LEGG MASON GLOBAL FUNDS
LEGG MASON GLOBAL TRUST, INC.:
Legg Mason Global Government Trust
Legg Mason Global Equity Trust
Primary Shares and Navigator Shares
STATEMENT OF ADDITIONAL INFORMATION
October 30, 1995
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other depository institution. Shares are not insured by
the FDIC, the Federal Reserve Board or any other agency, and are subject to
investment risk, including the possible loss of the principal amount invested.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for Primary Shares and for Navigator
Shares of the Funds, both dated October 30, 1995, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Corporation's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
Legg Mason Global Government Trust ("Global Government") and Legg Mason
Global Equity Trust ("Global Equity") (each separately referred to as a "Fund"
and collectively referred to as the "Funds") are separate series of Legg Mason
Global Trust, Inc. ("Corporation"), an open-end, management investment company.
Global Government, a non-diversified, professionally managed portfolio,
seeks capital appreciation and current income in order to achieve an attractive
total return, consistent with prudent investment risk, by normally investing at
least 75% of its total assets in debt securities issued by foreign governments,
the U. S. Government, their agencies, instrumentalities and political
subdivisions. Under normal circumstances, the Fund will invest at least 75% of
its assets in debt securities of foreign or domestic governmental entities,
corporations, financial institutions or other issuers rated within the four
highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's ("S&P") or, if unrated by Moody's or S&P ("unrated securities"), judged
by the Adviser to be of comparable quality.
Global Equity, a diversified, professionally managed portfolio, seeks
maximum long-term total return. In attempting to achieve the Fund's objective,
the Fund's investment adviser, Batterymarch Financial Management, Inc.
("Batterymarch"), normally will invest in common stocks of companies in at least
three different countries. In addition, the Fund may invest in the securities of
companies located in developing countries, including countries or regions with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid but unstable
economic growth (collectively, "emerging markets").
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Shares of Navigator Global Government and Navigator Global Equity
("Navigator Shares"), described in this Statement of Additional Information,
represent interests in Global Government and Global Equity that are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own funds and funds for which they act in
a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust Company")
for which Trust Company exercises discretionary investment management
responsibility (such institutional investors are referred to collectively as
"Institutional Clients" and accounts of the customers with such Clients
("Customers") are referred to collectively as "Customer Accounts"), to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust. The
Navigator Class of Shares may not be purchased by individuals directly, but
Institutional Clients may purchase shares for Customer Accounts maintained for
individuals.
The Primary Class of shares of Global Government and Global Equity
("Primary Shares") are offered for sale to all other investors and may be
purchased directly by individuals.
Navigator Shares and Primary Shares are sold and redeemed without any
purchase or redemption charge imposed by the Funds, although Institutional
Clients may charge their Customer Accounts for services provided in connection
with the purchase or redemption of shares. Each Fund will pay management fees to
Legg Mason Fund Adviser, Inc. Primary Shares pay a 12b-1 distribution fee, but
Navigator Shares pay no distribution fees. See "The Funds' Distributor."
Legg Mason Wood Walker, Incorporated
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111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
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ADDITIONAL INFORMATION ABOUT INVESTMENT
LIMITATIONS AND POLICIES
The following information supplements the information concerning each
Fund's investment objectives, policies and limitations found in the
Prospectuses. Each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of a majority of each Fund's outstanding
voting securities.
Global Government may not:
1. Borrow money, except from banks or through reverse repurchase agreements
or dollar rolls for temporary purposes in an aggregate amount not to exceed
33 1/3% of the total assets, including borrowings, less liabilities exclusive of
borrowings, of the Fund; provided that borrowings, including reverse repurchase
agreements and dollar rolls, in excess of 5% of such value will be only from
banks (although not a fundamental policy subject to shareholder approval, the
Fund will not purchase securities if borrowings, including reverse repurchase
agreements and dollar rolls, exceed 5% of its total assets);
2. Issue senior securities, except as permitted by the Investment Company
Act of 1940 ("1940 Act");
3. Underwrite the securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended, in
disposing of a portfolio security;
4. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
5. Purchase or sell any commodities or commodities contracts, except that
the Fund may purchase or sell currencies, interest rate and currency futures
contracts, options on currencies and securities indexes and options on interest
rate and currency futures contracts;
6. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, loans, loan participations and advances in
connection therewith or other evidences of indebtedness, the entry into
repurchase agreements, or deposits with banks and other financial institutions
may be considered loans;
7. Purchase any security if, as a result thereof, 25% or more of its total
assets would be invested in the securities of issuers having their principal
business activities in the same industry. This limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
Global Equity may not:
1. Borrow money, except from banks or through reverse repurchase agreements
or dollar rolls for temporary purposes in an aggregate amount not to exceed
33 1/3% of the total assets
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(including borrowings), less liabilities (exclusive of borrowings), of the Fund;
provided that borrowings, including reverse repurchase agreements and dollar
rolls, in excess of 5% of such value will be only from banks (although not a
fundamental policy subject to shareholder approval, the Fund will not purchase
securities if borrowings, including reverse repurchase agreements and dollar
rolls, exceed 5% of its total assets);
2. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer (other than,
in each case, cash items, securities of the U.S. Government, its agencies and
instrumentalities, and securities issued by other investment companies);
3. Issue senior securities, except as permitted by the Investment Company
Act of 1940 ("1940 Act");
4. Engage in the business of underwriting the securities of other issuers
except insofar as the Fund may be deemed an underwriter under the Securities Act
of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies; futures contracts on currencies,
securities or securities indexes, options on currencies, securities, and
securities indexes; and options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing investment limitations of each Fund cannot be changed
without the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares of the Fund
present at a shareholders' meeting if more than 50% of the outstanding shares of
the Fund are represented at the meeting in person or by proxy. Except with
respect to the 33 1/3% limit ininvestment limitation number 1, if a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered a
violation of any of the foregoing limitations.
Global Government interprets fundamental investment limitation (4) and
Global Equity interprets fundamental investment limitation (5) to prohibit
investment in real estate limited partnerships.
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Except as otherwise specified, the following investment limitations and
policies are nonfundamental and may be changed by the Corporation's Board of
Directors without shareholder approval.
Each Fund may not:
1. Purchase or sell any oil, gas or mineral exploration or development
programs, including leases;
2. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that a Fund may make margin
deposits in connection with the use of permitted futures contracts and options
on futures contracts as well as options on currencies, securities and securities
indexes;
3. Make short sales of securities or maintain a short position, except
that a Fund may (a) make short sales and maintain short positions in connection
with its use of options, futures contracts and options on futures contracts and
(b) sell short "against the box" (although not a fundamental policy, Global
Government does not intend to make short sales in excess of 5% of its net assets
during the coming year and Global Equity does not intend to make short sales
during the coming year);
4. Purchase or retain the securities of an issuer if, to the knowledge
of the Fund's management, those officers and directors of that Fund and officers
and directors of either its adviser, manager or sub-adviser who individually own
beneficially more than 0.5% of the outstanding securities of that issuer own in
the aggregate more than 5% of the securities of that issuer;
5. Purchase any security (except with respect to collateralized
mortgage obligations and asset-backed securities for Global Government), if, as
a result, more than 5% of a Fund's total assets would be invested in securities
of companies that together with any predecessors have been in continuous
operation for less than three years;
6. Purchase a security restricted as to resale if, as a result thereof,
more than 15% of Global Government's or 10% of Global Equity's total assets
would be invested in restricted securities. For purposes of this limitation,
securities that can be sold freely in the principal market in which they are
traded are not considered restricted, even if they cannot be sold in the United
States.
7. Make investments in warrants if such investments, valued at the
lower of cost or market, exceed 5% of the value of its net assets, which amount
may include warrants that are not listed on the New York or American Stock
Exchanges, provided that such unlisted warrants, valued at the lower of cost or
market, do not exceed 2% of a Fund's net assets, and further provided that this
restriction does not apply to warrants attached to, or sold as a unit with,
other securities. For purposes of this restriction, the term "warrants" does not
include options on securities, stock or bond indices, foreign currencies or
futures contracts.
With respect to Global Equity, the Fund may not:
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8. Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and in the open market at no more than
customary brokerage and commission rates. This limitation does not apply to
securities received or acquired as dividends, through offers of exchange, or as
a result of a reorganization, consolidation or merger.
The following information about investment policies applies only to Global
Government:
Ratings of Debt Obligations
Moody's, S&P and other nationally recognized or foreign statistical
rating organizations ("SROs") are private organizations that provide ratings of
the credit quality of debt obligations. A description of the ratings assigned to
corporate debt obligations by Moody's and S&P is included in Appendix A. The
Fund may consider these ratings in determining whether to purchase, sell or hold
a security. Ratings issued by Moody's or S&P represent only the opinions of
those agencies and are not guarantees of credit quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices. Credit rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates.
Sovereign Debt
Investments in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal and/or interest when due
in accordance with the terms of such debt, and the Fund may have limited legal
recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, holders of commercial
bank debt issued by the same sovereign entity may contest payments to the
holders of Sovereign Debt in the event of default under commercial bank loan
agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The ability of some sovereign debtors to repay their obligations may
depend on the timely receipt of assistance from international agencies or other
governments, the flow of which is not
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assured. The willingness of such agencies to make these payments may depend on
the sovereign debtor's willingness to institute certain economic changes, the
implementation of which may be politically difficult.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While the Adviser intends to manage investments in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Fund to suffer a loss of
interest or principal on any of its holdings.
Mortgage-Related Securities
Mortgage-related securities represent participations in, or are secured
by and payable from, mortgage loans secured by real property. These securities
are designed to provide monthly payments of interest and, in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed through" to investors such as the Fund. Many issuers or
poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. These guarantees are often backed by various forms
of credit, insurance and collateral, although these may be in amounts less than
the full obligation of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. In addition to fixed-rate, fixed-term
mortgages, the Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For example,
securities issued by the Government National Mortgage Association ("GNMAs") tend
to have a longer average life than participation certificates ("PCs") issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency
for the conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may
be shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Yields on mortgage-related securities are typically quoted based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience
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may cause the yield to differ from the yield expected on the basis of average
life. The compounding effect from reinvestments of monthly payments received by
the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Private Mortgage-Related Securities
The private mortgage-related securities in which the Fund may invest
include foreign mortgage pass-through securities ("Foreign Pass-Throughs"),
which are structurally similar to the pass-through instruments described above.
Such securities are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, specialized financial institutions and special purpose
subsidiaries of the foregoing. Foreign Pass-Throughs usually are backed by a
pool of fixed rate or adjustable-rate mortgage loans. The Foreign Pass-Throughs
in which the Fund may invest are not guaranteed by an entity having the credit
status of the Government National Mortgage Association, but generally utilize
various types of credit enhancement.
Other Debt Securities
The rate of return or return of principal on some obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
The market for lower-rated securities may be thinner and less active
than that for higherrated securities, which can adversely affect the prices at
which these securities can be sold, and may make it difficult for the Fund to
obtain market quotations daily. If market quotations are not available, these
securities will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair market value. Judgment may play a greater role
in valuing lower-rated debt securities than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information are available.
