THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
GLOBAL
FUNDS
------
Putting Your Future First
Global Funds
Navigator Class of Global
Government Trust
Navigator Class of
International Equity Trust
Navigator Class of
Emerging Markets Trust
Prospectus
May 1, 1997
This wrapper is not part of the prospectus.
Addresses
Distributor:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000 800 o 822 o 5544
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.,
Washington, DC 20036-1800
Independent Accountants:
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, MD 21202
No person has been authorized to give any information or to make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by the Prospectus 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 Prospectus does not
constitute an offering by any Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
[LEGG MASON FUNDS LOGO]
<PAGE>
NAVIGATOR GLOBAL FUNDS
PROSPECTUS
MAY 1, 1997
LEGG MASON GLOBAL TRUST, INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
Shares of Navigator Global Government Trust, Navigator International Equity
Trust and Navigator Emerging Markets Trust (collectively referred to as
"Navigator Shares") represent separate classes ( "Navigator Classes") of
interest in the Legg Mason Global Government Trust ("Global Government"), Legg
Mason International Equity Trust ("International Equity") and Legg Mason
Emerging Markets Trust ("Emerging Markets"), respectively. Global Government,
International Equity and Emerging Markets (each separately referred to as a
"Fund" and collectively referred to as the "Funds") are separate, professionally
managed portfolios of Legg Mason Global Trust, Inc. ("Corporation"), an open-end
management investment company. Global Government is a bond fund; International
Equity and Emerging Markets are equity funds.
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 Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. It should be retained for
future reference. A Statement of Additional Information about the Funds dated
May 1, 1997 has been filed with the Securities and Exchange Commission ("SEC")
and, as amended or supplemented from time to time, is incorporated herein by
reference. The Statement of Additional Information is available without charge
upon request from the Funds' distributor, Legg Mason Wood Walker, Incorporated
("Legg Mason") (address and telephone numbers listed on the next page).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INTERNATIONAL EQUITY AND EMERGING MARKETS MAY INVEST UP TO 35% AND 100%,
RESPECTIVELY, OF THEIR TOTAL ASSETS 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"). BECAUSE OF THE RISKS ASSOCIATED WITH COMMON
STOCK INVESTMENTS, BOTH INTERNATIONAL EQUITY AND EMERGING MARKETS ARE INTENDED
TO BE LONG-TERM INVESTMENT VEHICLES AND ARE NOT DESIGNED TO PROVIDE INVESTORS
WITH A MEANS OF SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS. INVESTORS IN
THESE TWO FUNDS SHOULD BE ABLE TO TOLERATE SUDDEN, SOMETIMES SUBSTANTIAL
FLUCTUATIONS IN THE VALUE OF THEIR INVESTMENTS.
GLOBAL GOVERNMENT is a non-diversified, professionally managed portfolio
seeking capital appreciation and current income in order to achieve an
attractive total return consistent with prudent investment risk. In attempting
to achieve the Fund's objective, the Fund's investment adviser, Western Asset
Management Company ("Western Asset"), normally invests at least 75% of the
Fund's total assets in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities or political
subdivisions. At least 75% of its total assets normally will be invested in
investment grade debt securities of foreign or domestic corporations,
governments or other issuers, certain money market instruments, and repurchase
agreements collateralized by such securities. The Fund may invest up to 25% of
its total assets in debt securities rated below investment grade.
INTERNATIONAL EQUITY is a diversified, professionally managed portfolio
seeking maximum long-term total return. IN ATTEMPTING TO ACHIEVE THE FUND'S
OBJECTIVE, THE FUND'S INVESTMENT ADVISER, BATTERYMARCH FINANCIAL MANAGEMENT,
INC. ("BATTERYMARCH"), NORMALLY INVESTS THE FUND'S ASSETS IN COMMON STOCKS OF
COMPANIES LOCATED OUTSIDE THE UNITED STATES. THE FUND MAY INVEST UP TO 35% OF
ITS TOTAL ASSETS IN EMERGING MARKET SECURITIES.
<PAGE>
EMERGING MARKETS is a diversified, professionally managed portfolio seeking
long-term capital appreciation. In attempting to achieve the Fund's objective,
Batterymarch, as the Fund's investment adviser, normally invests at least 65% of
the Fund's total assets in equity securities of emerging market companies.
Assets not invested in emerging market equity securities may be invested in any
combination of debt securities of the U.S. Government, equity securities of
issuers in developed countries, cash and money market instruments.
The adviser considers emerging markets to include most of the countries of
Asia, Africa, Latin America, Eastern Europe and the Middle East, as well as
certain countries in Western or Southern Europe. Most emerging market countries
or regions have relatively low gross national products per capita compared to
the world's major economies, and have the potential for rapid but unstable
economic growth. The risks of foreign investing are heightened in emerging
markets.
INVESTORS SHOULD BE COGNIZANT OF THE UNIQUE RISKS OF INTERNATIONAL
INVESTING, INCLUDING EXPOSURE TO CURRENCY FLUCTUATIONS. BECAUSE OF THESE RISKS,
AN INVESTMENT IN ANY OF THESE FUNDS SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM. BECAUSE OF THE SPECIAL RISKS ASSOCIATED WITH EMERGING
MARKETS, AN INVESTMENT IN EITHER OF THE EQUITY FUNDS SHOULD BE CONSIDERED
SPECULATIVE.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies 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.
Navigator Shares may not be purchased by individuals directly, but Institutional
Clients may purchase shares for Customer Accounts maintained for individuals.
No initial sales charge is imposed by the Funds on purchases, and no
redemption charge is imposed by Global Government and International Equity on
sales of Navigator Shares. For Emerging Markets, a 2% redemption fee is charged
on the proceeds of Navigator Shares redeemed or exchanged within one year of
purchase. Institutional Clients may charge their Customer Accounts for services
provided in connection with the purchase or redemption of shares. See "How to
Purchase and Redeem Shares." Each Fund pays management fees to Legg Mason Fund
Adviser, Inc. ("LMFA"), but Navigator Classes pay no distribution fees.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 5
Investment Objectives and Policies 6
How to Purchase and Redeem Shares 19
How Shareholder Accounts are Maintained 21
How Net Asset Value Is Determined 21
Dividends and Other Distributions 21
Taxes 22
Shareholder Services 23
The Funds' Management and Investment Advisers 23
The Funds' Distributor 25
The Funds' Custodian and Transfer Agent 25
Description of the Corporation and its Shares 25
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 o 539 o 0000
800 o 822 o 5544
2
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Navigator
Shares of a Fund will bear directly or indirectly. Other expenses set
forth in the table are based on estimates and fees are adjusted for
current expense limits and fee waiver levels for the initial period of
operations of the Navigator Classes.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND
Maximum sales charge on purchases or
reinvested dividends None
Redemption and exchange fees:
For Global Government and International
Equity None
For Emerging Markets 2.00%*
----------
* Because of the costs involved in trading emerging market securities,
Emerging Markets assesses a 2% redemption fee on the proceeds of shares
redeemed or exchanged within one year of purchase. The fee is paid
directly to the Fund, and not to LMFA or Legg Mason.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES(A)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
INTER-
GLOBAL NATIONAL EMERGING
GOVERNMENT EQUITY MARKETS
--------------------------------------
Management fees
(after fee waivers) 0.75% 0.68% 0.00%
12b-1 fees None None None
Other expenses 0.36% 0.57% 1.50(B)
--------------------------------------
Total operating
expenses (after fee
waivers) 1.11% 1.25% 1.50%
======================================
(A) Pursuant to voluntary expense limitations, LMFA and each Fund's
adviser have agreed to waive the management fees to the extent
necessary to limit total operating expenses attributable to the
Navigator Shares of each Fund (exclusive of taxes, interest, brokerage
and extraordinary expenses) as follows: For Global Government 1.15% of
average daily net assets indefinitely; for International Equity, 1.25%
of average daily net assets until May 1, 1998; and for Emerging
Markets, 1.50% of average daily net assets until May 1, 1998. In the
absence of such waivers, the expected management fee, other expenses,
and total operating expenses of each Fund would be as follows. For
International Equity, 0.75%, 0.57% and 1.32% of average net assets;
and for Emerging Markets, 1.00%, 1.50% and 2.50% of average net
assets. No fee waivers would be necessary for Global Government.
(B) Other expenses are based on annualized estimated amounts for the
current fiscal year.
For further information concerning Fund expenses, see "The Funds'
Management and Investment Advisers," page 23.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares over various time periods assuming
(1) a 5% annual rate of return and (2) full redemption at the end of each
time period. As noted in the table above, Global Government and
International Equity charge no redemption fees of any kind.
1 3 5 10
YEAR YEARS YEARS YEARS
---------------------------------------------------------
Global Government $11 $35 $61 $135
International Equity $13 $40 $69 $151
Emerging Markets $36 $47 N/A N/A
Emerging Markets
(Assuming no redemption) $15 $47 N/A N/A
This example assumes that the percentage amounts listed under "Annual
Fund Operating Expenses" remain the same over the time periods shown and
that all dividends and other distributions are reinvested. The above
tables and the assumption in the example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE
ASSUMED 5% ANNUAL RETURN IS NOT A PREDICTION OF AND DOES NOT REPRESENT THE
PROJECTED OR ACTUAL PERFORMANCE OF NAVIGATOR SHARES OF THE FUNDS. THE
ABOVE TABLES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributed to Navigator Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, whether LMFA and/or a Fund's adviser
waive their fees, and the extent to which Navigator Shares incur variable
expenses, such as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Each Fund offers two classes of shares, Primary Shares and Navigator
Shares. The information shown below is for Primary Shares and reflects
12b-1 fees paid by that class and not by Navigator Shares.
The financial information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. Global Government's,
International Equity's and Emerging Markets' financial statements for the
year ended December 31, 1996 and the report of Coopers & Lybrand L.L.P.
thereon are included in the Corporation's Annual Report to Shareholders and
are incorporated by reference into the Statement of Additional Information.
The annual report is available to shareholders without charge by calling a
financial advisor at Fairfield, Legg Mason or Legg Mason's Funds Marketing
Department at 800-822-5544.
