LEGG MASON
GLOBAL TRUST, INC.:
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LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
PRIMARY SHARES PROSPECTUS May 1, 1999
[LOGO]
LEGG
MASON
FUNDS
HOW TO INVEST(SM)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
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TABLE OF CONTENTS
About the funds:
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1 Investment objectives
5 Principal risks
9 Performance
12 Fees and expenses of the funds
14 Management
About your investment:
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16 How to invest
18 How to sell your shares
19 Account policies
20 Services for investors
21 Dividends and taxes
22 Financial highlights
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LEGG MASON GLOBAL TRUST, INC.
[GRAPHIC]
INVESTMENT OBJECTIVES
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Legg Mason Global Trust, Inc. offers three series: Legg Mason Global
Government Trust, Legg Mason International Equity Trust and Legg
Mason Emerging Markets Trust.
GLOBAL GOVERNMENT TRUST
Investment objective: capital appreciation and current income in
order to achieve an attractive total return consistent with prudent
investment risk
Principal investment strategies:
The fund invests 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 investment grade by Moody's
Investors Service, Inc. or Standard & Poor's or, if unrated by Moody's
or S&P, judged by Western Asset Management Company, the fund's
adviser, to be of comparable quality, certain money market
instruments, and repurchase agreements involving any of the foregoing.
These are considered investment grade securities. The fund may invest
in bonds of any maturity.
Under normal circumstances, 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 assets that may be
invested in any one country or currency.
Up to 25% of the fund's assets may be invested in below investment
grade securities of foreign and domestic issuers, loans of banks and
other financial institutions (which may be below investment grade),
convertible securities, and common and preferred stock.
The adviser has a number of proprietary tools which attempt to define
the interrelationship between bond markets, sectors and maturities.
Target ranges and prices are established as part of the adviser's
strategy process, monitored daily and re-balanced if necessary as
dictated by macro-economic or company-specific events. This ongoing
screening derives the adviser's discipline for buying, selling or
holding any security or currency position. The adviser deviates from
the discipline only if exceptional circumstances disrupt the orderly
functioning of the markets. The adviser's management style favors
"sector rotation," which may result in high portfolio turnover.
Legg Mason Global Trust 1
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The adviser sells securities when they have realized what the adviser
believes is their potential value or when the adviser believes that
they are not likely to achieve that value in a reasonable period of
time.
For temporary defensive purposes, the Fund may borrow money or invest
without limit in cash and U.S. dollar-denominated money market
instruments including repurchase agreements. The fund may not achieve
its investment objective when so invested.
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INTERNATIONAL EQUITY TRUST
Investment objective: maximum long-term total return
Principal investment strategies:
Batterymarch Financial Management, Inc., the fund's adviser, currently
intends to invest substantially all of the fund's assets in non-U.S.
equity securities.
The primary focus of the adviser is stock selection, with a secondary
focus on country allocation. The adviser uses a bottom-up,
quantitative stock selection process for the developed markets portion
of the fund's portfolio. The cornerstone of this process is a
proprietary stock selection model that ranks the 2,800 stocks in the
fund's principal investable universe by relative attractiveness on a
daily basis. The quantitative factors within this model are intended
to measure growth, value, fundamental expectations and technical
indicators (i.e., supply and demand). Because the same quantitative
factors are not effective across all markets due to individual market
characteristics, the adviser adjusts the stock selection model to
include factors that its research indicates are effective, eliminating
factors that are not valid in a particular market. The adviser runs
the stock selection model and re-balances the portfolio daily,
purchasing all stocks ranked "buys" by the model and selling all
stocks ranked "sells." Stocks are sold when the original reason for
purchase no longer pertains, the fundamentals have deteriorated or
portfolio re-balancing warrants.
Country allocation for the developed markets portion of the fund is
based on rankings generated by the adviser's proprietary country
model. The adviser examines securities from over 20 international
stock markets, with emphasis on several of the largest: Japan, the
United Kingdom, France, Canada and Germany.
The fund may invest up to 35% of its total assets in emerging market
securities. The adviser's investment strategy for the emerging markets
portion of the fund represents a distinctive combination of tested
quantitative methodology and traditional fundamental analysis. The
emerging markets allocation focuses on higher-quality, dominant
companies which the adviser believes to have strong growth prospects
and reasonable valuations. Country allocation for the emerging markets
portion of the portfolio also combines quantitative and fundamental
approaches.
2 Legg Mason Global Trust
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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 adviser may also seek
to enhance portfolio returns through active currency hedging
strategies.
More than 25% of the fund's total assets may be denominated in a
single currency or invested in securities of issuers located in a
single country.
When cash is temporarily available, or for temporary defensive
purposes, when the adviser 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. Such securities
will be rated investment grade or, if unrated, will be determined by
the adviser to be investment grade. The fund may not achieve its
investment objective when so invested.
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EMERGING MARKETS TRUST
Investment objective: long-term capital appreciation
Principal investment strategies:
Batterymarch Financial Management, Inc., the fund's adviser, intends
to invest substantially all of the fund's assets in equity securities
and convertible securities of emerging market issuers.
The fund intends to invest in Asia, Latin America, the Indian
Subcontinent, 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 or invested in securities of issuers located in a
single country.
The adviser focuses on higher-quality, dominant emerging markets
companies which the adviser believes to have strong growth prospects
and reasonable valuations, selected from a principal investable
universe of approximately 1,000 stocks. The adviser's emerging markets
investment strategy represents a distinctive combination of
quantitative methodology and traditional fundamental analysis.
Traditional "on-the-ground" fundamental research is combined by the
adviser with tested quantitative valuation disciplines in those
markets where reliable data is available. In determining country
allocation, the adviser also merges quantitative and fundamental
approaches. In markets with reliable historical data, buy and sell
decisions are driven by a combination of quantitative valuations and
the adviser's fundamental opinions. Stocks are sold when the original
reason for purchase no longer pertains, the fundamentals have
deteriorated or portfolio re-balancing warrants.
Legg Mason Global Trust 3
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When cash is temporarily available, or for temporary defensive
purposes, when the adviser 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. Such securities
will be rated investment grade or, if unrated, will be determined by
the adviser to be investment grade. The fund may not achieve its
investment objective when so invested.
4 Legg Mason Global Trust
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[GRAPHIC]
PRINCIPAL RISKS
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In general -
As with all mutual funds, an investment in any of these funds is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency; investors can lose money by investing in
the funds. There is no assurance that a fund will meet its investment
objective.
Market risk -
International Equity Trust and Emerging Markets Trust invest primarily
in foreign equity securities. Prices of equity securities generally
fluctuate more than those of other securities. A fund may experience a
substantial or complete loss on an individual stock. Market risk may
affect a single issuer, industry or section of the economy or may
affect the market as a whole.
Foreign securities risk -
Investments in foreign securities (including those denominated in U.S.
dollars) involve certain risks not typically associated with
investments in domestic issuers. The values of foreign securities are
subject to economic and political developments in the countries and
regions where the companies operate, such as changes in economic or
monetary policies, and to changes in exchange rates. Values may also
be affected by foreign tax laws and restrictions on receiving the
investment proceeds from a foreign country.
In general, less information is publicly available about foreign
companies than about U.S. companies. Foreign companies are generally
not subject to the same accounting, auditing and financial reporting
standards as are U.S. companies. Some foreign governments have
defaulted on principal and interest payments.
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. Even where a security is backed by
the full faith and credit of a foreign government, it may be difficult
for a fund to pursue its rights against a foreign government in that
country's courts.
Emerging markets risk -
The risks of foreign investment are greater for investments in
emerging markets. Emerging market countries typically have economic
and political systems that are less fully developed, and can be
expected to be less stable than those of more advanced countries. Low
trading volumes may result in a lack of liquidity and in
Legg Mason Global Trust 5
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price volatility. Emerging market countries may have policies that
restrict investment by foreigners, or that prevent foreign investors
from withdrawing their money at will.
Because International Equity Trust and Emerging Markets Trust may
invest a significant amount of their total assets in emerging market
securities, investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investments. An
investment in any fund that invests in emerging market securities
should be considered speculative.
Currency risk -
Because each fund invests significantly in securities denominated in
foreign currencies, its value can be affected by changes in the rates
of exchange between those currencies and the U.S. dollar. Currency
exchange rates can be volatile and affected by, among other factors,
the general economics of a country, the actions of the U.S and foreign
governments or central banks, the imposition of currency controls, and
speculation. A security may be denominated in a currency that is
different from the currency where the issuer is domiciled.
The funds may from time to time hedge a portion of their currency
risk, using currency futures, forwards, or options. However, these
instruments may not always work as intended, and in specific cases a
fund may be worse off than if it had not used a hedging instrument.
For most emerging market currencies, there are not suitable hedging
instruments available.
On January 1, 1999, the conversion of European currencies into the
Euro began and is expected to continue into 2002. Full implementation
of the Euro may be delayed and difficulties with the conversion may
significantly impact European capital markets resulting in increased
volatility in world capital markets. Individual issuers may suffer
substantial losses if they or their suppliers are not adequately
prepared for the transition.
Concentration and non-diversification -
A fund concentrating a significant portion of its investments in a
single country, currency or industry will be more susceptible to
factors adversely affecting issuers within that country, currency or
industry than would a less concentrated portfolio of securities.
Global Government is a non-diversified fund. The percentage of its
assets invested in any single issuer is not limited by the Investment
Company Act of 1940. When the fund's assets are invested in the
securities of a limited number of issuers, the value of its shares
will be more susceptible to any single economic, political or
regulatory event than shares of a diversified fund.
6 Legg Mason Global Trust
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Risks of fixed-income securities -
Global Government Trust invests substantially all of its assets in
fixed-income securities. International Equity Trust and Emerging
Markets Trust may also invest in fixed-income securities to a lesser
extent.
Interest rate risk -
Fixed-income securities are subject to interest rate risk, which is
the possibility that the market prices of the funds' investments may
decline due to an increase in market interest rates. Generally, the
longer the maturity of a fixed-income security, the greater is the
effect on its value when rates increase.
Certain securities pay interest at variable or floating rates.
Variable rate securities reset at specified intervals, while floating
rate securities reset whenever there is a change in a specified index
rate. In most cases, these reset provisions reduce the effect of
market interest rates on the value of the security. However, some
securities do not track the underlying index directly, but reset based
on formulas that can produce an effect similar to leveraging; others
may provide for interest payments that vary inversely with market
rates. The market prices of these securities may fluctuate
significantly when interest rates change.
Credit risk -
Fixed-income securities are also subject to credit risk, i.e., the
risk that an issuer of securities will be unable to pay principal and
interest when due, or that the value of the security will suffer
because investors believe the issuer is less able to pay. This is
broadly gauged by the credit ratings of the securities in which each
fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Moody's considers debt securities rated in the lowest investment grade
category (Baa) to have speculative characteristics. Debt securities
rated below investment grade are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse
conditions. 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.
Call risk -
Many fixed-income securities, especially those issued at high interest
rates, provide that the issuer may repay them early. Issuers often
exercise this right when interest rates are low. Accordingly, holders
of callable securities may not benefit fully from the increase in
value that other fixed-income securities experience
Legg Mason Global Trust 7
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when rates decline. Furthermore, the fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the
security that was paid off.
Investment models -
The proprietary models used by the advisers to evaluate securities or
securities markets are based on the advisers' understanding of the
interplay of market factors and do not assure successful investment.
The markets, or the prices of individual securities, may be affected
by factors not foreseen in developing the models.
Year 2000 -
Like other mutual funds (and most organizations around the world), the
funds could be adversely affected by computer problems related to the
year 2000. These could interfere with operations of the funds, their
adviser, distributor or subadviser, or could impact companies in which
the funds invest. The year 2000 poses an even greater risk for foreign
securities.
While no one knows if these problems will have any impact on the funds
or on financial markets in general, the manager and its affiliates are
taking steps to protect fund investors. These include efforts to
determine that the problem will not directly affect the systems used
by major service providers.
Whether these steps will be effective can only be known for certain in
the year 2000.
Portfolio turnover -
Global Government may have an annual portfolio turnover rate
significantly in excess of 100%. High turnover rates can result in
increased trading costs and higher levels of realized capital gains.
8 Legg Mason Global Trust
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[GRAPHIC]
PERFORMANCE
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The information below provides an indication of the risks of investing
in a fund by showing changes in the fund's performance from year to
year. Annual returns assume reinvestment of dividends and
distributions. Historical performance of a fund does not necessarily
indicate what will happen in the future.
Global Government Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(1.40) 20.80 8.22 (1.89) 11.50
During the last five calendar years:
Quarter Ended Total Return
- --------------------- ------------------- --------------------
Best quarter: March 31, 1995 +7.86%
Worst quarter : March 31, 1997 -3.28%
In the following table, average annual returns as of December 31, 1998
are compared with the Salomon Brothers World Government Bond Index.
<TABLE>
<S> <C> <C> <C>
1 Year 5 Years Life of Class
- ----------------------------------------- ------------ ----------- --------------------
Global Government Trust +11.50% +7.16% +7.45%(a)
Salomon Brothers World Government
Bond Index +15.31% +7.85% +7.87%(b)
</TABLE>
These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any. A fund's yield is its net
income over a recent 30-day period, expressed as an annualized rate of
return. For the fund's current yield, call toll-free 1-800-822-5544.
(a) April 15, 1993 (commencement of operations) to December 31, 1998.
(b) For the period April 30, 1993 to December 31, 1998.
Legg Mason Global Trust 9
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International Equity Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1996 1997 1998
---- ---- ----
16.49 1.76 8.49
During the last three calendar years:
<TABLE>
<S> <C> <C>
Quarter Ended Total Return
- --------------------- ----------------------- --------------------
Best quarter: March 31, 1998 +15.70%
Worst quarter: September 30, 1998 -20.06%
</TABLE>
In the following table, average annual total returns as of December
31, 1998 are compared with the Morgan Stanley Capital International
Europe, Australia and the Far East (EAFE) Index.
<TABLE>
<S> <C> <C>
1 Year Life of Class
- ----------------------------------- -------------- -----------------------
International Equity Trust +8.49% +8.88%(a)
MSCI EAFE Index +20.00% +11.18%(b)
</TABLE>
These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any.
(a) February 17, 1995 (commencement of operations) to December 31,
1998.
(b) For the period February 28, 1995 to December 31, 1998.
10 Legg Mason Global Trust
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Emerging Markets Trust -- Primary Shares
Year by year total return as of December 31 of each year (%)
[GRAPHIC TABLE APPEARS HERE]
1997 1998
---- ----
(6.18) (29.34)
During the last two calendar years:
<TABLE>
<S> <C> <C>
Quarter Ended Total Return
- --------------------- ----------------------- --------------------
Best quarter: December 31, 1998 +16.19%
Worst quarter: September 30, 1998 -28.18%
</TABLE>
In the following table, average annual total returns as of December
31, 1998 are compared with the Morgan Stanley Capital International
Emerging Markets Free (MSCI EM Free) Index.
<TABLE>
<S> <C> <C>
1 Year Life of Class
- ------------------------------- --------------- -----------------------
Emerging Markets Trust -29.34% -12.89%(a)
MSCI EM Free Index -25.34% -16.07%(b)
</TABLE>
These figures include changes in principal value, reinvested dividends
and capital gain distributions, if any.
(a) May 28, 1996 (commencement of operations) to December 31, 1998.
(b) For the period May 31, 1996 to December 31, 1998.
Legg Mason Global Trust 11
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[GRAPHIC]
FEES AND EXPENSES OF THE FUNDS
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The table below describes the fees and expenses you will incur
directly or indirectly as an investor in a fund. Each fund pays
operating expenses directly out of its assets so they lower that
fund's share price and dividends. Other expenses include transfer
agency, custody, professional and registration fees. The funds have no
sales charge but are subject to a 12b-1 fee. Emerging Markets Trust
imposes a 2% redemption fee on all redemptions, including exchanges,
of fund shares held for less than one year.
The fees shown are current fees, and the expenses shown are based on
expenses for the fiscal year ended December 31, 1998. The fees and
expenses are calculated as a percentage of average net assets.
Shareholder Fees
(fees paid directly from your investment)
Emerging Markets Trust Redemption fee: 2.00%
Proceeds of shares redeemed or exchanged within one year of purchase
will be subject to a 2% redemption fee. The fee is paid directly to
the fund and not to the manager or distributor.
<TABLE>
<S> <C> <C> <C>
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
- -------------------------------------------------------------------------------------
Global International Emerging
Government Equity Markets
Primary Shares of: Trust Trust Trust
- ---------------------------------- ------- ------- -------
Management fees (a) 0.75% 0.75% 1.00%
Distribution and/or
Service (12b-1) fees 0.75% 1.00% 1.00%
Other expenses 0.37% 0.39% 0.78%
- ---------------------------------- ------- ------- -------
Total Annual Fund
Operating Expenses (a) 1.87% 2.14% 2.78%
</TABLE>
(a) The manager has a voluntary agreement to waive fees so that
Primary Share expenses (exclusive of taxes, interest, brokerage and
extraordinary expenses) do not exceed annual rates of each fund's
average daily Primary Share net assets as follows: for Global
Government Trust, 1.90% indefinitely; for International Equity Trust,
2.25% indefinitely; and for Emerging Markets Trust, 2.50% until May 1,
2000. No fee waivers were necessary for Global Government Trust and
International Equity Trust. These voluntary waivers may be terminated
at any time.
12 Legg Mason Global Trust
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Example:
This example helps you compare the cost of investing in a fund with
the cost of investing in other mutual funds. Although your actual
costs may be higher or lower, you would pay the following expenses on
a $10,000 investment in a fund, assuming (1) a 5% return each year,
(2) the fund's operating expenses remain the same as shown in the
table above, and (3) you redeem all of your shares at the end of the
time periods shown. Actual returns may be higher or lower than 5% per
year.
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
- --------------------------------- ---------- ----------- ----------- ----------
Global Government Trust $ 190 $ 588 $ 1,011 $ 2,190
International Equity Trust $ 217 $ 670 $ 1,149 $ 2,472
Emerging Markets Trust $ 486 $ 862 $ 1,469 $ 3,109
Emerging Markets Trust
(Assuming no redemption) $ 281 $ 862 $ 1,469 $ 3,109
</TABLE>
Legg Mason Global Trust 13
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[GRAPHIC]
MANAGEMENT
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Management and Advisers:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland
21202, is the funds' manager. The manager is responsible for
investment management and administrative services and for overseeing
the funds' relationships with outside service providers, such as the
custodian, transfer agent, accountants, and lawyers.
