LEGG MASON
GLOBAL TRUST, INC.
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LEGG MASON GLOBAL TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
LEGG MASON EUROPE FUND
PRIMARY CLASS AND CLASS A PROSPECTUS October 5, 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
7 Principal risks
13 Performance
17 Fees and expenses of the funds
20 Management
About your investment:
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24 How to invest
28 How to sell your shares
30 Account policies
32 Services for investors
34 Distributions and taxes
36 Financial highlights
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[GRAPHIC]
LEGG MASON GLOBAL TRUST, INC.
INVESTMENT OBJECTIVES
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GLOBAL INCOME TRUST
INVESTMENT OBJECTIVE: Current income and capital appreciation 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 fixed income securities
rated investment grade by Moody's Investor's 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. The types of fixed income
securities in which the fund may invest include:
o U.S. and foreign investment grade corporate debt securities
o U.S. and foreign high-yielding corporate debt securities (including
those commonly known as "junk bonds")
o sovereign debt obligations of developed nations
o sovereign debt obligations of emerging market countries
o mortgage-related and asset-backed securities
The fund will maintain a minimum of 25% 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 debt securities in
which the fund may invest, and the average maturity of the fund's portfolio, may
be of any maturity. The fund may invest in corporate fixed income securities
rated as low as C by Moody's or D by S&P or in nonrated securities deemed by the
adviser to be of comparable quality.
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 an aggregate of 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.
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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 macroeconomic or
company-specific events. This ongoing screening drives the adviser's discipline
for buying, selling or holding any securities 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.
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.
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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.
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.
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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 fund's 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 markets 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
4 Legg Mason Global Trust
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disciplines in those markets where reliable data are 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.
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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EUROPE FUND
INVESTMENT OBJECTIVE: Long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES:
Lombard Odier International Portfolio Management Limited, the fund's
sub-adviser, under normal circumstances invests substantially all of the fund's
assets in equity securities of European issuers that it believes offer
above-average potential for capital appreciation. Such securities include common
and preferred stocks, convertible securities, rights and warrants. The
sub-adviser focuses on relatively larger capitalized issuers with good earnings,
growth potential and strong management.
A smaller portion of the fund's assets may be invested in fixed income
securities such as obligations of foreign or domestic governments, government
agencies or municipalities, and obligations of foreign or domestic
Legg Mason Global Trust 5
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companies. The sub-adviser will invest in such securities for potential capital
appreciation.
Securities in the fund's portfolio may be sold when they attain certain price
targets or when better opportunities arise. Sell decisions also are affected by
the level of subscriptions and redemptions of shares of the fund. The
sub-adviser's investment technique may result in high portfolio turnover.
For temporary defensive purposes, the fund may hold all or a portion of its
total assets in money market instruments, cash equivalents, short-term
government and corporate obligations, or repurchase agreements. The fund may not
achieve its investment objective when so invested.
6 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. The principal risks of
investing in the funds are described below.
MARKET RISK:
International Equity Trust, Emerging Markets Trust and Europe Fund 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. Some foreign governments have
defaulted on principal and interest payments.
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.
Transactions in foreign securities may be subject to less efficient settlement
practices, including extended clearance and settlement periods. Foreign stock
markets may be less liquid and less regulated than U.S. stock markets.
Legg Mason Global Trust 7
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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
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 each of the funds may invest a significant amount of its 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 of the funds invests significantly in securities denominated in
foreign currencies, the funds may incur currency conversion costs, and may be
favorably or unfavorably 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
8 Legg Mason Global Trust
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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 no suitable hedging instruments available.
The conversion of certain European currencies into the Euro began on January 1,
1999, 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 NONDIVERSIFICATION:
Europe Fund invests primarily in securities of European issuers. A fund
concentrating a significant portion of its investment in a single region will be
more susceptible to factors adversely affecting issuers within that region than
would a less concentrated portfolio of securities.