<TABLE>
<CAPTION>
INVESTMENT OPERATIONS DISTRIBUTIONS FROM:
------------------------------------------ --------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVEST- IN EXCESS
NET ASSET NET MENTS, OPTIONS TOTAL NET OF NET
VALUE, INVESTMENT AND FUTURES AND FROM NET REALIZED REALIZED
BEGINNING INCOME FOREIGN CURRENCY INVESTMENT INVESTMENT GAIN ON GAIN ON
OF PERIOD (LOSS) TRANSACTIONS OPERATIONS INCOME INVESTMENTS INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ 10.33 $ 0.59 $ 0.21 $ 0.80 $(0.62) $ (0.10) $ --
1995 9.54 0.63(A) 1.32 1.95 (1.16) -- --
1994 10.27 0.57(A) (0.71) (0.14) (0.59) -- --
April 15,(B)-
Dec. 31, 1993 10.00 0.36(A) 0.31 0.67 (0.36) (0.04) --
INTERNATIONAL EQUITY
TRUST
Year Ended Dec. 31,
1996(E) $ 10.70 $ 0.02(F) $ 1.74 $ 1.76 $(0.05) $ (0.32) $ --
Feb. 17,(B)-
Dec. 31, 1995 10.00 0.04(F) 0.77 0.81 (0.04) -- (0.07)
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ 10.00 $(0.03)(G) $ 0.57 $ 0.54 $(0.03) $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------
NET
NET ASSET INVESTMENT NET ASSETS,
VALUE, EXPENSES INCOME (LOSS) PORTFOLIO END OF
TOTAL END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD
DISTRIBUTIONS PERIOD RETURN NET ASSETS NET ASSETS RATE (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL GOVERNMENT TRUST
Years Ended Dec. 31,
1996 $ (0.72) $ 10.41 8.22% 1.86% 5.80% 172% $161,549
1995 (1.16) 10.33 20.80% 1.81%(A) 5.72%(A) 169% 153,954
1994 (0.59) 9.54 (1.40)% 1.34%(A) 5.71%(A) 127% 145,415
April 15,(B)-
Dec. 31, 1993 (0.40) 10.27 6.76%(C) 0.27%(A,D) 5.41%(A,D) 128%(D) 161,072
INTERNATIONAL EQUITY
TRUST
Year Ended Dec. 31,
1996(E) $ (0.37) $ 12.09 16.49% 2.25%(F) 0.21%(F) 83% $167,926
Feb. 17,(B)-
Dec. 31, 1995 (0.11) 10.70 8.11%(C) 2.25%(D,F) 0.52%(D,F) 58%(D) 65,947
EMERGING MARKETS TRUST
May 28,(B)-
Dec. 31, 1996(E) $ (0.03) $ 10.51 5.40%(C) 2.50%(D,G) (.68)%(D,G) 46%(D) $ 21,206
</TABLE>
----------
(A) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES
IN EXCESS OF VOLUNTARY EXPENSE LIMITATIONS OF 0.2% UNTIL SEPTEMBER 30,
1993; 0.35% UNTIL DECEMBER 31, 1993; 0.5% UNTIL JANUARY 31, 1994; 0.7%
UNTIL FEBRUARY 28, 1994; 0.9% UNTIL MARCH 31, 1994; 1.1% UNTIL APRIL
30, 1994; 1.3% UNTIL MAY 31, 1994; 1.5% UNTIL JUNE 30, 1994; 1.7%
UNTIL JULY 31, 1994; AND 1.9% INDEFINITELY.
(B) COMMENCEMENT OF OPERATIONS.
(C) NOT ANNUALIZED
(D) ANNUALIZED
(E) PURSUANT TO SEC REGULATIONS ADOPTED FOR FISCAL YEARS BEGINNING AFTER
SEPTEMBER 1, 1995, THE AVERAGE COMMISSION RATE PAID ON SECURITIES
PURCHASED AND SOLD DURING THE YEAR ENDED DECEMBER 31, 1996 FOR
INTERNATIONAL EQUITY TRUST AND EMERGING MARKETS TRUST WERE $.0083 AND
$.0061, RESPECTIVELY.
(F) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO A VOLUNTARY
EXPENSE LIMITATION OF 2.25%.
(G) NET OF FEES WAIVED AND/OR EXPENSES REIMBURSED PURSUANT TO VOLUNTARY
EXPENSES LIMITATION OF 2.50%.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may quote the TOTAL RETURN of each class of
shares in advertisements or in reports or other communications to shareholders.
A mutual fund's total return is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. CUMULATIVE TOTAL
RETURN shows the fund's performance over a specific period of time. AVERAGE
ANNUAL TOTAL RETURN is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Performance figures reflect past performance
only and are not intended to indicate future performance. Average annual returns
tend to smooth out variations in the fund's return, so they differ from actual
year-by-year results.
Prior to May 1, 1996, International Equity was named Legg Mason Global
Equity Trust ("Global Equity"). Global Equity invested primarily in common
stocks of companies located anywhere in the world, including the United States.
Since May 1, 1996, with this name change, International Equity invests in common
stocks located outside the United States.
Total returns as of December 31, 1996 were as follows:
CUMULATIVE TOTAL GLOBAL INTERNATIONAL EMERGING
RETURN GOVERNMENT EQUITY MARKETS
- -------------------------------------------------------------
Primary Class:
One Year +8.22% +16.49% N/A
Life of Class +37.62%(A) +25.94%(B) +3.30%(C)
AVERAGE ANNUAL
TOTAL RETURN
- -------------------------------------------------------------
Primary Class:
One Year +8.22% +16.49% N/A
Life of Class +8.97%(A) +13.10%(B) N/A
- ----------
(A) INCEPTION OF GLOBAL GOVERNMENT -- APRIL 15, 1993.
(B) INCEPTION OF INTERNATIONAL EQUITY -- FEBRUARY 17, 1995.
(C) INCEPTION OF EMERGING MARKETS -- MAY 28, 1996. NET OF 2.0% REDEMPTION FEE
ASSESSED WITHIN TWELVE MONTHS OF PURCHASE.
No adjustment has been made for any income taxes payable by shareholders.
The investment return and principal value of an investment in the Funds will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns would have been lower if LMFA had not
waived/reimbursed certain fees and expenses during the periods presented above.
Because Navigator Shares have lower total expenses, they will generally have a
higher return than Primary Shares. As of the date of this Prospectus, Navigator
Shares have no performance history.
Global Government also may advertise its YIELD. Yield reflects net
investment income per share (as defined by applicable SEC regulations) over a
30-day (or one-month) period, expressed as an annualized percentage of net asset
value at the end of the period. The effective yield, although calculated
similarly, will be slightly higher than the yield because it assumes that income
earned from the investment is reinvested (i.e., the compounding effect of
reinvestment). Yield computations differ from other accounting methods and
therefore may differ from dividends actually paid or reported net income.
Further information about each Fund's performance is contained in the
Corporation's annual report to shareholders, which may be obtained without
charge by calling a financial advisor at Fairfield, Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that any Fund will achieve its investment objective.
GLOBAL GOVERNMENT'S investment objective is to provide capital
appreciation and current income in order to achieve an attractive total
return consistent with prudent investment risk. The Fund normally attempts
to achieve this objective by investing at least 75% of its total assets in
debt securities issued or guaranteed by the U. S. Government or foreign
governments, their agencies, instrumentalities or political subdivisions.
The Fund normally will invest at least 75% of its total assets in debt
securities issued or guaranteed by the U. S. Government or foreign
governments, the agencies or instrumentalities of either, supranational
organizations and foreign or domestic corporations, trusts, or financial
institutions 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, judged by Western Asset to be of comparable quality,
certain money market instruments and repurchase agreements involving any
of the foregoing. These are considered investment grade debt securities.
Under normal circumstances, the Fund will be invested in at least
three different countries, including the United States. The Fund will
invest no more than 40% of its total assets in any one country other than
the United States. There is no other limit on the percentage of the Fund's
assets that may be invested in any one country or currency.
The money market instruments in which the Fund may invest include
commercial paper and other money market instruments which are: rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of investment;
issued or guaranteed as to principal and interest by issuers or guarantors
having an existing debt security rating of A or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by Western Asset to be of
comparable quality; and bank certificates of deposit and bankers'
acceptances judged by Western Asset to be of comparable quality.
The remainder of the Fund's assets, not in excess of 25% of its
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's or S&P's four highest grades, or
unrated securities judged by Western Asset to be of comparable quality.
This may include lower-rated debt securities issued or guaranteed by
foreign governments or by domestic or foreign corporations, trusts or
financial institutions; (2) loans and participations in loans originated
by banks and other financial institutions, which also may be below
investment grade; (3) securities which may be convertible into or
exchangeable for, or carry warrants to purchase, common stock, or other
equity interests (such securities may offer attractive income
opportunities, and the debt securities of certain issuers may not be
available without such features); and (4) common and preferred stocks. See
page 15 for a discussion of the risks of lower-rated debt securities. If a
security is downgraded subsequent to its purchase, the Fund will sell that
security or another if that is necessary to assure that 75% of its assets
are investment grade or equivalent quality instruments.
The Fund may invest directly in U.S. dollar-denominated or foreign
currency-denominated foreign fixed-income securities (including preferred
or preference stock) and money market securities issued or guaranteed by
governmental and non-governmental issuers, international agencies and
supranational entities. Some securities issued by foreign governments or
their subdivisions, agencies and instrumentalities may not be backed by
the full faith and credit of the foreign government.
The Fund's foreign investments may include securities of issuers based
in developed countries (including, but not limited to, countries in the
European Union, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
The Fund may invest in "Brady Bonds," which are debt restructurings
that provide for the exchange of cash and loans for newly issued bonds.
Brady Bonds have been issued by numerous emerging market governments, and
other such governments are expected to issue them in the future. Brady
Bonds currently are rated below investment grade. As of the date of this
Prospectus, Western Asset is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize, however, that Brady
Bonds have been issued only recently and, accordingly, do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U. S. dollar) and are
actively traded in the secondary market for Latin American debt.
The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which
6
<PAGE>
may be fixed-rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds
having the same maturity as the bonds. Interest payments on such bonds
generally are collateralized by cash or securities in an amount that, in
the case of fixed-rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is
equal to at least one year's rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter.