Although the market for lower-rated debt securities is not new, and the
market has previously weathered economic downturns, there has been in recent
years a substantial increase in the use of such securities to fund corporate
acquisitions and restructurings. Accordingly, the past performance of the market
for such securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates.
Bank Obligations
Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances and time deposits in U.S. banks (including foreign
branches) which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation. The Fund also may invest in certificates of deposit of
savings and loan associations (federally or state chartered and federally
insured) having total assets in excess of $1 billion.
The Fund may invest in obligations of domestic or foreign branches of
foreign banks and foreign branches of domestic banks. These investments involve
risks that are different from
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investments in securities of domestic branches of domestic banks. These risks
include seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect the payment of principal or
interest on the bank obligations held by the Fund.
The Fund limits its investments in foreign bank obligations to U.S.
dollar-denominated or foreign currency-denominated obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment (1)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (2) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (3) are judged by the
Adviser to be of comparable quality to obligations of U.S. banks in which the
Fund may invest. Subject to the limitation on concentration of less than 25% of
the Fund's assets in the securities of issuers in a particular industry, there
is no limitation on the amount of the Fund's assets which may be invested in
obligations of foreign banks which meet the conditions set forth herein. Foreign
banks are not generally subject to examination by any U.S. government agency or
instrumentality.
The following information about investment policies applies to each Fund:
Foreign Investments
Investors should recognize that investing in foreign companies involves
certain special considerations which are not typically associated with investing
in U.S. companies. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge the Fund's
holdings and commitments against changes in the level of future currency rates,
although the Fund may not hedge many of its positions. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
Although the Fund will endeavor to achieve most favorable executions
costs in its portfolio transactions, commissions on many foreign stock exchanges
are at fixed rates, and generally these are higher than negotiated commissions
on U.S. exchanges.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
Fund, since the Fund's investment objective is to seek long-term total return
and any income should be considered incidental.
Restricted and Illiquid Securities
Each Fund is authorized to invest up to 15% of its net assets in
securities for which no readily available market exists, which for this purpose
includes, among other things, repurchase agreements maturing in more than seven
days, over-the-counter ("OTC") options and securities used as cover for such
options. Restricted securities may be sold only (1) pursuant to SEC Rule
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144A or other exemption, (2) in privately negotiated transactions or (3) in
public offerings with respect to which a registration statement is in effect
under the Securities Act of 1933. Such securities may include those that are
subject to restrictions contained in the securities laws of other countries.
Securities that are freely marketable in the country where they are principally
traded, but would not be freely marketable in the United States, will not be
subject to this 15% limit. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. SEC regulations permit
certain restricted securities to be traded freely among qualified purchasers.
The SEC has stated that an investment company's board of directors, or its
investment adviser acting under authority delegated by the board, may determine
that a security eligible for trading under this rule is not "illiquid." Each
Fund intends to rely on this rule, to the extent appropriate, to deem restricted
securities as not "illiquid." If the newly-developing institutional markets for
restricted securities do not develop as anticipated, it could adversely affect
the liquidity of the Fund.
Repurchase Agreements
When a Fund enters into a repurchase agreement with a foreign or
domestic entity, it will obtain from that entity securities equal in value to
102% of the amount of the repurchase agreement (or 100%, if the securities
obtained are U.S. Treasury bills, notes or bonds). Such securities will be held
by that Fund's custodian, an approved foreign sub-custodian, or an approved
securities depository or book-entry system.
Reverse Repurchase Agreements and Other Borrowing
A reverse repurchase agreement is a portfolio management technique in
which a Fund temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, that Fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. A Fund may also enter into dollar rolls, in which a Fund sells a
security for delivery in the current month and simultaneously contracts to
repurchase a substantially similar security on a specified future date. That
Fund would be compensated by the difference between the current sales price and
the forward price for the future purchase. A Fund may engage in reverse
repurchase agreements and dollar rolls as a means of raising cash to satisfy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio instruments. While engaging in reverse repurchase
agreements or dollar rolls, each Fund will maintain cash, U.S. government
securities or other high-grade liquid securities in a segregated account at its
custodian bank with a value at least equal to that Fund's obligation under the
agreements.
Each Fund may borrow for temporary purposes, which borrowing may be
unsecured. The 1940 Act requires that Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of at least 300% of the amount borrowed. If the asset coverage
should decline below 300% as a result of market fluctuations or for other
reasons,
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the Fund may be required to sell some of its holdings within three days
(exclusive of Sundays and holidays) to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing may exaggerate the effect
on net asset value of any increase or decrease in the market value of the
portfolio. To avoid the potential leveraging effects of a Fund's borrowings,
each Fund will not make investments while borrowings are in excess of 5% of its
total assets. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. For purposes of its borrowing limitation and policies, each Fund considers
reverse repurchase agreements and dollar rolls to constitute borrowing. Global
Equity does not currently intend to use reverse repurchase agreements and dollar
rolls.
Short Sales
No Fund will sell securities short, other than through the use of short
sales against the box, futures and options as described in the Prospectuses. In
a short sale against the box, a Fund simultaneously owns, or has the right to
acquire, without the payment of any additional consideration, securities
identical in kind and amount to those sold short.
Options and Futures
As described in the Prospectuses, Global Government may purchase and
sell (write) both put options and call options on securities and bond indices,
may enter into interest rate and bond index futures contracts and may purchase
and sell options on such futures contracts ("futures options") for hedging
purposes or in other circumstances permitted by the Commodity Futures Trading
Commission ("CFTC") as part of its investment strategy. Global Equity may enter
into futures contracts, options and options on futures contracts for several
reasons: to maintain cash reserves while remaining fully invested, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
Batterymarch believes a futures contract is priced more attractively than the
underlying equity security or index. In addition, a Fund may purchase and sell
put and call options on foreign currencies, may enter into futures contracts on
foreign currencies and purchase and sell options on such futures contracts. If
other types of options, futures contracts or options on futures are traded in
the future, each Fund may also use those investment strategies. Options and
futures are generally considered to be "derivatives."
Options on Securities
A Fund may purchase call options on securities that its adviser intends
to include in that Fund's investment portfolio in order to fix the cost of a
future purchase. Purchased options also may be used as a means of participating
in an anticipated price increase of a security on a more limited risk basis than
would be possible if the security itself were purchased. In the event of a
decline in the price of the underlying security, use of this strategy would
serve to limit a Fund's potential loss to the option premium paid; conversely,
if the market price of the underlying security increases above the exercise
price and the Fund either sells or exercises the option, any profit realized
will be reduced by the premium.
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A Fund may purchase put options in order to hedge against a decline in
the market value of securities held in its portfolio or to enhance income. The
put option enables the Fund to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the Fund below the exercise price
is limited to the option premium paid. If the market price of the underlying
security is higher than the exercise price of the put option, any profit the
Fund realizes on the sale of the security would be reduced by the premium paid
for the put option less any amount for which the put option may be sold.
A Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, the Fund might write covered call options on
securities generally when its adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
Such securities would also be considered illiquid in the case of OTC options
written by a Fund, and therefore subject to its limitation on investing no more
than 15% of its net assets in illiquid securities, unless the OTC options are
sold to qualified dealers who agree that the Fund may repurchase any OTC option
it writes at a maximum price to be calculated by a formula set forth in the
option agreement. The cover for an OTC call option written subject to this
procedure will be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option. In
addition, the Fund could lose the ability to participate in an increase in the
value of such securities above the exercise price of the call option because
such an increase would likely be offset by an increase in the cost of closing
out the call option (or could be negated if the buyer chose to exercise the call
option at an exercise price below the securities' current market value).
The sale of a put option on a security by a Fund also serves to
partially offset the cost of a security that the Fund anticipates purchasing. If
the price of the security rises, the increased cost to the Fund of purchasing
the security will be offset, in whole or in part, by the premium received. In
the event, however, that the price of the security falls below the exercise
price of the option and the option is exercised, the Fund will be required to
purchase the security from the holder of the option at a price in excess of the
current market price of the security. A Fund's loss on this transaction will be
offset, in whole or in part, to the extent of the premium received by the Fund
for writing the option.
Global Government may purchase put and call options and write covered
put and call options on bond indices in much the same manner as securities
options, except that bond index options may serve as a hedge against overall
fluctuations in the debt securities markets (or a market sector) rather than
anticipated increases or decreases in the value of a particular security. A bond
index assigns a value to the securities included in the index and fluctuates
with changes in such values. Settlements of bond index options are effected with
cash payments and do not
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involve the delivery of securities. Thus, upon settlement of a bond index
option, the purchaser will realize, and the writer will pay, an amount based on
the difference between the exercise price and the closing price of the bond
index. The effectiveness of hedging techniques using bond index options will
depend on the extent to which price movements in the bond index selected
correlate with price movements of the securities in which the Fund invests.
Global Government may purchase and write covered straddles on
securities, currencies or bond indices. A long straddle is a combination of a
call and a put option purchased on the same security, index or currency where
the exercise price of the put is less than or equal to the exercise price of the
call. The Fund would enter into a long straddle when its adviser believes that
it is likely that interest rates or currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and a put written on the same security,
index or currency where the exercise price of the put is less than or equal to
the exercise price of the call. In a covered short straddle, the same issue of
security or currency is considered cover for both the put and the call that the
Fund has written. The Fund would enter into a short straddle when its adviser
believes that it is unlikely that interest rates or currency exchange rates will
be as volatile during the term of the options as the option pricing implies. In
such case, the Fund will set aside cash and/or liquid, high grade debt
securities in a segregated account with its custodian equivalent in value to the
amount, if any, by which the put is in-the-money, that is, the amount by which
the exercise price of the put exceeds the current market value of the underlying
security.
Foreign Currency Options and Related Risks
A Fund may purchase and write (sell) options on foreign currencies in
order to hedge against the risk of foreign exchange rate fluctuation on foreign
securities that Fund holds or which it intends to purchase. For example, if a
Fund enters into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
Fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The purchase
of an option on foreign currency may be used to hedge against fluctuations in
exchange rates although, in the event of exchange rate movements adverse to that
Fund's options position, it may forfeit the entire amount of the premium plus
related transaction costs. In addition, Global Government may purchase call
options on foreign currency to enhance income when its adviser anticipates that
the currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities.
If a Fund writes an option on foreign currency, it will constitute only
a partial hedge, up to the amount of the premium received, and that Fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. A Fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates of a different, but related, currency.
A Fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange traded, the majority are traded on
the OTC market. A Fund will not purchase or write
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such options unless, in the opinion of its adviser, the market for them has
developed sufficiently. There can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that influence foreign
exchange rates and investments generally. These OTC options also involve credit
risks that may not be present in the case of exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
Global Government:
The Fund will limit its use of futures contracts and options on futures
contracts to hedging transactions or other circumstances permitted by regulatory
authorities. For example, the Fund might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Fund's securities or the price of the securities that
the Fund intends to purchase. The Fund's hedging may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce exposure to interest rate fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts.