For its services during the fiscal year ended December 31, 1998, each
fund paid the manager a percentage of its average daily net assets as
follows:
<TABLE>
<S> <C>
Global Government Trust 0.75%
International Equity Trust 0.75%
Emerging Markets Trust 0.72%
</TABLE>
The manager acts as manager or adviser to investment companies with
aggregate assets of $18.1 billion as of March 31, 1999.
Batterymarch Financial Management, Inc., 200 Clarendon Street, Boston,
Massachusetts 02116, is investment adviser to International Equity
Trust and Emerging Markets Trust. The adviser is responsible for the
actual investment management of these funds which includes making
investment decisions and placing orders to buy or sell a particular
security.
The manager pays the adviser a monthly fee of 66 2/3% of the fee it
receives from International Equity Trust and a monthly fee of 75% of
the fee it receives from Emerging Markets Trust. Fees paid to the
adviser are net of any waivers.
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 $4.5 billion as of March 31, 1999.
Western Asset Management Company, 117 East Colorado Boulevard,
Pasadena, California 91105, is investment adviser to Global Government
Trust. The adviser is responsible for the actual investment management
of the fund which includes making investment decisions and placing
orders to buy or sell a particular security.
The manager pays the adviser a monthly fee of 53 1/3% of the fee it
receives, net of any waivers.
Western Asset acts as investment adviser to investment companies and
private accounts with aggregate assets of $49.2 billion as of March
31, 1999.
Western Asset Global Management Limited, 155 Bishopsgate, London,
England, serves as investment sub-adviser to Global Government Trust.
The sub-adviser is responsible for providing research, analytical and
trading support
14 Legg Mason Global Trust
<PAGE>
for the fund's investment program, as well as exercising investment
discretion for part of the portfolio, subject to the supervision of
Western Asset Management Company and Legg Mason Fund Adviser, Inc.
For its services and for expenses borne by Western Asset Global under
its sub-advisory agreement, the adviser pays the sub-adviser a fee at
an annual rate of 0.20% of the fund's average daily net assets, net of
any waivers.
The manager also pays the sub-adviser a sub-administration fee at an
annual rate of 0.10% of the fund's average daily net assets, net of
any waivers, for certain administrative services performed.
Western Asset Global renders investment advice to institutional,
private and commingled fund portfolios with assets of over $3.3
billion as of March 31, 1999. Western Asset Global has managed global
fixed-income assets for U.S. and non-U.S. clients since 1984.
Portfolio management:
Batterymarch investment teams have been responsible for the day-to-day
management of International Equity Trust and Emerging Markets Trust
since their inception.
An investment committee at Western Asset Management Company is
responsible for the day-to-day management of Global Government Trust.
Distributor of the fund's shares:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland 21202, is the distributor of each fund's shares. Each fund
has adopted a plan that allows it to pay distribution fees and
shareholder service fees for the sale of its shares and for services
provided to shareholders. Under each plan, the funds may pay the
distributor an annual fee equal to 0.50% of Global Government Trust's
average daily net assets attributable to Primary Shares, and 0.75% of
International Equity Trust's and Emerging Market Trust's average daily
net assets attributable to Primary Shares; and an annual service fee
from each fund equal to 0.25% of its average daily net assets
attributable to Primary Shares.
Because these fees are paid out of the fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
The distributor may enter into agreements with other brokers to sell
Primary Shares of each fund. The distributor pays these brokers up to
90% of the service fee that it receives from a fund for those sales.
The manager, advisers, sub-adviser and distributor are wholly owned
subsidiaries of Legg Mason, Inc., a financial services holding
company.
Legg Mason Global Trust 15
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[GRAPHIC]
HOW TO INVEST
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To open a regular account or a retirement account with one or more of the
funds, contact a Legg Mason financial advisor or other entity that has entered
into an agreement with the funds' distributor to sell shares of the Legg Mason
family of funds. A Legg Mason financial advisor will explain the shareholder
services available from our funds and answer any questions you may have. The
minimum initial investment for regular accounts and retirement accounts is
$1,000 and the minimum for each purchase of additional shares is $100, except
as noted below.
Retirement accounts include traditional IRAs, spousal IRAs, education IRAs,
Roth IRAs, simplified employee pension plans, savings incentive match plans
for employees and other qualified retirement plans. Contact your Legg Mason
financial advisor or other entity offering the funds to discuss which one
might be appropriate for you.
ONCE YOUR ACCOUNT IS OPEN, YOU MAY USE THE FOLLOWING METHODS TO ADD TO YOUR
ACCOUNT:
IN PERSON Give your financial advisor a check for $100 or more payable
to the fund
MAIL Mail your check, payable to the fund, for $100 or more to
your financial advisor
TELEPHONE Call your financial advisor to transfer available cash
OR WIRE balances in your brokerage account or to transfer money
from your bank directly to Legg Mason. Wire transfers may be
subject to a service charge by your bank.
FUTURE FIRST Contact your Legg Mason financial advisor to enroll in Legg
SYSTEMATIC Mason's Future First Systematic Investment Plan. Under
INVESTMENT this plan, you may arrange for automatic monthly investments
PLAN in the fund of $50 or more. The fund's transfer agent will
transfer funds monthly from your Legg Mason account or from
your checking account to purchase shares of the fund.
AUTOMATIC Arrangements may be made with some employers and financial
INVESTMENTS institutions for regular automatic monthly investments of
$50 or more in shares of the fund. You may also reinvest
dividends from certain unit investment trusts in shares of
the fund.
Call your financial advisor or another entity offering the fund for sale with
any questions regarding the investment options above.
Certain investment methods may be subject to lower minimum initial and
additional investments.
16 Legg Mason Global Trust
<PAGE>
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Investments made through entities other than Legg Mason may be subject to
transaction fees or other purchase conditions established by those entities.
You should consult their program literature for further information.
Purchase orders received by your financial advisor or the entity offering the
funds before the close of the New York Stock Exchange (normally 4:00 p.m.,
Eastern time) will be processed at the fund's net asset value as of the close
of the exchange on that day. Orders received after the close of the exchange
will be processed at the fund's net asset value as of the close of the
exchange on the next day the exchange is open. Payment must be made within
three business days to Legg Mason.
You will begin to earn dividends on shares of Global Government Trust as of
settlement date, which is normally the third business day after your order is
placed with a financial advisor.
Legg Mason Global Trust 17
<PAGE>
[GRAPHIC]
HOW TO SELL YOUR SHARES
--------------------------------------------------------------------------
Redemptions made through entities other than Legg Mason may be subject to
transaction fees or other conditions imposed by those entities. You should
consult their program literature for further information.
<TABLE>
<S> <C>
Any of the following methods may be used to sell your shares:
TELEPHONE Call your Legg Mason financial advisor or entity offering the fund
and request a redemption. Please have the following information
ready when you call: the name of the fund, the number of shares
(or dollar amount) to be redeemed and your shareholder account
number.
Proceeds will be credited to your brokerage account or a check
will be sent to you, at your direction, at no charge to you. Wire
requests will be subject to a fee of $18. Be sure that your
financial advisor has your bank account information on file.
The funds will follow reasonable procedures to ensure the
validity of any telephone redemption request, such as requesting
identifying information from callers or employing identification
numbers. Unless you specify that you do not wish to have telephone
redemption privileges, you may be held responsible for any
fraudulent telephone order.
MAIL Send a letter to the fund requesting redemption of your shares.
The letter should be signed by all of the owners of the account
and their signatures guaranteed without qualification. You may
obtain a signature guarantee from most banks or securities
dealers.
</TABLE>
Your order will be processed promptly and you will generally receive the
proceeds within a week. Fund shares will be sold at the next net asset value
calculated after your redemption request is received by your Legg Mason
financial advisor or another entity.
Redemptions of shares that were recently purchased by check or acquired
through reinvestment of dividends on such shares may be delayed for up to 10
days from the purchase date in order to allow for the check to clear.
Additional documentation may be required from corporations, executors,
partnerships, administrators, trustees or custodians.
Emerging Markets Trust Redemption Fee:
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. 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 fee will be paid directly to the fund
to help offset the costs imposed on it by short-term trading in emerging
markets.
The fund will use the "first-in, first-out" method to determine the one year
holding period. The date of redemption or exchange will be compared with the
earliest purchase date of shares held in the account. The fee will not apply
to any shares purchased through reinvestment of dividends or other
distributions or to shares held in retirement plans; however, it will apply to
shares held in IRA accounts (including IRA-based plans) and to shares
purchased through automatic investment plans.
18 Legg Mason Global Trust
<PAGE>
[GRAPHIC]
ACCOUNT POLICIES
--------------------------------------------------------------------------
Calculation of Net Asset Value:
Net asset value per Primary Share is determined daily as of the close
of the New York Stock Exchange, on every day the exchange is open. To
calculate each fund's Primary Share price, the fund's assets
attributable to Primary Shares are valued and totaled, liabilities are
subtracted, and the resulting net assets are divided by the number of
Primary 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 Trust are valued on the basis of valuations
furnished by a 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.
Other:
Fund shares may not be held in, or transferred to, an account with any
firm that does not have an agreement with Legg Mason or its
affiliates.
If your account falls below $500, the fund may ask you to increase
your balance. If, after 60 days, your account is still below $500, the
fund may close your account and send you the proceeds.
Each fund reserves the right to:
- reject any order for shares or suspend the offering of
shares for a period of time
- change its minimum investment amounts
- delay sending out redemption proceeds for up to seven days.
This generally applies only in cases of very large
redemptions, excessive trading or during unusual market
conditions. The funds may delay redemptions beyond seven
days, or suspend redemptions, only as permitted by the SEC.
Legg Mason Global Trust 19
<PAGE>
[GRAPHIC]
SERVICES FOR INVESTORS
--------------------------------------------------------------------------
For further information regarding any of the services below, please
contact your financial advisor or other entity offering the funds for
sale.
Confirmations and Account Statements:
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares (except a reinvestment of dividends, capital
gain distributions and purchases made through the Future First
Systematic Investment Plan or through automatic investments). Legg
Mason or the entity through which you invest will send you account
statements monthly unless there has been no activity in the account,
in which case a statement will be sent quarterly. Legg Mason will send
you statements quarterly if you participate in the Future First
Systematic Investment Plan or if you purchase shares through automatic
investments.
Systematic Withdrawal Plan:
If you are purchasing or already own shares of a fund with a net asset
value of $5,000 or more, you may elect to make systematic withdrawals
from the fund. The minimum amount for each withdrawal is $50. You
should not purchase shares of the fund that is participating in the
plan.
Exchange Privilege:
Primary fund shares may be exchanged for Primary Shares of any of the
other Legg Mason funds, provided these funds are eligible for sale in
your state of residence. You can request an exchange in writing or by
phone. Be sure to read the current prospectus for any fund into which
you are exchanging.
Other than the redemption fee imposed on exchanges of shares of
Emerging Markets Trust, there is currently no fee for exchanges;
however, you may be subject to a sales charge when exchanging into a
fund that has one. In addition, an exchange of a fund's shares will be
treated as a sale of the shares and any gain on the transaction may be
subject to tax.
Each fund reserves the right to:
- terminate or limit the exchange privilege of any shareholder
who makes more than four exchanges from the fund in one
calendar year
- terminate or modify the exchange privilege after 60 days'
notice to shareholders
20 Legg Mason Global Trust
<PAGE>
[GRAPHIC]
DIVIDENDS AND TAXES
--------------------------------------------------------------------------
Global Government Trust declares and pays dividends from its net
investment income monthly. International Equity Trust and Emerging
Markets Trust each declares and pays these dividends annually.
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 realized
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 a federal excise tax.
Your dividends and distributions will be automatically reinvested in
additional Primary Shares of the fund. If you wish to receive
dividends and/or distributions in cash, you must notify the fund at
least 10 days before the next dividend and/or distribution is to be
paid.
If the postal or other delivery service is unable to deliver your
check, your distribution option will automatically be converted to
having all dividends and distributions reinvested in fund shares. No
interest will accrue on amounts represented by uncashed distribution
or redemption checks.
Fund dividends and other distributions are taxable to investors (other
than retirement plans and other tax-exempt investors) whether received
in cash or reinvested in additional Primary Shares of the fund.
Dividends of net investment income and any net short-term capital
gains will be taxable as ordinary income. Distributions of a fund's
net capital gain will be taxable as long-term capital gain, regardless
of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or
loss, depending on whether the proceeds are more or less than the cost
of your shares.
Each fund's dividend and interest income, and gains realized from the
disposition of foreign securities, may be subject to income,
withholding or other taxes imposed by foreign countries and U.S.
possessions.
A tax statement is sent to you at the end of each year detailing the
tax status of your distributions.
Each fund will withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to individuals and
certain other non-corporate shareholders who do not provide the fund
with a valid taxpayer identification number. Each fund will also
withhold 31% of all dividends and capital gain distributions payable
to such shareholders who are otherwise subject to backup withholding.
Because each investor's tax situation is different, please consult
your tax advisor about federal, state and local tax considerations.
Legg Mason Global Trust 21
<PAGE>
[GRAPHIC]
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
The financial highlights table is intended to help you understand each fund's
financial performance for the past 5 years or since inception. Total return
represents the rate that an investor would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and
distributions. This information has been audited by the funds' independent
accountants, PricewaterhouseCoopers LLP, whose report, along with the funds'
financial statements, is incorporated by reference into the Statement of
Additional Information (see back cover) and is included in the annual report.
The annual report is available upon request by calling toll-free
1-800-822-5544.
<TABLE>
<S> <C> <C> <C> <C>
Income from
Investment Operations
-------------------------------------------------------------
Net Realized &
Unrealized Gain
(Loss) On
Investments,
Options, Futures
For the Net Asset Net and Foreign Total From
Years Ended Value, Investment Currency Investment
Dec. 31, Beginning of Year Income Transactions Operations
-------- ----------------- ------ ------------ ----------
Global Government Trust -- Primary Shares
1998 $ 9.60 $ .37 $ .70 $ 1.07
1997 10.41 .54 (.71) (.17)
1996 10.33 .59 .21 .80
1995 9.54 .63 1.32 1.95
1994 10.27 .57 (a) (.71) (.14)
International Equity Trust -- Primary Shares
1998 $ 11.78 $ .01 $ .99 $ 1.00
1997 12.09 .02 .19 .21
1996 10.70 .02 (c) 1.74 1.76
1995 (b) 10.00 .04 (c) .77 .81
Emerging Markets Trust -- Primary Shares
1998 $ 9.85 $ .01 (e) $ (2.90) $ (2.89)
1997 10.51 (.02)(e) (.63) (.65)
1996 (d) 10.00 (.03)(e) .57 .54
</TABLE>
22 Legg Mason Global Trust
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Distributions
---------------------------------------------------------------------
In Excess
In Excess From Net of Net
For the From Net of Net Realized Realized Net Asset
Years Ended Investment Investment Gain on Gain on Total Value,
Dec. 31, Income Income Investments Investments Distributions End of Year
-------- ------ ------ ----------- ----------- ------------- -----------
Global Government Trust -- Primary Shares
1998 $ (.47) $ -- $ (.06) $ -- $ (.53) $ 10.14
1997 (.48) (.05) (.11) -- (.64) 9.60
1996 (.62) -- (.10) -- (.72) 10.41
1995 (1.16) -- -- -- (1.16) 10.33
1994 (.59) -- -- -- (.59) 9.54
International Equity Trust -- Primary Shares
1998 $ (.14) $ -- $ -- $ -- $ (.14) $ 12.64
1997 (.08) -- (.44) -- (.52) 11.78
1996 (.05) -- (.32) -- (.37) 12.09
1995 (b) (.04) -- -- (.07) (.11) 10.70
Emerging Markets Trust -- Primary Shares
1998 $ -- $ -- $ -- $ -- $ -- $ 6.96
1997 (.01) -- -- -- (.01) 9.85
1996 (d) (.03) -- -- -- (.03) 10.51
</TABLE>
Legg Mason Global Trust 23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------------
Net Investment
Expenses Income (Loss)
For the to Average to Average Portfolio Net Assets,
Years Ended Total Return Net Assets Net Assets Turnover Rate End of Year
Dec. 31, (%) (%) (%) (%) (thousands -- $)
----------- ------------ ---------- ---------- ------------- ----------------
Global Government Trust -- Primary Shares
1998 11.50 1.87 4.51 288 120,805
1997 (1.69) 1.86 5.39 241 136,732
1996 8.22 1.86 5.80 172 161,549
1995 20.80 1.81 5.72 169 153,954
1994 (1.40) 1.34(a) 5.71(a) 127 145,415
International Equity Trust -- Primary Shares
1998 8.49 2.14 .06 72 258,521
1997 1.76 2.17 .17 59 227,655
1996 16.49 2.25(c) .21(c) 83 167,926
1995 (b) 8.11(g) 2.25(c,f) .52(c,f) 58(f) 65,947
Emerging Markets Trust -- Primary Shares
1998 (29.34) 2.50(e) .09(e) 76 42,341
1997 (6.18) 2.50(e) (.76)(e) 63 65,302
1996 (d) 5.40(g) 2.50(e,f) (.68)(e,f) 46(f) 21,206
</TABLE>
(a) Net of fees waived by the manager for expenses in excess of voluntary
expense limitations of 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; and 1.9% indefinitely. If no fees had
been waived by the manager, the annualized ratio of expenses to average
daily net assets for 1994 would have been 1.82%.
(b) February 17, 1995 (commencement of operations) to December 31, 1995.
(c) Net of fees waived by the manager for expenses in excess of a voluntary
expense limitation of 2.25%. If no fees had been waived by the manager,
the annualized ratio of expenses to average daily net assets would have
been: 1996, 2.32% and 1995, 2.91%.
(d) May 28, 1996 (commencement of operations) to December 31, 1996.
(e) Net of fees waived by the manager for expenses in excess of a voluntary
expense limitation of 2.50%. If no fees had been waived by the manager,
the annualized ratio of expenses to average daily net assets would have
been: 1998, 2.78%; 1997, 2.86% and 1996, 3.71%.
(f) Annualized
(g) Not annualized
24 Legg Mason Global Trust
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
Legg Mason Global Trust, Inc.
------------------------------------------------------------------
The following additional information about the funds is available upon
request and without charge:
Statement of Additional Information (SAI) - the SAI is filed with the
Securities and Exchange Commission (SEC) and is incorporated by
reference into (is considered part of) the prospectus. The SAI provides
additional details about each fund and their policies.