European issuers are subject to the special risks in that region, including
risks related to the introduction of the Euro and the potential for difficulties
in its acceptance, and the emergence of more unified economic and financial
governance in the European Monetary Union ("EMU") countries.
Global Income is a nondiversified 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.
RISKS OF FIXED INCOME SECURITIES:
Global Income invests substantially all of its assets in fixed income
securities. Europe Fund may invest up to 35% of its total assets in fixed income
securities. International Equity Trust and Emerging Markets Trust may also
invest in fixed income securities to a lesser extent.
Legg Mason Global Trust 9
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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.
10 Legg Mason Global Trust
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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 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 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 the operations of each fund, its adviser, sub-adviser or
distributor, or could impact companies in which the funds invest. The year 2000
poses an even greater risk for foreign securities than for other securities in
which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the advisers, sub-advisers and their affiliates
are taking steps to protect fund investors. These include efforts to determine
that the problems 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.
Legg Mason Global Trust 11
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PORTFOLIO TURNOVER:
Global Income and Europe Fund each 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.
12 Legg Mason Global Trust
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[GRAPHIC] PERFORMANCE
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Each fund has two authorized classes of shares: Primary Class and Navigator
Class; Europe Fund has an additional authorized class of shares: Class A. The
information provided below for Europe Fund is primarily for Class A, which is
the class with the longest history. Its expenses generally are slightly lower,
and its performance higher than the Primary Class. Each class is subject to
different expenses and a different sales charge structure. 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. Sales charges have not been
deducted from total returns (in the bar chart) for Class A shares. Returns would
have been lower had these charges been deducted.
GLOBAL INCOME TRUST - PRIMARY CLASS
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
[GRAPHIC TABLE APPEARS HERE]
1998 1997 1996 1995 1994
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(1.40) 20.80 8.22 (1.69) 11.50
DURING THE LAST FIVE CALENDAR YEARS:
Quarter Ended Total Return
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Best quarter March 31, 1995 +7.86%
Worst quarter March 31, 1997 -3.28%
In the following table, average annual total returns as of December 31, 1998,
are compared with the Salomon Brothers World Government Bond Index.
1 Year 5 Years Life of Class
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Global Income Trust +11.50% +7.16% +7.45%(a)
Solomon Brothers World
Government Bond Index +15.31% +7.85% +7.87%(b)
(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 13
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INTERNATIONAL EQUITY TRUST - PRIMARY CLASS
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
[GRAPHIC TABLE APPEARS HERE]
1996 1997 1998
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16.49 1.76 8.49
DURING THE LAST THREE CALENDAR YEARS:
Quarter Ended Total Return
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Best quarter March 31, 1998 +15.70%
Worst quarter September 30, 1998 -20.06%
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 (MSCI EAFE) Index.
1 Year Life of Class
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International Equity Trust +8.49% +8.88%(a)
(MSCI EAFE) Index +20.00% +11.18%(b)
(a) February 17, 1995 (commencement of operations) to December 31, 1998.
(b) For the period February 28, 1995 to December 31, 1998.
14 Legg Mason Global Trust
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EMERGING MARKETS TRUST - PRIMARY CLASS
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
[GRAPHIC TABLE APPEARS HERE]
1997 1998
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(6.18) (29.34)
DURING THE LAST TWO CALENDAR YEARS:
Quarter Ended Total Return
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Best quarter December 31, 1998 +16.19%
Worst quarter September 30, 1998 -28.18%
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.
1 Year Life of Class
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Emerging Markets Trust -29.34% -12.89%(a)
(MSCI EM) Free Index -25.34% -16.07%(b)
(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 15
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EUROPE FUND - CLASS A SHARES
YEAR BY YEAR TOTAL RETURN AS OF DECEMBER 31 OF EACH YEAR (%)
[GRAPHIC TABLE APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.47 (20.56) 7.07 (7.17) 29.91 (4.23) 19.90 31.53 17.52 41.85
</TABLE>
DURING THE LAST TEN YEARS:
Quarter Ended Total Return
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Best quarter March 31, 1991 +25.74%
Worst quarter September 30, 1990 -20.21%
In the following table, average annual total returns as of December 31, 1998,
are compared with the Morgan Stanley Capital International (MSCI) Europe Index,
a broad-based, unmanaged index based on the share prices of common stocks in
different European countries. The countries included in this index are Austria,
Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands,
Norway, Spain, Sweden, Switzerland and the U.K.