Foreign government securities may include debt securities denominated
in multinational currency units. An example of a multinational currency
unit is the European Currency Unit ("ECU"). An ECU represents specified
amounts of currencies of certain member states of the European Economic
Community. The specific amounts of currencies comprising the ECU may be
adjusted to reflect changes in relative values of the underlying
currencies. Western Asset does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the
marketability of such securities. European supranational entities, in
particular, issue ECU-denominated obligations. The market for ECUs may
become illiquid at times of rapid change in the European currency markets,
limiting the Fund's ability to prevent potential losses.
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. See "Options, Futures
and Forward Currency Exchange Contracts," page 13 and "Risks of Futures,
Options and Forward Currency Exchange Contracts," page 14. The Fund may
purchase securities on a when-issued basis and enter into forward
commitments to purchase securities (see page 18); may enter into swaps,
caps, collars and floors for hedging and other purposes; may lend its
securities to brokers, dealers and other financial institutions to earn
income; may borrow money for temporary or emergency purposes; and may
enter into short sales "against the box."
When Western Asset believes such action is warranted by abnormal
market or economic situations, the Fund may invest temporarily without
limit in cash and U.S. dollar-denominated money market instruments
including repurchase agreements.
INTERNATIONAL EQUITY'S investment objective is to seek maximum
long-term total return. The Fund attempts to meet this objective by
investing primarily in equity securities of companies located outside the
United States. Under normal circumstances, the Fund will invest at least
65% of its total assets in equity securities of issuers located in at
least three different countries other than the United States. In
implementing this policy, Batterymarch currently intends to invest
substantially all of the Fund's assets in non-U.S. equity securities.
Batterymarch examines securities from over 20 international stock markets,
with emphasis on several of the largest -- Japan, the United Kingdom,
France, Canada and Germany. Common stocks are chosen using Batterymarch's
system for identifying common stocks it believes to be undervalued. The
weighting of the Fund's assets among individual countries will reflect an
assessment of the attractiveness of individual equity securities
regardless of where they trade. In addition, the Fund may invest up to 35%
of its total assets in emerging market securities.
The Fund's investment portfolio will normally be diversified across a
broad range of industries and across a number of countries, consistent
with the objective of maximum total return. The Fund is expected to remain
substantially fully invested in equity securities. However, when cash is
temporarily available, or for temporary defensive purposes, when
Batterymarch believes such action is warranted by abnormal market or
economic situations, the Fund may invest without limit in cash and U.S.
dollar-denominated money market instruments, including repurchase
agreements of domestic issuers. When Batterymarch believes such action is
warranted by abnormal market or economic situations, for temporary
defensive purposes, the Fund also may invest without limit in short-term
debt instruments, including government, corporate and money market
securities of domestic issuers. Such short-term investments will be rated
in one of the four highest rating categories by S&P or Moody's or, if
unrated by S&P or Moody's, judged by Batterymarch to be of comparable
quality.
The Fund is authorized to invest in stock index futures and options as
discussed below. The Fund may also enter into forward foreign currency
exchange contracts in order to protect against fluctuations in exchange
rates. See "Options, Futures and Forward Currency Exchange Contracts,"
page 13 and "Risks of Futures, Options and Forward Currency Exchange
Contracts," page 14.
The Fund is permitted to hold securities other than common stock, such
as debentures or preferred stock that may or may not be convertible
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into common stock. Some of these instruments may be rated below investment
grade. The Fund will not purchase securities rated below investment grade
(or comparable unrated securities) if, as a result, more than 5% of the
Fund's net assets would be so invested.
EMERGING MARKETS' investment objective is long-term capital
appreciation. The Fund attempts to meet this objective by investing at
least 65% of its total assets in emerging market equity securities under
normal conditions.
Assets not invested in emerging market equity securities may be
invested in any combination of debt securities of the U.S. Government,
equity securities of issuers in developed countries, cash and money market
instruments, including repurchase agreements. Batterymarch intends to be
substantially fully invested in equity securities and convertible
securities of emerging market issuers. The Fund may use options and stock
index futures as discussed below. It may also enter into forward foreign
currency exchange contracts in order to protect against fluctuations in
exchange rates. However, appropriate hedging instruments are not available
with respect to most emerging markets, and the Fund accordingly will not
often employ hedging strategies. See "Options, Futures and Forward
Currency Exchange Contracts," page 13, and "Risks of Futures, Options,
Futures and Forward Currency Exchange Contracts," page 14.
The Fund may invest in the following types of equity securities:
common stock, preferred stock, securities convertible into common stock,
rights and warrants to acquire such securities and substantially similar
forms of equity with comparable risk characteristics.
The Fund intends to invest in Asia, Latin America, the Indian
Sub-continent, Southern and Eastern Europe, the Middle East, and Africa,
although it may not invest in all these markets at all times and may not
invest in any particular market when it deems investment in that country
or region to be inadvisable.
More than 25% of the Fund's total assets may be denominated in a
single currency. Concentration in a single foreign currency will increase
the Fund's exposure to adverse developments affecting the value of that
currency. An issuer of securities purchased by the Fund may be domiciled
in a country other than the country in whose currency the securities are
denominated.
When abnormal market or economic situations warrant in the opinion of
Batterymarch, the Fund may invest without limit for temporary defensive
purposes in short-term debt instruments, including government, corporate
and money market securities of domestic issuers, as well as repurchase
agreements. Such short-term instruments will be rated in one of the four
highest rating categories by S&P or Moody's or, if unrated, judged by
Batterymarch to be of comparable quality.
INVESTMENT RESTRICTIONS
Global Government is a "non-diversified" investment company;
therefore, the percentage of its assets invested in any single issuer is
not limited by the Investment Company Act of 1940 ("1940 Act"). However,
the Fund intends to continue to qualify as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ( "Code"),
which requires that, among other things, at the close of each quarter of
the Fund's taxable year: (1) with respect to 50% of the Fund's total
assets, no more than 5% of its total assets may be invested in the
securities of any one issuer; and (2) no more than 25% of the value of the
Fund's total assets may be invested in the securities of a single issuer;
these limits do not apply to U.S. government securities. To the extent the
Fund's assets are invested in the obligations of a limited number of
issuers or in a limited number of countries or currencies, the value of
the Fund's shares will be more susceptible to any single economic,
political or regulatory occurrence than would the shares of a diversified
company.
The fundamental restrictions applicable to the Fund include a
prohibition on investing 25% or more of total assets in the securities of
issuers having their principal business activities in the same industry
(with the exception of securities issued or guaranteed by the U. S.
Government, its agencies or instrumentalities and repurchase agreements
with respect thereto). Additional fundamental and non-fundamental
investment restrictions are set forth in the Statement of Additional
Information.
As a fundamental policy, each Fund may borrow an amount equal to
33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Because of the limited liquidity of
some emerging markets, Emerging Markets, in particular, may occasionally
be required to borrow to meet redemption requests. Borrowing may cause
greater fluctuation in share value, but also may enable the Fund to retain
favorable securities positions rather than liquidating them to meet
redemptions. None of the Funds will borrow for the purpose of leveraging
its portfolio. As a non-fundamental policy, none of the Funds may purchase
securities when outstanding borrowings exceed 5% of total assets.
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INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to each of the
Funds unless otherwise stated.
Foreign Securities
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing
in U.S. companies. These include risks resulting from differences in
accounting, auditing and financial reporting standards; lower liquidity
than U.S. securities; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer
currency out of a country); and political instability. In many cases,
there is less publicly available information concerning foreign issuers
than is available concerning U.S. issuers. Additionally, purchases and
sales of foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes and tax withholding. Foreign
securities generally exhibit greater price volatility and a greater risk
of illiquidity. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar
irrespective of the performance of the underlying investment.
The relative performance of various countries' fixed income and equity
markets historically has reflected wide variations relating to the unique
characteristics of each country's economy. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Bank deposit insurance, if any, may be subject to widely varying
regulations and limits in foreign countries.
Foreign securities purchased by a Fund may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges
are usually subject to mark-ups or commissions higher than negotiated
commissions on U.S. transactions, although each Fund will endeavor to
obtain the best net results in effecting transactions. There is less
government supervision and regulation of exchanges and brokers in many
foreign countries than in the United States. Additional costs associated
with an investment in foreign securities will include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions.
Emerging Market Securities
Each Fund may invest in securities of issuers based in emerging
markets (including, but not limited to, countries in Asia, Latin America,
the Indian Sub-continent, Southern and Eastern Europe, the Middle East,
and Africa). The risks of foreign investment, described above, are greater
for investments in emerging markets. Because of the special risks
associated with investing in emerging markets, an investment in any of the
Funds should be considered speculative. With respect to Global Government,
debt securities of governmental and corporate issuers in such countries
will typically be rated below investment grade or be of comparable
quality. Emerging markets will include any country: (i) having an
"emerging stock market" as defined by the International Finance
Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development ("World Bank");
(iii) listed in World Bank publications as developing or (iv) determined
by Batterymarch to be an emerging market in accordance with the criteria
of those organizations. The following are considered emerging market
securities: (1) securities publicly traded on emerging market stock
exchanges, or whose principal trading market is over-the-counter (i.e.,
off-exchange) in an emerging market; (2) securities (i) denominated in any
emerging market currency or (ii) denominated in a major currency if issued
by companies to finance operations in an emerging market; (3) securities
of companies that derive a substantial portion of their total revenues
from goods or services produced in, or sales made in, emerging markets;
(4) securities of companies organized under the laws of an emerging market
country or region, which are publicly traded in securities markets
elsewhere; and (5) American depositary receipts ("ADRs") (or similar
instruments) with respect to the foregoing.
Investors are strongly advised to consider carefully the special risks
involved in emerging markets, which are in addition to the usual risks of
investing in developed markets around the world. Many emerging market
countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations
in inflation rates have had, and may continue to have, very negative
effects on the economies and securities markets of certain emerging
markets.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be
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affected adversely by economic conditions, trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade.
Over the last quarter of a century, inflation in many emerging market
countries has been significantly higher than the world average. While some
emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may
continue to have significant effects both on emerging market economies and
their securities markets. In addition, many of the currencies of emerging
market countries have experienced steady devaluations relative to the U.S.
dollar, and major devaluations have occurred in certain countries.