Annual and Semiannual Reports - additional information about each
fund's investments is available in the funds' annual and semiannual
reports to shareholders. These reports provide detailed information
about each fund's portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain
more
information:
- call toll-free 1-800-822-5544
- visit us on the Internet via http://www.leggmason.com
- write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and
copied at the SEC's public reference room in Washington, DC (phone
1-800-SEC-0330). Reports and other information about the funds are
available on the SEC's Internet site at http://www.sec.gov. Investors
may also write to: SEC, Public Reference Section, Washington, DC
20549-6009. A fee will be charged for making copies.
LMF-041 SEC file number 811-7418
<PAGE>
LEGG MASON GLOBAL FUNDS
LEGG MASON GLOBAL TRUST, INC.:
LEGG MASON GLOBAL GOVERNMENT TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
PRIMARY SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectuses for Primary Shares and for
Navigator Shares of the funds, both dated May 1, 1999, which have been filed
with the Securities and Exchange Commission ("SEC"). The funds' annual report is
incorporated by reference into this Statement of Additional Information. Copies
of either the annual report or the Prospectuses are available without charge by
writing to or calling the funds' distributor, Legg Mason Wood Walker,
Incorporated ("Legg Mason") (address and telephone numbers listed below).
LEGG MASON WOOD WALKER, INCORPORATED
- --------------------------------------------------------------------------------
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
TABLE OF CONTENTS
Page
Description of the Funds 1
Fund Policies 1
Investment Strategies and Risks 6
Additional Purchase and Redemption Information 29
Additional Tax Information 31
Tax-Deferred Retirement Plans 35
Performance Information 36
Valuation of Fund Shares 42
Management of the Fund 42
The Funds' Investment Adviser/Manager 44
Sub-Advisory Agreement for Global Government Trust 47
The Funds' Distributor 48
Portfolio Transactions and Brokerage 50
Capital Stock Information 51
The Corporation's Custodian and Transfer and Dividend-
Disbursing Agent 51
The Corporation's Legal Counsel 51
The Corporation's Independent Accountants 52
Financial Statements 52
Appendix A A-1
Appendix B B-1
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by any fund or its distributor. The Prospectuses
and the Statement of Additional Information do not constitute offerings by any
fund or by the distributor in any jurisdiction in which such offerings may not
lawfully be made.
- --------------------------------------------------------------------------------
- 2 -
<PAGE>
DESCRIPTION OF THE FUNDS
Legg Mason Global Trust, Inc. is an open-end investment company which
was incorporated in Maryland on December 31, 1992. Legg Mason Global Government
Trust, Legg Mason International Equity Trust and Legg Mason Emerging Markets
Trust are separate series of Legg Mason Global Trust, Inc. Global Government is
non-diversified; International Equity and Emerging Markets are diversified.
FUND POLICIES
Global Government's investment objective is to seek capital
appreciation and current income in order to achieve an attractive total return
consistent with prudent investment risk. International Equity Trust's investment
objective is to seek to maximize long-term total return. Emerging Market Trust's
investment objective is to seek long-term capital appreciation.
The following information supplements the information concerning each
fund's investment objectives, policies and limitations found in the
Prospectuses. Each fund has adopted certain fundamental investment limitations
that, like the investment objectives listed above, cannot be changed except by
vote of that fund's shareholders.
Global Government may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets, including borrowings, less liabilities
exclusive of borrowings, of the fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. Issue senior securities, except as permitted by the Investment
Company Act of 1940 ("1940 Act");
3. Underwrite the securities of other issuers except insofar as the
fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of a portfolio security;
4. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
5. Purchase or sell any commodities or commodities contracts, except
that the fund may purchase or sell currencies, interest rate and currency
futures contracts, options on currencies and securities indexes and options on
interest rate and currency futures contracts;
6. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, loans, loan participations and advances in
connection therewith or other evidences of indebtedness, the entry into
repurchase agreements, or deposits with banks and other financial institutions
may be considered loans;
7. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
- 3 -
<PAGE>
International Equity may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets (including borrowings), less liabilities
(exclusive of borrowings), of the fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer (other than,
in each case, cash items, securities of the U.S. Government, its agencies and
instrumentalities, and securities issued by other investment companies);
3. Issue senior securities, except as permitted by the 1940 Act;
4. Engage in the business of underwriting the securities of other
issuers except insofar as the fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
6. Purchase or sell any commodities or commodities contracts, except
that the fund may purchase or sell currencies; futures contracts on currencies,
securities or securities indexes, options on currencies, securities, and
securities indexes; and options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
Emerging Markets may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 33 1/3% of the total assets (including borrowings), less liabilities
(exclusive of borrowings), of the fund; provided that borrowings, including
reverse repurchase agreements and dollar rolls, in excess of 5% of such value
will be only from banks (although not a fundamental policy subject to
shareholder approval, the fund will not purchase securities if borrowings,
including reverse repurchase agreements and dollar rolls, exceed 5% of its total
assets);
2. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer (other than,
in each case, cash items, securities of the U.S. Government, its agencies and
instrumentalities, and securities issued by other investment companies);
3. Issue senior securities, except as permitted by the 1940 Act;
- 4 -
<PAGE>
4. Engage in the business of underwriting the securities of other
issuers except insofar as the fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in disposing of a portfolio security;
5. Buy or hold any real estate other than instruments secured by real
estate or interests therein;
6. Purchase or sell any commodities or commodities contracts, except
that the fund may purchase or sell currencies; futures contracts on currencies,
securities or securities indexes, options on currencies, securities, and
securities indexes; and options on interest rate and currency futures contracts;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds, or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
The foregoing investment limitations of each fund cannot be changed
without the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the fund or (2) 67% or more of the shares of the fund
present at a shareholders' meeting if more than 50% of the outstanding shares of
the fund are represented at the meeting in person or by proxy. Except with
respect to the 33 1/3% limit in investment limitation number 1, if a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered to exceed
any of the foregoing limitations.
Except as otherwise specified, the following investment limitations and
policies, and all other investment limitations and policies of the funds, are
non-fundamental and may be changed by the Corporation's Board of Directors
without shareholder approval.
Each fund may not:
1. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that a fund may make margin
deposits in connection with the use of permitted futures contracts and options
on futures contracts as well as options on currencies, securities and securities
indexes;
2. Make short sales of securities or maintain a short position, except
that a fund may (a) make short sales and maintain short positions in connection
with its use of options, futures contracts and options on futures contracts and
(b) sell short "against the box" (Global Government does not intend to make
short sales in excess of 5% of its net assets during the coming year and
International Equity does not intend to make short sales during the coming
year);
Global Government may not:
3. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry. This limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements with respect thereto.
- 5 -
<PAGE>
International Equity intends to:
4. Under normal circumstances, invest at least 65% of its total assets
in equity securities of issuers located outside the United States.
Emerging Markets intends to:
5. Under normal circumstances, invest at least 65% of its total assets
in emerging market equity securities.
Global Government is a non-diversified fund; however, the fund intends
to continue to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, which requires that, among other things. At
the close of each quarter of the fund's taxable year: (1) with respect to 50% of
its 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.
INVESTMENT STRATEGIES AND RISKS
THE FOLLOWING INFORMATION APPLIES TO ALL OF THE FUNDS:
RATINGS OF DEBT OBLIGATIONS
Moody's, S&P and other nationally recognized or foreign statistical
rating organizations ("SROs") are private organizations that provide ratings of
the credit quality of debt obligations. A description of the ratings assigned to
corporate debt obligations by Moody's and S&P is included in Appendix A. A fund
may consider these ratings in determining whether to purchase, sell or hold a
security. Ratings issued by Moody's or S&P represent only the opinions of those
agencies and are not guarantees of credit quality. Consequently, securities with
the same maturity, interest rate and rating may have different market prices.
Credit rating agencies attempt to evaluate the safety of principal and interest
payments and do not evaluate the risks of fluctuations in market value. Also,
rating agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be better
or worse than the rating indicates.
THE FOLLOWING INFORMATION ABOUT INVESTMENT POLICIES APPLIES ONLY TO GLOBAL
GOVERNMENT:
BRADY BONDS
The fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which 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 CURRENCY EXCHANGE-RELATED SECURITIES AND FOREIGN CURRENCY WARRANTS
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United States,
in U.S. dollars) that is calculated pursuant to a predetermined formula and
based on the exchange rate between a specified foreign currency and the U.S.
dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable
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upon their issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that is inherent in the international
fixed income/debt marketplace. The formula used to determine the amount payable
upon exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate moves in a particular
direction.
Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants
are delisted from an exchange or if their trading is suspended permanently,
which would result in the loss of any remaining "time value" of the warrants
(i.e., the difference between the current market value and the exercise value of
the warrants) and, in the case where the warrants were "out-of-the-money," in a
total loss of the purchase price of the warrants. Warrants are generally
unsecured obligations of their issuers and are not standardized foreign currency
options issued by the Options Clearing Corporation ("OCC"). Unlike foreign
currency options issued by OCC, the terms of foreign currency warrants generally
will not be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price
that a commercial user of foreign currencies might pay in the interbank market
for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political and economic
factors.
SWAPS, CAPS, COLLARS AND FLOORS
The fund may enter into interest rate, currency and index swaps, and
may purchase and sell caps, collars and floors for hedging purposes or in an
effort to increase overall return. Interest rate swap transactions involve an
agreement between two parties under which one makes to the other periodic
payments based on a fixed rate of interest and receives in return periodic
payments based on a variable rate of interest; the rates are calculated on the
basis of a specified amount of principal (the "notional principal amount") for a
specified period of time. A currency swap is an agreement to exchange cash flows
based on changes in the value of an exchange rate; participants in currency
swaps may also exchange the principal amount. Index swaps link one of the
payments to the total return of a market portfolio. Cap and floor transactions
involve an agreement between two parties in which one agrees to pay the other
when a designated market interest rate, currency rate or index value goes above
(in the case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. In an interest rate
collar, one party agrees to pay the other when a designated market interest rate
either goes above a specified cap level or below a specified floor level, either
on predetermined dates or during a specified time period.
As with options and future transactions, successful use of swap
agreements depends on the Adviser's ability to predict movements in the
direction of the overall currency and interest rate markets. There might be
imperfect correlation between the value of a swap, cap, collar or floor
agreement and movements in the underlying interest rate or currency markets.
While swap agreements can offset the potential for loss on a position, they can
also limit the opportunity for gain by offsetting favorable price movements.
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Swaps, caps, collars and floors can be highly volatile instruments. The
value of these agreements is dependent on the ability of the counterparty to
perform and is therefore linked to the counterparty's creditworthiness. The fund
may also suffer a loss if it is unable to terminate an outstanding swap
agreement.
The fund will enter into swaps, caps, collars and floors only with
parties deemed by its adviser to present a minimal risk of default during the
period of agreement. When the fund enters into a swap, cap, collar or floor, it
will maintain a segregated account containing cash and appropriate liquid
securities equal to the payment, if any, due to the other party; where contracts
are on a net basis, only the net payment will be segregated. The fund regards
caps, collars and floors as illiquid, and therefore subject to the fund's 15%
limit on illiquid securities. There can be no assurance that the fund will be
able to terminate a swap at the appropriate time. The fund will sell caps,
collars and floors only to close out its positions in such instruments.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps. The market for all of these
instruments is largely unregulated. Swaps, caps, collars and floors are
generally considered "derivatives."
The fund does not intend to purchase swaps, caps, collars, or floors
if, as a result, more than 5% of the fund's net assets would thereby be placed
at risk.
COMMERCIAL PAPER AND OTHER SHORT-TERM INSTRUMENTS
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies.
The fund may purchase commercial paper issued pursuant to the private
placement exemption in Section 4(2) of the Securities Act of 1933. Section 4(2)
paper is restricted as to disposition under the federal securities laws in that
any resale must similarly be made in an exempt transaction. The fund may or may
not regard such securities as illiquid, depending on the circumstances of each
case.
The fund may also invest in obligations (including certificates of
deposit, demand and time deposits and bankers' acceptances) of U.S. banks and
savings and loan institutions if the issuer has total assets in excess of $1
billion at the time of purchase or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower, usually in connection with
an international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
specified interest rate. Certificates of deposit are negotiable short-term
obligations issued by banks against funds deposited in the issuing institution.
The interest rate on some certificates of deposit is periodically adjusted prior
to the stated maturity, based upon a specified market rate. While domestic bank
deposits are insured by an agency of the U.S. Government, the fund will
generally assume positions considerably in excess of the insurance limits.
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 the adviser to be of comparable quality; and bank
certificates of deposit and bankers' acceptances judged by the adviser to be of
comparable quality.
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SOVEREIGN DEBT
Investments in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal and/or interest when due
in accordance with the terms of such debt, and the fund may have limited legal
recourse in the event of a default.
Sovereign Debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, holders of commercial
bank debt issued by the same sovereign entity may contest payments to the
holders of Sovereign Debt in the event of default under commercial bank loan
agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The ability of some sovereign debtors to repay their obligations may
depend on the timely receipt of assistance from international agencies or other
governments, the flow of which is not assured. The willingness of such agencies
to make these payments may depend on the sovereign debtor's willingness to
institute certain economic changes, the implementation of which may be
politically difficult.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing Sovereign Debt could adversely affect the fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While Western Asset intends to manage investments in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the fund to suffer a loss of
interest or principal on any of its holdings.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent participations in, or are secured
by and payable from, mortgage loans secured by real property. These securities
are designed to provide monthly payments of interest and, in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed through" to investors such as the fund. Many issuers or
poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. These guarantees are often backed by various forms
of credit, insurance and collateral, although these may be in amounts less than
the full obligation of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. In addition to fixed-rate, fixed-term
mortgages, the fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages
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included in the pools. In addition, many mortgages included in pools are insured
through private mortgage insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments, as well as
with market interest rates. For example, securities issued by the Government
National Mortgage Association ("GNMAs") tend to have a longer average life than
participation certificates ("PCS") issued by Freddie Mac because there is a
tendency for the conventional and privately-insured mortgages underlying Freddie
Mac PCS to repay at faster rates than the Federal Housing Administration and
Veterans Administration loans underlying GNMAs. In addition, the term of a
security may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. Thus, an increase in interest rates can slow prepayments
effectively extending the maturity of mortgage-related securities and making
them more sensitive to changes in value caused by interest-rate fluctuations.
When market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage refinancing slows, which
lengthens the effective maturities of these securities. As a result, the
negative effect of the rate increase on the market value of mortgage securities
is usually more pronounced than it is for other types of fixed income
securities.
Yields on mortgage-related securities are typically quoted based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
yield expected on the basis of average life. The compounding effect from
reinvestments of monthly payments received by the fund will increase the yield
to shareholders compared to bonds that pay interest semi-annually. Some
mortgage-related securities will be considered illiquid and will be subject to
the fund's limit that no more than 15% of its net assets will be invested in
illiquid securities.
PRIVATE MORTGAGE-RELATED SECURITIES
The private mortgage-related securities in which the fund may invest
include foreign mortgage pass-through securities ("Foreign Pass-Throughs"),
which are structurally similar to the pass-through instruments described above.
Such securities are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment bankers, specialized financial institutions and special purpose
subsidiaries of the foregoing. Foreign Pass-Throughs usually are backed by a
pool of fixed rate or adjustable-rate mortgage loans. The Foreign Pass-Throughs
in which the fund may invest are not guaranteed by an entity having the credit
status of the Government National Mortgage Association, but generally utilize
various types of credit enhancement.
OTHER DEBT SECURITIES
The rate of return or return of principal on some obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities, which can adversely affect the prices at
which these securities can be sold, and may make it difficult for the fund to
obtain market quotations daily. If market quotations are not available, these
securities will be valued by a method that the Corporation's Board of Directors
believes accurately reflects fair market value. Judgment may play a greater role
in valuing lower-rated debt securities than is the case with respect to
securities for which a broader range of dealer quotations and last-sale
information is available.
Although the market for lower-rated debt securities is not new, and the
market has previously weathered economic downturns, there has been in recent
years a substantial increase in the use of such securities to fund corporate
acquisitions and restructurings. Accordingly, the past performance of the
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market for such securities may not be an accurate indication of its performance
during future economic downturns or periods of rising interest rates.
BANK OBLIGATIONS
Bank obligations in which the fund may invest include certificates of
deposit, bankers' acceptances and time deposits in U.S. banks (including foreign
branches) which have more than $1 billion in total assets at the time of
investment and are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation. The fund also may invest in certificates of deposit of
savings and loan associations (federally or state chartered and federally
insured) having total assets in excess of $1 billion.
The fund may invest in obligations of domestic or foreign branches of
foreign banks and foreign branches of domestic banks. These investments involve
risks that are different from investments in securities of domestic branches of
domestic banks. These risks include seizure of foreign deposits, currency
controls, interest limitations or other governmental restrictions which might
affect the payment of principal or interest on the bank obligations held by the
fund.
The fund limits its investments in foreign bank obligations to U.S.
dollar-denominated or foreign currency-denominated obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment (1)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (2) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (3) are judged by Western
Asset to be of comparable quality to obligations of U.S. banks in which the fund
may invest. Subject to the limitation on concentration of less than 25% of the
fund's assets in the securities of issuers in a particular industry, there is no
limitation on the amount of the fund's assets which may be invested in
obligations of foreign banks which meet the conditions set forth herein. Foreign
banks are not generally subject to examination by any U.S. government agency or
instrumentality.
U.S. GOVERNMENT SECURITIES
The fund may invest in direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. Government
agencies and instrumentalities. Such securities include, but are not limited to,
GNMAs, Federal Home Loan Banks, Fannie Mae and Freddie Mac.
ASSET-BACKED SECURITIES
Asset-backed securities 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. The value of such securities partly depends on loan repayments by
individuals, which may be adversely affected during general downturns in the
economy. 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 securities.
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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. The adviser 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 income 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. There is a risk
that the fund 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 disadvantageous time for the
fund.
FORWARD COMMITMENTS
The fund may enter into commitments to purchase U.S. Government
securities or other securities on a "forward commitment" basis, including
purchases on a "when-issued" basis or a "to be announced" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities takes place at a later date.
The fund may sell the securities subject to a forward commitment purchase, which
may result in a gain or a loss. When the fund purchases securities on a forward
commitment basis, it assumes the risks of ownership, including the risk of price
fluctuation, at the time of purchase, not at the time of receipt. Purchases of
forward commitments also involve a risk of loss if the seller fails to deliver
after the value of the securities has risen. The fund's custodian will place
cash or U.S. Government securities in a separate account equal to the
commitments to purchase securities.
