $ 189,910 $ 570,440 $ 178,845
MFS Total Return ++
$ 1,224,166 $ 157,567 $ 762,995 $ 558,675
Asset Allocation $ 4,180,150 $ 716,334 $ 3,758,570 $ 2,556,963
Equity Income $ 38,116 $ 4,546+++ -- --
Telecom Utility $ 763,860 $ 93,546 $ 372,897 $ 100,647
Equity Index $ 123,376 $ 5,763+++ -- --
Growth-Income $ 7,933,020 $ 1,024,303 $ 4,533,481 $ 2,784,063
Federated Value $ 1,400,196 $ 193,283 $ 764,690 $ 237,339
Davis Venture Value $14,964,215 $ 2,175,195 $10,509,956 $ 5,952,702
Alliance Growth * $13,621,029 $ 1,551,967 $ 5,626,794 $ 3,145,937
MFS Growth and Income++
$ 2,126,722 $ 288,906 $ 1,467,118 $ 1,299,894
Putnam Growth
$ 4,697,170 $ 593,614 $ 2,581,835 $ 1,565,910**
Real Estate $ 470,856 $ 81,013 $ 398,357 $ 58,800***
Small Company Value $ 51,037 $ 6,831+++ -- --
Aggressive Growth $ 1,689,376 $ 188,017 $ 826,035 $ 506,503
</TABLE>
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ADVISORY FEES
<TABLE>
<CAPTION>
PORTFOLIO 2000 1999+ 1998 1997
--------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
International Growth and Income $ 1,932,120 $ 231,046 $ 922,124 $ 125,310***
Global Equities $ 3,613,901 $ 545,025 $ 2,893,944 $ 2,337,577
International Diversified Equities $ 4,025,530 $ 612,770 $ 3,095,975 $ 2,127,386
Emerging Markets $ 735,084 $ 67,951 $ 341,627 $ 99,436***
"Dogs" of Wall Street $ 626,409 $ 87,628 $ 126,908 --
MFS Mid-Cap Growth $ 140,877! -- -- --
</TABLE>
+ For the period 12/1/98 through 1/31/99 (new fiscal year end)
++ Prior to January 1, 1999, the Advisory Agreement with respect to the
MFS Total Return Portfolio (formerly the Balanced/Phoenix Investment
Counsel Portfolio) and the MFS Growth and Income Portfolio (formerly
the Growth/Phoenix Investment Counsel Portfolio) provided for an
advisory fee payable by each Portfolio to the Adviser at the following
annual rates: .70% on the first $50 million; .65% on the next $100
million; .60% on the next $150 million; .55% on the next $200 million;
.50% over $500 million. The Advisory Agreement was amended as of
December 30, 1998 to provide for the following annual fee rates with
respect to the MFS Total Return Portfolio : .70% on the first $50
million and .65% over $50 million. The Advisory Agreement was amended
as of December 30, 1998 to provide for the following annual fee rate
with respect to the MFS Growth and Income Portfolio: .70% on the first
$600 million; .65% on the next $900 million and .60% thereafter.
+++ For the period 4/1/98 (commencement of operations) through 1/31/99.
* Prior to January 1, 1999, the Advisory Agreement with respect to the
Alliance Growth Portfolio provided for an advisory fee payable by the
Portfolio to the Adviser at the following annual rates: .70% on the
first $50 million; .65% on the next $100 million; .60% over $150
million; .55% on the next $200 million and .50% thereafter. The
Advisory Agreement relating to the Alliance Growth Portfolio was
amended as of December 30, 1998 to provide for the following annual fee
rates: .70% on the first $50 million; .65% on the next $100 million and
.60% over $150 million.
** Until April 15, 1997, the Advisory Agreement with respect to the Putnam
Growth Portfolio (formerly Provident 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.
*** For the period 6/2/97 (commencement of operations) through 11/30/97.
! For the period 4/1/99 (commencement of operations) through 1/31/00.