The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to invest in a
foreign security of the same currency. The Fund may purchase put options on
foreign currency futures contracts as a hedge against a decline in the foreign
exchange rates or the value of its foreign portfolio securities. The Fund may
write a call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign exchange rates on the value of foreign
securities. The Fund may sell a put option on a foreign currency to partially
offset the cost of a security denominated in that currency that the Fund
anticipates purchasing; however, the cost will only be offset to the extent of
the premium received by the Fund for writing the option.
The Fund also may use futures contracts on fixed income instruments and
options thereon to hedge its investment portfolio against changes in the general
level of interest rates. A futures contract on a fixed income instrument is a
bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of fixed income security
called for in the contract at a specified future time and at a specified price.
The Fund may purchase a futures contract on a fixed income security when it
intends to purchase fixed income securities but has not yet done so. This
strategy may minimize the effect of all or part of an increase in the market
price of the fixed income security that the Fund intends to purchase in the
future. A rise in the price of the fixed income security prior to its purchase
may be either offset by an increase in the value of the futures contract
purchased by the Fund or avoided by taking delivery of the fixed income
securities under the futures contract. Conversely, a fall in the market price of
the underlying fixed income security may result in a corresponding decrease in
the value of the futures position. The Fund may sell a futures contract on a
fixed income security in order to continue to receive the income from a fixed
income security, while endeavoring to avoid part or all
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of the decline in the market value of that security that would accompany an
increase in interest rates.
The Fund may purchase a call option on a futures contract to hedge
against a market advance in debt securities that the Fund plans to acquire at a
future date. The purchase of a call option on a futures contract is analogous to
the purchase of a call option on an individual fixed income security that can be
used as a temporary substitute for a position in the security itself. The Fund
also may write covered call options on futures contracts as a partial hedge
against a decline in the price of fixed income securities held in the Fund's
investment portfolio, or purchase put options on futures contracts in order to
hedge against a decline in the value of fixed income securities held in the
Fund's investment portfolio. The Fund may write a put option on a security that
the Fund anticipates purchasing to partially offset the cost of purchasing that
security; however, the cost will only be offset to the extent of the premium the
Fund receives for writing the option.
The Fund may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of its investments. To the extent that a portion of the Fund's investments
correlate with a given index, the sale of futures contracts on that index could
reduce the risks associated with a market decline and thus provide an
alternative to the liquidation of securities positions. For example, if the Fund
correctly anticipates a general market decline and sells bond index futures to
hedge against this risk, the gain in the futures position should offset some or
all of the decline in the value of the portfolio. The Fund may purchase bond
index futures contracts if a significant market or market sector advance is
anticipated. Such a purchase of a futures contract would serve as a temporary
substitute for the purchase of individual debt securities, which debt securities
may then be purchased in an orderly fashion. This strategy may minimize the
effect of all or part of an increase in the market price of securities that the
Fund intends to purchase. A rise in the price of the securities should be partly
or wholly offset by gains in the futures position.
As in the case of a purchase of a bond index futures contract, the Fund
may purchase a call option on a bond index futures contract to hedge against a
market advance in securities that the Fund plans to acquire at a future date.
The Fund may write put options on bond index futures as a partial anticipatory
hedge and may write covered call options on bond index futures as a partial
hedge against a decline in the prices of bonds held in its portfolio. This is
analogous to writing covered call options on securities. The Fund also may
purchase put options on bond index futures contracts. The purchase of put
options on bond index futures contracts is analogous to the purchase of
protective put options on individual securities where a level of protection is
sought below which no additional economic loss would be incurred by the Fund.
The Fund may also write put options on interest rate, bond index or
foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, bond index or foreign currency futures
contract in order synthetically to create a long interest rate, bond index or
foreign currency futures contract position. The options will have the same
strike prices and expiration dates. The Fund will engage in this strategy only
when its adviser believes it is more advantageous to the Fund to do so as
compared to purchasing the futures contract.
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The Fund may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle is a
combination of a call and a put purchased on the same futures contract where the
exercise price of the put option is less than the exercise price of the call
option. The Fund would enter into a long straddle when it believes that it is
likely that interest rates or foreign currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and put written on the same futures contract
where the exercise price of the put option is less than the exercise price of
the call option. In a covered short straddle, the same futures contract is
considered "cover" for both the put and the call that the Fund has written. The
Fund would enter into a short straddle when it believes that it is unlikely that
interest rates or foreign currency exchange rates will be as volatile during the
term of the options as the option pricing implies. In such case, the Fund will
set aside cash and/or liquid, high grade debt securities in a segregated account
with its custodian equal in value to the amount, if any, by which the put is
"in-the-money", that is, the amount by which the exercise price of the put
exceeds the current market value of the underlying futures contract.
Global Equity:
Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific instrument at a specified
future time and at a specified price. Domestic futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Domestic futures exchanges and trading are
regulated under the Commodity Exchange Act by the CFTC, a U.S. Government
agency. Foreign futures exchanges and futures contracts may be regulated
differently, or may be unregulated.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not closed out prior to the specified delivery date. Minimal
initial margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold on
margin deposits that may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as
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long as the contract remains open. The Fund expects to earn interest income
on its margin deposits.
Regulations of the CFTC applicable to the Fund limit the assets that
can be committed to futures transactions that do not constitute bona fide
hedging transactions. The Fund will sell futures contracts only to protect
securities it owns against price declines or purchase contracts to protect
against an increase in the price of securities it intends to purchase. As
evidence of this hedging interest, the Fund expects that approximately 75% of
its futures contract purchases will be "completed"; that is, equivalent amounts
of related securities will have been purchased or are being purchased by the
Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of the Fund income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of underlying equity
securities.
For each Fund:
A Fund may also purchase and sell futures contracts on a foreign
currency. A Fund may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the U.S. dollar. In addition, a Fund may sell a foreign currency futures
contract when its adviser anticipates a general weakening of the foreign
currency exchange rate that could adversely affect the market values of that
Fund's foreign securities holdings. In this case, the sale of futures contracts
on the underlying currency may reduce the risk to the Fund caused by foreign
currency variations and, by so doing, provide an alternative to the liquidation
of securities positions in the Fund and resulting transaction costs. When a
Fund's adviser anticipates a significant foreign exchange rate increase while
intending to invest in a security denominated in a foreign currency, the Fund
may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the Fund against any rise
in the foreign exchange rate that may add additional costs to acquiring the
foreign security position.
A Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. A
Fund may purchase a call option or write a put option on a foreign currency
futures contract to hedge against a rise in the foreign exchange rate while
intending to invest in a foreign security of the same currency. A Fund may
purchase put options on foreign currency futures contracts as a partial hedge
against a decline in the foreign exchange rates or the value of its foreign
portfolio securities. It may also write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
When a purchase or sale of a futures contract is made by a Fund, it is
required to deposit with its custodian (or a broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract, which is
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returned to the Fund upon termination of the contract assuming all contractual
obligations have been satisfied. Under certain circumstances, such as periods of
high volatility, a Fund may be required by an exchange to increase the level of
its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. A Fund expects to earn
interest income on its initial margin deposits. A futures contract held by a
Fund is valued daily at the official settlement price of the exchange on which
it is traded. Each day the Fund pays or receives cash, called "variation
margin," equal to the daily change in value of the futures contract. This
process is known as "marking-to-market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract had expired
on that date. In computing daily net asset value, a Fund will mark-to-market its
open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts and on certain foreign currencies
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract or currency (and the related initial margin
requirements), the current market value of the option and other options and
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally futures contracts are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency, index or underlying security and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting
sale price is more than the original purchase price, the Fund realizes a gain,
or if it is less, the Fund realizes a loss. A Fund will also bear transaction
costs for each contract, which must be considered in these calculations.
The Corporation has filed on behalf of each Fund a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets. Under Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility must include representations
that the Fund will use futures contracts and related options solely for bona
fide hedging purposes within the meaning of the CFTC regulations provided that a
Fund may hold futures contracts and related options that do not fall within the
definition of bona fide hedging transactions if, with respect to such
non-hedging transactions, the initial margin deposits plus premiums paid by that
Fund, less the amount by which any such options positions are "in-the-money" at
the time of purchase, would exceed 5% of the fair market value of the Fund's net
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option. Foreign currency options traded on a
commodities exchange are considered commodity options for this purpose. In
addition, Global Equity will not enter into futures contracts to the extent that
its outstanding obligations to purchase securities under those contracts would
exceed 20% of the Fund's total assets. Pursuant to an undertaking to a state
securities administrator, the Fund will not invest in puts, calls, straddles,
spreads, or any combination thereof if, as a result, the value of its aggregate
investment in such instruments would exceed 10% of its total assets. Also
pursuant to an undertaking to a state securities administrator, the Fund will
buy and sell options in the OTC market only when such options are unavailable on
exchanges, only
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when there is an active OTC market for such options which could establish their
pricing and liquidity, and only with dealers having a minimum net worth of $20
million.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may engage in transactions in options,
futures, options on futures or forward contracts. See "Additional Tax
Information."
Risks Associated with Futures and Options
In considering a Fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance of a
liquid secondary market. Consequently, it may not be possible for a Fund to
close a position and, in the event of adverse price movements, that Fund would
have to make daily cash payments of variation margin (except in the case of
purchased options). However, in the event futures contracts or options have been
used to hedge portfolio securities, such securities will not be sold until the
contracts can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.
(3) Successful use by a Fund of futures contracts and options will
depend upon its adviser's ability to predict movements in the direction of the
overall securities, currency and interest rate markets, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future. There is, in addition, the risk that the movements in the price
of the futures contract will not correlate with the movements in prices of the
securities or currencies being hedged. For example, if the price of the futures
contract moves less than the price of the securities or currencies that are
subject to the hedge, the hedge will not be fully effective; however, if the
price of securities or currencies being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the securities or currencies being hedged has moved in a
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favorable direction, this advantage may be partially offset by losses in the
futures position. In addition, if a Fund has insufficient cash, it may have to
sell assets from its investment portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market; consequently, that Fund may need to sell assets at a
time when such sales are disadvantageous to it. If the price of the futures
contract moves more than the price of the underlying securities or currencies,
the Fund will experience either a loss or a gain on the futures contract that
may or may not be completely offset by movements in the price of the securities
or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, futures contract or
currency, the time remaining until expiration, the relationship of the exercise
price to the market price, the historical price volatility of the underlying
security, index, futures contract or currency and general market conditions. For
this reason, the successful use of options as a hedging strategy depends upon a
Fund's adviser's ability to forecast the direction of price fluctuations in the
underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, index, futures contract or currency. Purchased
options that expire unexercised have no value, and a Fund will realize a loss in
the amount paid plus any transaction costs.