The fund may also enter into a forward commitment to sell only those
securities it owns and will do so only with the intention of actually delivering
the securities. In a forward sale, the fund does not participate in gains or
losses on the security occurring after the commitment date. The fund's custodian
will place the securities in a separate account. Forward commitments to sell
securities involves a risk of loss if the seller fails to take delivery after
the value of the securities has declined.
The fund does not expect that its purchases of forward commitments will
at any time exceed, in the aggregate, 20% of its total assets.
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
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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.
THE FOLLOWING INFORMATION ABOUT INVESTMENT POLICIES APPLIES TO EACH FUND UNLESS
OTHERWISE STATED:
FOREIGN INVESTMENTS
Investors should recognize that investing in foreign companies involves
certain special considerations which are not typically associated with investing
in U.S. companies. Certain countries prohibit or impose substantial restrictions
on investments in their capital markets, particularly their equity markets, by
foreign entities such as the funds. These restrictions or controls may at times
limit or preclude investment in certain securities and may increase the cost and
expenses of the fund. For example, certain countries require prior governmental
approval before investments by foreign persons may be made, or may limit the
amount of investment by foreign persons in a particular company, or may limit
the investment by foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals. Moreover, the national policies of certain
countries may restrict investment opportunities in issuers or industries deemed
sensitive to national interests.
Some countries require governmental approval for the repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors. In addition, if there is a deterioration in a country's balance of
payments or for other reasons, a country may impose restrictions on foreign
capital remittances abroad. A fund could be adversely affected by delays in, or
a refusal to grant, any required governmental approval for repatriation.
Certain countries in which a fund may invest may have groups that
advocate radical religious or political philosophies or support ethnic
independence. Disturbances involving such groups carry the potential for
widespread destruction or confiscation of property owned by individuals and
entities foreign to that country or ethnic region and could cause the loss of a
fund's investment in those areas. Instability may also result from, among other
things: (I) authoritarian governments or military involvement in political and
economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; and (iii) hostile relations
with other countries. Such political, social and economic instability could
disrupt the principal financial markets in which a fund invests and adversely
affect the value of a fund's assets.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries have
previously expropriated large quantities of real and personal property similar
to the property which will be represented by the securities purchased by the
funds. The claims of property owners against those governments were never
finally settled. There can be no assurance that any property represented by
securities purchased by a fund will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, a fund could lose its
entire investment in such countries.
Although a fund will endeavor to achieve most favorable execution costs
in its portfolio transactions, commissions on many foreign stock exchanges are
at fixed rates, and generally these are higher than negotiated commissions on
U.S. exchanges.
Delays in settlement could result in temporary periods when assets of a
fund are uninvested and no return is earned thereon. The inability of a fund to
make intended security purchases due to settlement problems could cause the fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to a fund due
to subsequent declines in value of the portfolio security or, if the fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
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The funds may use foreign subcustodians, which may involve risks in
addition to those related to the use of U.S. custodians. Such risks include
uncertainties relating to: (I) determining and monitoring the financial
strength, reputation and standing of the foreign custodian; (ii) maintaining
appropriate safeguards to protect the fund's investments and (iii) possible
difficulties in obtaining and enforcing judgments against such custodians.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies whose securities are held by a fund.
CURRENCY FLUCTUATIONS
Each fund, under normal circumstances, will invest a substantial
portion of its total assets in the securities of foreign issuers which are
denominated in foreign currencies and may temporarily hold uninvested cash in
bank deposits in foreign currencies. Accordingly, the strength or weakness of
the U.S. dollar against such foreign currencies may account for a substantial
part of a fund's investment performance. The rate of exchange between the U.S.
dollar and other currencies is determined by several factors, including the
supply and demand for particular currencies, central bank efforts to support
particular currencies, the relative movement of interest rates and pace of
business activity in the other countries and the U.S., and other economic and
financial conditions affecting the world economy.
A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the fund's holdings of
securities and cash denominated in such currency and, therefore, will cause an
overall decline in the fund's net asset value and any net investment income and
capital gains derived from such securities to be distributed in U.S. dollars to
shareholders of a fund. Moreover, if the value of the foreign currencies in
which the fund receives its income falls relative to the U.S. dollar between
receipt of the income and the making of fund distributions, a fund may be
required to liquidate securities in order to make distributions if the fund has
insufficient cash in U.S. dollars to meet distribution requirements.
Fluctuations in currency exchange rates may affect the performance of
emerging market issuers in which a fund invests without regard to the effect
such fluctuations have on income received or gains realized by a fund. Given the
level of foreign-denominated debt owed by many countries with emerging markets,
fluctuating exchange rates 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 risk (and the costs
associated with hedging transactions) makes it virtually impossible to hedge
effectively against such risks.
To some extent, if forward markets are available, currency exchange
risk can be managed through hedging operations. However, governmental
regulations and limited currency exchange markets in most emerging markets make
it highly unlikely that International Equity (to the extent it invests in
emerging market securities) or Emerging Markets will be able to engage in any
hedging operations, at least in the foreseeable future. In the event hedging
opportunities become available and a fund's adviser elects to employ them, a
fund may incur investment risks and substantial transaction costs to which it
would not otherwise be subject. Whether or not it hedges, each fund will incur
costs in connection with conversions between various currencies.
RESTRICTED AND ILLIQUID SECURITIES
Each fund is authorized to invest up to 15% of its net assets in
securities which cannot be expected to be sold within seven days at
approximately the price at which they are valued, which for this purpose
includes, among other things, repurchase agreements maturing in more than seven
days, over-
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the-counter ("OTC") options and securities used as cover for such options. Such
securities may include those that are subject to restrictions contained in the
securities laws of other countries. Restricted securities may be sold in the
U.S. only (1) pursuant to SEC Rule 144A or other exemption, (2) in privately
negotiated transactions or (3) in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933. Securities
that are freely marketable in the country where they are principally traded, but
would not be freely marketable in the United States, will not be considered to
be restricted. Where registration is required, a fund may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the fund may be permitted
to sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the fund might obtain a less
favorable price than prevailed when it decided to sell.
Not all restricted securities are illiquid. SEC regulations permit
certain restricted securities to be traded freely among qualified purchasers.
The SEC has stated that an investment company's board of directors, or its
investment adviser acting under authority delegated by the board, may determine
that a security eligible for trading under this rule is not "illiquid." Each
fund intends to rely on this rule, to the extent appropriate, to deem restricted
securities as not "illiquid." If the institutional markets for restricted
securities do not perform as anticipated, it could adversely affect the
liquidity of the fund.
REPURCHASE AGREEMENTS
When a fund enters into a repurchase agreement with a foreign or
domestic entity, it will obtain from that entity securities equal in value to
102% of the amount of the repurchase agreement (or 100%, if the securities
obtained are U.S. Treasury bills, notes or bonds). Such securities will be held
for that fund by a custodian bank, an approved foreign sub-custodian, or an
approved securities depository or book-entry system. Repurchase agreements are
usually for one week or less, but may be for longer periods. Repurchase
agreements maturing in more than seven days may be considered illiquid. In the
event that a foreign counterparty defaults on its repurchase agreement
obligations, the laws of the foreign country where that party resides may not
provide the same favorable treatment to repurchase agreements as are provided
under U.S. bankruptcy laws, which could lead to further delay or losses.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in
which a fund temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, that fund agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment. A fund may also enter into dollar rolls, in which a fund sells a
security for delivery in the current month and simultaneously contracts to
repurchase a substantially similar security on a specified future date. That
fund would be compensated by the difference between the current sales price and
the forward price for the future purchase. A fund may engage in reverse
repurchase agreements and dollar rolls as a means of raising cash to satisfy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio instruments. There is a risk that the contraparty
to either a reverse repurchase agreement or a dollar roll will be unable or
unwilling to complete the transaction as scheduled, which may result in losses
to a fund. While engaging in reverse repurchase agreements or dollar rolls, each
fund will maintain cash and/or appropriate liquid securities in a segregated
account at its custodian bank with a value at least equal to that fund's
obligation under the agreements, adjusted daily.
Each fund may borrow for temporary purposes, which borrowing may be
unsecured. The 1940 Act requires the fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of at least 300% of the amount borrowed. If the asset coverage
should decline below 300% as a result of market fluctuations or for other
reasons, the fund may be required to sell some of its holdings within three days
(exclusive of Sundays and holidays) to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
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standpoint to sell securities at that time. Borrowing may exaggerate the effect
on net asset value of any increase or decrease in the market value of the
portfolio. To avoid the potential leveraging effects of a fund's borrowings,
each fund will not make investments while borrowings are in excess of 5% of its
total assets. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. For purposes of its borrowing limitation and policies, each fund considers
reverse repurchase agreements and dollar rolls to constitute borrowing.
International Equity does not currently intend to use reverse repurchase
agreements and dollar rolls.
PREFERRED STOCK
Each fund may purchase preferred stock as a substitute for debt
securities of the same issuer when, in the adviser's opinion, the preferred
stock is more attractively priced in light of the risks involved. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. 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 prices of debt securities.
Under normal 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. Convertible securities are usually
subordinated to comparable-tier non-convertible securities but rank senior to
common stock in a corporation's capital structure.
Global Government has no current intention of converting any
convertible securities it may own into equity or holding them as equity upon
conversion, although it may do so for temporary purposes. 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 objective.
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 the fund's custodian. During the time the
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. 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.
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.
SECURITIES OF OTHER INVESTMENT COMPANIES
A fund may invest in the securities of other investment companies only
if it: (i) will not own more than 3% of the total outstanding voting stock of
any investment company, (ii) does not invest more than
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5% of its total assets in any one investment company or (iii) does not 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.
SHORT SALES
No fund will sell securities short, other than through the use of
futures and options as described in the Prospectuses, or short sales against the
box. In a short sale against the box, a fund sells a security and borrows the
security to make delivery, even though the fund simultaneously owns, or has the
right to acquire, without the payment of any additional consideration,
securities identical in kind and amount to those sold short.
OPTIONS AND FUTURES
As described in the Prospectuses, Global Government may purchase and
sell (write) both put options and call options on securities and bond indices,
may enter into interest rate and bond index futures contracts, may purchase and
sell options on such futures contracts ("futures options") and may purchase and
sell foreign currency options and futures for hedging purposes or in other
circumstances permitted by the Commodity Futures Trading Commission ("CFTC") as
part of its investment strategy.
International Equity and Emerging Markets may enter into futures
contracts, options and options on futures contracts for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when Batterymarch
believes a futures contract or option is priced more attractively than the
underlying equity security or index. In addition, a fund may purchase and sell
put and call options on foreign currencies, may enter into futures contracts on
foreign currencies and purchase and sell options on such futures contracts.
Emerging Markets and International Equity are permitted to engage in
forward currency exchange transactions to protect in part against the
uncertainty in the level of future exchange rates. A fund's dealings in foreign
currency exchange would in all cases be limited to hedges involving either
specific transactions or portfolio positions. A fund is not permitted to engage
in currency transactions for speculation but only as a hedge against changes in
currency values. A fund is not permitted to hedge a position to an extent
greater than the aggregate market value (at the time of the hedging transaction)
of the fund's assets invested in cash or securities denominated in the relevant
currency. Emerging Markets will not often employ hedging strategies because such
instruments are generally not available in emerging markets; however, the fund
reserves the right to hedge its portfolio investments in the future.
If other types of options, futures contracts or options on futures are
traded in the future, each fund may also use those investment strategies.
Options and futures are generally considered to be "derivatives."
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.
OPTIONS ON SECURITIES
A fund may purchase call options on securities that its adviser intends
to include in that fund's investment portfolio in order to fix the cost of a
future purchase. Purchased options also may be used as a means of participating
in an anticipated price increase of a security on a more limited risk basis than
would be possible if the security itself were purchased. In the event of a
decline in the price of the
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underlying security, use of this strategy would serve to limit a fund's
potential loss to the option premium paid; conversely, if the market price of
the underlying security increases above the exercise price and the fund either
sells or exercises the option, any profit realized will be reduced by the
premium.
A fund may purchase put options in order to hedge against a decline in
the market value of securities held in its portfolio or to enhance income. The
put option enables the fund to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the fund below the exercise price
is limited to the option premium paid. If the market price of the underlying
security is higher than the exercise price of the put option, any profit the
fund realizes on the sale of the security would be reduced by the premium paid
for the put option less any amount for which the put option may be sold.
A fund may write covered call options on securities in its portfolio.
Because it can be expected that a call option will be exercised if the market
value of the underlying security increases to a level greater than the exercise
price, the fund might write covered call options on securities generally when
its adviser believes that the premium received by the fund will exceed the
extent to which the market price of the underlying security will exceed the
exercise price. The strategy may be used to provide limited protection against a
decrease in the market price of the security, in an amount equal to the premium
received for writing the call option less any transaction costs. Thus, in the
event that the market price of the underlying security held by the fund
declines, the amount of such decline will be offset wholly or in part by the
amount of the premium received by the fund. If, however, there is an increase in
the market price of the underlying security and the option is exercised, the
fund would be obligated to sell the security at less than its market value. The
fund would give up the ability to sell the portfolio securities used to cover
the call option while the call option was outstanding. Such securities would
also be considered illiquid in the case of OTC options written by a fund, and
therefore subject to its limitation on investing no more than 15% of its net
assets in illiquid securities, unless the OTC options are sold to qualified
dealers who agree that the fund may repurchase any OTC option it writes at a
maximum price to be calculated by a formula set forth in the option agreement.
The cover for an OTC call option written subject to this procedure will be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option. In addition, the fund
could lose the ability to participate in an increase in the value of such
securities above the exercise price of the call option because such an increase
would likely be offset by an increase in the cost of closing out the call option
(or could be negated if the buyer chose to exercise the call option at an
exercise price below the securities' current market value).
The sale of a put option on a security by a fund also may serve to
partially offset the cost of a security that the fund anticipates purchasing. If
the price of the security rises, the increased cost to the fund of purchasing
the security will be offset, in whole or in part, by the premium received. In
the event, however, that the price of the security falls below the exercise
price of the option and the option is exercised, the fund will be required to
purchase the security from the holder of the option at a price in excess of the
current market price of the security. A fund's loss on this transaction will be
offset, in whole or in part, to the extent of the premium received by the fund
for writing the option.
Global Government may purchase put and call options and write covered
put and call options on bond indices in much the same manner as securities
options, except that bond index options may serve as a hedge against overall
fluctuations in the debt securities markets (or a market sector) rather than
anticipated increases or decreases in the value of a particular security. A bond
index assigns a value to the securities included in the index and fluctuates
with changes in such values. Settlements of bond index options are effected with
cash payments and do not involve the delivery of securities. Thus, upon
settlement of a bond index option, the purchaser will realize, and the writer
will pay, an amount based on the difference between the exercise price and the
closing price of the bond index. The effectiveness of hedging techniques using
bond index options will depend on the extent to which price movements in the
bond index selected correlate with price movements of the securities in which
the fund invests.
Global Government may purchase and write covered straddles on
securities, currencies or bond indices. A long straddle is a combination of a
call and a put option purchased on the same security, index
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or currency where the exercise price of the put is less than or equal to the
exercise price of the call. The fund would enter into a long straddle when its
adviser believes that it is likely that interest rates or currency exchange
rates will be more volatile during the term of the options than the option
pricing implies. A short straddle is a combination of a call and a put written
on the same security, index or currency where the exercise price of the put is
less than or equal to the exercise price of the call. In a covered short
straddle, the same issue of security or currency is considered cover for both
the put and the call that the fund has written. The fund would enter into a
short straddle when its adviser believes that it is unlikely that interest rates
or currency exchange rates will be as volatile during the term of the options as
the option pricing implies. In such cases, the fund will set aside cash and/or
appropriate liquid securities in a segregated account with its custodian
equivalent in value to the amount, if any, by which the put is "in-the-money,"
that is, the amount by which the exercise price of the put exceeds the current
market value of the underlying security. Straddles involving currencies are
subject to the same risks as other foreign currency options.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
A fund may purchase and write (sell) options on foreign currencies in
order to hedge against the risk of foreign exchange rate fluctuation on foreign
securities that fund holds or which it intends to purchase. For example, if a
fund enters into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The purchase
of an option on foreign currency may be used to hedge against fluctuations in
exchange rates although, in the event of exchange rate movements adverse to that
fund's options position, it may forfeit the entire amount of the premium plus
related transaction costs. In addition, Global Government may purchase call
options on foreign currency to enhance income when its adviser anticipates that
the currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities.
If a fund writes an option on foreign currency, it will constitute only
a partial hedge, up to the amount of the premium received, and that fund could
be required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. A fund may use options on currency for proxy
hedging, which involves writing or purchasing options on one currency to hedge
against changes in exchange rates of a different currency which the Adviser
expects to show a high degree of correlation to the first currency. If a fund
uses proxy-hedging, it may experience losses on both the currency in which it
has invested and the currency used for hedging, if the two currencies do not
vary within the expected degree of correlation.
A fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange traded, the majority are traded on
the OTC market. A fund will not purchase or write such options unless, in the
opinion of its adviser, the market for them has developed sufficiently. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally. These OTC options also involve credit risks that may not
be present in the case of exchange-traded currency options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GLOBAL GOVERNMENT:
The fund will limit its use of futures contracts and options on futures
contracts to hedging transactions or other circumstances permitted by regulatory
authorities. For example, the fund might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely
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affect either the value of the fund's securities or the price of the securities
that the fund intends to purchase. The fund's hedging may include sales of
futures contracts as an offset against the effect of expected increases in
interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce exposure to interest rate fluctuations, the fund may be able
to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and options on futures contracts.
The fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to invest in a
foreign security of the same currency. The fund may purchase put options on
foreign currency futures contracts as a hedge against a decline in the foreign
exchange rates or the value of its foreign portfolio securities. The fund may
write a call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign exchange rates on the value of foreign
securities. The fund may sell a put option on a foreign currency to partially
offset the cost of a security denominated in that currency that the fund
anticipates purchasing; however, the cost will only be offset to the extent of
the premium received by the fund for writing the option.
The fund also may use futures contracts on fixed income instruments and
options thereon to hedge its investment portfolio against changes in the general
level of interest rates. A futures contract on a fixed income instrument is a
bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of fixed income security
called for in the contract at a specified future time and at a specified price.