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: Equity Income Portfolio - 0.95%; Equity Index
Portfolio - 0.55%; Small Company Value Portfolio - 1.40%; Emerging Markets
Portfolio - 1.90%; and MFS Mid-Cap Growth Portfolio - 1.15%; 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 January 31, 2000, the Adviser voluntarily
waived fees or reimbursed expenses, which are not included as part of the table
as follows: Equity Income Portfolio - $35,799; Equity Index Portfolio - $92,559;
MFS Mid-Cap Growth Portfolio - $4,045; and Small Company Value - $43,169.
Certain Portfolios had recoupments for the fiscal year ended January 31, 2000,
and such recoupments,
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<PAGE> 135
which are not included as part of the advisory fee table, were as follows:
Emerging Markets Portfolio - $75,700 and "Dogs" of Wall Street Portfolio -
$1,193.
Personal Trading. The Trust and the Adviser have adopted a written Code
of Ethics (the "SunAmerica 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 SunAmerica 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 SunAmerica 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 SunAmerica Code, and have, with
the exception of Putnam Investment Management, Inc. and Davis Selected Advisers,
LP, undertaken to comply with the provisions of the SunAmerica 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 SunAmerica Code by Access Persons of the Trust or any
Subadviser.
SUBADVISORY AGREEMENTS
Alliance Capital Management L.P. ("Alliance"), Davis Selected Advisers
L.P. ("Davis Selected"), Federated Investment Counseling ("Federated"), First
American Asset Management ("First American"), Goldman Sachs Asset Management
("GSAM"), Goldman Sachs Asset Management International ("GSAM-International"),
Morgan Stanley Dean Witter Investment Management d/b/a Morgan Stanley Asset
Management ("MSAM"), Massachusetts Financial Services Company ("MFS") and Putnam
Investment Management, Inc. ("Putnam") act as Subadvisers to certain of the
Trust's Portfolios pursuant to various Subadvisory Agreements with SAAMCo. Under
the Subadvisory Agreements, the Subadvisers manage the investment and
reinvestment of the assets of the respective Portfolios for which they are
responsible. Each of the Subadvisers is independent of SAAMCo and discharges its
responsibilities subject to the policies of the Trustees and the oversight and
supervision of SAAMCo, which pays the Subadvisers' fees.
Alliance is a majority-owned subsidiary of AXA Financial, Inc.
Federated is a wholly owned subsidiary of Federated Investors, Inc. First
American is a division of U.S. Bank National Association. As of September 1,
1999, the Investment Management Division ("IMD") was established as a new
operating division of Goldman, Sachs & Co. GSAM is a unit of IMD. GSAM
International is an affiliate of Goldman, Sachs & Co. MSAM is a subsidiary of
Morgan Stanley Dean Witter and Co.