(7) Like options on securities and currencies, options on futures
contracts have a limited life. The ability to establish and close out options on
futures will be subject to the development and maintenance of liquid secondary
markets on the relevant exchanges or boards of trade. There can be no certainty
that liquid secondary markets for all options on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on futures
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contracts, however, must post an initial margin and are subject to additional
margin calls that could be substantial in the event of adverse price movements.
In addition, although the maximum amount at risk when a Fund purchases an option
is the premium paid for the option and the transaction costs, there may be
circumstances when the purchase of an option on a futures contract would result
in a loss to the Fund when the use of a futures contract would not, such as when
there is no movement in the value of the securities or currencies being hedged.
(9) A Fund's activities in the futures and options markets may result
in a higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, a Fund also may save on commissions by
using such contracts as a hedge rather than buying or selling individual
securities or currencies in anticipation or as a result of market movements.
(10) A Fund may purchase and write both exchange-traded options and
options traded on the OTC market. The ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Although each Fund intends to purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. Closing transactions may be effected
with respect to options traded in the OTC markets (currently the primary markets
for options on debt securities and foreign currencies) only by negotiating
directly with the other party to the option contract, or in a secondary market
for the option if such market exists. Although a Fund will enter into OTC
options only with dealers that agree to enter into, and that are expected to be
capable of entering into, closing transactions with that Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. In the event of insolvency of the
contra-party, the Fund may be unable to liquidate an OTC option. Accordingly, it
may not be possible to effect closing transactions with respect to certain
options, with the result that the Fund would have to exercise those options that
it has purchased in order to realize any profit. With respect to options written
by a Fund, the inability to enter into a closing transaction may result in
material losses to the Fund. For example, because a Fund must maintain a covered
position with respect to any call option it writes on a security, futures
contract or currency, the Fund may not sell the underlying security, futures
contract or currency or invest any cash, U.S. government securities or other
liquid, high quality debt securities used as cover during the period it is
obligated under such option. This requirement may impair that Fund's ability to
sell a portfolio security or make an investment at a time when such a sale or
investment might be advantageous. Options traded on U.S. or other exchanges may
be subject to position and daily fluctuation limits which may limit the ability
of the Fund to reduce risk using such options and may limit their liquidity.
With respect to Global Government,
(11) Bond index options are settled exclusively in cash. If the Fund
purchases a put or call option on an index, the Fund will not know in advance
the difference, if any, between the closing value of the index on the exercise
date and the exercise price of the option itself. Thus, if the Fund exercises a
bond index option before the closing index value for that day is available, the
Fund runs the risk that the level of the underlying index may subsequently
change.
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Special Risks Related to Foreign Currency Futures Contracts and Options on Such
Contracts and Options on Foreign Currencies
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described below. Further, settlement of a foreign currency futures contract must
occur within the country issuing the underlying currency. Thus, a Fund must
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to pay any
fees, taxes or charges associated with such delivery that are assessed in the
issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, a Fund will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of its adviser, the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase or sale
of foreign currency futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a foreign currency futures contract would result in a loss, such as when there
is no movement in the price of the underlying currency or futures contract, when
the purchase of the underlying futures contract would not result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
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Additional Risks of Options on Securities, Futures Contracts, Options on
Futures and Forward Currency Exchange Contracts and Options Thereon Traded on
Foreign Exchanges
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees and
are subject to the risk of governmental actions affecting trading in, or the
price of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) less available data than in the United States on which to make
trading decisions, (3) delays in a Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) less trading volume.
Cover for Strategies Involving Options, Futures and Forward Contracts
Global Government will not use leverage in its options, futures and
forward contract strategies. The Fund will not enter into an options, futures or
forward currency strategy that exposes it to an obligation to another party
unless it owns either (1) an offsetting ("covering") position in securities,
currencies or other options, futures or forward contracts or (2) cash,
receivables and liquid high quality debt securities with a value sufficient to
cover its potential obligations.
Each Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds, and, if the guidelines
so require, will set aside cash and/or liquid, high-grade debt securities in a
segregated account with its custodian in the amount prescribed, as
marked-to-market daily. Securities, currencies or other options or futures
positions used for cover and securities held in a segregated account cannot be
sold or closed out while the strategy is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that the use of cover
or segregation involving a large percentage of a Fund's assets could impede
portfolio management or that Fund's ability to meet redemption requests or other
current obligations.
Forward Currency Exchange Contracts
A Fund may use forward currency exchange contracts to hedge against
uncertainty in the level of future exchange rates or, with respect to Global
Government, to enhance income. Forward contracts are generally considered to be
derivatives.
A Fund may enter into forward currency exchange contracts with respect
to specific transactions. For example, when a Fund anticipates purchasing or
selling a security denominated in a foreign currency, or when it anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, that Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars or foreign currency, of the amount of foreign currency involved in
the underlying transaction. That Fund will thereby attempt 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.
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A Fund also may use forward currency exchange contracts to lock in the
U.S. dollar value of its portfolio positions, to increase its exposure to
foreign currencies that its adviser believes may rise in value relative to the
U.S. dollar or to shift its exposure to foreign currency fluctuations from one
country to another. For example, when a Fund's adviser believes that the
currency of a particular foreign country may suffer a substantial decline
relative to the U.S. dollar or another currency, it may enter into a forward
contract to sell the amount of the former foreign currency approximating the
value of some or all of that Fund's securities denominated in such foreign
currency. These investment practices generally are referred to as
"cross-currency hedging" when two foreign currencies are involved. In
cross-currency hedging, a Fund may suffer losses on both currencies if their
values do not move as its adviser anticipates.
At or before the maturity date of a forward contract requiring a Fund
to sell a currency, that Fund 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 Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
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 Fund 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
the offsetting contract.
The precise matching of the forward contract amount 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 those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund 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 the Fund 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 the Fund 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 Fund to sustain losses on
these contracts and transaction costs. A Fund may enter into forward contracts
or maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains cash, U.S. Government
securities or other liquid, high-grade debt securities in a segregated account
with the Fund's custodian, marked-to-market daily, in an amount not less than
the value of the Fund's total assets committed to the consummation of the
contract. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer-term investment decisions made
with regard to overall diversification strategies. However, each Fund's adviser
believes that it is important to have the flexibility to enter into such forward
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contracts when it determines that the best interests of that Fund will be
served. Some foreign currency forward contracts into which a Fund enters may be
illiquid.
The cost to a Fund 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. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities a Fund 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.
Although each Fund 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. Each Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should that Fund
desire to resell that currency to the dealer.
The following information applies only to Global Government:
Foreign Currency Exchange-Related Securities and Foreign Currency Warrants
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United States,
in U.S. dollars) that is calculated pursuant to a predetermined formula and
based on the exchange rate between a specified foreign currency and the U.S.
dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date
and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that is inherent in the international
fixed income/debt marketplace. The formula used to determine the amount payable
upon exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate moves in a particular
direction.
Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants
are delisted from an exchange or if their trading is suspended permanently,
which would result in the loss of any
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remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants) and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign currency warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political and economic factors.
Swaps, Caps, Collars and Floors
The Fund may enter into interest rate, currency and index swaps, and
may purchase and sell caps, collars and floors for hedging purposes or in an
effort to increase overall return. Interest rate swap transactions involve an
agreement between two parties under which one makes to the other periodic
payments based on a fixed rate of interest and receives in return periodic
payments based on a variable rate of interest; the rates are calculated on the
basis of a specified amount of principal (the "notional principal amount") for a
specified period of time. A currency swap is an agreement to exchange cash flows
based on changes in the value of an exchange rate; participants in currency
swaps may also exchange the principal amount. Index swaps link one of the
payments to the total return of a market portfolio. Cap and floor transactions
involve an agreement between two parties in which one agrees to pay the other
when a designated market interest rate, currency rate or index value goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. In an interest rate
collar, one party agrees to pay the other when a designated market interest rate
either goes above a specified cap level or below a specified floor level, either
on predetermined dates or during a specified time period.
As with options and future transactions, successful use of swap
agreements depends on the Adviser's ability to predict movements in the
direction of the overall currency and interest rate markets. There might be
imperfect correlation between the value of a swap, cap, collar or floor
agreement and movements in the underlying interest rate or currency markets.
While swap agreements can offset the potential for loss on a position, they can
also limit the opportunity for gain by offsetting favorable price movements.
Swaps, caps, collars and floors can be highly volatile instruments. The
value of these agreements is dependent on the ability of the counterparty to
perform and is therefore linked to the counterparty's creditworthiness. The Fund
may also suffer a loss if it is unable to terminate an outstanding swap
agreement.
The Fund will enter into swaps, caps, collars and floors only with
parties deemed by its adviser to present a minimal risk of default during the
period of agreement. When the Fund enters into a swap, cap, collar or floor, it
will maintain a segregated account containing cash and high-quality liquid debt
securities equal to the payment, if any, due to the other party; where contracts
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are on a net basis, only the net payment will be segregated. The Fund regards
caps, collars and floors as illiquid, and therefore subject to the Fund's 15%
limit on illiquid securities. There can be no assurance that the Fund will be
able to terminate a swap at the appropriate time. The Fund will sell caps,
collars and floors only to close out its positions in such instruments.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps. The market for all of these
instruments is largely unregulated. Swaps, caps, collars and floors are
generally considered "derivatives."
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each Fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates. Navigator Shares are currently offered for sale only to
Institutional Clients, to clients of Trust Company for which Trust Company
exercises discretionary investment management responsibility, to qualified
retirement plans managed on a discretionary basis and having net assets of at
least $200 million, and to The Legg Mason Profit Sharing Plan and Trust.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
Primary Shares are available to all other investors.
Future First Systematic Investment Plan
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan, you may arrange for automatic
monthly investments in Primary Shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), the Funds' transfer agent, to prepare a check
each month drawn on your checking account. Each month the transfer agent will
send a check to your bank for collection, and the proceeds of the check will be
used to buy Primary Shares at the per share net asset value determined on the
day the check is sent to your bank. You will receive a quarterly account
statement. You may terminate the Future First Systematic Investment Plan at any
time without charge or penalty. Forms to enroll in the Future First Systematic
Investment Plan are available from any Legg Mason or affiliated office.
Purchases by Check
In making purchases of Fund shares by check, you should be aware that
checks drawn on a member bank of the Federal Reserve System will normally be
converted to federal funds and used to purchase shares of the Fund within two
business days of receipt by Legg Mason. Legg Mason is closed on the days that
the New York Stock Exchange ("Exchange") is closed, which are listed under
"Valuation of Fund Shares" on page 36. Checks drawn on banks that are not
members of the Federal Reserve System may take up to nine business days to be
converted.