The fund may purchase a futures contract on a fixed income security when it
intends to purchase fixed income securities but has not yet done so. This
strategy may minimize the effect of all or part of an increase in the market
price of the fixed income security that the fund intends to purchase in the
future. A rise in the price of the fixed income security prior to its purchase
may be either offset by an increase in the value of the futures contract
purchased by the fund or avoided by taking delivery of the fixed income
securities under the futures contract. Conversely, a fall in the market price of
the underlying fixed income security may result in a corresponding decrease in
the value of the futures position. The fund may sell a futures contract on a
fixed income security in order to continue to receive the income from a fixed
income security, while endeavoring to avoid part or all of the decline in the
market value of that security that would accompany an increase in interest
rates.
The fund may purchase a call option on a futures contract to hedge
against a market advance in debt securities that the fund plans to acquire at a
future date. The purchase of a call option on a futures contract is analogous to
the purchase of a call option on an individual fixed income security that can be
used as a temporary substitute for a position in the security itself. The fund
also may write covered call options on futures contracts as a partial hedge
against a decline in the price of fixed income securities held in the fund's
investment portfolio, or purchase put options on futures contracts in order to
hedge against a decline in the value of fixed income securities held in the
fund's investment portfolio. The fund may write a put option on a security that
the fund anticipates purchasing to partially offset the cost of purchasing that
security; however, the cost will only be offset to the extent of the premium the
fund receives for writing the option.
The fund may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of its investments. To the extent that a portion of the fund's investments
correlate with a given index, the sale of futures contracts on that index could
reduce the risks associated with a market decline and thus provide an
alternative to the liquidation of securities positions. For example, if the fund
correctly anticipates a general market decline and sells bond index futures to
hedge against this risk, the gain in the futures position should offset some or
all of the decline in the value of the portfolio. The fund may purchase bond
index futures contracts if a significant market or market sector advance is
anticipated. Such a purchase of a futures contract would serve as a temporary
substitute for the purchase of individual debt securities, which debt securities
may then be
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purchased in an orderly fashion. This strategy may minimize the effect of all or
part of an increase in the market price of securities that the fund intends to
purchase. A rise in the price of the securities should be partly or wholly
offset by gains in the futures position.
As in the case of a purchase of a bond index futures contract, the fund
may purchase a call option on a bond index futures contract to hedge against a
market advance in securities that the fund plans to acquire at a future date.
The fund may write put options on bond index futures as a partial anticipatory
hedge and may write covered call options on bond index futures as a partial
hedge against a decline in the prices of bonds held in its portfolio. This is
analogous to writing covered call options on securities. The fund also may
purchase put options on bond index futures contracts. The purchase of put
options on bond index futures contracts is analogous to the purchase of
protective put options on individual securities where a level of protection is
sought below which no additional economic loss would be incurred by the fund.
The fund may also write put options on interest rate, bond index or
foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, bond index or foreign currency futures
contract in order synthetically to create a long interest rate, bond index or
foreign currency futures contract position. The options will have the same
strike prices and expiration dates. The fund will engage in this strategy only
when its adviser believes it is more advantageous to the fund to do so as
compared to purchasing the futures contract.
The fund may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle is a
combination of a call and a put purchased on the same futures contract where the
exercise price of the put option is less than or equal to the exercise price of
the call option. The fund would enter into a long straddle when it believes that
it is likely that interest rates or foreign currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and put written on the same futures contract
where the exercise price of the put option is less than or equal to the exercise
price of the call option. In a covered short straddle, the same futures contract
is considered "cover" for both the put and the call that the fund has written.
The fund would enter into a short straddle when it believes that it is unlikely
that interest rates or foreign currency exchange rates will be as volatile
during the term of the options as the option pricing implies. In such case, the
fund will set aside cash and/or appropriate liquid securities in a segregated
account with its custodian equal in value to the amount, if any, by which the
put is "in-the-money," that is, the amount by which the exercise price of the
put exceeds the current market value of the underlying futures contract.
INTERNATIONAL EQUITY AND EMERGING MARKETS:
Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific instrument at a specified
future time and at a specified price. Domestic futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Domestic futures exchanges and trading are
regulated under the Commodity Exchange Act by the CFTC, a U.S. Government
agency. Foreign futures exchanges and futures contracts may be regulated
differently, or may be unregulated.
Although some futures contracts by their terms call for actual delivery
or acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold," "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is
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intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not closed out prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin deposits that may range upward from less than 5% of
the value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The fund
expects to earn interest income on its margin deposits.
Regulations of the CFTC applicable to each fund limit the assets that
can be committed to futures transactions that do not constitute bona fide
hedging transactions. A fund generally will sell futures contracts only to
protect securities it owns against price declines or purchase contracts to
protect against an increase in the price of securities it intends to purchase.
As evidence of this hedging interest, the fund expects that approximately 75% of
its futures contract purchases will be "completed;" that is, equivalent amounts
of related securities will have been purchased or are being purchased by the
fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of fund income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of underlying equity
securities.
FOR EACH FUND:
A fund may also purchase and sell futures contracts on a foreign
currency. A fund may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the U.S. dollar. In addition, a fund may sell a foreign currency futures
contract when its adviser anticipates a general weakening of the foreign
currency exchange rate that could adversely affect the market values of that
fund's foreign securities holdings. In this case, the sale of futures contracts
on the underlying currency may reduce the risk to the fund caused by foreign
currency variations and, by so doing, provide an alternative to the liquidation
of securities positions in the fund and resulting transaction costs. When a
fund's adviser anticipates a significant foreign exchange rate increase while
intending to invest in a security denominated in a foreign currency, the fund
may purchase a foreign currency futures contract to hedge against a rise in
foreign exchange rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the fund against any rise
in the foreign exchange rate that may add additional costs to acquiring the
foreign security position.
A fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. A
fund may purchase a call option or write a put option on a foreign currency
futures contract to hedge against a rise in the foreign exchange rate while
intending to invest in a foreign security of the same currency. A fund may
purchase put options on foreign currency futures contracts as a hedge against a
decline in the foreign exchange rates or the value of its foreign portfolio
securities. It may also write a call option on a foreign currency futures
contract as a partial hedge against the effects of declining foreign exchange
rates on the value of foreign securities.
When a purchase or sale of a futures contract is made by a fund, it is
required to deposit with its custodian (or a broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract
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is traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract, which is returned to the fund upon termination of the contract
assuming all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a fund may be required by an
exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. A fund expects to earn interest income on its initial margin
deposits. A futures contract held by a fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking-to-market." Variation
margin does not represent a borrowing or loan by the fund but is instead
settlement between the fund and the broker of the amount one would owe the other
if the futures contract had expired on that date. In computing daily net asset
value, a fund will mark-to-market its open futures positions.
A fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts and on certain foreign currencies
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract or currency (and the related initial margin
requirements), the current market value of the option and other options and
futures positions held by the fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally futures contracts are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency, index or underlying security and delivery month).
If an offsetting purchase price is less than the original sale price, the fund
realizes a gain, or if it is more, the fund realizes a loss. If an offsetting
sale price is more than the original purchase price, the fund realizes a gain,
or if it is less, the fund realizes a loss. A fund will also bear transaction
costs for each contract, which must be considered in these calculations.
The Corporation has filed on behalf of each fund a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets. Under Section 4.5 of the regulations under the
Commodity Exchange Act, the notice of eligibility must include representations
that the fund will use futures contracts and related options solely for bona
fide hedging purposes within the meaning of the CFTC regulations; provided that
a fund may hold futures contracts and related options that do not fall within
the definition of bona fide hedging transactions if, with respect to such
non-hedging transactions, the initial margin deposits plus premiums paid by that
fund, less the amount by which any such options positions are "in-the-money" at
the time of purchase, do not exceed 5% of the fair market value of the fund's
net assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option. Foreign currency options traded on a
commodities exchange are considered commodity options for this purpose. In
addition, International Equity will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under those
contracts would exceed 20% of its total assets.
RISKS ASSOCIATED WITH FUTURES AND OPTIONS
In considering a fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and
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therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or options thereon is also subject to the maintenance of a liquid
secondary market. Consequently, it may not be possible for a fund to close a
position and, in the event of adverse price movements, that fund would have to
make daily cash payments of variation margin (except in the case of purchased
options). However, in the event futures contracts or options have been used to
hedge portfolio securities, such securities will not be sold until the contracts
can be terminated. In such circumstances, an increase in the price of the
securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.
(3) Successful use by a fund of futures contracts and options thereon
will depend upon its adviser's ability to predict movements in the direction of
the overall securities, currency and interest rate markets, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future. There is, in addition, the risk that the movements in the price
of the futures contract will not correlate with the movements in prices of the
securities or currencies being hedged. For example, if the price of the futures
contract moves less than the price of the securities or currencies that are
subject to the hedge, the hedge will not be fully effective; however, if the
price of securities or currencies being hedged has moved in an unfavorable
direction, the fund would be in a better position than if it had not hedged at
all. If the price of the securities or currencies being hedged has moved in a
favorable direction, this advantage may be partially offset by losses in the
futures position. In addition, if a fund has insufficient cash, it may have to
sell assets from its investment portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market; consequently, that fund may need to sell assets at a
time when such sales are disadvantageous to it. If the price of the futures
contract moves more than the price of the underlying securities or currencies,
the fund will experience either a loss or a gain on the futures contract that
may or may not be completely offset by movements in the price of the securities
or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, index, futures contract or
currency, the time remaining until expiration, the relationship of the exercise
price to the market price, the historical price volatility of the underlying
security, index, futures contract or currency and general market conditions. For
this reason, the successful use of options as a hedging strategy depends upon a
fund's adviser's ability to forecast the direction of price fluctuations in the
underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out
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their contracts. As a result, a correct forecast of general market trends may
not result in successful hedging through the use of futures contracts over the
short term. In addition, activities of large traders in both the futures and
securities markets involving arbitrage and other investment strategies may
result in temporary price distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, index, futures contract or currency. Purchased
options that expire unexercised have no value, and a fund will realize a loss in
the amount paid plus any transaction costs.
(7) Like options on securities and currencies, options on futures
contracts have a limited life. The ability to establish and close out options on
futures will be subject to the development and maintenance of liquid secondary
markets on the relevant exchanges or boards of trade. There can be no certainty
that liquid secondary markets for all options on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs are all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls that could be substantial in
the event of adverse price movements. In addition, although the maximum amount
at risk when a fund purchases an option is the premium paid for the option and
the transaction costs, there may be circumstances when the purchase of an option
on a futures contract would result in a loss to the fund when the use of a
futures contract would not, such as when there is no movement in the value of
the securities or currencies being hedged.
(9) A fund's activities in the futures and options markets may result
in a higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, a fund also may save on commissions by
using such contracts as a hedge rather than buying or selling individual
securities or currencies in anticipation or as a result of market movements.
(10) A fund may purchase and write both exchange-traded options and
options traded on the OTC market. The ability to establish and close out
positions on the exchanges is subject to the maintenance of a liquid secondary
market. Although each fund intends to purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. Closing transactions may be effected
with respect to options traded in the OTC markets (currently the primary markets
for options on debt securities and foreign currencies) only by negotiating
directly with the other party to the option contract, or in a secondary market
for the option if such market exists. Although a fund will enter into OTC
options only with dealers that agree to enter into, and that are expected to be
capable of entering into, closing transactions with that fund, there can be no
assurance that the fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. In the event of insolvency of the
contra-party, the fund may be unable to liquidate an OTC option. Accordingly, it
may not be possible to effect closing transactions with respect to certain
options, with the result that the fund would have to exercise those options that
it has purchased in order to realize any profit. With respect to options written
by a fund, the inability to enter into a closing transaction may result in
material losses to the fund. For example, because a fund must maintain a covered
position with respect to any call option it writes on a security, futures
contract or currency, the fund may not sell the underlying security, futures
contract or currency or invest any cash, or appropriate liquid securities used
as cover during the period it is obligated under such option. This requirement
may impair that fund's ability to sell a portfolio security or make an
investment at a time when such a sale or investment might be advantageous.
Options traded on U.S. or other exchanges may be subject to position and daily
fluctuation limits which may limit the ability of the fund to reduce risk using
such options and may limit their liquidity.
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With respect to Global Government,
(11) Bond index options are settled exclusively in cash. If the fund
purchases a put or call option on an index, the fund will not know in advance
the difference, if any, between the closing value of the index on the exercise
date and the exercise price of the option itself. Thus, if the fund exercises a
bond index option before the closing index value for that day is available, the
fund runs the risk that the level of the underlying index may subsequently
change.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS ON SUCH
CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described below. Further, settlement of a foreign currency futures contract may
be required to occur within the country issuing the underlying currency. Thus, a
fund must accept or make delivery of the underlying foreign currency in
accordance with any U.S. or foreign restrictions or regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and may be
required to pay any fees, taxes or charges associated with such delivery that
are assessed in the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, a fund will not purchase or write options on foreign currency futures
contracts unless and until, in the opinion of its adviser, the market for such
options has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions in the
underlying foreign currency futures contracts. Compared to the purchase or sale
of foreign currency futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to a fund because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a foreign currency futures contract would result in a loss, such as when there
is no movement in the price of the underlying currency or futures contract, when
the purchase of the underlying futures contract would not result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
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ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES, FORWARD CURRENCY EXCHANGE CONTRACTS AND FOREIGN CURRENCY OPTIONS TRADED
ON FOREIGN EXCHANGES
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees and
are subject to the risk of governmental actions affecting trading in, or the
price of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) less available data than in the United States on which to make
trading decisions, (3) delays in a fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) less trading volume.
COVER FOR STRATEGIES INVOLVING OPTIONS, FUTURES AND FORWARD CONTRACTS
No fund will use leverage in its options, futures and forward contract
strategies. A fund will not enter into an options, futures or forward currency
strategy that exposes it to an obligation to another party unless it owns either
(1) an offsetting ("covering") position in securities, currencies or other
options, futures or forward contracts or (2) cash, receivables and appropriate
liquid securities with a value sufficient to cover its potential obligations.
Each fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds, and, if the guidelines
so require, will set aside cash and/or appropriate liquid securities in a
segregated account with its custodian in the amount prescribed, as
marked-to-market daily. Securities, currencies or other options, futures or
forward positions used for cover and securities held in a segregated account
cannot be sold or closed out while the strategy is outstanding, unless they are
replaced with similar assets. As a result, there is a possibility that the use
of cover or segregation involving a large percentage of a fund's assets could
impede portfolio management or that fund's ability to meet redemption requests
or other current obligations.
FORWARD CURRENCY EXCHANGE CONTRACTS
A fund may use forward currency exchange contracts to hedge against
uncertainty in the level of future exchange rates or, with respect to Global
Government, to enhance income. Forward contracts are generally considered to be
derivatives.
A fund may enter into forward currency exchange contracts with respect
to specific transactions. For example, when a fund anticipates purchasing or
selling a security denominated in a foreign currency, or when it anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, that fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars or foreign currency, of the amount of foreign currency involved in
the underlying transaction. That fund will thereby attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the currency exchange rates during the period between the date on which
the security is purchased or sold, or on which the payment is declared, and the
date on which such payments are made or received.
A fund also may use forward currency exchange contracts to lock in the
U.S. dollar value of its portfolio positions, to increase its exposure to
foreign currencies that its adviser believes may rise in value relative to the
U.S. dollar or to shift its exposure to foreign currency fluctuations from one
country to another. For example, when a fund's adviser believes that the
currency of a particular foreign country may suffer a substantial decline
relative to the U.S. dollar or another currency, it may enter into a forward
contract to sell the amount of the former foreign currency approximating the
value of some or all of that
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fund's securities denominated in such foreign currency. These investment
practices generally are referred to as "cross-currency hedging" when two foreign
currencies are involved. In cross-currency hedging, a fund may suffer losses on
both currencies if their values do not move as its adviser anticipates.
At or before the maturity date of a forward contract requiring a fund
to sell a currency, that fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. A fund would realize a
gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the fund is obligated to deliver.
The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that currency movements
will not be accurately predicted, causing a fund to sustain losses on these
contracts and transaction costs. A fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the fund to deliver an amount of foreign currency
in excess of the value of the fund's portfolio securities or other assets
denominated in that currency or (2) the fund maintains cash or appropriate
liquid securities in a segregated account with the fund's custodian,
marked-to-market daily, in an amount not less than the value of the fund's total
assets committed to the consummation of the contracts. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer-term investment decisions made with regard to
overall diversification strategies. However, each fund's adviser believes that
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of that fund will be served. Some
foreign currency forward contracts into which a fund enters may be illiquid.
The cost to a fund of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities a fund owns or intends to acquire, but it does fix a rate
of exchange in advance. In addition, although forward contracts limit the risk
of loss due to a decline in the value of the hedged currencies, at the same time
they limit any potential gain that might result should the value of the
currencies increase.
Although each fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. Each fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
fund at one rate, while offering a lesser rate of exchange should that fund
desire to resell that currency to the dealer.
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SPECIAL CONSIDERATIONS AFFECTING EMERGING MARKETS AND INTERNATIONAL EQUITY:
Investing in equity securities of companies in emerging markets may
entail greater risks than investing in equity securities in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property. Investing in
the securities of companies in emerging markets may entail special risks
relating to the potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, convertibility of currencies into U.S. dollars and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the fund could lose its
entire investment in any such country.
Settlement mechanisms in emerging securities markets may be less
efficient and reliable than in more developed markets. In such emerging
securities markets there may be lengthy share registration periods during which
the fund is unable to sell its securities, and there may be delivery delays or
failures in purchases and sales.
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates and corresponding currency devaluations have had
and may continue to have negative effects on the economies and securities
markets of certain Latin American countries.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Primary Shares are available from Legg Mason and certain of
its affiliates, as well as from certain institutions having agreements with Legg
Mason. Navigator Shares are currently offered for sale only to Institutional
Clients, to qualified retirement plans managed on a discretionary basis and
having net assets of at least $200 million, and to any qualified retirement plan
of Legg Mason, Inc. or of any of its affiliates. Navigator Shares may not be
purchased by individuals directly, but Institutional Clients may purchase shares
for Customer Accounts maintained for individuals. Primary Shares are available
to all other investors.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan, you may arrange for automatic
monthly investments in Primary Shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), the funds' transfer agent, to transfer funds
to be used to buy Primary Shares at the per share net asset value determined on
the day the funds are sent by your bank. You will receive a quarterly account
statement. You may terminate the Future First Systematic Investment Plan at any
time without charge or penalty. Forms to enroll in the Future First Systematic
Investment Plan are available from any Legg Mason or affiliated office.
PURCHASES BY CHECK
In making purchases of fund shares by check, you should be aware that
checks drawn on a member bank of the Federal Reserve System will normally be
converted to federal funds and used to
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<PAGE>
purchase shares of the fund within two business days of receipt by Legg Mason.