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<PAGE> 136
The Adviser pays each Subadviser a monthly fee with respect to each
Portfolio for which the Subadviser performs services, computed on average daily
net assets, at the following annual rates:
<TABLE>
<CAPTION>
SUBADVISER PORTFOLIO FEE
-------------------------- ----------------------------- --------------------------------
<S> <C> <C>
Alliance Alliance Growth Portfolio* .35% on the first $50 million
.30% on the next $100 million
.25% thereafter
Growth-Income Portfolio .35% on the first $50 million
.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 Davis Venture Value and Real Estate .45% on the first $100 million
Portfolios .40% on the next $400 million
.35% thereafter
Federated Corporate Bond .30% on the first $25 million
Portfolio .25% on the next $25 million
.20% on the next $100 million
.15% thereafter
Federated Value and Telecom 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
First American Equity Income Portfolio .30% of Net Assets
Small Company Value Portfolio .80% of Net Assets
Equity Index Portfolio .125% of Net Assets
GSAM Asset Allocation Portfolio .40% on the first $50 million
.30% on the next $100 million
.25% on the next $100 million
.20% thereafter
Goldman Sachs Research .80% on the first $500 million
.70% thereafter
GSAM-International Global Bond Portfolio .40% on the first $50 million
.30% on the next $100 million
.25% on the next $100 million
.20% thereafter
MFS** MFS Growth and Income .40% on the first $300 million
Portfolio .375% on the next $300 million
.35% on the next $300 million
.325% on the next $600 million
.25% thereafter
MFS Total Return Portfolio .375% of Net Assets
</TABLE>
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<PAGE> 137
<TABLE>
<CAPTION>
SUBADVISER PORTFOLIO FEE
-------------------------- ----------------------------- --------------------------------
<S> <C> <C>
MFS Mid-Cap Growth Portfolio .40% on the first $50 million
.30% on the next $100 million
.25% on the next $100 million
.20% thereafter
----------------------------------------------------------------------------------------------------------
MSAM International Diversified Equities and .65% on the first $350 million
Worldwide High Income Portfolios .60% thereafter
----------------------------------------------------------------------------------------------------------
Technology .70% on the first $250 million
.65% on the next $250 million
.60% thereafter
----------------------------------------------------------------------------------------------------------
Putnam Putnam Growth Portfolio*** .50% on the first $150 million
.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>
* Prior to January 1, 1999, the Subadvisory fee for Alliance Growth
Portfolio was as calculated at the following annual rates: .35% on the
first $50 million; .30% on the next $100 million; .25% on the next $150
million; .20% on the next $200 million and .15% over $500 million.
** Prior to January 1, 1999, Phoenix Investment Counsel served as
Subadviser to the MFS Growth and Income and MFS Total Return Portfolios
(formerly Growth/Phoenix Investment Counsel and Balanced/Phoenix
Investment Counsel Portfolios). The Subadvisory fee was calculated at
the following rates for both Portfolios: .35% on the first $50 million;
.30% on the next $100 million; .25% on the next $150 million; .20% on
the next $200 million and .15% over $500 million.
*** Until April 15, 1997, Provident Investment Counsel, Inc. served as
Subadviser to the Putnam Growth Portfolio (formerly Provident Growth
Portfolio). The Subadvisory fee was calculated at the following annual
rates: .50% on the first $50 million of average daily net assets; .45%
on the next $100 million; .35% on the next $100 million; .30% on the
next $100 million; .25% over $350 million.
The following table sets forth the fees paid to the Subadvisers, and to Phoenix
Investment Counsel, Inc. and Provident Investment Counsel, Inc. as former
Subadvisers, for the fiscal years ended November 30, 1998, 1997 and 1996 and for
the period December 1, 1998 through January 31, 1999 (new fiscal year end), as
well as fiscal year ended January 31, 2000.
SUBADVISORY FEES
<TABLE>
<CAPTION>
SUBADVISER PORTFOLIO 2000 1999+ 1998 1997
--------------------- --------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alliance Alliance Growth++ $5,733,762 $ 603,017 $2,038,038 $1,280,957
Growth-Income $2,729,906 $ 366,743 $1,710,044 $1,161,812
Global Equities $1,605,346 $ 246,211 $1,328,440 $1,109,352
Davis Selected Davis Venture Value $7,632,108 $1,113,077 $5,404,978 $3,126,351
Real Estate $ 264,856 $ 45,570 $ 219,647 $ 33,075+++
Federated Corporate Bond $ 377,246 $ 57,239 $ 238,882 $ 128,651
Federated Value $ 556,732 $ 79,715 $ 344,897 $ 146,523
Telecom Utility $ 344,620 $ 46,470 $ 192,017 $ 73,542
First American Asset Equity Income $ 17,592 $ 2,098* -- --
Management Equity Index $ 38,555 $ 1,801* -- --
Small Company Value $ 40,830 $ 5,465* -- --
GSAM Asset Allocation $1,679,145 $ 287,509 $1,525,843 $1,088,896
</TABLE>
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<PAGE> 138
<TABLE>
<CAPTION>
SUBADVISER PORTFOLIO 2000 1999+ 1998 1997
--------------------- --------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GSAM International Global Bond $ 429,356 $ 69,083 $ 363,357 $ 281,015
MFS MFS Growth and Income $1,212,484 $ 88,285 -- --
MFS Total Return $ 691,827 $ 45,323 -- --
MFS Mid-Cap Growth $ 73,003 *** -- -- --
MSAM Worldwide High Income $ 775,142 $ 128,059 $ 866,690 $ 595,193
International Diversified
Equities $2,590,115 $ 397,302 $2,012,245 $1,382,736
Phoenix Investment MFS Growth and Income
Counsel, Inc.** (formerly Growth/Phoenix -- $ 60,957 $ 669,632 $ 599,956
Investment Counsel
MFS Total Return (formerly
Balanced/Phoenix -- $ 36,628 $ 365,613 $ 271,312
Investment Counsel
Provident Investment Putnam Growth (formerly -- -- -- $ 284,164!!