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly
affect the debt service obligations of those countries. This could, in
turn, affect local interest rates, profit margins and exports which are a
major source of foreign exchange earnings. Although it might be
theoretically possible to hedge for anticipated income and gains, the
ongoing and indeterminate nature of the foregoing risks (and the costs
associated with hedging transactions) makes it virtually impossible to
hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on
the outflow of any foreign exchange. Repatriation is ultimately dependent
on the ability of the Fund to liquidate its investments and convert the
local currency proceeds obtained from such liquidation into U.S. dollars.
Where this conversion must be done through official channels (usually the
central bank or certain authorized commercial banks), the ability to
obtain U.S. dollars is dependent on the availability of such U.S. dollars
through those channels and, if available, upon the willingness of those
channels to allocate those U.S. dollars to the Fund. In such a case, the
Fund's ability to obtain U.S. dollars may be adversely affected by any
increased restrictions imposed on the outflow of foreign exchange. If the
Fund is unable to repatriate any amounts due to exchange controls, it may
be required to accept an obligation payable at some future date by the
central bank or other governmental entity of the jurisdiction involved. If
such conversion can legally be done outside official channels, either
directly or indirectly, the Fund's ability to obtain U.S. dollars may not
be affected as much by any increased restrictions except to the extent of
the price which may be required to be paid for the U.S. dollars.
Many emerging market countries have little experience with the
corporate form of business organization, and may not have well developed
corporation and business laws or concepts of fiduciary duty in the
business context.
The securities markets of emerging markets are substantially smaller,
less developed, less liquid and more volatile than the securities markets
of the U.S. and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the U.S. and other
major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such
markets; enforcement of existing regulations has been extremely limited.
Some emerging markets have different settlement and clearance
procedures. In certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. The inability of a Fund
to make intended securities purchases due to settlement problems could
cause that Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease
or may be substantially curtailed and prices for a Fund's portfolio
securities in such markets may not be readily available.
Investment in Japan
International Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock
market outside the United States. The performance of the Fund may
therefore be significantly affected by events affecting the Japanese
economy and the exchange rate between the Japanese yen and the U.S.
dollar. Japan has recently experienced a recession, including a decline in
real estate values that adversely affected the balance sheets of many
financial institutions. The strength of the Japanese currency may
adversely affect industries engaged substantially in export. Japan's
economy is heavily dependent on foreign oil. Japan is located in a
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seismically active area, and severe earthquakes may damage important
elements of the country's infrastructure. Japanese economic prospects may
be affected by the political and military situations of its nearby
neighbors, notably North and South Korea, China, and Russia.
Sovereign Debt Securities
Global Government may invest in sovereign debt securities of emerging
market governments. Sovereign debt is subject to risks in addition to
those relating to foreign investments generally. As a sovereign entity,
the issuing government may be immune from lawsuits in the event of its
failure or refusal to pay the obligations when due. The debtor's
willingness or ability to repay 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 the sovereign
debtor may be subject. Sovereign debtors also may be dependent on expected
disbursements from foreign governments or multilateral agencies, the
country's access to trade and other international credits, and the
country's balance of trade. Some emerging market sovereign debtors have in
the past rescheduled their debt payments or declared moratoria on
payments, and similar occurrences may happen in the future.
Repurchase Agreements
Repurchase agreements are agreements under which either U.S.
government obligations or other high-quality, liquid debt securities are
acquired from a securities dealer or bank subject to resale at an
agreed-upon price and date. The securities are held for the Funds by a
custodian bank as collateral until resold and will be supplemented by
additional collateral if necessary to maintain a total value equal to or
in excess of the value of the repurchase agreement. A Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults
on its obligations and that Fund is delayed or prevented from exercising
its right to dispose of the collateral securities, which may decline in
value in the interim. A Fund will enter into repurchase agreements only
with financial institutions which its adviser believes present minimal
risk of default during the term of the agreement based on guidelines
established by the Corporation's Board of Directors.
Preferred Stock
Each Fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the opinion of its adviser, the
preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and generally
has preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Preferred shareholders may
have certain rights if dividends are not paid, but do not generally have a
legal right to demand payment. Shareholders may suffer a loss of value if
dividends are not paid. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the
issuer's creditworthiness than are the prices of debt securities. Under
ordinary circumstances, preferred stock does not carry voting rights.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt
or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier non-convertible
securities but rank senior to common stock in a corporation's capital
structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted into the underlying common stock. Convertible
securities are typically issued by smaller capitalized companies whose
stock prices may be volatile. The price of a convertible security often
reflects such variations in the price of the underlying common stock in a
way that non-convertible debt does not. Global Government has no current
intention of converting any convertible securities it
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may own into equity or holding them as equity upon conversion, although it
may do so for temporary purposes. A convertible security may be subject to
redemption at the option of the issuer at a price established in the
convertible security's governing instrument. If a convertible security
held by Global Government is called for redemption, the Fund will be
required to convert it into the underlying common stock, sell it to a
third party or permit the issuer to redeem the security. Any of these
actions could have an adverse effect on the Fund's ability to achieve its
investment objective.
Reverse Repurchase Agreements and Other Borrowing
In a reverse repurchase agreement, a Fund temporarily transfers
possession of a portfolio instrument to another person, such as a
financial institution or broker-dealer, in return for cash and agrees to
repurchase the instrument at an agreed upon time (normally within seven
days) and price, including interest payment. Each Fund may also enter into
dollar rolls, in which a Fund sells a fixed income security for delivery
in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, that Fund would forego
principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned
on the proceeds of the initial sale.
Each Fund may engage in reverse repurchase agreements, dollar rolls
and other borrowing as a means of raising cash to satisfy redemption
requests or for other temporary or emergency purposes without selling
portfolio instruments.
To avoid potential leveraging effects of borrowing (including reverse
repurchase agreements and dollar rolls), each Fund will not purchase
securities while such borrowing is in excess of 5% of its total assets.
Each Fund will limit its borrowing to no more than one-third of its total
assets.
Loans of Portfolio Securities
Each Fund may lend portfolio securities to brokers or dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, is continuously maintained by the borrower with that Fund's
custodian. During the time securities are on loan, the borrower will pay
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn income,
or it may receive an agreed upon amount of interest income from the
borrower who has delivered equivalent collateral. These loans are subject
to termination at the option of the Fund or the borrower. Each Fund may
pay reasonable administrative and custodial fees in connection with a loan
and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. Each Fund
presently does not expect to have on loan at any given time securities
totaling more than one-third of its net asset value. When a Fund loans a
security to another party, it runs the risk that the other party will
default on its obligation, and that the value of the collateral will
decline before the Fund can dispose of it.
Restricted and Illiquid Securities
Restricted securities are securities subject to legal or contractual
restrictions on resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when a sale
would otherwise be desirable. No Fund will acquire a security which cannot
be expected to be sold within seven days at approximately the price at
which it is valued ("illiquid assets"), if such acquisition would cause
the aggregate value of illiquid assets to exceed 15% of its net assets.
Time deposits and repurchase agreements maturing in more than seven days
are considered illiquid. Illiquid securities may be difficult to value,
and the Fund may have difficulty disposing of such securities promptly.
The Funds do not consider foreign securities to be restricted if they
can be freely sold in the principal markets in which they are traded, even
if they are not registered for sale in the U.S. Rule 144A securities,
although not registered, may be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. Each Fund's
adviser, acting pursuant to guidelines established by the Corporation's
Board of Directors, may determine that some Rule 144A securities are
liquid. If the newly-developing institutional markets for restricted
securities do not develop as anticipated, it could adversely affect the
liquidity of a Fund.
Depositary Receipts
The Funds may invest in ADRs or similar non-U.S. instruments issued by
foreign banks or trust companies. ADRs are securities issued by a U.S.
depositary (usually a bank) and represent a specified quantity of
underlying non-U.S. stock on deposit with a custodian bank as collateral.
ADRs
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may be sponsored or unsponsored. A sponsored ADR is issued by a depositary
which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S.
depositaries. The Funds may invest in either type of ADR. A foreign issuer
of the security underlying an ADR is generally not subject to the same
reporting requirements in the United States as a domestic issuer.
Accordingly, the information available to a U.S. investor will be limited
to the information the foreign issuer is required to disclose in its own
country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security.
ADRs may also be subject to exchange rate risks if the underlying
securities are denominated in foreign currency. Some of these depositary
receipts may be issued in bearer form. For purposes of their investment
policies, each Fund will treat ADRs and similar instruments as equivalent
to investment in the underlying securities.
Securities of Other Investment Companies
Due to restrictions on direct investment by foreign entities in
certain emerging markets, or other difficulties limiting the availability
of local securities, investment in other investment companies may be the
most practical or only manner in which a Fund can invest in certain
emerging markets. A Fund may invest in the securities of other investment
companies, but it will not own more than 3% of the total outstanding
voting stock of any investment company, invest more than 5% of its total
assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. Such investments may involve
the payment of substantial premiums above the net asset value of such
issuers' portfolio securities, and the total return on such investments
will be reduced by the operating expenses and fees of such investment
companies, including advisory fees. There can be no assurance that a Fund
will be able to invest in certain emerging markets. A Fund will invest in
such funds when, in the adviser's judgment, the potential benefits of such
investment justify the payment of any applicable premium or sales charge.
Options, Futures and Forward Currency Exchange Contracts
A futures contract is an agreement between the parties to buy or sell
a specified amount of one or more securities or currencies at a specified
price and date; futures contracts are generally closed out by the parties
in advance of that date for a cash settlement. Under an option contract,
one party has the right to require the other to buy or sell a specific
security, currency or futures contract, and may exercise that right if the
market price of the underlying instrument moves in a direction
advantageous to the holder of the option. A forward foreign currency
exchange contract is an obligation to purchase or sell a specific amount
of a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. Options, futures and forward currency
exchange contracts are generally considered to be "derivatives."
FOR GLOBAL GOVERNMENT:
The Fund may buy and sell options, futures and forward contracts for
hedging purposes and, to the extent permitted by regulatory agencies, for
non-hedging purposes in an effort to enhance income. The Fund may purchase
and sell call and put options on bond indices and on securities in which
the Fund is authorized to invest for hedging purposes or to enhance
income. The Fund may also purchase and sell interest rate and bond index
futures contracts and options thereon for hedging purposes.