Legg Mason is closed on the days that the New York Stock Exchange ("Exchange")
is closed, which are listed under "Valuation of Fund Shares" on page 36. Checks
drawn on banks that are not members of the Federal Reserve System may take up to
nine business days to be converted.
SYSTEMATIC WITHDRAWAL PLAN
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient Primary Shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Simplified Employee Pension Plan ("SEP"), Savings Incentive Match Plan for
Employees ("SIMPLE") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value determined as of
the close of regular trading of the Exchange on the first day of each month. If
the Exchange is not open for business on that day, the shares will be redeemed
at the net asset value determined as of the close of regular trading of the
Exchange on the preceding business day. The check for the withdrawal payment
will usually be mailed to you on the next business day following redemption. If
you elect to participate in the Systematic Withdrawal Plan, dividends and other
distributions on all Primary Shares in your account must be automatically
reinvested in Primary Shares. You may terminate the Systematic Withdrawal Plan
at any time without charge or penalty. Each fund, its transfer agent, and Legg
Mason also reserve the right to modify or terminate the Systematic Withdrawal
Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and other distributions,
the amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the fund in
which you have an account if you maintain a Systematic Withdrawal Plan because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
REDEMPTION SERVICES
Each fund reserves the right to modify or terminate the wire or
telephone redemption services described in the Prospectuses at any time.
The date of payment may not be postponed for more than seven days, and
the right of redemption may not be suspended except (a) for any period during
which the Exchange is closed (other than for customary weekend and holiday
closings), (b) when trading in markets a fund normally utilizes is restricted or
an emergency, as defined by rules and regulations of the SEC, exists, making
disposal of that fund's investments or determination of its net asset value not
reasonably practicable, or (c) for such other periods as the SEC, by order, may
permit for protection of a fund's shareholders. In the case of any such
suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
Each fund reserves the right under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the fund,
whichever is less, by making payment in whole or in part by securities valued in
the
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same way as they would be valued for purposes of computing that fund's net asset
value per share. If payment is made in securities, a shareholder generally will
incur brokerage expenses in converting those securities into cash and will be
subject to fluctuation in the market price of those securities until they are
sold. Each fund does not redeem in kind under normal circumstances, but would do
so where its adviser determines that it would be in the best interests of the
shareholders as a whole.
Foreign securities markets may be open for trading on days when the
funds are not open for business. The net asset value of fund shares may be
significantly affected on days when investors do not have access to their
respective fund to purchase and redeem shares.
No charge is made for redemption from Global Government and
International Equity. There is a 2% redemption transaction fee charged for
redemptions within one year of purchase of Emerging Markets. The redemption
transaction fee is paid to the fund to reimburse the fund for transaction costs
it incurs entering into positions in emerging market securities and liquidating
them in order to fund redemptions.
Clients of certain institutions that maintain omnibus accounts with the
funds' transfer agent may obtain shares through those institutions. Such
institutions may receive payments from the funds' distributor for account
servicing, and may receive payments from their clients for other services
performed. Investors can purchase shares from Legg Mason without receiving or
paying for such other services.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state or local taxes that may apply to them.
GENERAL
For federal tax purposes, each fund is treated as a separate
corporation. To continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), a
fund must distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, net investment income, net short-term capital
gain, and net gains from certain foreign currency transactions, if any)
("Distribution Requirement") and must meet several additional requirements. For
each fund, these requirements include the following: (1) the fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward currency contracts) derived with respect
to its business of investing in securities or those currencies ("Income
Requirement"); (2) at the close of each quarter of the fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the fund's total assets and
does not represent more than 10% of the issuer's outstanding voting securities;
and (3) at the close of each quarter of the fund's taxable year, not more than
25% of the value of its total assets may be invested in the securities (other
than U.S. Government securities or the securities of other RICs) of any one
issuer. If any fund failed to qualify for treatment as a RIC for any taxable
year, (i) it would be taxes a corporate rates on the full amount of its taxable
income for that year without being able to deduct the distributions it makes to
its shareholders and (ii) the shareholders would treat all those distributions,
including distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), as dividends (that is, ordinary
income) to the extent of the fund's earnings and profits. In addition, the fund
would be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before requalifying for RIC
treatment.
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<PAGE>
If fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or other distribution, the investor will pay full
price for the shares and receive some portion of the price back as a taxable
distribution.
Each fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by a fund in December of any year and payable to shareholders of record
on a date in that month will be deemed to have been paid by the fund and
received by the shareholders on December 31 if the distributions are paid by the
fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from each fund's investment company taxable
income (whether paid in cash or reinvested in fund shares) may be eligible for
the dividends-received deduction allowed to corporations. The eligible portion
for any fund may not exceed the aggregate dividends received by that fund from
domestic corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax. Distributions of net capital
gain do not qualify for the dividends-received deduction.
FOREIGN SECURITIES
Foreign Taxes. Interest and dividends received by a fund, and gains
realized thereby, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions ("foreign taxes") that would reduce
the total return on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of a fund's total assets at
the close of any taxable year consists of securities of foreign corporations,
the fund will be eligible to, and 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 taxes paid by it.
Pursuant to any such election, a 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 foreign taxes deemed paid by the shareholder in
computing the shareholder's taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the shareholder's
federal income tax. If a fund makes this election, it will report to its
shareholders shortly after each taxable year the shareholders' respective shares
of the foreign taxes it paid and its income from sources within foreign
countries and U.S. possessions. Individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and all of whose foreign source income is "qualified passive income" will
be able to claim a foreign tax credit without having to file the detailed Form
1116 that otherwise is required.
Passive Foreign Investment Companies. Each fund may invest in the stock
of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation -- other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly or constructively, by "U.S.
shareholders," defined as U.S. persons that individually own, directly,
indirectly or constructively, at least 10% of that voting power) as to which a
fund is a U.S. shareholder -- that, in general, meets either of the following
tests: (1) at least 75% of its gross income is passive or (2) an
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<PAGE>
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock of a PFIC or of any gain on disposition of the stock (collectively "PFIC
income"), plus interest thereon, even if the fund distributes the PFIC income as
a taxable dividend to its shareholders. The balance of the PFIC income will be
included in the fund's investment company taxable income and, accordingly, will
not be taxable to it to the extent it distributes that income to its
shareholders.
If a fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund would be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which the fund probably would have to distribute to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax -- even if those earnings and
gain were not received by the fund from the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over a
fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a fund also may deduct (as an ordinary, not capital, loss) the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock included in income by the fund for prior
taxable years. A fund's adjusted basis in each PFIC's stock subject to the
election would be adjusted to reflect the amounts of income included and
deductions taken thereunder (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs).
Foreign Currencies. Gains or losses (1) from the disposition of foreign
currencies, (2) from the disposition of a debt security denominated in foreign
currency that are attributable to fluctuations in the value of the foreign
currency between the dates of acquisition and disposition of the security and
(3) that are attributable to fluctuations in exchange rates that occur between
the time a fund accrues dividends, interest or other receivables or expenses or
other liabilities denominated in a foreign currency and the time the fund
actually collects the receivables or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses, referred to under the
Code as "section 988" gains or losses, may increase or decrease the amount of a
fund's investment company taxable income to be distributed to its shareholders.
OPTIONS, FUTURES, FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCIES
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward contracts derived by a fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement.
Certain futures and foreign currency contracts in which a fund may
invest will be "section 1256 contracts." Section 1256 contracts held by a fund
at the end of each taxable year, other than section 1256 contracts that are part
of a "mixed straddle" with respect to which the fund has made an election not to
have the following rules apply, must be "marked-to-market" (that is, treated as
having been sold for their fair market value) for federal income tax purposes,
with the result that unrealized gains or losses will be treated as though they
were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. These rules may
operate to increase the amount that a fund must distribute to satisfy the
Distribution
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<PAGE>
Requirement, which will be taxable to its shareholders as ordinary income, and
to increase the net capital gain recognized by a fund, without in either case
increasing the cash available to the fund. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax.
When a covered call option written (sold) by a fund expires, the fund
realizes a short-term capital gain equal to the amount of the premium it
received for writing the option. When a fund terminates its obligations under
such an option by entering into a closing transaction, the fund realizes a
short-term capital gain (or loss), depending on whether the cost of the closing
transaction is less than (or exceeds) the premium received when the option was
written. When a covered call option written by a fund is exercised, the fund is
treated as having sold the underlying security, producing long-term or
short-term capital gain or loss, depending on the holding period of the
underlying security and whether the sum of the option price received upon the
exercise plus the premium received when the option was written exceeds or is
less than the basis of the underlying security.
Code section 1092 (dealing with straddles) also may affect the taxation
of options, futures and forward contracts in which a fund may invest. Section
1092 defines a "straddle" as offsetting positions with respect to actively
traded personal property; for these purposes, options, futures and forward
contracts are personal property. Under that section, any loss from the
disposition of a position in a straddle may be deducted only to the extent the
loss exceeds the unrealized gain on the offsetting position(s) of the straddle.
The regulations under section 1092 also provide certain "wash sale" rules, which
apply to transactions where a position is sold at a loss and a new offsetting
position is acquired within a prescribed period, and "short sale" rules
applicable to straddles. If a fund makes certain elections, the amount,
character and timing of recognition of gains and losses from the affected
straddle positions would be determined under rules that vary according to the
elections made. Because only a few of the regulations implementing the straddle
rules have been promulgated, the tax consequences to a fund of straddle
transactions are not entirely clear.
If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and a fund holds the appreciated financial position
unhedged for 60 days after that closing (I.E., at no time during that 60 day
period is the fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities.
ORIGINAL ISSUE DISCOUNT AND PAY-IN-KIND SECURITIES
Each fund may purchase zero coupon or other debt securities issued with
original issue discount ("OID"). As a holder of those securities, a fund must
include in its income the OID that accrues thereon during the taxable year, even
if it receives no corresponding payment on the securities during the year.
Similarly, a fund must include in its gross income securities it receives as
"interest" on pay-in-kind securities. Because each fund annually must distribute
substantially all of its investment company taxable income, including any OID
and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a
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<PAGE>
fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. A fund may realize capital gains or losses from those dispositions,
which would increase or decrease its investment company taxable income and/or
net capital gain.
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a fund through IRAs, SEPs, SIMPLEs
and other qualified retirement plans. In general, income earned through the
investment of assets of qualified retirement accounts and plans is not taxed to
the beneficiaries thereof until the income is distributed to them. Investors who
are considering establishing such a plan should consult their attorneys or other
tax advisors with respect to individual tax questions. Please contact your
Financial Advisor or other entity offering the funds for further information
with respect to these plans.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAs
Traditional IRA. Certain investors may obtain tax advantages by
establishing an IRA. Specifically, except as noted below, if neither you nor
your spouse is an active participant in a qualified employer or government
retirement plan, or if either you or your spouse is an active participant in
such a plan and your adjusted gross income does not exceed a certain level, then
each of you may deduct cash contributions made to an IRA in an amount for each
taxable year not exceeding the lesser of 100% of your earned income or $2,000.
However, a married investor who is not an active participant in such a plan and
files a joint income tax return with his or her spouse (and their combined
adjusted gross income does not exceed $150,000) is not affected by the spouse's
active participant status. In addition, if your spouse is not employed and you
file a joint return, you may establish a separate IRA for your spouse and
contribute up to a total of $4,000 to the two IRAs, provided that the
contribution to either does not exceed $2,000. If your employer's plan qualifies
as a SIMPLE, permits voluntary contributions and meets certain requirements, you
may make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in shares of a fund through
non-deductible IRA contributions, up to certain limits, because all dividends
and other distributions on your shares are then not immediately taxable to you
or the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability, where the distribution is rolled over
into another qualified plan or certain other situations.
Roth IRA. A shareholder whose adjusted gross income (or combined
adjusted gross income with his or her spouse) does not exceed certain levels may
establish and contribute up to $2,000 per tax year to a Roth IRA. In addition,
for a shareholder whose adjusted gross income does not exceed $100,000 (or is
not married filing a separate return), certain distributions from traditional
IRAs may be rolled over to a Roth IRA and any of the shareholder's traditional
IRAs may be converted to a Roth IRA; these rollover distributions and
conversions are, however, subject to federal income tax.
Contributions to a Roth IRA are not deductible; however, earnings
accumulate tax-free in a Roth IRA, and withdrawals of earnings are not subject
to federal income tax if the account has been held for at least five years (or
in the case of earnings attributable to rollover contributions from or
conversions of a traditional IRA, the rollover or conversion occurred more than
five years before the withdrawal) and the account holder has reached age 59 1/2
(or certain other conditions apply).
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<PAGE>
Education IRA. Although not technically for retirement savings,
Education IRAs provide a vehicle for saving for a child's higher education. An
Education IRA may be established for the benefit of any minor, and any person
whose adjusted gross income does not exceed certain levels may contribute to an
Education IRA, provided that no more than $500 may be contributed for any year
to Education IRAs for the same beneficiary. Contributions are not deductible and
may not be made after the beneficiary reaches age 18; however, earnings
accumulate tax-free, and withdrawals are not subject to tax if used to pay the
qualified higher education expenses of the beneficiary (or transferred to an
Education IRA of a qualified family member).
SIMPLIFIED EMPLOYEE PENSION PLAN - SEP
Legg Mason also makes available to corporate and other employers a SEP
for investment in shares of a fund.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES - SIMPLE
An employer with no more than 100 employees that does not maintain
another retirement plan may establish a SIMPLE either as separate IRAs or as
part of a Code section 401(k) plan. A SIMPLE, which is not subject to the
complicated nondiscrimination rules that generally apply to qualified retirement
plans, will allow certain employees to make elective contributions of up to
$6,000 per year and will require the employer to make matching contributions up
to 3% of each such employee's salary or a 2% non-elective contribution.
Withholding at the rate of 20% is required for federal income tax
purposes on distributions eligible for rollover (which excludes, for example,
certain periodic payments) from the foregoing retirement plans (except IRAs and
SEPs), unless the recipient transfers the distribution directly to an "eligible
retirement plan" (including IRAs and other qualified plans) that accepts those
distributions. Other distributions generally are subject to regular wage
withholding or to withholding at the rate of 10% (depending on the type and
amount of the distribution), unless the recipient elects not to have any
withholding apply. Investors should consult their plan administrator or tax
advisor for further information.
PERFORMANCE INFORMATION
The following performance information relates to Primary Shares. As of
the date of this Statement of Additional Information, Navigator Shares of Global
Government and Emerging Markets have no performance history. Navigator Shares of
International Equity commenced operations on May 5, 1998.
Total Return Calculations. Average annual total return quotes used in a
fund's advertising and other promotional materials ("Performance
Advertisements") are calculated according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of
a hypothetical $1,000 payment made
at the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In
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<PAGE>
calculating the ending redeemable value, all dividends and other distributions
by a fund are assumed to have been reinvested at net asset value on the
reinvestment dates during the period.
FOR GLOBAL GOVERNMENT:
YIELD Yields used in the fund's Performance Advertisements are
calculated by dividing the fund's net investment income for a 30-day period
("Period"), by the average number of shares entitled to receive dividends during
the Period, and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the maximum offering price per share at the end of
the Period. Yield quotations are calculated according to the following formula:
YIELD = 2 [(a-b + 1)6] - 1
---
cd
where: a = dividends and interest earned during the
Period
b = expenses accrued for the Period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the Period.
Except as noted below, in determining investment income earned during
the Period (variable "a" in the above formula), the fund calculates interest
earned on each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity based on the market value of the obligation
(including actual accrued interest) on the last business day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the fund, interest earned during the Period is then
determined by totaling the interest earned on all debt obligations. For purposes
of these calculations, the maturity of an obligation with one or more call
provisions is assumed to be the next call date on which the obligation
reasonably can be expected to be called or, if none, the maturity date. The
fund's yield for the thirty-day period ended December 31, 1998 was 4.31%.
With respect to the treatment of discount and premium on
mortgage-backed and other asset-backed obligations that are expected to be
subject to monthly payments of principal and interest ("paydowns"): (1) the fund
accounts for gain or loss attributable to actual paydowns as an increase or
decrease in interest income during the period and (2) the fund accrues the
discount and amortizes the premium on the remaining obligation, based on the
cost of the obligation, to the weighted average maturity date or, if weighted
average maturity information is not available, to the remaining term of the
obligation.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Primary Shares of Global
Government at the fund's commencement of operations on April 15, 1993. The table
assumes that all dividends and other distributions are reinvested in the fund.
It includes the effect of all charges and fees applicable to shares the fund has
paid. (There are no fees for investing or reinvesting in the fund, and there are
no redemption fees.) It does not include the impact of any income taxes that an
investor would pay on such distributions.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------ -------------------------------------------- ---------------------------------------- ------------
Value of Original Shares Plus Shares
Obtained Through Reinvestment of Capital Value of Shares Acquired Through Total
Fiscal Year Gain Distributions Reinvestment of Income Dividends Value
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1993* $10,311 $ 365 $10,676
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1994 9,578 948 10,526
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1995 10,361 2,355 12,716
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1996 10,582 3,179 13,761
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1997 9,908 3,621 13,529
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1998 10,556 4,529 15,085
- ------------------ -------------------------------------------- ---------------------------------------- ------------
* April 15, 1993 (commencement of operations) to December 31, 1993.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1998 would
have been $10,140, and the investor would have received a total of $3,053 in
distributions. Returns would have been lower if Global Government's adviser had
not waived certain fees during the fiscal years 1993 through 1994.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Primary Shares of International
Equity at the fund's commencement of operations on February 17, 1995. The table
assumes that all dividends and other distributions are reinvested in the fund.
It includes the effect of all charges and fees applicable to shares the fund has
paid. (There are no fees for investing or reinvesting in the fund, and there are
no redemption fees.) It does not include the impact of any income taxes that an
investor would pay on such distributions.
- ------------------ -------------------------------------------- ---------------------------------------- ------------
Value of Original Shares Plus Shares
Obtained Through Reinvestment of Capital Value of Shares Acquired Through Total
Fiscal Year Gain Distributions Reinvestment of Income Dividends Value
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1995* $10,771 $ 40 $10,811
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1996 12,501 93 12,594
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1997 12,641 174 12,815
- ------------------ -------------------------------------------- ---------------------------------------- ------------
1998 13,564 339 13,903
- ------------------ -------------------------------------------- ---------------------------------------- ------------
</TABLE>
* February 17, 1995 (commencement of operations) to December 31, 1995.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1998 would
have been $12,640, and the investor would have
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<PAGE>
received a total of $1,131 in distributions. Returns would have been lower if
International Equity's adviser had not waived certain fees during the fiscal
years ended 1995 and 1996.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Navigator Shares of
International Equity at the class' commencement of operations on May 5, 1998.