Counsel, Inc.! Provident Growth)
Putnam International Growth and
Income $1,238,806 $ 150,180 $ 565,251 $ 81,451+++
Emerging Markets $ 588,068 $ 54,361 $ 273,302 $ 79,549+++
Putnam Growth $2,536,085 $ 328,656 $1,472,238 $ 618,584
</TABLE>
+ For the period 12/1/98 through 1/31/99 (new fiscal year end).
++ Prior to January 1, 1999, the Subadvisory fee for Alliance Growth
Portfolio was as calculated at the following annual rates: .35% on the
first $50 million; .30% on the next $100 million; .25% on the next $150
million; .20% on the next $200 million and .15% over $500 million.
+++ For the period 6/2/97 (commencement of operations) through 11/30/97.
* For the period 12/14/98 (commencement of operations) through 1/31/99.
** Prior to January 1, 1999, Phoenix Investment Counsel served as
Subadviser to the MFS Growth and Income and MFS Total Return Portfolios
(formerly Growth/Phoenix Investment Counsel and Balanced/Phoenix
Investment Counsel Portfolios). The Subadvisory fee was calculated at
the following rates for both Portfolios: .35% on the first $50 million;
.30% on the next $100 million; .25% on the next $150 million; .20% on
the next $200 million and .15% over $500 million.
*** For the period 4/1/99 (commencement of operations) through 1/31/00.
! Prior to April 15, 1997, Provident Investment Counsel, Inc. served as
Subadviser to the Putnam Growth Portfolio (formerly 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)
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 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
B-68
<PAGE> 139
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 or the
securities of other regulated investment companies); and (c) distribute at least
90% of its investment company taxable income (including short-term capital
gains).
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 not be subject to federal income tax. These regulations are also expected
to provide that excess inclusion income of a 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, the "PFIC income"), plus interest thereon, even if
the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Portfolio's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that
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<PAGE> 140
income is distributed to its shareholders. 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 by the Code for purposes of such election). 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.
Income received by a Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Income tax treaties between certain countries and the United States
may reduce or eliminate such taxes. It is impossible to determine in advance the
effective rate of foreign tax to which a Portfolio will be subject, since the
amount of that Portfolio assets to be invested in various countries is not
known. Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes.
For the fiscal year ended January 31, 2000, the Corporate Bond,
Global Bond, High Yield Bond, Worldwide High Income, Equity Income, MFS Growth
and Income, Real Estate and Emerging Markets Portfolios had capital loss
carry-forwards of $1,244,271, $2,524,770, $11,652,345, $29,920,449, $67,110,
$2,233,544, $8,675,657 and $1,679,121, respectively. To the extent not yet
utilized, such losses will be available to each of the Portfolios to offset
future gains through 2004 and 2008. The utilization of such losses will be
subject to annual limitations under the Code.