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Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient Primary Shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified Employee
Pension Plan ("SEP") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value determined as of
the close of regular trading of the Exchange on the first day of each month. If
the Exchange is not open for business on that day, the shares will be redeemed
at the net asset value determined as of the close of regular trading of the
Exchange on the preceding business day. The check for the withdrawal payment
will usually be mailed to you on the next business day following redemption. If
you elect to participate in the Systematic Withdrawal Plan, dividends and
distributions on all Primary Shares in your account must be automatically
reinvested in Primary Shares. You may terminate the Systematic Withdrawal Plan
at any time without charge or penalty. Each Fund, its transfer agent, and Legg
Mason also reserve the right to modify or terminate the Systematic Withdrawal
Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or a capital gain distribution. These payments are taxable to the
extent that the total amount of the payments exceeds the tax basis of the shares
sold. If the periodic withdrawals exceed reinvested dividends and other
distributions, the amount of your original investment may be correspondingly
reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
Redemption Services
Each Fund reserves the right to modify or terminate the wire or
telephone redemption services described in the Prospectuses at any time.
The date of payment may not be postponed for more than seven days, and
the right of redemption may not be suspended except (a) for any period during
which the Exchange is closed (other than for customary weekend and holiday
closings), (b) when trading in markets a Fund normally utilizes is restricted or
an emergency, as defined by rules and regulations of the SEC, exists, making
disposal of that Fund's investments or determination of its net asset value not
reasonably practicable, or (c) for such other periods as the SEC, by order, may
permit for protection of a Fund's shareholders. In the case of any such
suspension, you may either withdraw
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your request for redemption or receive payment based upon the net asset value
next determined after the suspension is lifted.
Each Fund reserves the right under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part by securities valued in
the same way as they would be valued for purposes of computing that Fund's net
asset value per share. If payment is made in securities, a shareholder generally
will incur brokerage expenses in converting those securities into cash and will
be subject to fluctuation in the market price of those securities until they are
sold. Each Fund does not redeem in kind under normal circumstances, but would do
so where its adviser determines that it would be in the best interests of the
shareholders as a whole.
Foreign securities exchanges may be open for trading on days when the
Funds are not open for business. The net asset value of Fund shares may be
significantly affected on days when investors do not have access to their
respective Fund to purchase and redeem shares.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state or local taxes that may be applicable to them.
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), a
Fund must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, net investment income, net short-term capital
gain, and net gains from certain foreign currency transactions, if any)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) a Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in securities or those currencies ("Income Requirement"); (2) a Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months -- options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ("Short-Short Limitation"); (3) at the close of each quarter of a
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of that
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) at the close of each quarter of a Fund's
taxable year,
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not more than 25% of the value of its total assets may be invested in the
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by a Fund in December of any year and payable to shareholders of record
on a date in that month will be deemed to have been paid by that Fund and
received by the shareholders on December 31 if the distributions are paid by
that Fund during the following January. Accordingly, those dividends and other
distributions will be taxed to shareholders for the year in which that December
31 falls.
Foreign Securities
Each Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). Under certain circumstances, a Fund will be subject to federal income
tax on a portion of any "excess distribution" received on the stock of a PFIC or
of any gain on disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if that Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
Proposed regulations have been published pursuant to which open-end
RICs, such as the Funds, would be entitled to elect to "mark-to-market" their
stock in certain PFICs. "Marking-tomarket," in this context, means recognizing
as gain for each taxable year the excess, as of the end of that year, of the
fair market value of each such PFIC's stock over the adjusted basis in that
stock (including mark-to-market gain for each prior year for which an election
was in effect).
Gains or losses from the disposition of foreign currencies, and gains
or losses attributable to fluctuations in exchange rates that occur between the
time a Fund accrues dividends or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects the receivables or pays the liabilities, generally will be treated as
ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders.
Options, Futures, Forward Contracts and Foreign Currencies
The use of hedging instruments, such as writing (selling) and
purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses a Fund
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realizes in connection therewith. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by a Fund with
respect to its business of investing in securities and foreign currencies, will
qualify as permissible income under the Income Requirement. However, income from
the disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held for
less than three months. Income from the disposition of foreign currencies, and
options, futures and forward contracts on foreign currencies, that are not
directly related to a Fund's principal business of investing in securities (or
options and futures with respect to securities) also will be subject to the
Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether that Fund satisfies the
Short-Short Limitation. Thus, only the net gain, if any, from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
that Fund to qualify as a RIC.
Certain options and futures in which a Fund may invest will be "section
1256 contracts." Section 1256 contracts held by a Fund at the end of each
taxable year, other than section 1256 contracts that are part of a "mixed
straddle" with respect to which that Fund has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation
of options and futures contracts in which a Fund may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Section
1092 generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
Fund of straddle transactions are not entirely clear.
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Miscellaneous
If a Fund invests in shares of common stock or preferred stock or
otherwise holds dividend-paying securities as a result of exercising a
conversion privilege, a portion of the dividends from its investment company
taxable income (whether paid in cash or reinvested in additional Fund shares)
may be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
Original Issue Discount and "Pay-in-Kind" Securities (for Global Government
only)
The Fund may purchase zero coupon or other debt securities issued with
original issue discount. As a holder of those securities, the Fund must include
in its income the original issue discount that accrues during the taxable year,
even if the Fund receives no corresponding payment on the securities during the
year. Similarly, the Fund must include in its gross income securities it
receives as "interest" on pay-in-kind securities. Because the Fund annually must
distribute substantially all of its investment company taxable income, including
any original issue discount and other non-cash income, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, it may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from the Fund's cash, assets or from the proceeds of sales of
portfolio securities, if necessary. The Fund may realize capital gains or losses
from those dispositions, which would increase or decrease its investment company
taxable income and/or net capital gain (the excess of net long-term capital gain
over net short-term capital loss). In addition, any such gains may be realized
on the disposition of securities held for less than three months. Because of the
Short-Short Limitation, any such gains would reduce the Fund's ability to sell
other securities (and certain options, futures, forward contracts and foreign
currencies) held for less than three months that it might wish to sell in the
ordinary course of its portfolio management.
PERFORMANCE INFORMATION
Total Return Calculations Average annual total return quotes used in a
Fund's advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of
a hypothetical $1,000 payment made
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior
31
<PAGE>
to submission of the Performance Advertisements for publication. Total return,
or "T" in the formula above, is computed by finding the average annual change in
the value of an initial $1,000 investment over the period. In calculating the
ending redeemable value, all dividends and other distributions by a Fund are
assumed to have been reinvested at net asset value on the reinvestment dates
during the period.
For Global Government:
Yield Yields used in the Fund's Performance Advertisements are
calculated by dividing the Fund's net investment income for a 30-day period
("Period"), by the average number of shares entitled to receive dividends during
the Period, and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the maximum offering price per share at the end of
the Period. Yield quotations are calculated according to the following formula:
YIELD = 2 [(a-b + 1)6] - 1
---
cd
where: a = dividends and interest earned during the Period
b = expenses accrued for the Period (net of
reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the Period.
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), the Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest). Once interest earned is calculated in this
fashion for each debt obligation held by the Fund, interest earned during the
Period is then determined by totaling the interest earned on all debt
obligations. For purposes of these calculations, the maturity of an obligation
with one or more call provisions is assumed to be the next on which the
obligation reasonably can be expected to be called or, if none, the maturity
date. The Fund's yield for the thirty-day period ended December 31, 1994 was
8.01%. The Fund's annualized thirty-day yield at June 30, 1995 was 6.78%. The
yields would have been lower if the Fund's adviser had not waived certain fees
and expenses.
With respect to the treatment of discount and premium on
mortgage-backed and other asset-backed obligations that are expected to be
subject to monthly payments of principal and interest ("paydowns"): (1) the Fund
accounts for gain or loss attributable to actual paydowns as an increase or
decrease in interest income during the period and (2) the Fund accrues the
discount and amortizes the premium on the remaining obligation, based on the
cost of the obligation, to the
32
<PAGE>
weighted average maturity date or, if weighted average maturity information is
not available, to the remaining term of the obligation.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Global Government at the Fund's
commencement of operations on April 15, 1993. The table assumes that all
dividends and other distributions are reinvested in the Fund. It includes the
effect of all charges and fees applicable to shares the Fund has paid. (There
are no fees for investing or reinvesting in the Fund, and there are no
redemption fees.) It does not include the effect of any income taxes that an
investor would have to pay on distributions.
<TABLE>
<CAPTION>
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Distributions Income Dividends Value
- ------------ -------------------------------- --------------------------- ----------------------
<S> <C> <C> <C>
1993* $10,311 $365 $10,676
1994 9,578 948 10,526
</TABLE>
*April 15, 1993 (commencement of operations) to December 31 1993.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1994 would
have been $10,984, and the investor would have received a total of $984 in
distributions. Returns would have been lower if Global Government's adviser had
not waived/reimbursed certain Fund expenses during the fiscal years 1993 and
1994.
The table above is based only on Primary Shares. As of the date of this
Statement of Additional Information, Navigator Shares have no performance
history of their own.
For each Fund:
In performance advertisements each Fund may compare its total return
with data published by Lipper Analytical Services, Inc. ("Lipper") for U.S.
government funds and corporate bond (BBB) funds, CDA Investment Technologies,
Inc. ("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), or
Morningstar Mutual Funds ("Morningstar"), or with the performance of U.S.
Treasury securities of various maturities, recognized stock, bond and other
indexes, including (but not limited to) the Salomon Brothers Bond Index,
Shearson Lehman Bond Index, Shearson Lehman Government/Corporate Bond Index, the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Value Line, the
Dow Jones Industrial Average, and changes in the Consumer Price Index as
published by the U.S. Department of Commerce.
A Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels with
funds having similar investment objectives, published by Lipper, CDA,
Wiesenberger or Morningstar. Performance Advertisements also may refer to
discussions of a Fund and comparative mutual fund data and ratings reported in
independent periodicals, including (but not limited to) THE WALL STREET JOURNAL,
MONEY
33
<PAGE>
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRONS, FORTUNE and THE
NEW YORK TIMES.
Global Government invests primarily in fixed-income securities and
Global Equity invests primarily in global equity securities, as described in the
Prospectuses. Each Fund does not generally invest in the equity securities that
make up the S&P 500 or the Dow Jones indices. Comparison with such indices is
intended to show how an investment in either Fund behaved as compared to indices
that are often taken as a measure of performance of the equity market as a
whole. The indices, like each Fund's total return, assume reinvestment of all
dividends and other distributions. They do not take into account the costs or
the tax consequences of investing.
Each Fund may include discussions or illustrations of the effects of
compounding in performance advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested in additional Fund shares, any future income or capital appreciation
of that Fund would increase the value, not only of the original Fund investment,
but also of the additional Fund shares received through reinvestment. As a
result, the value of the Fund investment would increase more quickly than if
dividends or other distributions had been paid in cash.
Each Fund may also compare its performance with the performance of bank
certificates of deposit (CDS) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index. In
comparing a Fund's performance to CD performance, investors should keep in mind
that bank CDS are insured in whole or in part by an agency of the U.S.