The table assumes that all dividends and other distributions are reinvested in
the fund. It includes the effect of all charges and fees applicable to shares
the fund has paid. (There are no fees for investing or reinvesting in the fund,
and there are no redemption fees.) It does not include the impact of any income
taxes that an investor would pay on such distributions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ----------------- ------------------------------------- --------------------------------- ---------------------
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Income Total
Distributions Dividends Value
- ----------------- ------------------------------------- --------------------------------- ---------------------
1998* $8,895 $163 $9,058
- ----------------- ------------------------------------- --------------------------------- ---------------------
</TABLE>
* May 5, 1998 (commencement of sale of Navigator Shares) to December 31, 1998.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1998 would
have been $8,895 and the investor would have received a total of $158 in
distributions.
The following table shows the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in Primary Shares of Emerging
Markets at the fund's commencement of operations on May 28, 1996. The table
assumes that all dividends and other distributions are reinvested in the fund.
It includes the effect of all charges and fees applicable to shares the fund has
paid. (There are no fees for investing or reinvesting in the fund, but there is
a 2% redemption fee if shares are redeemed within one year of purchase. The
following table assumes no redemption fees were paid.) It does not include the
impact of any income taxes that an investor would pay on such distributions.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------ ------------------------------------------- ----------------------------------------- ------------
Value of Original Shares Plus Shares
Obtained Through Reinvestment of Capital Value of Shares Acquired Through Total
Fiscal Year Gain Distributions Reinvestment of Income Dividends Value
- ------------------ ------------------------------------------- ----------------------------------------- ------------
1996* $10,510 $30 $10,540
- ------------------ ------------------------------------------- ----------------------------------------- ------------
1997 9,850 39 9,889
- ------------------ ------------------------------------------- ----------------------------------------- ------------
1998 6,960 27 6,987
- ------------------ ------------------------------------------- ----------------------------------------- ------------
</TABLE>
* May 28, 1996 (commencement of operations) to December 31, 1996.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1998 would
have been $6,960, and the investor would have received a total of $40 in
distributions. Returns would have been lower if Emerging Markets' adviser had
not waived certain fees during the fiscal years ended 1997 and 1998.
- 39 -
<PAGE>
FOR EACH FUND:
In performance advertisements each fund may compare its total return
with data published by Lipper Analytical Services, Inc. ("Lipper") for U.S.
government funds and corporate bond (BBB) funds, CDA Investment Technologies,
Inc. ("CDA"), Wiesenberger Investment Companies Service ("Wiesenberger"), or
Morningstar Mutual funds ("Morningstar"), or with the performance of U.S.
Treasury securities of various maturities, recognized stock, bond and other
indexes, including (but not limited to) the Salomon Brothers Bond Index,
Shearson Lehman Bond Index, Shearson Lehman Government/Corporate Bond Index, the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Morgan Stanley
Capital International World Indices, including, among others, the Morgan Stanley
Capital International Europe, Australasia, Far East Index ("EAFE Index"), Morgan
Stanley Capital International Emerging Markets Free Index ("EMF"), Salomon
Brothers World Government Bond Index, Value Line, the Dow Jones Industrial
Average, and changes in the Consumer Price Index as published by the U.S.
Department of Commerce.
A fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels with
funds having similar investment objectives, published by Lipper, CDA,
Wiesenberger or Morningstar. Performance Advertisements also may refer to
discussions of a fund and comparative mutual fund data and ratings reported in
independent periodicals, including (but not limited to) THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRONS, FORTUNE and THE
NEW YORK TIMES.
Global Government invests primarily in fixed-income securities and
International Equity and Emerging Markets each invests primarily in global
equity securities, as described in the Prospectuses. Each fund does not
generally invest in the equity securities that make up the S&P 500 or the Dow
Jones indices. Comparison with such indices is intended to show how an
investment in either fund behaved as compared to indices that are often taken as
a measure of performance of the equity market as a whole. The indices, like each
fund's total return, assume reinvestment of all dividends and other
distributions. They do not take into account the costs or the tax consequences
of investing.
Each fund may include discussions or illustrations describing the
effects of compounding in performance advertisements. "Compounding" refers to
the fact that, if dividends or other distributions on an investment in a fund
are reinvested in additional fund shares, any future income or capital
appreciation of that fund would increase the value, not only of the original
fund investment, but also of the additional fund shares received through
reinvestment. As a result, the value of the fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
Each fund may also compare its performance with the performance of bank
certificates of deposit (CDs) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index and the Bank Rate Monitor National Index. In
comparing a fund's performance to CD performance, investors should keep in mind
that bank CDs are insured in whole or in part by an agency of the U.S.
Government and offer fixed principal and fixed or variable rates of interest,
and that bank CD yields may vary. Fund shares are not insured or guaranteed by
the U.S. Government and returns and net asset value will fluctuate. The
securities held by a fund generally have longer maturities than most CDs and may
reflect interest rate fluctuations for longer-term securities. An investment in
each fund involves greater risks than an investment in certificates of deposit.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
Advertisements may also describe techniques each fund's adviser employs in
selecting among the sectors of the fixed-income market and adjusting average
portfolio maturity. In particular, the advertisements may focus on the
techniques of 'value investing'. With value investing, a fund's adviser invests
in those securities it believes to be undervalued in relation to the long-term
earning power or asset value of their issuers. Securities may be undervalued
because of many factors, including market decline, poor economic conditions,
tax-loss selling, or actual or anticipated
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<PAGE>
unfavorable developments affecting the issuer of the security. Batterymarch
believes that the securities of sound, well-managed companies that may be
temporarily out of favor due to earnings declines or other adverse developments
are likely to provide a greater total return than securities with prices that
appear to reflect anticipated favorable developments and that are therefore
subject to correction should any unfavorable developments occur.
In advertising, a fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. A fund may use other recognized
sources as they become available.
A fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
A fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
A fund may also include in advertising biographical information on key
investment and managerial personnel.
A fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount,
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through periods of low prices.
A fund may discuss Legg Mason's tradition of service. Since 1899, Legg
Mason and its affiliated companies have helped investors address their specific
investment goals and have provided a full spectrum of financial services. Legg
Mason affiliates serve as investment advisors to private accounts and mutual
funds with approximately $89 billion in assets as of March 31, 1999.
In advertising, a fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
A fund may include in advertising and sales literature descriptive
material relating to both domestic and international economic conditions
including but not limited to discussions regarding the effects of inflation as
well as discussions which compare the growth of various world equity markets. A
fund may depict the historical performance of the securities in which that fund
may invest over periods reflecting a variety of market or economic conditions
whether alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A fund may also describe its
portfolio holdings and depict its size, the number and make-up of its
shareholder base and other descriptive factors concerning that fund.
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<PAGE>
A fund may discuss its investment adviser's philosophy regarding
international investing. Recognizing the differing evolutionary stages of the
distinct emerging market segments, each fund's adviser, intent on participating
in all of these marketplaces, does not apply a uniform investment process and
approach to its different marketplaces. As a result, an adviser's investment
processes for the U.S., non-U.S. developed countries and emerging markets are
distinct. Well-defined disciplines appropriate to the respective markets are
applied within the company's framework of strong, experienced management, sound
fundamental research and analysis, and superior data and modeling resources.
Batterymarch, adviser to International Equity and Emerging Markets, is
recognized as a "pioneer" in international investing and is well-known in the
investment community. Batterymarch has been applying a consistent investment
discipline in the international markets for over 10 years.
VALUATION OF FUND SHARES
As described in the Prospectuses, securities for which market
quotations are readily available are valued at current market value. Securities
are valued at the last sale price for a comparable position on the day the
securities are being valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than one
market, the securities are generally valued on the market considered by each
fund's adviser as the primary market. Trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is normally completed
well before the close of the business day in New York. Each fund is open for
business and its net asset value is calculated each day the Exchange is open for
business. The Exchange currently observes the following holidays: New Year's
Day, Martin Luther King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined. Foreign currency exchange rates are generally
determined prior to the close of trading on the Exchange. Occasionally, events
affecting the value of foreign investments and such exchange rates occur between
the time at which they are determined and the close of trading on the Exchange.
Such investments will be valued at their fair value, as determined in good faith
by or under the direction of the Board of Directors. Foreign currency exchange
transactions of a fund occurring on a spot basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market.
Securities trading in emerging markets may not take place on all days
on which the Exchange is open. Further, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days on which the
Exchange is not open. Consequently, the calculation of a fund's net asset value
therefore may not take place contemporaneously with the determination of the
prices of securities held by the fund.
MANAGEMENT OF THE FUND
The Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers and
directors, their dates of birth and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates those officers and/or
directors who are "interested persons" of the Corporation as defined by the 1940
Act. The business address of each officer and director is 100 Light Street,
Baltimore, Maryland, unless otherwise indicated.
JOHN F. CURLEY, JR.,* [07/24/39] Chairman of the Board and Director;
Retired Vice Chairman and Director of Legg Mason Wood Walker, Inc. and Legg
Mason, Inc.; President and Director of three Legg Mason funds; Chairman of the
Board and Trustee of one Legg Mason fund; Chairman of the Board, President and
Trustee of one Legg Mason fund; Chairman of the Board and Director of three Legg
Mason
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<PAGE>
funds. Formerly: Director of Legg Mason Fund Adviser, Inc. and Western Asset
Management Company (each a registered investment adviser); officer and/or
Director of various other affiliates of Legg Mason, Inc.
EDWARD A. TABER, III,* [08/25/43] President and Director; Senior
Executive Vice President of Legg Mason, Inc. and Legg Mason Wood Walker, Inc.;
Vice Chairman and Director of Legg Mason Fund Adviser, Inc.; Director of three
Legg Mason funds; Trustee of two Legg Mason funds; President and Director of two
Legg Mason funds.
RICHARD G. GILMORE, [06/09/27] Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company engaged in the manufacture and sale of decorative
paper products, business forms, and specialty metal packaging); Director of PECO
Energy Company (formerly Philadelphia Electric Company); Director/Trustee of all
Legg Mason funds. Formerly: Senior Vice President and Chief Financial Officer of
Philadelphia Electric Company (now PECO Energy Company); Executive Vice
President and Treasurer, Girard Bank, and Vice President of its parent holding
company, the Girard Company (bank holding company) and Director of Finance, City
of Philadelphia.
ARNOLD L. LEHMAN, [07/18/44] Director; 200 Eastern Parkway, Brooklyn,
New York. Director of the Brooklyn Museum of Art; Director/Trustee of all Legg
Mason funds. Formerly: Director of the Baltimore Museum of Art.
JILL E. McGOVERN, [08/29/44] Director; 400 Seventh St., NW, Washington,
DC. Chief Executive Officer of the Marrow Foundation; Director/Trustee of all
Legg Mason funds.
T. A. RODGERS, [10/22/34] Director; 2901 Boston Street, Baltimore,
Maryland. Principal, T. A. Rodgers & Associates (management consulting);
Director/Trustee of all Legg Mason funds.
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, [1/1/49] Vice President and Treasurer; Treasurer
of Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of all Legg Mason
funds; Vice President of Legg Mason.
KATHI D. BAIR*, [12/15/64] Secretary and Assistant Treasurer; Secretary
and/or Assistant Treasurer of three Legg Mason funds; employee of Legg Mason.
BRIAN M. EAKES*, [12/9/69 ] Assistant Treasurer and Assistant
Secretary; Assistant Treasurer and Assistant Secretary of two Legg Mason funds;
employee of Legg Mason, Inc. since July 1995. Formerly: Senior Associate - Audit
of PricewaterhouseCoopers LLP (Aug. 1992 - June 1995).
SUE SILVA*, [3/29/67] Assistant Treasurer; Assistant Secretary of five
Legg Mason funds; employee of Legg Mason, Inc., since 1994.
Officers and directors of the Corporation who are "interested persons"
thereof, as defined in the 1940 Act, receive no salary or fees from the
Corporation. Directors who are not interested persons of the Corporation receive
an annual retainer and a per meeting fee based on the average net assets of each
fund at December 31 of the previous year.
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Gilmore, Lehman and Rodgers and Dr. McGovern.
At April 15, 1999, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each fund's outstanding
shares.
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<PAGE>
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1998. None of the Legg Mason funds has any retirement plan for its
directors.
<TABLE>
<CAPTION>
<S> <C>
================================================================================================================
TOTAL COMPENSATION FROM
CORPORATION AND FUND COMPLEX
AGGREGATE COMPENSATION FROM PAID TO DIRECTORS**
NAME OF PERSON AND POSITION CORPORATION*
- --------------------------------------------- ----------------------------------- ------------------------------
John F. Curley, Jr. -
Chairman of the Board and Director None None
- --------------------------------------------- ----------------------------------- ------------------------------
Edward A. Taber, III -
President and Director None None
- --------------------------------------------- ----------------------------------- ------------------------------
Richard G. Gilmore - $3,595 $35,100
Director
- --------------------------------------------- ----------------------------------- ------------------------------
Charles F. Haugh - $2,756 $25,800
Director A
- --------------------------------------------- ----------------------------------- ------------------------------
Arnold L. Lehman - $3,595 $30,600
Director
- --------------------------------------------- ----------------------------------- ------------------------------
Jill E. McGovern - $3,595 $35,100,
Director
- --------------------------------------------- ----------------------------------- ------------------------------
T. A. Rodgers - $3,595 $35,100
Director
================================================================================================================
</TABLE>
A Mr. Haugh retired as a director in September 1998.
* Represents fees paid to each director during the fiscal year ended December
31, 1998.
** Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1998. There are nine open-end investment companies
in the Legg Mason Complex (with a total of seventeen funds).
THE FUNDS' INVESTMENT ADVISER/MANAGER
LMFA
Legg Mason Fund Adviser, Inc. ("LMFA"), a Maryland corporation, is
located at 100 Light Street, Baltimore, Maryland 21202. LMFA is a wholly owned
subsidiary of Legg Mason, Inc., which also is the parent of Legg Mason and each
fund's adviser. LMFA served as Global Government's investment adviser and
manager under an Investment Advisory and Management Agreement ("Advisory
Agreement") dated April 5, 1993. A revised Management Agreement dated May 1,
1995 ("Management Agreement") between Global Government and LMFA was approved by
the vote of a majority of the fund's outstanding shares on April 21, 1995.
Pursuant to the revised Management Agreement, and subject to overall direction
by the Board of Directors, LMFA manages the investment and other affairs of
Global Government. Continuation of the Agreement was most recently approved by
the Board of Directors on November 13, 1998. LMFA is responsible for managing
the fund consistent with the fund's investment objectives and policies described
in the Prospectuses and this Statement of Additional Information. LMFA also is
obligated to (a) furnish the fund with office space and executive and other
personnel necessary for the operations of the fund; (b) supervise all aspects of
the fund's operations; (c) bear the expense of certain informational and
purchase and redemption services to the fund's shareholders; (d) arrange, but
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<PAGE>
not pay for, the periodic updating of prospectuses, proxy material, tax returns
and reports to shareholders and state and federal regulatory agencies; and (e)
report regularly to the Corporation's officers and directors. LMFA and its
affiliates pay all the compensation of directors and officers of the Corporation
who are employees of LMFA. LMFA has delegated the portfolio management functions
for Global Government to its adviser, Western Asset Management Company.
As explained in the Prospectuses, LMFA receives for its services a
management fee, calculated daily and payable monthly, at an annual rate equal to
0.75% of Global Government's average daily net assets. LMFA has voluntarily
agreed to waive indefinitely its fees to the extent the fund's total operating
expenses attributable to Primary Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed during any month an annual rate of the fund's
average daily net assets attributable to Primary Shares of 1.90%. For the years
ended December 31, 1998, 1997 and 1996, LMFA did not waive any management fees.
For the years ended December 31, 1998, 1997 and 1996, the fund paid management
fees of $934,781, $1,155,558,and $1,150,265, respectively.
LMFA also serves as the manager for International Equity and Emerging
Markets under separate Management Agreements (each a "Management Agreement").
Continuation of International Equity's and Emerging Markets' Management
Agreements was most recently approved by the Board of Directors on November 13,
1998. Each Management Agreement provides that, subject to overall direction by
the Board of Directors, LMFA will manage the investment and other affairs of
International Equity and Emerging Markets. LMFA is responsible for managing
International Equity's and Emerging Markets' investments and for making
purchases and sales of securities consistent with the investment objectives and
policies described in the Prospectuses and this Statement of Additional
Information. LMFA is obligated to furnish the funds with office space and
certain administrative services as well as executive and other personnel
necessary for the operation of the funds. LMFA and its affiliates also are
responsible for the compensation of directors and officers of the Corporation
who are employees of LMFA and/or its affiliates. LMFA has delegated the
portfolio management functions for International Equity and Emerging Markets to
its adviser, Batterymarch Financial Management, Inc.
LMFA receives for its services a management fee, calculated daily and
payable monthly, at an annual rate equal to 0.75% of International Equity's
average daily net assets and 1.00% of Emerging Markets' average daily net
assets. LMFA and Batterymarch have voluntarily agreed to waive their fees if and
to the extent necessary to limit International Equity's and Emerging Markets'
total annual operating expenses attributable to Primary Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) to 2.25% and 2.50%,
respectively, of each fund's average daily net assets attributable to Primary
Shares. The agreement for International Equity is indefinite and the agreement
for Emerging Markets will expire on May 1, 2000, unless extended by LMFA and
Batterymarch.
For the years ended December 31, 1998, 1997 and 1996, LMFA waived $0,
$0 and $91,764, respectively, in management fees for International Equity. For
the same periods, the fund paid management fees of $1,950,682, $1,616,187, and
$933,951, respectively.
For the years ended December 31, 1998 and 1997, Emerging Markets paid
management fees of $553,914 (prior to waiver of $156,468) and $554,454 (prior to
waiver of $198,734) respectively. For the period May 28, 1996 (commencement of
operations of Emerging Markets) to December 31, 1996, LMFA waived all management
fees.
Under each Management Agreement, LMFA will not be liable for any error
of judgment or mistake of law or for any loss suffered by any fund in connection
with the performance of each Management Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or losses resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
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<PAGE>
Each Management Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the outstanding voting securities of that
fund or by LMFA, on not less than 60 days' written notice to the other party,
and may be terminated immediately upon the mutual written consent of LMFA and
the respective fund.