SHARES OF THE TRUST
The Trust consists of twenty-six separate Portfolios, each of which
offers a single class of shares. 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% 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 of Trust to the requirements of applicable federal laws or
regulations or the regulated investment company provisions of the Code may be
made by the Trustees
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<PAGE> 141
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.
In matters affecting only a particular Portfolio, the matter shall
have been effectively acted upon by a majority vote of that Portfolio even
though: (1) the matter has not been approved by a majority vote of any other
Portfolio; or (2) the matter has not been approved by a majority vote of the
Trust.
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.
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<PAGE> 142
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 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 its 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 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.
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<PAGE> 143
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 Adviser or Subadviser may cause a Portfolio to pay such
broker-dealers commissions that exceed what other broker-dealers may have
charged, if in its view the commissions are reasonable in relation to the value
of the brokerage and/or research services provided by the broker-dealer. 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
may not be used by the Adviser or Subadviser in connection with the Trust and
could be useful and of value to the Adviser or Subadviser in serving other
clients as well as the Trust. Research services obtained by the Adviser or
Subadviser as a result of the placement of portfolio brokerage of other clients
could also be useful and of value in serving the Trust.
In the over-the-counter market, securities are generally traded on
a "net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of a security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price, which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid. The Trust has obtained exemptive orders
from the 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
B-73
<PAGE> 144
on a securities exchange during a comparable period of time. This standard would
allow such broker-dealer to receive no more than the remuneration that 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.
For the fiscal year ended November 30, 1998, and for the period
December 1, 1998 through January 31, 1999 (new fiscal year end) the Portfolios
acquired no securities of brokers or dealers that executed its portfolio
transactions during the fiscal year.
The following tables set forth the brokerage commissions paid by
the Portfolios and the amounts of the brokerage commissions paid to affiliated
broker-dealers of such Portfolios for the fiscal years ended January 31, 2000,
November 30, 1998 and 1997, as well as the period December 1, 1998 through
January 31, 1999.
2000 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS DEALERS* BROKER-DEALERS BROKER-DEALERS
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Cash Management -- -- -- --
Corporate Bond $ 351 -- -- --
Global Bond -- -- -- --
High-Yield Bond $ 770 -- -- --
Worldwide High Income $ 518 -- -- --
SunAmerica Balanced $ 244,959 -- -- --
MFS Total Return
Portfolio (formerly
Balanced/Phoenix $ 184,004 -- -- --
Investment Counsel)
Asset Allocation $2,692,225 $ 77,357 2.87% 2.08%
Equity Income $ 6,474 -- -- --
Telecom Utility $ 358,061 -- -- --
Equity Index $ 21,660 -- -- --
</TABLE>
B-74
<PAGE> 145
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS DEALERS* BROKER-DEALERS BROKER-DEALERS
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Growth-Income $1,568,820 -- -- --
Federated Value $192,687
Davis Venture Value $1,251,727 $ 9,603 0.77% 0.69%
Alliance Growth $2,831,086 -- -- --
MFS Growth and Income
Portfolio (formerly
Growth/Phoenix $ 456,832 -- -- --
Investment Counsel)
Putnam Growth
(formerly Provident $ 631,393 -- -- --
Growth)
Real Estate $ 187,761 -- --
Small Company Value $ 10,281 -- --
Aggressive Growth $ 333,636 -- --
International Growth and $ 773,397 -- --
Income
Global Equities $1,588,213 -- --
International Diversified $ 365,969 -- --
Equities
Emerging Markets $ 714,722 -- --
"Dogs" of Wall Street $ 188,595 -- --
MFS Mid-Cap Growth $ 101,342 -- --
</TABLE>
* The affiliated broker-dealers that effected transactions with the indicated
portfolios included Goldman Sachs & Co. and Shelby Cullom & Davis.