Government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary. Fund shares are not insured or guaranteed by
the U.S. Government and returns and net asset value will fluctuate. The
securities held by a Fund generally have longer maturities than most CDS and may
reflect interest rate fluctuations for longer-term securities. An investment in
each Fund involves greater risks than an investment in certificates of deposit.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
Advertisements may also describe techniques each Fund's adviser employs in
selecting among the sectors of the fixed-income market and adjusting average
portfolio maturity. In particular, the advertisements may focus on the
techniques of 'value investing'. With value investing, a Fund's adviser invests
in those securities it believes to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be undervalued
because of many factors, including market decline, poor economic conditions,
tax-loss selling, or actual or anticipated unfavorable developments affecting
the issuer of the security. Global Equity's adviser believes that the securities
of sound, well-managed companies that may be temporarily out of favor due to
earnings declines or other adverse developments are likely to provide a greater
total return than securities with prices that appear to reflect anticipated
favorable developments and that are therefore subject to correction should any
unfavorable developments occur.
In advertising, a Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest
34
<PAGE>
rates, college tuitions, the rate of inflation, Social Security benefits,
mortality statistics and other relevant information. A Fund may use other
recognized sources as they become available.
A Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
A Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
A Fund may also include in advertising biographical information on key
investment and managerial personnel.
A Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount,
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through periods of low prices.
A Fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors address their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisors for private accounts and mutual
funds with assets of more than $26 billion as of June 30, 1995.
In advertising, a Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
A Fund may include in advertising and sales literature descriptive
material relating to both domestic and international economic conditions
including but not limited to discussions regarding the effects of inflation as
well as discussions which compare the growth of various world equity markets. A
Fund may depict the historical performance of the securities in which that Fund
may invest over periods reflecting a variety of market or economic conditions
whether alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size, the number and make-up of its
shareholder base and other descriptive factors concerning that Fund.
35
<PAGE>
A Fund may discuss its investment adviser's philosophy regarding
international investing. Recognizing the differing evolutionary stages of the
distinct emerging market segments, each Fund's adviser, intent on participating
in all of these marketplaces, does not apply a uniform investment process and
approach to its different marketplaces. As a result, an adviser's investment
processes for the U.S., non-U.S. developed countries and emerging markets are
distinct. Well-defined disciplines appropriate to the respective markets are
applied within the company's framework of strong, experienced management, sound
fundamental research and analysis, and superior data and modeling resources.
Batterymarch, adviser to Global Equity, is recognized as a "pioneer" in
international investing and is well-known in the investment community.
Batterymarch has been applying a consistent investment discipline in the
international markets for over 10 years. During this time, Batterymarch has
studied the world's equity markets and developed time-tested disciplines
appropriate to each country's respective market.
VALUATION OF FUND SHARES
As described in the Prospectuses, securities for which market
quotations are readily available are valued at current market value. Securities
are valued at the last sale price for a comparable position on the day the
securities are being valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than one
market, the securities are generally valued on the market considered by each
Fund's adviser as the primary market. Each Fund is open for business and its net
asset value is calculated each day the Exchange is open for business. The
Exchange currently observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined. Foreign currency exchange rates are generally
determined prior to the close of trading on the Exchange. Occasionally, events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of trading on the Exchange.
Such investments will be valued at their fair value, as determined in good faith
by or under the direction of the Board of Directors. Foreign currency exchange
transactions of a Fund occurring on a spot basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market.
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a Fund through IRAs, Keogh Plans,
SEPs and other qualified retirement plans. In general, income earned through the
investment in assets of qualified retirement plans is not taxed to the
beneficiaries of such plans until the income is distributed to them. Investors
who are considering establishing such a plan should consult their attorneys or
tax advisers with respect to individual tax questions. The option of investing
in these plans through regular payroll deductions may be arranged with a Legg
Mason or affiliated investment executive and your employer. Additional
information with respect to these plans is available upon request from any Legg
Mason or affiliated investment executive.
36
<PAGE>
Individual Retirement Account - IRA
Certain Primary Share investors may obtain tax advantages by
establishing IRAs. Specifically, if neither you nor your spouse is an active
participant in a qualified employer or government retirement plan, or if either
you or your spouse is an active participant and your adjusted gross income does
not exceed a certain level, then you may deduct cash contributions made to an
IRA in an amount for each taxable year not exceeding the lesser of 100% of your
earned income or $2,000. In addition, if your spouse is not employed and you
file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $2,250 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If you and your spouse are both
employed and neither of you is an active participant in a qualified employer or
government retirement plan and you establish separate IRAs, you each may
contribute all of your earned income, up to $2,000 each, and thus may together
receive tax deductions of up to $4,000 for contributions to your IRAs. If your
employer's plan qualifies as a SEP, permits voluntary contributions, and meets
certain other requirements, you may make voluntary contributions to that plan
that are treated as deductible IRA contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through IRA
contributions, up to certain limits, because all dividends and capital gain
distributions on your Primary Shares are then not immediately taxable to you or
the IRA; they become taxable only when distributed to you. To avoid penalties,
your interest in an IRA must be distributed, or start to be distributed, to you
not later than the end of the taxable year in which you attain age 70 1/2.
Distributions made before age 59 1/2, in addition to being taxable, generally
are subject to a penalty equal to 10% of the distribution, except in the case of
death or disability, where the distribution is rolled over into another
qualified plan, or certain other situations.
Self-Employed Individual Retirement Plan - Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. Primary Share investors have the right to use a bank of your own
choice to provide these services at your own cost. There are penalties for
distributions from a Keogh Plan prior to age 59 1/2, except in the case of death
or disability.
Simplified Employee Pension Plan - SEP
Legg Mason also makes available to corporate and other employers a
Simplified Employee Pension Plan for investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover from the foregoing retirement
plans (except IRAs and SEPs), unless the recipient transfers the distribution
directly to an "eligible retirement plan" (including IRAs and other qualified
plans) that accepts those distributions. Other distributions generally are
subject to regular wage withholding or to withholding at the rate of 10%
(depending on the type and amount of the
37
<PAGE>
distribution), unless the recipient elects not to have any withholding apply.
Primary Share investors should consult your plan administrator or tax advisor
for further information.
THE CORPORATION'S DIRECTORS AND OFFICERS
The Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers and
directors and their principal occupations during the past five years are set
forth below. An asterisk (*) indicates those officers and/or directors who are
"interested persons" of the Corporation as defined by the 1940 Act. The business
address of each officer and director is 111 South Calvert Street, Baltimore,
Maryland, unless otherwise indicated.
JOHN F. CURLEY, JR.,* [56] Chairman of the Board and Director of each
Fund; Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg Mason,
Inc.; Director of Legg Mason Fund Adviser, Inc. and Western Asset Management
Company; Officer and/or Director of various other affiliates of Legg Mason,
Inc.; President and Director of three Legg Mason funds; Chairman of the Board
and Trustee of one Legg Mason fund; Chairman of the Board, President and Trustee
of one Legg Mason fund; Chairman of the Board and Director of three Legg Mason
funds.
EDWARD A. TABER, III,* [52] President and Director of each Fund; Executive
Vice President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice
Chairman and Director of Legg Mason Fund Adviser, Inc.; Director of three Legg
Mason funds; Trustee of one Legg Mason fund; President and Director of two Legg
Mason funds; and Vice President of Worldwide Value Fund, Inc. Formerly:
Executive Vice President of T. Rowe Price-Fleming International, Inc. (1986-
1992) and Director of the Taxable Fixed Income Division at T. Rowe Price
Associates, Inc. (1973- 1992).
RICHARD G. GILMORE, [68] Director of each Fund; 948 Kennett Way, West
Chester, Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company engaged in manufacture and sale of decorative paper
products, business forms, and specialty metal packaging); Director of PECO
Energy Company (formerly Philadelphia Electric Company); Director of six Legg
Mason funds; Trustee of one Legg Mason fund. Formerly: Senior Vice President and
Chief Financial Officer of Philadelphia Electric Company (now PECO Energy
Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company (bank holding
company) and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH, [70] Director of each Fund; 14201 Laurel Park Drive,
Laurel, Maryland. Real Estate Developer and Investor; President and Director of
Resource Enterprises, Inc. (real estate brokerage); Chairman of Resource Realty
LLC (management of retail and office space); Partner in Greater Laurel Health
Park Ltd. Partnership (real estate investment and development); Director of six
Legg Mason funds; Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN, [52] Director of each Fund; The Baltimore Museum of Art,
Art Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of Art;
Director of six Legg Mason funds; Trustee of two Legg Mason funds.
38
<PAGE>
JILL E. McGOVERN, [51] Director of each Fund; 1500 Wilson Boulevard,
Arlington, Virginia. Chief Executive Officer of the Marrow Foundation; Director
of six Legg Mason funds; Trustee of two Legg Mason funds. Formerly: Executive
Director of the Baltimore International Festival (January 1991 - March 1993);
Senior Assistant to the President of The Johns Hopkins University (1986-1991).
T. A. RODGERS, [61] Director of each Fund; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director and Vice President of Corporate Development of Polk Audio,
Inc.(manufacturer of audio components); Director of six Legg Mason funds;
Trustee of one Legg Mason fund. Formerly: Director of Polk Audio, Inc.
(manufacturer of audio components) through July 1994.
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, [46] Vice-President and Treasurer of each Fund;
Treasurer of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of
eight Legg Mason funds; Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice
President of Legg Mason.
KATHI D. GLENN*, [30] Secretary and Assistant Treasurer of each Fund;
Secretary and Assistant Treasurer of two Legg Mason funds; employee of Legg
Mason.
BLANCHE P. ROCHE*, [46] Assistant Secretary and Assistant Vice President of
each Fund; Assistant Secretary and Assistant Vice President of seven Legg Mason
funds; employee of Legg Mason since 1991. Formerly: Manager of Consumer
Financial Services, Primerica Corporation (1989-1991).
Officers and directors of the Corporation who are "interested persons"
thereof, as defined in the 1940 Act, receive no salary or fees from the
Corporation. Independent directors of the Corporation receive a fee of $400
annually for serving as a director and a fee of $400 for each meeting of the
Board of Directors attended by him or her.
The Nominating Committee of the Board of Directors is responsible for the
selection and nomination of disinterested directors. The Committee is composed
of Messrs. Gilmore, Haugh, Lehman and Rodgers and Dr. McGovern.
At July 31, 1995, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each Fund's outstanding
shares.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1994.
39
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Pension or Retirement Estimated Annual Corporation and Fund
Compensation From Benefits Accrued as Part of Benefits Upon Complex Paid to
Name of Person and Position Corporation (A,B) Corporation's Expenses Retirement Directors (B,C)
<S> <C> <C> <C> <C>
John F. Curley, Jr. -
Chairman of the Board and
Director None N/A N/A None
Edward A. Taber, III -
President and Director None N/A N/A None
Marie K. Karpinski -
Vice President and Treasurer None N/A N/A None
Richard G. Gilmore -
Director $2,000 N/A N/A $21,600
Charles F. Haugh -
Director $2,000 N/A N/A $23,600
Arnold L. Lehman -
Director $2,000 N/A N/A $23,600
Director $2,000 N/A N/A $23,600
T. A. Rodgers -
Director $2,000 N/A N/A $21,600
==================================== ==================== ============================ =================== ===================
</TABLE>
A Represents fees paid to each director during the fiscal year ended December
31, 1994.