Each fund pays all its other expenses which are not expressly assumed
by LMFA. These expenses include, among others, interest expense, taxes,
brokerage fees, commissions, expenses of preparing and printing prospectuses,
statements of additional information, proxy statements and reports and of
distributing them to existing shareholders, custodian charges, transfer agency
fees, organizational expenses, distribution fees to the fund's distributor,
compensation of the independent directors, legal and audit expenses, insurance
expenses, expenses of registering and qualifying shares of the fund for sale
under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations.
Under its Management Agreement, each fund has the non-exclusive right
to use the name "Legg Mason" until that Agreement is terminated or until the
right is withdrawn in writing by LMFA.
WESTERN ASSET
Western Asset Management Company ("Western Asset"), 117 East Colorado
Boulevard, Pasadena, CA 91105, a wholly owned subsidiary of Legg Mason, serves
as investment adviser to Global Government under an Advisory Agreement dated May
1, 1995, between Western Asset and LMFA ("Advisory Agreement"). The Advisory
Agreement was approved by the Board of Directors, including a majority of the
directors who are not "interested persons" of the Corporation, Western Asset or
LMFA, on February 14, 1995, and was approved by the shareholders of Global
Government on April 21, 1995. Continuation of the Advisory Agreement was most
recently approved by the Board of Directors on November 13, 1998. Under the
Advisory Agreement, Western Asset is responsible, subject to the general
supervision of LMFA and the Corporation's Board of Directors, for the actual
management of Global Government's assets, including the responsibility for
making decisions and placing orders to buy, sell or hold a particular security.
For Western Asset's 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. For the
years ended December 31, 1998, 1997 and 1996, LMFA paid Western $498,550,
$616,282, and $613,478, respectively.
Under the Advisory Agreement, Western Asset will not be liable for any
error of judgment or mistake of law or for any loss suffered by the fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the fund's outstanding voting
securities, or by Western Asset, on not less than 60 days' notice to the other
party to the Agreement and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
BATTERYMARCH
Batterymarch Financial Management, Inc., 200 Clarendon Street, Boston,
Massachusetts 02116, is a wholly owned subsidiary of Legg Mason, Inc., which
also is the parent of Legg Mason. Batterymarch serves as International Equity's
and Emerging Markets' investment adviser under separate Investment Advisory
Agreements (each an "Advisory Agreement"). Under each Advisory Agreement,
Batterymarch is responsible, subject to the general supervision of LMFA and the
Corporation's Board of Directors, for the
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<PAGE>
actual management of International Equity's and Emerging Markets' assets,
including the responsibility for making decisions and placing orders to buy,
sell or hold a particular security. For Batterymarch's services, LMFA (not the
funds) pays Batterymarch a fee, computed daily and payable monthly, at an annual
rate equal to 0.50% and 0.75% of the average daily net assets of International
Equity and Emerging Markets, respectively.
For the years ended December 31, 1998, 1997 and 1996, Batterymarch
received $1,300,455, $1,077,462, and $539,873, respectively for its services to
International Equity Trust. For the years ended December 31, 1998 and 1997,
Batterymarch received $298,085 and $266,194 respectively for its services to
Emerging Markets. For the period May 28, 1996 (commencement of operations) to
December 31, 1996, Batterymarch waived its fees for its services to Emerging
Markets.
Under each Advisory Agreement, Batterymarch will not be liable for any
error of judgment or mistake of law or for any loss suffered by either fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
Each Advisory Agreement terminates automatically upon assignment. It
also is terminable at any time without penalty by vote of the Corporation's
Board of Directors, by vote of a majority of the fund's outstanding voting
securities, or by Batterymarch, on not less than 60 days' notice to the other
party to the Agreement and may be terminated immediately upon the mutual written
consent of both parties to the Agreement.
SUB-ADVISORY AGREEMENT
FOR GLOBAL GOVERNMENT TRUST
Western Asset Global Management, Ltd. ("Western Asset Global"), 155
Bishopsgate, London EC2M 3TY, an affiliate of Legg Mason, serves as an
investment sub-adviser to Global Government under a Sub-Advisory Agreement dated
May 1, 1997, between Western Asset Global and Western Asset ("Sub-Advisory
Agreement"). The Sub-Advisory Agreement was approved by the Board of Directors,
including a majority of the directors who are not "interested persons" of the
Corporation, Western Asset Global, Western Asset or LMFA, on February 14, 1997,
and was approved by the shareholders of Global Government on April 30, 1997.
Continuation of the Sub-Advisory Agreement was most recently approved by the
Board of Directors on November 13, 1998.
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 and the overall direction of the Board of Directors. As
compensation for Western Asset Global's services and for expenses borne by
Western Asset Global under the Sub-Advisory Agreement, Western Asset pays
Western Asset Global monthly at an annual rate equal to 0.20% of the fund's
average daily net assets. In addition, LMFA pays Western Asset Global a fee at
an annual rate equal to 0.10% of the fund's average daily net assets for certain
administrative expenses. Fees paid by LMFA to Western Asset Global for the year
ended December 31, 1998 and the period May 1, 1997 to December 31, 1997 totaled
$124,637 and $102,219 respectively.
Under the Sub-Advisory Agreement, Western Asset Global will not be
liable for any error of judgment or mistake of law or for any loss suffered by
LMFA or by the fund in connection with the performance of the Sub-Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations or duties thereunder.
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<PAGE>
The Sub-Advisory Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the fund's outstanding voting securities, by
LMFA, by Western Asset or by Western Asset Global, on not less than 60 days'
notice to the fund and/or the other party(ies). The Sub-Advisory Agreement
terminates immediately upon any termination of the Advisory Agreement or upon
the mutual written consent of LMFA, Western Asset, Western Asset Global and the
fund.
To mitigate the possibility that a fund will be affected by personal
trading of employees, the Corporation, LMFA, Batterymarch, Western Asset and
Western Asset Global have adopted policies that restrict securities trading in
the personal accounts of portfolio managers and others who normally come into
advance possession of information on portfolio transactions. These policies
comply, in all material respects, with the recommendations of the Investment
Company Institute.
THE FUNDS' DISTRIBUTOR
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore,
Maryland, acts as distributor of the funds' shares pursuant to separate
Underwriting Agreements with the Corporation. Each Underwriting Agreement
obligates Legg Mason to promote the sale of fund shares and to pay certain
expenses in connection with its distribution efforts, including the printing and
distribution of prospectuses and periodic reports used in connection with the
offering to prospective investors (after the prospectuses and reports have been
prepared, set in type and mailed to existing shareholders at each fund's
expense) and for supplementary sales literature and advertising costs.
Each fund has adopted a Distribution and Shareholder Services Plan
("Plan") which, among other things, permits a fund to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and the
provision of ongoing services to Primary Class shareholders. Distribution
activities for which such payments may be made include, but are not limited to,
compensation to persons who engage in or support distribution and redemption of
shares, printing of prospectuses and reports for persons other than existing
shareholders, advertising, preparation and distribution of sales literature,
overhead, travel and telephone expenses.
The Plan was adopted, as required by Rule 12b-1 under the 1940 Act, by
a vote of the Board of Directors on February 5, 1993 (for Global Government),
October 21, 1994 (for International Equity) and February 7, 1996 (for Emerging
Markets), including a majority of the directors who are not "interested persons"
of the Corporation as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or the
Underwriting Agreement ("12b-1 Directors"). Amendment of the Plan to conform to
new rules of the National Association of Securities Dealers, Inc., was approved
by the Board on May 14, 1993. Continuation of the Plan was most recently
approved by the Board of Directors on November 13, 1998, including a majority of
the 12b-1 Directors. In approving the continuance of the Plan, in accordance
with the requirements of Rule 12b-1, the directors determined that there was a
reasonable likelihood that the Plan would benefit each fund and its
shareholders. The directors noted that, to the extent the Plan results in
additional sales of Primary Shares of a fund, the Plan may enable the fund to
achieve economies of scale that could reduce expenses and to minimize the
prospects that the fund will experience net redemptions and the accompanying
disruption of portfolio management.
As compensation for its services and expenses, Legg Mason receives from
each fund an annual distribution fee equivalent to 0.50% (for Global Government)
and 0.75% (for International Equity and Emerging Markets) of its average daily
net assets attributable to Primary Shares and a service fee equivalent to 0.25%
of its average daily net assets attributable to Primary Shares in accordance
with the Plan. The distribution and service fees are calculated daily and
payable monthly. Legg Mason voluntarily agreed to waive its fees and reimburse
each fund if and to the extent its expenses attributable to Primary Shares
(exclusive of taxes, interest, brokerage and extraordinary expenses) exceeded
during any month
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<PAGE>
an annual rate of each fund's average daily net assets attributable to Primary
Shares in accordance with the following schedule:
Global Government: 0.20% until September 30, 1993; 0.35% until December
31, 1993; 0.50% until January 31, 1994; 0.70% until February 28, 1994; 0.90%
until March 31, 1994; 1.10% until April 30, 1994; 1.30% until May 31, 1994;
1.50% until June 30, 1994, 1.70% until July 31, 1994; and 1.90% indefinitely.
International Equity: 2.25% indefinitely.
Emerging Markets: 2.50% until May 1, 2000.
For the years ended December 31, 1998, 1997 and 1996, Global Government
paid full distribution and service fees of $934,846, $1,155,558, and $1,150,140,
respectively.
For the years ended December 31, 1998, 1997 and 1996, International
Equity paid full distribution and service fees of $2,600,611, $2,154,916, and
$1,245,267, respectively.
For the years ended December 31, 1998 and 1997 Emerging Markets paid
distribution and service fees of $553,914 and $554,454, respectively. For the
period May 28, 1996 (commencement of operations) to December 31, 1996, Emerging
Markets paid distribution and service fees of $84,388 (prior to fees waived of
$17,498).
The Plan continues in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 Directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated with respect to each
fund by a vote of a majority of 12b-1 Directors or by vote of a majority of the
outstanding voting Primary Class securities of that fund. Any change in the Plan
that would materially increase the distribution costs to a fund requires Primary
Class shareholder approval; otherwise, the Plan may be amended by the directors,
including a majority of the 12b-1 Directors.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by a fund, pursuant to the Plan or any
related agreement shall provide to that fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which the expenditures were made. Rule 12b-1 also
provides that a fund may rely on that Rule only if, while the Plan is in effect,
the nomination and selection of that fund's independent directors is committed
to the discretion of such independent directors.
For the year ended December 31, 1998, Legg Mason incurred the following
expenses in connection with distribution and shareholder services for each fund:
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Global International Emerging
Government Equity Markets
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Compensation to sales personnel $582,000 $1,564,000 $346,000
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Advertising 85,000 100,000 102,000
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Printing and mailing of prospectuses to prospective 105,000 154,000 149,000
shareholders
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Other 657,000 1,119,000 656,000
- ------------------------------------------------------------- ----------------- ------------------ ----------------
Total $1,429,000 $2,937,000 $1,253,000
- ------------------------------------------------------------- ----------------- ------------------ ----------------
</TABLE>
- 49 -
<PAGE>
The amounts in "Other" reflect the allocation of certain items of overhead,
using assumptions believed by Legg Mason to be reasonable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are excluded from
the calculation. For the years ended December 31, 1998 and 1997, Global
Government's portfolio turnover rates were 288% and 241%, respectively. For the
years ended December 31, 1998 and 1997, International Equity's portfolio
turnover rates were 72% and 59%, respectively. For the years ended December 31,
1998, and 1997 Emerging Market's portfolio turnover rates were 77% and 63%
respectively.
Under each Advisory Agreement, each fund's adviser is responsible for
the execution of portfolio transactions. Corporate and government debt
securities are generally traded on the OTC market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. Prices paid to a dealer in debt securities will generally include a
"spread," which is the difference between the price at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit. Some portfolio transactions may be executed through
brokers acting as agent. In selecting brokers or dealers, each adviser must seek
the most favorable price (including the applicable dealer spread or brokerage
commission) and execution for such transactions, subject to the possible payment
as described below of higher brokerage commissions or spreads to broker-dealers
who provide research and analysis. A fund may not always pay the lowest
commission or spread available. Rather, in placing orders on behalf of a fund,
each adviser also takes into account such factors as size of the order,
difficulty of execution, efficiency of the executing broker's facilities
(including the services described below) and any risk assumed by the executing
broker.
Consistent with the policy of most favorable price and execution, each
adviser may give consideration to research and statistical services furnished by
brokers or dealers to that adviser for its use, may place orders with
broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may pay to these broker-dealers a higher
brokerage commission than may be charged by other broker-dealers. Such research
and analysis may be useful to each adviser in connection with services to
clients other than the funds. On the other hand, research and analysis received
by the adviser from broker-dealers executing orders for clients other than the
funds may be used for the funds' benefit. Each adviser's fee is not reduced by
reason of its receiving such brokerage and research services. For the years
ended December 31, 1998 and 1997, Global Government paid no brokerage
commissions. For the years ended December 31, 1998 and 1997 , International
Equity paid $627,793, and $556,869 respectively in brokerage commissions. For
the years ended December 31, 1998 and 1997 Emerging Markets paid $297,253, and
$496,536 in brokerage commissions.
Although Global Government does not expect to purchase securities on a
commission basis, each fund may use Legg Mason to effect agency transactions in
listed securities at commission rates and under circumstances consistent with
the policy of best execution. Commissions paid to Legg Mason will not exceed
"usual and customary brokerage commissions." Rule 17e-1 under the 1940 Act
defines "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." In the OTC market, a fund generally will deal with
responsible primary market makers unless a more favorable execution can
otherwise be obtained.
- 50 -
<PAGE>
No fund may buy securities from, or sell securities to, Legg Mason or
its affiliated persons as principal. However, the Corporation's Board of
Directors has adopted procedures in conformity with Rule 10f-3 under the 1940
Act whereby a fund may purchase securities that are offered in certain
underwritings in which Legg Mason or any of its affiliated persons is a
participant.
Section 11(a) of the Securities Exchange Act of 1934 prohibits Legg
Mason from retaining compensation for executing transactions on an exchange for
its affiliates, such as the funds, unless the affiliate expressly consents by
written contract. Each Advisory Agreement expressly provides such consent in
accordance with Rule 11a2-2(T).
Investment decisions for each fund are made independently from those of
other funds and accounts advised by LMFA, Batterymarch, Western, or Western
Asset Global. However, the same security may be held in the portfolios of more
than one fund or account. When two or more accounts simultaneously engage in the
purchase or sale of the same security, the prices and amounts will be equitably
allocated to each account. In some cases, this procedure may adversely affect
the price or quantity of the security available to a particular account. In
other cases, however, an account's ability to participate in large-volume
transactions may produce better executions and prices.
CAPITAL STOCK INFORMATION
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. Each fund
currently offers two classes of shares, Class A, known as Primary Shares and
Class Y, known as Navigator 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 or servicing fund shares may receive more with
respect to one class than another.
The Board of Directors 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 actions. 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.
THE CORPORATION'S CUSTODIAN AND
TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts, serves as custodian of each fund's assets. Boston Financial Data
Services, P.O. Box 953, Boston, Massachusetts 02103 serves as transfer and
dividend-disbursing agent and administrator of various shareholder services.
Legg Mason also assists BFDS with certain of its duties as transfer agent, for
which BFDS pays Legg Mason a fee. Each fund reserves the right, upon 60 days'
written notice, to make other charges to investors to cover administrative
costs.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036-1800, serves as counsel to the Corporation.
- 51 -
<PAGE>
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, Maryland
21201, serves as the Corporation's independent accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets as of December 31, 1998; the Statements of
Operations for the year ended December 31, 1998; the Statements of Changes in
Net Assets for the years ended December 31, 1998 and December 31, 1997 ; the
Financial Highlights for the periods presented; the Notes to Financial
Statements and the Report of the Independent Accountants, all of which are
included in the Corporation's annual report for the year ended December 31,
1998, are hereby incorporated by reference in this Statement of Additional
Information.
- 52 -
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS
AAA: This is the highest rating assigned by S&P to an obligation and
indicates an extremely strong capacity to pay principal and interest.
A - 1
<PAGE>
AA: Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D: Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
AAA: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stock.
AA: An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
A: An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "a " classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
BAA: An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
BA: An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1: Issuers (or supporting institutions) rated Prime-1 (P-1) have
a superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers (or supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will
A - 2
<PAGE>
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for the issues
designated "A-1".
A - 3
<PAGE>
APPENDIX B
The funds may use the following instruments:
OPTIONS ON DEBT SECURITIES AND FOREIGN CURRENCIES (Global Government)
A call option is a short-term contract pursuant to which the purchaser
of the option, in return for a premium, has the right to buy the security or
currency underlying the option at a specified price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to deliver the
underlying security or currency against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security or currency at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security or currency at the exercise price.
OPTION ON A BOND INDEX (Global Government)
An option on a bond index is similar to an option on a security or
foreign currency, except that settlement of a bond index option is effected with
a cash payment based on the value of the bond index and does not involve the
delivery of the securities included in the index. Thus, upon settlement of a
bond index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price of the option and the
closing price of the bond index.
INTEREST RATE, FOREIGN CURRENCY AND BOND INDEX FUTURES CONTRACTS
(Global Government)
Interest rate and foreign currency futures contracts are bilateral
agreements pursuant to which one party agrees to make, and the other party
agrees to accept, delivery of a specified type of debt security or currency at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement date
without the making or taking of delivery. A bond index futures contract is
similar to any other futures contract except that settlement of a bond index
futures contract is effected with a cash payment based on the value of the bond
index and does not involve the delivery of the securities included in the index.
OPTIONS ON FUTURES CONTRACTS
Options on futures contracts are similar to options on securities or
currencies, except that an option on a futures contract gives the purchaser the
right, in return for the premium, to assume a position in a futures contract (a
long position if the option is a call, and a short position if the option is a
put), rather than to purchase or sell a security or currency, at a specified
price at any time during the option term. Upon exercise of the option, the
delivery of the futures position to the holder of the option will be accompanied
by delivery of the accumulated balance that represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the future. The
writer of an option, upon exercise, will assume a short position in the case of
a call, and a long position in the case of a put. An option on a bond index
futures contract is similar to any other option on a futures contract except
that the purchaser has the right, in return for the premium, to assume a
position in a bond index futures contract at a specified price at any time
during the option term.
FORWARD CURRENCY CONTRACTS
A forward currency contract involves an obligation to purchase or sell
a specific currency at a specified future date, which may be any fixed number of
days from the contract date agreed upon by the parties, at a price set at the
time the contract is entered into.
B - 1