B-75
<PAGE> 146
1999 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS* DEALERS* BROKER-DEALERS* BROKER-DEALERS*
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Cash Management -- -- -- --
Corporate Bond -- -- -- --
Global Bond -- -- -- --
High-Yield Bond -- -- -- --
Worldwide High Income -- -- -- --
SunAmerica Balanced $ 20,508 -- -- --
MFS Total Return $ 104,590 -- -- --
Portfolio (formerly
Balanced/Phoenix
Investment Counsel)
Asset Allocation $ 308,929 $32,590 10.5% 7.77%
Equity Income $ 8,370 -- -- --
Telecom Utility $ 26,459 -- -- --
Equity Index $ 7,045 -- -- --
Growth-Income $ 411,348 -- -- --
Federated Value $ 23,384 -- -- --
Davis Venture Value $ 246,044 $ 5,130 2.1% 4.17%
Alliance Growth $ 323,300 -- -- --
MFS Growth and Income $ 333,737 -- -- --
Portfolio (formerly
Growth/Phoenix
Investment Counsel)
Putnam Growth $ 68,229 -- -- --
(formerly Provident
Growth)
Real Estate $ 37,343 -- -- --
</TABLE>
B-76
<PAGE> 147
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS* DEALERS* BROKER-DEALERS* BROKER-DEALERS*
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Small Company Value $ 9,881 -- -- --
Aggressive Growth $ 56,850 -- -- --
International Growth and -- -- --
Income $ 78,648
Global Equities $ 155,404 -- -- --
International Diversified $ 39,214 -- -- --
Equities
Emerging Markets $ 47,618 -- - --
"Dogs" of Wall Street $ 109,583 - - --
</TABLE>
* For period December 1, 1998 through January 31, 1999 (new fiscal year end).
1998 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS DEALERS BROKER-DEALERS BROKER-DEALERS
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Cash Management -- -- -- --
Corporate Bond $ 391 -- -- --
Global Bond -- -- -- --
High-Yield Bond -- -- -- --
Worldwide High Income -- -- -- --
SunAmerica Balanced $ 141,473 -- -- --
MFS Total Return $ 125,555 $ 95 -- --
Portfolio (formerly
Balanced/Phoenix
Investment Counsel)
Asset Allocation $ 1,153,926 $ 100,571 8.72% 9.16%
</TABLE>
B-77
<PAGE> 148
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
PERCENTAGE OF INVOLVING PAYMENT
AGGREGATE AMOUNT PAID TO COMMISSIONS PAID OF COMMISSIONS
BROKERAGE AFFILIATED BROKER- TO AFFILIATED THROUGH AFFILIATED
PORTFOLIO COMMISSIONS DEALERS BROKER-DEALERS BROKER-DEALERS
---------------------- --------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Telecom Utility $ 139,718 -- -- --
Growth-Income $ 984,054 $ 1,000 0.10% 0.06%
Federated Value $ 214,317 -- -- --
Davis Venture Value $ 1,124,621 $ 9,576 0.85% 0.98%
Alliance Growth $ 1,701,859 -- -- --
MFS Growth and Income $ 423,830 $ 360 0.08% 0.04%
Portfolio (formerly
Growth/Phoenix
Investment Counsel)
Putnam Growth $ 433,115 $ 610 0.14% 0.15%
(formerly Provident
Growth)
Real Estate $ 119,289 $ 222 0.19% 0.24%
Aggressive Growth $ 424,154 -- -- --
International Growth and $ 336,662 -- -- --
Income
Global Equities $ 1,215,172 $2,030 0.17% 0.23%
International Diversified $ 239,147 -- -- --
Equities
Emerging Markets $ 202,758 -- -- --
"Dogs" of Wall Street $ 82,855 -- --
</TABLE>
1997 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 -- -- --
Global Bond -- -- --
</TABLE>
B-78
<PAGE> 149
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID
BROKERAGE AFFILIATED TO AFFILIATED
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER-DEALERS
--------------------------- --------------- -------------- --------------
<S> <C> <C> <C>
High-Yield Bond $ 90 -- --
Worldwide High Income -- -- --
SunAmerica Balanced $ 73,801 -- --
MFS Total Return Portfolio $ 153,408 -- --
(formerly Balanced/Phoenix
Investment Counsel)
Asset Allocation $ 618,233 $ 77,151 12.48%
Telecom Utility $ 40,772 -- --
Growth-Income $ 547,081 -- --
Federated Value $ 77,121 -- --
Davis Venture Value $ 634,966 $ 87,696 13.81%
Alliance Growth $ 1,020,216 -- --
MFS Growth and Income Portfolio $ 731,747 $ 1,220 .17%
(formerly Growth/Phoenix
Investment Counsel)
Putnam Growth $ 241,968 $ 920 .38%
(formerly Provident Growth)
Real Estate* $ 53,466 -- --
Aggressive Growth $ 251,919 -- --
International Growth and Income * $ 120,957 -- --
Global Equities $ 1,376,002 -- --
International Diversified Equities $ 269,652 -- --
Emerging Markets* $ 80,600 -- -
</TABLE>
* For the period June 2, 1997 (commencement of operations) through November
30, 1997.