The Fund may enter into forward currency contracts for the purchase or
sale of a specified currency at a specified future date either with
respect to specified transactions or with respect to its portfolio
positions. For example, when Western Asset anticipates making a currency
exchange transaction in connection with the purchase or sale of a
security, the Fund may enter into a forward contract in order to set the
exchange rate at which the transaction will be made. The Fund may enter
into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of its security positions
denominated in such currency. It may also engage in cross-hedging by using
a forward contract in one currency to hedge against fluctuations in the
value of securities denominated in a different currency. The purpose of
these contracts is to minimize the risk to the Fund from adverse changes
in the relationship between two currencies. Cross-currency hedging
requires a degree of correlation between the two currencies involved. Some
currency relationships thought to be correlated have proven highly
volatile on some occasions.
The Fund may also purchase and sell foreign currency futures
contracts, options thereon and options on foreign currencies to hedge
against the risk of fluctuations in the market value of foreign securities
it holds or intends to purchase, resulting from changes in foreign
exchange rates. The Fund
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may also purchase and sell options on foreign currencies and use forward
currency contracts to enhance income.
FOR INTERNATIONAL EQUITY AND EMERGING MARKETS:
A Fund may enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign
exchange rates in the purchase and sale of investment securities. It may
not enter into such contracts for speculative purposes. Forward currency
contracts may be bought or sold to protect the Fund to a limited extent
against adverse changes in exchange rates between foreign currencies and
the U.S. dollar.
Each Fund may utilize futures contracts and options to a limited
extent. Specifically, a Fund may enter into futures contracts and related
options provided that not more than 5% of its net assets are required as a
futures contract deposit and/or premium; in addition, a Fund may not enter
into futures contracts or related options if, as a result, more than 20%
of the Fund's total assets would be so invested.
Futures contracts and options may be used for several reasons: to
simulate full investment in underlying securities while retaining a cash
balance for Fund management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures
contract or option is priced more attractively than the underlying equity
security or index.
As noted above, it may be difficult or impossible to hedge exposures
in emerging markets, both because of the nature of the risks and because
of the limited availability of suitable hedging instruments.
Risks of Futures, Options and Forward Currency Exchange Contracts
The use of options, futures and forward currency exchange contracts
involves certain investment risks and transaction costs. These risks
include (1) dependence on the ability of each Fund's adviser to predict
movements in the prices of individual securities, fluctuations in the
general securities markets or in market sectors and movements in interest
rates and currency markets; (2) imperfect correlation, or no correlation
at all, between movements in the price of options, futures contracts or
forward currency contracts and movements in the price of the underlying
securities or currencies; (3) the fact that skills needed to use these
instruments are different from those needed to select a Fund's portfolio
securities; (4) the possible lack of a liquid secondary market for any
particular instrument at any particular time; (5) the possibility that the
use of cover or segregation involving a large percentage of the Fund's
assets could impede portfolio management or that Fund's ability to meet
redemption requests or other short-term obligations; (6) the possible need
to defer closing out positions in these instruments in order to avoid
adverse tax consequences; and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments. There can be
no assurance that a Fund's use of futures contracts, forward currency
contracts or options will be successful. Moreover, in the event that an
anticipated change in the price of the securities or currencies that are
the subject of the strategy does not occur, the Fund might have been in a
better position had it not used that strategy at all. Forward currency
contracts, which protect the value of a Fund's investment securities
against a decline in the value of a currency, do not eliminate
fluctuations in the underlying prices of the securities. They simply
establish an exchange rate at a future date. The use of options and
futures contracts for speculative purposes, i.e., to enhance income or to
increase a Fund's exposure to a particular security or foreign currency,
subjects the Fund to additional risk. The use of options, futures or
forward contracts to hedge an anticipated purchase also subjects a Fund to
additional risk until the purchase is completed or the position is closed
out.
When a Fund purchases or sells a futures contract, 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"). A Fund
will not enter into futures contracts or commodities option positions
(other than option positions that are "in-the-money" at the time of
purchase) if, immediately thereafter, its initial margin deposits plus
premiums paid by it, would exceed 5% of the fair market value of the
Fund's net assets. If a Fund writes an option or sells a futures contract
and is not able to close out that position prior to settlement date, the
Fund may be required to deliver cash or securities substantially in excess
of these amounts.
Many options on securities are traded primarily on the
over-the-counter ("OTC") market. OTC options are two-party contracts with
price and other terms negotiated between buyer and seller and generally do
not have as much liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer
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from which it has purchased the option to make or take delivery of the
securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by that Fund as well as the loss of
the expected benefit of the transaction. OTC options may be considered
"illiquid securities" for purposes of each Fund's investment limitations.
Options and futures traded on U.S. or other exchanges may be subject to
position and daily fluctuation limits, which may limit the ability of a
Fund to reduce risk using such options and futures and may limit their
liquidity.
When using options, futures or forwards, each Fund will cover its
short positions or maintain a segregated asset account, to the extent
required by SEC staff positions. The Statement of Additional Information
contains a more detailed description of futures, options and forward
strategies.
THE FOLLOWING DESCRIBES CERTAIN INVESTMENT TECHNIQUES USED PRIMARILY
BY GLOBAL GOVERNMENT:
Lower-Rated Debt Securities
The Fund may invest in debt obligations of any grade. Western Asset
seeks to minimize the risks of investing in all securities through
in-depth credit analysis and attention to current developments in interest
rates and market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest 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." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the Fund may consider the instrument to be investment grade. The
ratings do not include the risk of market fluctuations.
The Fund may invest up to 25% of its total assets in high-yield,
high-risk securities rated below investment grade. The Fund may invest in
lower-rated debt securities of domestic issuers, those issued by foreign
corporations, those issued or guaranteed by foreign governmental issuers,
and those issued by domestic corporations but linked to the performance of
such foreign-issue debt. See "Foreign Securities" page 9. Such securities
are deemed by Moody's and S&P to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal. Those in the
lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken
the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting the issuers may result in an increased incidence of default.
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. Although the prices of lower-rated bonds are
generally less sensitive to interest rate changes than those of
higher-rated bonds, the prices of lower-rated bonds may be more sensitive
to adverse economic changes and developments regarding the individual
issuer. Issuers of lower-rated debt securities are often highly leveraged
and may not have access to more traditional methods of financing.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities. As a result of the limited
liquidity of high yield securities, the valuation of these securities may
require greater judgment than is necessary with respect to securities
having more active markets. In addition, their prices have at times
experienced rapid decline when a significant number of holders of such
securities decided to sell them. Widespread sales may result from adverse
publicity and investor perceptions, whether or not based on fundamental
analysis.
Debt securities may be subject to mandatory call provisions. If
issuers were to invoke these provisions during periods of declining
interest rates, the Fund would receive redemption proceeds at times when
only lower-yielding securities were available for investment by the Fund.
The table below provides a summary of ratings assigned to debt
holdings in Global Government's portfolio. These figures are
dollar-weighted averages of month-end portfolio holdings during the fiscal
year ended December 31, 1996, presented as a percentage of total
investments. These percentages are historical and are not necessarily
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indicative of the quality of current or future portfolio holdings, which
may vary. A further description of Moody's and S&P's ratings is included
in the Appendix to the Statement of Additional Information.
MOODY'S Aaa/
RATINGS Aa/A Baa Ba B Caa Ca C NR
- -----------------------------------------------------------------
Average 68.4% 9.1% 5.9% 10.6% -- 1.5% -- 4.5%
AAA/ CC/
S&P RATINGS AA/A BBB BB B CCC C D NR
- -----------------------------------------------------------------------
Average 72.9% 4.5% 14.7% 1.9% -- 1.5% -- 4.5%
The dollar-weighted average of securities not rated by either Moody's
or S&P amounted to 4.5%. This may include securities rated by other
nationally recognized rating organizations, as well as unrated securities.
Unrated securities are not necessarily lower-quality securities.
U.S. Government Securities
The U.S. government securities in which the Fund may invest include
direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association ("GNMA") certificates), securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Federal Home Loan Banks), securities supported solely by
the discretionary authority of the U.S. Treasury to lend to the issuer of
the issuer (such as Fannie Mae ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") securities).
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of mortgages created by lenders
such as commercial banks, savings and loan institutions, mortgage bankers
and others. Mortgage-related securities may be issued by governmental or
government-related entities or by non-governmental entities such as banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers.
Interest in pools of mortgage-related securities differ from other
forms of debt securities which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. In contrast, mortgage-related securities provide monthly
payments which consist of interest and, in most cases, principal. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their residential mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure. Some mortgage-related securities entitle the
holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not
the mortgagors actually make the payments.
As prepayment rates of individual pools of mortgage loans vary widely,
it is not possible to predict accurately the average life of a particular
mortgage-related security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments
of principal and interest on the underlying mortgages may shorten
considerably the securities' effective maturities. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. The volume of prepayments of principal on a pool of
mortgages underlying a particular mortgage-related security will influence
the yield of that security. Increased prepayment of principal may limit
the Fund's ability to realize the appreciation in the value of such
securities that would otherwise accompany declining interest rates. An
increase in mortgage prepayments could cause the Fund to incur a loss on a
mortgage-related security that was purchased at a premium. In determining
the Fund's average maturity, Western Asset must apply certain assumptions
and projections about the maturity and prepayment of mortgage-related
securities; actual prepayment rates may differ.
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential
mortgage loans; mortgage-backed bonds which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs")
which are collateralized by mortgage-related securities issued by FHLMC,
FNMA, GNMA or by pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence.
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<PAGE>
Although full payoff of each class of bonds is contractually required by a
certain date, any or all classes of obligations may be paid off sooner
than expected because of an increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-
related securities because there are no direct or indirect government
guarantees of payments in the former securities. However, many issuers or
servicers of mortgage-related securities guarantee timely payment of
interest and principal on such securities. Timely payment of principal may
also be supported by various forms of insurance, including individual
loan, title, pool and hazard policies. There can be no assurance that the
private issuers or insurers will be able to meet their obligations under
the relevant guarantees and insurance policies. Where non-governmental
securities are collateralized by securities issued by FHLMC, FNMA or GNMA,
the timely payment of interest and principal is supported by the
government-related securities collateralizing such obligations.
Some mortgage-related securities will be considered illiquid and will
be subject to the Fund's investment limitation that no more than 15% of
its net assets will be invested in illiquid securities.