B This information applies only to Global Government since Global Equity did not
commence operations until February 17, 1995.
C Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1994.
40
<PAGE>
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, is
located at 111 South Calvert Street, Baltimore, Maryland 21202. LMFA is a wholly
owned subsidiary of Legg Mason, Inc., which also is the parent of Legg Mason.
LMFA serves as Global Government's investment adviser and manager under an
Investment Advisory and Management Agreement ("Advisory Agreement") dated April
5, 1993. Continuation of the Agreement was most recently approved by the Board
of Directors on October 21, 1994. A revised Advisory Agreement between Global
Government and LMFA was approved by the vote of a majority of the Fund's
outstanding shares on April 21, 1995. Pursuant to the revised Advisory
Agreement, and subject to overall direction by the Board of Directors, LMFA
manages the investment and other affairs of Global Government. LMFA is
responsible for managing the Fund consistent with the Fund's investment
objectives and policies described in the Prospectus and this Statement of
Additional Information. LMFA also is obligated to (a) furnish the Fund with
office space and executive and other personnel necessary for the operations of
the Fund; (b) supervise all aspects of the Fund's operations; (c) bear the
expense of certain informational and purchase and redemption services to the
Fund's shareholders; (d) arrange, but not pay for, the periodic updating of
prospectuses, proxy material, tax returns and reports to shareholders and state
and federal regulatory agencies; and (e) report regularly to the Corporation's
officers and directors. LMFA and its affiliates pay all the compensation of
directors and officers of the Corporation who are employees of LMFA.
The Fund pays all its other expenses which are not expressly assumed by
LMFA. These expenses include, among others, interest expense, taxes, brokerage
fees, commissions, expenses of preparing and printing prospectuses, statements
of additional information, proxy statements and reports and of distributing them
to existing shareholders, custodian charges, transfer agency fees,
organizational expenses, distribution fees to the Fund's distributor,
compensation of the independent directors, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Fund for sale
under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations.
As explained in the Prospectus, LMFA receives for its services an
advisory fee, calculated daily and payable monthly, at an annual rate equal to
0.75% of the Fund's average daily net assets. LMFA voluntarily agreed to waive
its fees and reimburse the Fund if and to the extent its expenses (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceeded during any month
an annual rate of the Fund's average daily net assets in accordance with the
following schedule: 0.20% annually until September 30, 1993; 0.35% annually
until December 31, 1993; 0.50% annually until January 31, 1994; 0.70% annually
until February 28, 1994; 0.90% annually until March 31, 1994; 1.10% annually
until April 30, 1994; 1.30% annually until May 31, 1994; 1.50% annually until
June 30, 1994, 1.70% annually until July 31, 1994; and 1.90% annually until
December 31, 1995. For the year ended December 31, 1994 and the period April 15,
1993 (commencement of operations) to December 31, 1993, LMFA waived advisory
fees of $765,018 and $647,723, respectively. For the year ended December 31,
1994 and the period April 15, 1993 (commencement of operations) to December 31,
1993, the Fund paid advisory fees of $428,854 and $0, respectively.
41
<PAGE>
Under the Advisory Agreement, LMFA will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Advisory Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser, on not less than 60 days' notice to the other
party to the Agreement and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
Under the Advisory Agreement, the Fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated or until the right
is withdrawn in writing by the Adviser.
LMFA also serves as the manager for Global Equity under a Management
Agreement ("Management Agreement"), which was approved by the Corporation's
Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation, LMFA or
Batterymarch, on October 21, 1994. The Management Agreement provides that,
subject to overall direction by the Board of Directors, LMFA will manage the
investment and other affairs of Global Equity. LMFA is responsible for managing
Global Equity's securities and for making purchases and sales of securities
consistent with the investment objectives and policies described in the
Prospectus and this Statement of Additional Information. LMFA is obligated to
furnish the Fund with office space and certain administrative services as well
as executive and other personnel necessary for the operation of the Fund. LMFA
and its affiliates also are responsible for the compensation of directors and
officers of the Corporation who are employees of LMFA and/or its affiliates.
LMFA has delegated the portfolio management functions for the Fund to its
adviser, Batterymarch Financial Management, Inc.
As explained in the Fund's Prospectus, LMFA receives for its services a
management fee, calculated daily and payable monthly, at an annual rate equal to
0.75% of Global Equity's average daily net assets. LMFA and Batterymarch have
voluntarily agreed to waive their fees if and to the extent necessary to limit
the Fund's total operating expenses attributable to Primary Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) to 2.25% of its average
daily net assets. This agreement will expire on December 31, 1995, unless
extended by LMFA and Batterymarch.
Under the Management Agreement, LMFA will not be liable for any error
of judgment or mistake of law or for any loss suffered by Global Equity in
connection with the performance of the Management Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or losses resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
The Management Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority
42
<PAGE>
of the outstanding voting securities or by LMFA, on not less than 60 days'
written notice to the other party, and may be terminated immediately upon the
mutual written consent of LMFA and the Fund.
The Fund pays all its other expenses which are not expressly assumed by
LMFA. These expenses include, among others, interest expense, taxes, brokerage
fees, commissions, expenses of preparing and printing prospectuses, statements
of additional information, proxy statements and reports and of distributing them
to existing shareholders, custodian charges, transfer agency fees,
organizational expenses, distribution fees to the Fund's distributor,
compensation of the independent directors, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the Fund for sale
under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations.
Under the Management Agreement, the Fund has the non-exclusive right to
use the name "Legg Mason" until that Agreement is terminated or until the right
is withdrawn in writing by LMFA.
Batterymarch
Batterymarch Financial Management, Inc. is a wholly owned subsidiary of
Legg Mason, Inc., which also is the parent of Legg Mason. Batterymarch serves as
Global Equity's investment adviser under an Investment Advisory Agreement
("Advisory Agreement"). Under the Advisory Agreement, Batterymarch is
responsible, subject to the general supervision of LMFA and the Corporation's
Board of Directors, for the actual management of Global Equity's assets,
including the responsibility for making decisions and placing orders to buy,
sell or hold a particular security. For Batterymarch's services, LMFA (not the
Fund) pays Batterymarch a fee, computed daily and payable monthly, at an annual
rate equal to 0.50% of the average daily net assets of the Fund.
Under the Advisory Agreement, Batterymarch will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the Fund's outstanding voting
securities, or by Batterymarch, on not less than 60 days' notice to the other
party to the Agreement and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
SUB-ADVISORY AGREEMENT
Western Asset Management Company, 117 East Colorado Boulevard,
Pasadena, CA 91105, an affiliate of Legg Mason, serves as an investment
sub-adviser ("Western") to Global Government under a Sub-Advisory Agreement,
dated May 1, 1995, between Western and LMFA ("Sub-Advisory Agreement"). The
Sub-Advisory Agreement was approved by the Board of Directors, including a
majority of the directors who are not "interested persons" of the Corporation,
Western or LMFA, on February 14, 1995, and was approved by the shareholders of
Global Government on April 21, 1995.
Western is responsible for providing LMFA with research and analysis on
domestic and foreign fixed-income securities, and consulting with LMFA on
portfolio strategy. Western may
43
<PAGE>
execute portfolio transactions when requested to do so by LMFA. For Western's
services to Global Government, LMFA (not the Fund) pays Western a fee, computed
daily and payable monthly, at an annual rate equal to 531/3% of the fee received
by LMFA or 0.40% of the Fund's average daily net assets.
Under the Sub-Advisory Agreement, Western will not be liable for any
error of judgment or mistake of law or for any loss suffered by LMFA or by the
Fund in connection with the performance of the Sub-Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Sub-Advisory Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the Fund's outstanding voting securities, by
LMFA or by Western, on not less than 60 days' notice to the Fund and/or the
other party(ies). The Sub-Advisory Agreement terminates immediately upon any
termination of the Advisory Agreement or upon the mutual written consent of
LMFA, Western and the Fund.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, the Corporation, LMFA, Batterymarch and Western have
adopted policies that restrict securities trading in the personal accounts of
portfolio managers and others who normally come into advance possession of
information on portfolio transactions. These policies comply, in all material
respects, with the recommendations of the Investment Company Institute.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of the Funds' shares pursuant to
separate Underwriting Agreements with the Corporation. Each Underwriting
Agreement obligates Legg Mason to promote the sale of Fund shares and to pay
certain expenses in connection with its distribution efforts, including the
printing and distribution of prospectuses and periodic reports used in
connection with the offering to prospective investors (after the prospectuses
and reports have been prepared, set in type and mailed to existing shareholders
at each Fund's expense) and for supplementary sales literature and advertising
costs.
Each Fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits a Fund to pay Legg Mason fees for
its services related to sales and distribution of Fund shares and the provision
of ongoing services to shareholders. Distribution activities for which such
payments may be made include, but are not limited to, compensation to persons
who engage in or support distribution and redemption of shares, printing of
prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead, travel
and telephone expenses.
The Plan was adopted, as required by Rule 12b-1 under the 1940 Act, by
a vote of the Board of Directors on February 5, 1993 (for Global Government) and
October 21, 1994 (for Global Equity), including a majority of the directors who
are not "interested persons" of each Fund as that term is defined in the 1940
Act and who have no direct or indirect financial interest in the operation of
the Plan or the Underwriting Agreement ("12b-1 Directors"). Amendment of the
Plan to conform to new rules of the National Association of Securities Dealers,
Inc., was approved by the Board on May 14, 1993. Continuation of the Plan was
most recently approved by the Board of Directors on October 21, 1994, including
a majority of the 12b-1 Directors. In approving the continuance of the
44
<PAGE>
Plan, in accordance with the requirements of Rule 12b-1, the directors
determined that there was a reasonable likelihood that the Plan would benefit
each Fund and its shareholders.
As compensation for its services and expenses, Legg Mason receives from
each Fund an annual distribution fee equivalent to 0.50% (for Global Government)
and 0.75% (for Global Equity) of its average daily net assets attributable to
Primary Shares and a service fee each equivalent to 0.25% of its average daily
net assets attributable to Primary Shares in accordance with the Plan. The
distribution and service fees are calculated daily and payable monthly. Legg
Mason voluntarily agreed to waive its fees and reimburse each Fund if and to the
extent its expenses attributable to Primary Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceeded during any month an
annual rate of each Fund's average daily net assets in accordance with the
following schedule:
Global Government: 0.20% until September 30, 1993; 0.35% until December 31,
1993; 0.50% until January 31, 1994; 0.70% until February 28, 1994; 0.90% until
March 31, 1994; 1.10% until April 30, 1994; 1.30% until May 31, 1994; 1.50%
until June 30, 1994, 1.70% until July 31, 1994; and 1.90% until December 31,
1995.
Global Equity: 2.25% until December 31, 1995.