The policy of the Trust with respect to brokerage is reviewed by the
Board of Trustees from time to time. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be modified.
B-79
<PAGE> 150
The Adviser and the Subadvisers and their respective affiliates may
manage, or have proprietary interests in, accounts with similar or dissimilar or
the same investment objectives as one or more Portfolios of the Trust. Such
account may or may not be in competition with a Portfolio for investments.
Investment decisions for such accounts are based on criteria relevant to such
accounts; Portfolio decisions and results of the Portfolio's investments may
differ from those of such other accounts. There is no obligation to make
available for use in managing the Portfolio any information or strategies used
or developed in managing such accounts. In addition, when two or more accounts
seek to purchase or sell the same assets, the assets actually purchased or sold
may be allocated among accounts on a good faith equitable basis at the
discretion of the account's adviser. In some cases, this system may adversely
affect the price or size of the position obtainable for a Portfolio.
If determined by the Adviser or Subadviser to be beneficial to the
interests of the Trust, partners and/or employees of the Adviser or Subadvisers
may serve on investment advisory committees, which will consult with the Adviser
regarding investment objectives and strategies for the Trust. In connection with
serving on such a committee, such persons may receive information regarding a
Portfolio's proposed investment activities which is not generally available to
unaffiliated market participants, and there will be no obligation on the part of
such persons to make available for use in managing the Portfolio any information
or strategies known to them or developed in connection with their other
activities.
It is possible that a Portfolio's holdings may include securities of
entities for which a Subadviser or its affiliate performs investment banking
services as well as securities of entities in which a Subadviser or its
affiliate makes a market. From time to time, such activities may limit a
Portfolio's flexibility in purchases and sales of securities. When a subadviser
or its affiliate is engaged in an underwriting or other distribution of
securities of an entity, the Subadviser may be prohibited from purchasing or
recommending the purchase of certain securities of that entity for the
Portfolio.
GENERAL INFORMATION
Custodian - State Street Bank Corporation ("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 firm
of Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405 Lexington
Avenue, New York, NY 10174 has 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.
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<PAGE> 151
Shareholder and Trustee Responsibility - Shareholders of a
Massachusetts business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the Trust. The risk of a
shareholder incurring any financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. The Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer must be given in each agreement, obligation or
instrument entered into or executed by the Trust or Trustees. The Declaration of
Trust provides for indemnification of any shareholder held personally liable for
the obligations of the Trust and also provides for the Trust to reimburse the
shareholder for all legal and other expenses reasonably incurred in connection
with any such claim or liability.
Under the Declaration of Trust, the trustees or officers are not liable
for actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
provides indemnification to its trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
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
The Trust's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 2000 annual report to
shareholders. You may request a copy of the Annual Report at no charge by
calling (800) 445-7862 or writing the Trust at P.O. Box 54299, Los Angeles,
California 90054-0299.
B-81