Stripped Mortgage-Backed Securities
The Fund may invest in stripped mortgage-backed securities, which are
classes of mortgage-backed securities that receive different proportions
of interest and principal distributions from an underlying pool of
mortgage assets. These securities are more sensitive to changes in
prepayment and interest rates and the market for them is less liquid than
is the case for traditional mortgage-backed and other debt securities. A
common type of stripped mortgage-backed security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest only or "IO" class), while the
other class will receive all of the principal (the principal only or "PO"
class). The yield to maturity of an IO class is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related underlying
mortgage assets. If the Fund purchases an IO and the underlying principal
is repaid faster than expected, the Fund will recoup less than the
purchase price of the IO, even one that is highly rated. Extensions of
maturity resulting from increases of market interest rates may have an
especially pronounced effect on POs. Most IOs and POs are regarded as
illiquid and will be included in the Fund's 15% limit on illiquid
securities. U.S. government-issued IOs and POs backed by fixed-rate
mortgages may be deemed liquid by Western Asset, following guidelines and
standards established by the Corporation's Board of Directors.
Asset-Backed Securities
Asset-backed securities are securities that represent direct or
indirect participations in, or are secured by and payable from, assets
such as motor vehicle installment sales contracts, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets
are securitized through the use of trusts and special purpose
corporations. The value of such securities partly depends on loan
repayments by individuals, which may be adversely affected during general
downturns in the economy. Payments or distributions of principal and
interest on asset-backed securities may be supported by credit
enhancements, such as various forms of cash collateral accounts or letters
of credit. Like mortgage-related securities, asset-backed securities are
subject to the risk of prepayment. The risk that recovery on repossessed
collateral might be unavailable or inadequate to support payments on
asset-backed securities, however, is greater than in the case of
mortgage-backed securities.
Loans and Loan Participations
The Fund may purchase loans and participation interests in loans
originally made by banks and other lenders to governmental borrowers. Many
such interests are not rated by any rating agency and may involve
borrowers considered to be poor credit risks. The Fund's interests in
these loans may not be secured, and the Fund will be exposed to a risk of
loss if the borrower defaults. Many such interests will be illiquid and
therefore subject to the Fund's 15% limit on illiquid investments.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on the particular terms of the loan agreement
among the parties.
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<PAGE>
Variable and Floating Rate Securities
The Fund may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on
the obligations. Western Asset believes that the variable or floating rate
of interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate, long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company. The rates
of some securities vary according to a formula based on one or more
interest rates, and some vary inversely with changes in the underlying
rates. The value of these securities can be very volatile when market
rates change.
Zero Coupon and Pay-In-Kind Bonds
A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a deep discount from its face value. The bond is
redeemed at its face value on the specified maturity date. Zero coupon
bonds may be issued as such, or they may be created by a broker who strips
the coupons from a bond and separately sells the rights to receive
principal and interest. Pay-in-kind securities pay interest in the form of
additional securities, thereby adding additional debt to the issuer's
balance sheet. The prices of both types of bonds fluctuate more in
response to changes in market interest rates than do the prices of debt
securities with similar maturities that pay interest in cash.
An investor in zero coupon or pay-in-kind bonds generally accrues
income on such securities prior to the receipt of cash payments. Since the
Fund must distribute substantially all of its income to its shareholders
to qualify for pass-through treatment under the federal income tax laws,
the Fund, as an investor in such bonds, may have to dispose of other
securities to generate the cash necessary for the distribution of income
attributable to its zero coupon or pay-in-kind bonds. Such disposal could
occur at a time which would be disadvantageous to the Fund and when the
Fund would not otherwise choose to dispose of the assets.
When-Issued Securities and Standby Commitments
The Fund may enter into commitments to purchase U.S. government
securities or other securities on a when-issued basis. Such securities are
often the most efficiently priced and have the best liquidity in the bond
market. When the Fund purchases securities on a when-issued basis, it
assumes the risks of ownership at the time of purchase, not at the time of
receipt. However, the Fund does not have to pay for the obligations until
they are delivered to it. This is normally seven to 15 days later, but
could be considerably longer in the case of some mortgage-backed
securities. Use of this practice would have a leveraging effect on the
Fund. The Fund does not expect that its commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of its total
assets.
Issuance of securities purchased on a when-and-if-issued basis depends
on the occurrence of an event. If the anticipated event does not occur,
the securities are not issued. The characteristics and risks of
when-and-if-issued securities are similar to those involved in writing put
options.
To meet its payment obligation, the Fund will establish a segregated
account with its custodian and maintain cash or appropriate liquid
obligations, in an amount at least equal in value to the Fund's
commitments to purchase when-and-if-issued securities.
Indexed Securities
The Fund may purchase various fixed income and debt securities whose
principal value or rate of return is linked or indexed to relative
exchange rates among two or more currencies or linked to commodities
prices or other financial indicators. Such securities may be more volatile
than the underlying instruments, resulting in a leveraging effect on the
Fund.
The value of such securities may fluctuate in response to changes in
the index, market conditions, and the creditworthiness of the issuer.
These securities may vary directly or inversely with the underlying
investments. The value of such securities may change significantly if
their principal value or rate of return is linked or indexed to relative
exchange rates involving a foreign currency for which there is not a
readily available market.
Capital Appreciation and Risk
The market value of fixed income and other debt securities is
partially a function of changes in the current level of interest rates. An
increase in interest rates generally reduces the market value of existing
fixed income and other debt securities, while a decline in interest rates
generally increases the market value of such securities. The longer the
maturity, the more pronounced is the rise or decline in the security's
price. When interest rates are falling, a fund with a shorter maturity
generally will not generate as high a level of total return as a fund with
a longer maturity. Conversely,
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when interest rates are rising, a fund with a shorter maturity will
generally outperform longer maturity portfolios. When interest rates are
flat, shorter maturity portfolios generally will not generate as high a
level of total return as longer maturity portfolios (assuming that
long-term interest rates are higher than short-term rates, which is
commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt securities
will also affect their prices.
A debt security may be callable, i.e., subject to redemption at the
option of the issuer, at a price established in the security's governing
instrument. If a debt security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security or
sell it to a third party. Either of these actions could have an adverse
effect on the Fund's ability to achieve its investment objective.
FOR EACH FUND:
PORTFOLIO TURNOVER
For the year ended December 31, 1996, Global Government's portfolio
turnover rate was 172%, International Equity's portfolio turnover rate was
83% and for the period May 28, 1996 (commencement of operations) to
December 31, 1996, Emerging Markets' annualized portfolio turnover rate
was 46%. Global Government may sell fixed income securities and buy
similar securities to obtain yield and take advantage of market anomalies,
a practice which will increase the reported turnover rate of that Fund.
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. High portfolio turnover rates (100% or more) will
involve correspondingly greater transaction costs which will be borne
directly by that Fund. It may also increase the amount of short-term
capital gains, if any, realized by a Fund and will affect the tax
treatment of distributions paid to shareholders because distributions of
net short-term capital gains are taxable as ordinary income. Each Fund
will take these possibilities into account as part of its investment
strategy.
HOW TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield may purchase Navigator Shares from
Fairfield, the principal offices of which are located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Other investors eligible to purchase
Navigator Shares may purchase them through a brokerage account with Legg
Mason.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
Institutional Clients purchasing or holding Navigator Shares on behalf
of their Customers are responsible for the transmission of purchase and
redemption orders (and the delivery of funds) to each Fund on a timely
basis.
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may change these minimum amounts at its discretion.
Institutional Clients may set different minimums for their Customers'
investments in accounts invested in Navigator Shares.
Share purchases will be processed at the net asset value next
determined after Legg Mason or Fairfield has received your order; payment
must be made within three business days to the selling organization.
Orders received by Legg Mason or Fairfield before the close of regular
trading on the New York Stock Exchange ("Exchange") (normally 4:00 p.m.
Eastern time) ("close of the Exchange") on any day the Exchange is open
will be executed at the net asset value determined as of the close of the
Exchange on that day. Orders received by Legg Mason or Fairfield after the
close of the Exchange or on days the Exchange is closed will be executed
at the net asset value determined as of the close of the Exchange on the
next day the Exchange is open. See "How Net Asset Value is Determined" on
page 21.
Each Fund reserves the right to reject any order for its shares, to
suspend the offering of shares for a period of time, or to waive any
minimum investment requirements.
In addition to Institutional Clients purchasing shares directly from
Fairfield, Navigator Shares may be purchased through procedures
established by Fairfield in connection with requirements of Customer
Accounts of various Institutional Clients.
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No sales charge is imposed by any of the Funds in connection with the
purchase of Navigator Shares. Depending upon the terms of a particular
Customer Account, however, Institutional Clients may charge their
Customers fees for automatic investment and other cash management services
provided in connection with investments in a Fund. Information concerning
these services and any applicable charges will be provided by the
Institutional Clients. This Prospectus should be read by Customers in
connection with any such information received from the Institutional
Clients. Any such fees, charges or other requirements imposed by an
Institutional Client upon its Customers will be in addition to the fees
and requirements described in this Prospectus.
REDEMPTION OF SHARES
Shares may ordinarily be redeemed by a shareholder via telephone, in
accordance with the procedures described below. However, Customers of
Institutional Clients wishing to redeem shares held in Customer Accounts
at the Institution may redeem only in accordance with instructions and
limitations pertaining to their Account at the Institution.
Fairfield clients can make telephone redemption requests by calling
Fairfield at 1-800-441-3885. Legg Mason clients should call their
financial advisors at 1-800-822-5544. Callers should have available the
number of shares (or dollar amount) to be redeemed and their account
number.
Orders for redemption received by Legg Mason or Fairfield before the
close of the Exchange on any day when the Exchange is open will be
transmitted to Boston Financial Data Services ("BFDS"), transfer agent for
the Funds, for redemption at the net asset value per share determined as
of the close of the Exchange on that day. Requests for redemption received
by Legg Mason or Fairfield after the close of the Exchange will be
executed at the net asset value determined as of the close of the Exchange
on its next trading day. A redemption request received by Legg Mason or
Fairfield may be treated as a request for repurchase and, if it is
accepted by Legg Mason, your shares will be purchased at the net asset
value per share determined as of the next close of the Exchange.