For the year ended December 31, 1994 and the period April 15, 1993
(commencement of operations) to December 31, 1993, Legg Mason waived
distribution and service fees of $0 and $647,723, respectively, for Global
Government. For the year ended December 31, 1994 and the period April 15, 1993
(commencement of operations) to December 31, 1993, Global Government paid
distribution and service fees of $1,193,872 and $0, respectively.
The Plan continues in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated with respect to each
Fund by a vote of a majority of 12b-1 Directors or by vote of a majority of the
outstanding voting securities of that Fund. Any change in the Plan that would
materially increase the distribution costs to a Fund requires shareholder
approval; otherwise, the Plan may be amended by the directors, including a
majority of the 12b-1 Directors.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by a Fund, pursuant to the Plan or any
related agreement shall provide to that Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which the expenditures were made. Rule 12b-1 also
provides that a Fund may rely on that Rule only if, while the Plan is in effect,
the nomination and selection of that Fund's independent directors is committed
to the discretion of such independent directors.
For the year ended December 31, 1994, Legg Mason incurred the following
expenses with respect to Global Government:
Compensation to sales personnel $ 854,000
Advertising 62,000
Printing and mailing of prospectuses to
prospective shareholders 48,000
Other 342,000
Total expenses $ 1,306,000
==============
45
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the year ended December 31, 1994, Global Government's
portfolio turnover rate was 127.0%. For the period April 15, 1993 (commencement
of operations) to December 31, 1993, Global Government's annualized portfolio
turnover rate was 127.8%.
Under each Advisory Agreement, each Fund's adviser is responsible for
the execution of portfolio transactions. Corporate and government debt
securities are generally traded on the OTC market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. Prices paid to a dealer in debt securities will generally include a
"spread," which is the difference between the price at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit. Some portfolio transactions may be executed through
brokers acting as agent. In selecting brokers or dealers, each adviser must seek
the most favorable price (including the applicable dealer spread) and execution
for such transactions, subject to the possible payment as described below of
higher brokerage commissions to brokers who provide research and analysis. A
Fund may not always pay the lowest commission or spread available. Rather, in
placing orders on behalf of a Fund, each adviser also takes into account such
factors as size of the order, difficulty of execution, efficiency of the
executing broker's facilities (including the services described below) and any
risk assumed by the executing broker.
Consistent with the policy of most favorable price and execution, each
adviser may give consideration to research and statistical services furnished by
brokers or dealers to that adviser for its use, may place orders with
broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may pay to these broker-dealers a higher
brokerage commission than may be charged by other broker-dealers. Such research
and analysis may be useful to each adviser in connection with services to
clients other than the Funds. Each adviser's fee is not reduced by reason of its
receiving such brokerage and research services. For the year ended December 31,
1994 and the period April 15, 1993 (commencement of operations) to December 31,
1993, Global Government paid no brokerage commissions.
Although Global Government does not expect to purchase securities on a
commission basis, each Fund may use Legg Mason to effect agency transactions in
listed securities at commission rates and under circumstances consistent with
the policy of best execution. Commissions paid to Legg Mason will not exceed
"usual and customary brokerage commissions." Rule 17e-1 under the 1940 Act
defines "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In the OTC market, a
Fund generally will deal with responsible primary market makers unless a more
favorable execution can otherwise be obtained.
No Fund may buy securities from, or sell securities to, Legg Mason or
its affiliated persons as principal. However, the Corporation's Board of
Directors has adopted procedures in conformity with Rule 10f-3 under the 1940
Act whereby a Fund may purchase securities that are offered in certain
underwritings in which Legg Mason or any of its affiliated persons is a
participant.
46
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from retaining compensation for executing transactions on an exchange for
its affiliates, such as the Funds, unless the affiliate expressly consents by
written contract. Each Advisory Agreement expressly provides such consent in
accordance with Rule 11a2-2(T).
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by LMFA, Batterymarch or Western. However, the
same security may be held in the portfolios of more than one fund or account.
When two or more accounts simultaneously engage in the purchase or sale of the
same security, the prices and amounts will be equitably allocated to each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large-volume transactions may
produce better executions and prices.
THE CORPORATION'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston
Massachusetts, serves as custodian of each Fund's assets. Boston Financial Data
Services, P.O. Box 953, Boston, Massachusetts 02103 serves as transfer and
dividend-disbursing agent and administrator of various shareholder services.
Legg Mason also assists BFDS with certain of its duties as transfer agent, for
which BFDS pays Legg Mason a fee. Each Fund reserves the right, upon 60 days'
written notice, to make other charges to investors to cover administrative
costs.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 M Street, N.W., Washington, D.C.
20036, serves as counsel to the Corporation.
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, Maryland
21202, have been selected by the directors to serve as the Corporation's
independent accountants.
FINANCIAL STATEMENTS
The Portfolio of Investments as of December 31, 1994; the Statement of
Assets and Liabilities as of December 31, 1994; the Statement of Operations for
the period ended December 31, 1994; the Statement of Changes in Net Assets for
the period April 15, 1993 (commencement of operations) to December 31, 1993 and
the year ended December 31, 1994; the Financial Highlights for the periods
presented; the Notes to Financial Statements and the Report of the Independent
Accounts, all of which are included in the Fund's annual report for the year
ended December 31, 1994, are hereby incorporated by reference in this Statement
of Additional Information. The Statement of Assets and Liabilities of Global
Equity Trust as of November 16, 1994, and the Report of the Independent
Accountants are included in this Statement of Additional Information.
The unaudited financial statements for the six months ended June 30,
1995 for each Fund are hereby incorporated by reference in this Statement of
Additional Information.
47
<PAGE>
LEGG MASON GLOBAL TRUST, INC.
INTERNATIONAL EQUITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 16, 1994
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash $ 1,000
Deferred organization and initial offering costs 50,000
------
Total assets 51,000
Liabilities
Accrued organization expenses and initial
offering costs 50,000
Total liabilities 50,000
Net Assets - Offering and redemption price of $10.00 per share with 100 shares
outstanding (1,000,000,000
shares par value $.001 per share authorized) $ 1,000
= =====
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
A. Legg Mason Global Trust, Inc. ("Corporation") was organized on December
31, 1992. The International Equity Trust ("Fund") constitutes one of the two
series established under the Corporation at November 16, 1994. The Fund has had
no operations other than those matters related to its organization and
registration as an investment company under the Investment Company Act of 1940
and the sale of its shares. Legg Mason Fund Adviser, Inc. ("Fund Adviser"), a
wholly owned subsidiary of Legg Mason, Inc. (a financial services holding
company), has provided the initial capital for the Fund by purchasing 100 shares
of the Fund at $10.00 per share. Such shares were acquired for investment and
can be disposed of only by redemption. Legg Mason Wood Walker, Incorporated, a
wholly owned subsidiary of Legg Mason, Inc. and a member of the New York Stock
Exchange, acts as distributor of the Fund's shares.
B. Deferred organization and initial offering costs represent expenses
incurred in connection with the Fund's organization and will be amortized on a
straight line basis over five years commencing on the effective date of the
Fund's initial sale of shares to the public. The Fund has agreed to reimburse
Fund Adviser for organization expenses advanced by Fund Adviser. The advances
are repayable on demand but must be fully repaid within five years from the
commencement of operations. The proceeds realized by Fund Adviser upon
redemption during the amortization period of any of the shares constituting
initial capital will be reduced by a proportionate amount of unamortized
deferred organization expenses which the number of initial shares redeemed bears
to the number of initial shares then outstanding.
48
<PAGE>
(Coopers & Lybrand logo)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Legg Mason Global Trust, Inc.:
We have audited the accompanying statement of assets and liabilities of
the Legg Mason International Equity Trust (the "Fund"), one of the portfolios of
the Legg Mason Global Trust, Inc., as of November 16, 1994. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Legg
Mason International Equity Trust as of November 16, 1994, in conformity with
generally accepted accounting principles.
(Signature of Coopers & Lybrand L.L.P.)
Baltimore, Maryland
November 16, 1994
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") corporate bond
ratings:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. 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-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
Caa- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
A - 1
<PAGE>
Description of Standard & Poor's Ratings Group ("Standard & Poor's")
corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to an
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
D-Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Description of Moody's preferred stock ratings:
aaa-An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stock.
aa-An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a-An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba-An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
Description of Moody's Short-Term Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection;
A - 2
<PAGE>
broad margins in earnings coverage of fixed financial charges and high internal
cash generation; well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (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 alternate liquidity is
maintained.
Description of Standard & Poor's Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for the issues
designated "A-1".
A - 3
<PAGE>
Appendix B
The Funds may use the following instruments for the purposes described on
pages 10-18.
Options on Debt Securities and Foreign Currencies (Global Government)
A call option is a short-term contract pursuant to which the purchaser of
the option, in return for a premium, has the right to buy the security or
currency underlying the option at a specified price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security or currency at the exercise price.
Option on a Bond Index (Global Government)
An option on a bond index is similar to an option on a security or
foreign currency, except that settlement of a bond index option is effected with
a cash payment based on the value of the bond index and does not involve the
delivery of the securities included in the index. Thus, upon settlement of a
bond index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price of the option and the
closing price of the bond index.
Interest Rate, Foreign Currency and Bond Index Futures Contracts (Global
Government)
Interest rate and foreign currency futures contracts are bilateral
agreements pursuant to which one party agrees to make, and the other party
agrees to accept, delivery of a specified type of debt security or currency at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement date
without the making or taking of delivery. A bond index futures contract is
similar to any other futures contract except that settlement of a bond index
futures contract is effected with a cash payment based on the value of the bond
index and does not involve the delivery of the securities included in the index.
Options on Futures Contracts
Options on futures contracts are similar to options on securities or
currencies, except that an option on a futures contract gives the purchaser the
right, in return for the premium, to assume a position in a futures contract (a
long position if the option is a call, and a short position if the option is a
put), rather than to purchase or sell a security or currency, at a specified
price at any time during the option term. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by delivery of the accumulated balance that represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the case of
a call, and a long position in the case of a put. An option on a bond index
futures contract is similar to any other option on a futures contract except
that the purchaser has the right, in return for the premium, to assume a
position in a bond index futures contract at a specified price at any time
during the option term.
Forward Currency Contracts
A forward currency contract involves an obligation to purchase or sell a
specific currency at a specified future date, which may be any fixed number of
days from the contract date agreed upon by the parties, at a price set at the
time the contract is entered into.
B - 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Additional Information About Investment Limitations and
Policies 2
Additional Purchase and Redemption Information 26
Additional Tax Information 28
Performance Information 31
Valuation of Fund Shares 36
Tax-Deferred Retirement Plans 36
The Corporation's Directors and Officers 38
The Funds' Investment Adviser/Manager 41
Sub-Advisory Agreement 43
The Funds' Distributor 44
Portfolio Transactions and Brokerage 46
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 47
The Corporation's Legal Counsel 47
The Corporation's Independent Accountants 47
Financial Statements 47
Appendix A A-1
Appendix B B-1
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No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any Fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by any
Fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
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