Shareholders may have their telephone redemption requests paid by a
direct wire to a domestic commercial bank account previously designated by
the shareholder, or mailed to the name and address in which the
shareholder's account is registered with the respective Fund. Such
payments will normally be transmitted on the next business day following
receipt of a valid request for redemption. The proceeds of redemption or
repurchase may be more or less than the original cost. If the shares to be
redeemed or repurchased were paid for by check (including certified or
cashier's checks) within 10 business days of the redemption or repurchase
request, the proceeds may not be disbursed unless that Fund can be
reasonably assured that the check has been collected.
Emerging Markets' investment objective results in it investing a
substantial portion of its assets in thinly traded stock which can
experience large price fluctuations and whose purchase and sale can
involve significant transaction costs. The Fund is intended for long-term
investors. Short-term "market timers" who engage in frequent purchases and
redemptions affect the Fund's investment planning and create additional
transaction costs which are borne by all shareholders. For this reason,
the Fund imposes a 2% redemption fee on all redemptions, including
exchanges, of Fund shares held for less than one year.
The redemption fee will be paid directly to the Fund to help offset
the costs imposed on it by short-term trading in emerging markets. The fee
will not be paid to either LMFA or Legg Mason. No fees are charged on
redemptions from Global Government or International Equity.
The fee will not apply to any shares purchased through reinvestment of
dividends or distributions or to shares held in retirement plans such as
401(k), 403(b), 457, Keogh, SEP-IRA, profit sharing, and money purchase
pension accounts. The fee does apply to shares held in IRA accounts. The
fee may apply to shares in broker omnibus accounts.
The Fund will use the "first-in, first-out" (FIFO) method to determine
the one year holding period. Under this method, the date of redemption or
exchange will be compared with the earliest purchase date of shares held
in the account. If this holding period is less than one year, the
redemption fee will be assessed.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. A Fund may be
liable for losses due to unauthorized or fraudulent instructions if it
does not follow reasonable procedures. Telephone redemption privileges are
available automatically to all shareholders unless certificates have been
issued. Shareholders who do not wish to have telephone redemption
privileges
20
<PAGE>
should call their financial advisor for further instructions.
To the extent permitted by law, each Fund reserves the right to take
up to seven days to make payment upon redemption if, in the judgment of a
Fund's adviser, the respective Fund could be adversely affected by
immediate payment. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.)
Because of the relatively high cost of maintaining small accounts,
each Fund may elect to close any account with a current value of less than
$500 by redeeming all of the shares in the account and mailing the
proceeds to the investor. However, the Funds will not redeem accounts that
fall below $500 solely as a result of a reduction in net asset value per
share. If a Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $500 and will be
allowed 60 days in which to make an additional investment in order to
avoid having the account closed.
HOW SHAREHOLDER ACCOUNTS ARE
MAINTAINED
A shareholder account is established automatically for each
shareholder. Any shares the shareholder purchases or receives as a
dividend or other distribution will be credited directly to the account at
the time of purchase or receipt. Fund shares may not be held in, or
transferred to, an account with any brokerage firm other than Fairfield,
Legg Mason or their affiliates. The Funds no longer issue share
certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of persons
maintaining Customer Accounts at Institutional Clients will normally be
held of record by the Institutional Clients. Therefore, in the context of
Institutional Clients, references in this Prospectus to shareholders mean
the Institutional Clients rather than their Customers.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund is determined daily
as of the close of the Exchange, on every day that the Exchange is open,
by subtracting the liabilities attributable to Navigator Shares from the
total assets attributable to such shares and dividing the result by the
number of Navigator Shares outstanding. Each Fund's securities are valued
on the basis of market quotations or, lacking such quotations, at fair
value as determined under the guidance of the Board of Directors.
Securities for which market quotations are readily available are valued at
the last sale price of the day for a comparable position, or, in the
absence of any such sales, the last available bid price for a comparable
position. Where a security is traded on more than one market, which may
include foreign markets, the securities are generally valued on the market
considered by each Fund's adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
Each Fund will value its foreign securities in U.S. dollars on the basis
of the then-prevailing exchange rates.
Most securities held by Global Government are valued on the basis of
valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other data.
DIVIDENDS AND OTHER DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly for
Global Government and are declared and paid annually for International
Equity and Emerging Markets. Shareholders begin to earn dividends on their
Global Government shares as of settlement date, which is normally the
third business day after their orders are placed with their financial
advisor. Dividends from net short-term capital gain and distributions of
substantially all net capital gain (the excess of net long-term capital
gain over net short-term capital loss), and any net gain from foreign
currency transactions, generally are declared and paid after the end of
the taxable year in which the gain is realized. A second distribution of
net capital gain may be necessary in some years to avoid imposition of the
excise tax described under the heading "Additional Tax Information" in the
Statement of Additional Information. Dividends and other distributions, if
any, on shares held in a qualified retirement plan and by shareholders
maintaining a Systematic Withdrawal Plan generally are reinvested in
Navigator Shares on the payment dates. Shareholders may elect to:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
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2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Navigator
fund. Please contact a financial advisor for additional information about
this option. Qualified retirement plans that obtained Navigator Shares
through exchange generally receive dividends and other distributions in
additional shares.
If no election is made, both dividends and other distributions are
credited to the Institutional Client's account in Navigator Shares of the
distributing Fund at the net asset value of the shares determined as of
the close of the Exchange on the reinvestment date. Shares received
pursuant to any of the first three (reinvestment) elections above also
will be credited to the account at that net asset value. If an investor
elects to receive dividends and/or other distributions in cash, a check
will be sent. Investors purchasing through Fairfield may elect at any time
to change the distribution option by notifying the applicable Fund in
writing at: [insert complete Fund name], c/o Fairfield Group, Inc., 200
Gibraltar Road, Horsham, Pennsylvania 19044. Those purchasing through Legg
Mason should write to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland, 21203-1476. An election
must be received at least 10 days before the record date in order to be
effective for dividends and other distributions paid to shareholders as of
that date.
TAXES
Each Fund intends to continue to qualify for treatment as a regulated
investment company under the Code so that it will be relieved of federal
income tax on that part of its investment company taxable income
(generally consisting of net investment income and any net short-term
capital gain and net gains from certain foreign currency transactions) and
net capital gain that is distributed to its shareholders.
Dividends from a Fund's investment company taxable income (whether
paid in cash or reinvested in Navigator Shares) are taxable to its
shareholders (other than qualified retirement plans or other tax-exempt
investors) as ordinary income to the extent of that Fund's earnings and
profits. Distributions of a Fund's net capital gain (whether paid in cash
or reinvested in Navigator Shares), when designated as such, are taxable
to those shareholders as long-term capital gain, regardless of how long
they have held their Fund shares.
The Funds send each shareholder a notice following the end of each
calendar year specifying the amounts of all dividends and other
distributions paid (or deemed paid) during that year. Each Fund is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide that Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends and other distributions payable to such shareholders who
otherwise are subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares. An exchange of Fund shares for shares of another Legg Mason fund
will generally have similar tax consequences. If Fund shares are purchased
within 30 days before or after redeeming at a loss other shares of the
same Fund (regardless of class), all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
Each Fund's dividend and interest income, and gains realized from
disposition of foreign securities, may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that
would reduce the yield on that Fund's securities. Tax conventions between
certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
A dividend or other distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to
federal income tax. Accordingly, an investor should recognize that a
purchase of Fund shares immediately prior to the record date for a
dividend or capital gain distribution could cause the investor to incur
tax liabilities and should not be made solely for the purpose of receiving
the dividend or other distribution.
If more than 50% of the value of International Equity's or Emerging
Markets' total assets at the
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close of any taxable year consists of securities of foreign corporations,
the Fund may file an election with the Internal Revenue Service that will
enable its shareholders, in effect, to receive the benefit of the foreign
tax credit with respect to any foreign and U.S. possessions' income taxes
paid by it. Pursuant to any such election, such Fund would treat those
taxes as dividends paid to its shareholders, and each shareholder would be
required to (1) include in gross income, and treat as paid by the
shareholder, the shareholder's proportionate share of those taxes, (2)
treat the shareholder's share of those taxes and of any dividend paid by
the Fund that represents income from foreign or U.S. possessions' sources
as the shareholder's own income from those sources, and (3) either deduct
the taxes deemed paid by the shareholder in computing the shareholder's
taxable income, or alternately, use the foregoing information in
calculating the foreign tax credit against the shareholder's federal
income tax. Each of the Funds will report to its shareholders shortly
after each taxable year their respective shares of the Fund's income from
sources within, and taxes paid to, foreign countries and U.S. possessions
if it makes this election.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders; see the
Statement of Additional Information for a further discussion. In addition
to those considerations, which are applicable to any investment in the
Funds, there may be other federal, state, local or foreign tax
considerations applicable to a particular investor. Prospective
shareholders are urged to consult their tax advisers with respect to the
effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
CONFIRMATIONS AND REPORTS
Every shareholder of record will receive a confirmation of each new
share transaction with a Fund, which will also show the total number of
shares being held in safekeeping by the Fund's transfer agent for the
account of the shareholder.
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or capital gain distributions) of Navigator
Shares made by Institutional Clients acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of persons maintaining
Customer Accounts at Institutional Clients will be sent to the
Institutional Client by the transfer agent. Beneficial ownership of shares
by Customer Accounts will be recorded by the Institutional Client and
reflected in the regular account statements provided by them to their
Customers.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by the Corporation's
independent accountants.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476 or c/o Fairfield Group Inc., 200 Gibraltar Road, Horsham,
Pennsylvania 19044.
EXCHANGE PRIVILEGE
Holders of Navigator Shares are entitled to exchange them for the
corresponding class of shares of any of the Legg Mason Funds (including
the Legg Mason Cash Reserve Trust), the Navigator Money Market Fund, Inc.
and the Navigator Tax-Free Money Market Fund, Inc. provided that such
shares are eligible for sale under applicable state securities laws.
Investments by exchange into the other Navigator funds are made at the
per share net asset value determined on the same business day as
redemption of the Fund shares you wish to exchange. To obtain further
information concerning the exchange privilege and prospectuses of other
Navigator funds, or to make an exchange, please contact your financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page 19. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each Fund reserves the right to modify or terminate
the exchange privilege upon 60 days' notice to shareholders.
Emerging Markets imposes a 2% redemption fee on exchanges of shares
held less than one year. See page 20.
THE FUNDS' MANAGEMENT AND INVESTMENT
ADVISERS
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
LEGG MASON FUND ADVISER
Pursuant to separate management or advisory agreements with each Fund
(each a "Management
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Agreement" or "Advisory Agreement"), which were approved by the
Corporation's Board of Directors, Legg Mason Fund Adviser, Inc., serves as
manager of each Fund. As manager, LMFA manages the non-investment affairs
of each Fund, directs all matters related to the operation of those Funds
and provides office space and administrative staff for the Funds. Pursuant
to its Advisory Agreement or Management Agreement, Global Government and
International Equity each pays LMFA a fee equal to an annual rate of 0.75%
and Emerging Markets pays a fee at an annual rate equal to 1.00% of its
average daily net assets. Each Fund pays all its other expenses which are
not assumed by LMFA.
LMFA acts as manager, investment adviser or investment consultant to
eighteen investment company portfolios which had aggregate assets under
management of over $7.0 billion as of March 31, 1997. LMFA's address is
111 South Calvert Street, Baltimore, Maryland 21202. LMFA has voluntarily
agreed to waive indefinitely its fees to the extent Global Government's
expenses relating to Navigator Shares (exclusive of taxes, interest,
brokerage and extraordinary expenses) exceed during any month an annual
rate of 1.15% of the Fund's average daily net assets. These agreements are
voluntary and may or may not be renewed by LMFA.
WESTERN ASSET MANAGEMENT COMPANY
Western Asset Management Company ("Western Asset") serves as
investment adviser to Global Government pursuant to the terms of an
advisory agreement with LMFA dated May 1, 1995. Western Asset acts as the
portfolio manager for Global Government and is responsible for the actual
investment management of the Fund, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.
For these services, LMFA (not the Fund) pays Western Asset a fee, computed
daily and payable monthly, at an annual rate equal to 53 1/3% of the fee
received by LMFA, or 0.40% of the Fund's average daily net assets.
Keith J. Gardner has been primarily responsible for the day-to-day
management of Global Government since its inception. Mr. Gardner has been
Vice President of Legg Mason since November, 1992 and Senior Portfolio
Manager at Western Asset Management Company since December, 1994. From
1985 to 1992, he served as Vice President, bond trader and portfolio
manager for both U.S. and global portfolios at T. Rowe Price Associates,
Inc.
Western Asset renders investment advice to sixteen open-end investment
companies and one closed-end investment company, which together had
aggregate assets under management of approximately $4.3 billion as of
March 31, 1997. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $22.6
billion as of that date. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, California 91105.
Western Asset has managed fixed income portfolios continuously since
its founding in 1971, and has focused exclusively on such accounts since
1984.
WESTERN ASSET GLOBAL MANAGEMENT, LTD.
Western Asset Global Management, Ltd. ("Western Asset Global") serves
as investment sub-adviser to Global Government pursuant to the terms of a
sub-advisory agreement with Western Asset dated May 1, 1997. Western Asset
Global is responsible for providing research, analytical and trading
support for the Fund's investment program, as well as exercising
investment discretion for part of the portfolio, subject to the
supervision of Western Asset and LMFA. As compensation for Western Asset
Global's services and for expenses borne by Western Asset Global under the
sub-advisory agreement, Western Asset Global will be paid monthly by
Western Asset (not the Fund) at an annual rate equal to 0.20% of the
Fund's average daily net assets.
Western Asset Global, located at 155 Bishopsgate, London EC2M 3TY,
also renders investment advice to institutional, private and commingled
fund portfolios with assets of over $2.1 billion as of March 31, 1997.
Western Asset Global has managed global fixed income assets for U.S. and
non-U.S. clients since 1984.
BATTERYMARCH FINANCIAL MANAGEMENT, INC.
Pursuant to advisory agreements with LMFA (each an "Advisory
Agreement"), which were approved by the Corporation's Board of Directors,
Batterymarch serves as investment adviser to International Equity and
Emerging Markets. Batterymarch acts as the portfolio manager for each Fund
and is responsible for the actual investment management of the Funds,
including the responsibility for making decisions and placing orders to
buy, sell or hold a particular security. LMFA (not the Funds) pays
Batterymarch, pursuant to each Advisory Agreement, a management fee equal
to an annual rate of 0.50% of International Equity's and 0.75% of Emerging
Markets' average daily net assets. LMFA and Batterymarch have voluntarily
agreed to waive their fees to the extent necessary to limit each Fund's
total operating expenses
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attributable to Navigator Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) to 1.25% of International Equity's and 1.50%
of Emerging Markets' average daily net assets attributable to Navigator
Shares. This agreement will expire on May 1, 1998, unless extended by LMFA
or Batterymarch.
Batterymarch acts as investment adviser to institutional accounts,
such as corporate pension plans, mutual funds and endowment funds, as well
as to individual investors. Total assets under management by Batterymarch
were approximately $4.3 billion as of March 31, 1997. The address of
Batterymarch is 200 Clarendon Street, Boston, Massachusetts 02116.
An investment team is responsible for the day-to-day management of
International Equity and Emerging Markets.
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Funds, including any compensation to its
financial advisors, the printing and distribution of prospectuses,
statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the
prospectuses, statements of additional information and reports have been
prepared, set in type and mailed to existing shareholders at each Fund's
expense, and for any supplementary sales literature and advertising costs.
Legg Mason also receives a fee from BFDS for assisting it with its
transfer agent and shareholder servicing functions.
Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of the Manager, the Advisers, and Fairfield.
The Funds may use Legg Mason, among others, as broker for agency
transactions in listed and over-the-counter securities at commission rates
and under circumstances consistent with the policy of best execution.
Fairfield Group, Inc. is a registered broker-dealer with principal
offices located at 200 Gibraltar Road, Horsham, Pennsylvania 19044.
Fairfield sells Navigator Shares pursuant to a Dealer Agreement with Legg
Mason. Neither Fairfield nor Legg Mason receives compensation from the
Fund for selling Navigator Shares.
The Chairman, President and Treasurer of the Corporation are employed
by Legg Mason.
THE FUNDS' CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, is custodian for the securities and cash of each
Fund. Boston Financial Data Services, P.O. Box 953, Boston, Massachusetts
02103, serves as transfer agent for Fund shares and dividend-disbursing
agent for each Fund.
Pursuant to rules adopted under Section 17(f) of the 1940 Act, each
Fund may maintain foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by the Board of Directors in
accordance with SEC rules. The Board of Directors will consider a number
of factors, including, but not limited to, the relationship of the
institution to State Street, the reliability and financial stability of
the institution, the ability of the institution to capably perform
custodial services for the Funds, the reputation of the institution in its
national market, the perceived political and economic stability of the
countries in which the sub-custodians will be located and perceived risks
of potential nationalization or expropriation of Fund assets. No assurance
can be given that the Board of Directors' appraisal of the risks in
connection with foreign custodial arrangements will always be correct or
that expropriation, nationalization, freezes, or confiscation of Fund
assets will not occur. Securities traded abroad are more likely to be in
bearer form, which heightens the risk of loss through inadvertance or
theft. In such event, a Fund may be dependent on its foreign custodian,
the custodian's business insurance, or foreign law for any recovery.
DESCRIPTION OF THE CORPORATION AND ITS
SHARES
The Corporation was established as a Maryland corporation on December
31, 1992. The Articles of Incorporation authorize the Corporation to issue
one billion shares of common stock par value $.001 per share and to create
additional series, each of which may issue separate classes of shares.
Global Government, International Equity and Emerging Markets currently
offer two classes of shares -- Class Y (known as "Navigator Shares") and
Class A (known as "Primary Shares"). The two classes represent interests
in the same pool of assets. A separate vote is taken by a class of shares
of a Fund if a matter affects just that class of shares. Each class of
shares may bear certain differing class-specific expenses. Salespersons
and others entitled to receive compensation for selling
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<PAGE>
or servicing Fund shares may receive more with respect to one class than
another.
The initial and subsequent investment minimums for Primary Shares are
$1,000 and $100, respectively. Investments in Primary Shares may be made
through a Legg Mason or affiliated financial advisor, through the Future
First Systematic Investment Plan or through automatic investment
arrangements.
Holders of Primary Shares bear distribution and service fees under
Rule 12b-1 at the rate of 0.75%, 1.00% and 1.00% of the net assets
attributable to Primary Shares of Global Government, International Equity
and Emerging Markets, respectively. Investors in Primary Shares may elect
to receive dividends and/or other distributions in cash through the
receipt of a check or a credit to their Legg Mason account. The per share
net asset value of the Navigator Class of Shares, and dividends and
distributions (if any) paid to Navigator shareholders, are generally
expected to be higher than those of Primary Shares of the Fund, because of
the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares will tend to converge, however,
immediately after the payment of ordinary income dividends. Primary Shares
of a Fund may be exchanged for the corresponding class of shares of other
Legg Mason Funds. Investments by exchange into the Legg Mason funds sold
with an initial sales charge are made at the per share net asset value,
plus the sales charge, determined on the same business day as redemption
of the fund shares the investors in Primary Shares wish to redeem.
LMFA and Legg Mason have agreed that they will continue to reimburse
management fees and 12b-1 fees to the extent the expenses of Primary
Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 1.90% of the average
daily net assets of Global Government indefinitely. LMFA, Legg Mason and
Batterymarch have also agreed that until May 1, 1998 they will continue to
reimburse management fees and 12b-1 fees to the extent the expenses of
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 2.25% of the average
daily net assets of International Equity and 2.50% of the average daily
net assets of Emerging Markets for such month. These reimbursement
agreements are voluntary and may or may not be renewed by LMFA and/or each
Fund's adviser. Reimbursement by LMFA reduces a Fund's expenses and
increases its yield and total return.
The Board of Directors of the Corporation does not anticipate that
there will be any conflicts among the interests of the holders of the
different classes of Fund shares. On an ongoing basis, the Board will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' meetings will not be held except where the 1940 Act
requires a shareholder vote on certain matters (including the election of
directors, approval of an advisory contract, and approval of a plan of
distribution pursuant to Rule 12b-1). The Corporation will call a special
meeting of the shareholders at the request of 10% or more of the shares
entitled to vote; shareholders wishing to call such a meeting should
submit a written request to their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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