1 Year 5 Years 10 Years Life of Class
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Europe Fund Class A +35.09% +19.12% +10.72% +9.58%(a)
Europe Fund Primary Class +40.48% N/A N/A +27.13%(b)
MSCI Europe Index +28.53% +19.10% +15.23% +14.02%(c)
(a) August 19, 1986 (commencement of sale of Class A shares) to December 31,
1998.
(b) July 23, 1997 (commencement of sale of Primary Class shares) to December 31,
1998.
(c) For comparison with Class A, the index's return shown in the table is for
the period August 31, 1986 to December 31, 1998. For comparison with Primary
Class, the index's return for the period July 31, 1997 to December 31, 1998,
was 22.26%.
16 Legg Mason Global Trust
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[GRAPHIC] FEES AND EXPENSES OF THE FUNDS
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The tables below describe 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 will lower that fund's share price and dividends.
Other expenses include transfer agency, custody, professional and registration
fees. Emerging Markets 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.
GLOBAL INCOME TRUST, INTERNATIONAL EQUITY TRUST,
EMERGING MARKETS TRUST
Shareholder Fees
(fees paid directly from your investment)
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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.
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
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Global International Emerging
Primary Class Income Equity Markets
shares of: Trust Trust Trust
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Management fees (a) 0.75% 0.75% 1.00%
Distribution and service
(12b-1) fees 0.75% 1.00% 1.00%
Other expenses 0.37% 0.39% 0.78%
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Total annual fund operating
expenses (a) 1.87% 2.14% 2.78%
(a) Legg Mason Fund Adviser, Inc., as manager/investment adviser, has
voluntarily agreed to waive fees so that Primary Class share expenses (exclusive
of taxes, interest, brokerage and extraordinary expenses) do not exceed the
following annual rates of each fund's average daily net assets attributable to
Primary shares: for Global Income, 1.90% indefinitely; for International Equity
Trust, 2.25% indefinitely; and for Emerging Markets Trust, 2.50% until May 1,
2000. These voluntary waivers may
Legg Mason Global Trust 17
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be terminated at any time. With these waivers, management fees and total annual
fund operating expenses for the fiscal year ended December 31, 1998, were 0.72%
and 2.50%, respectively, for Emerging Markets Trust.
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) that you redeem all of your shares at
the end of the time periods shown.
1 Year 3 Years 5 Years 10 Years
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Global Income 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
EUROPE FUND
Shareholder Fees
(fees paid directly from your investment)
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Class A Primary Class
Shares Shares
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Maximum sales charge (load) imposed on purchases
(as a % of offering price) (a) 4.75% None
Maximum deferred sales charge
(as a % of net asset value) (b) None None
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
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Class A Primary Class
Shares Shares
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Management fees (c) 1.00% 1.00%
Service (12b-1) fees 0.25% 1.00%
Other expenses 0.64% 0.59%
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Total annual fund operating expenses (c) 1.89% 2.59%
18 Legg Mason Global Trust
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(a) Sales charge waivers and reduced sales charge purchase plans are available
for Class A shares. See "How to Invest."
(b) A contingent deferred sales charge ("CDSC") of 1% of the net asset value of
Class A shares will be imposed on redemptions of shares purchased pursuant
to the front-end sales charge waiver on purchases of $1 million or more of
Class A shares made within one year of the purchase date. See "How to
Invest."
(c) Legg Mason Fund Adviser, Inc., as investment adviser to Europe Fund, has
voluntarily agreed to waive fees so that expenses (exclusive of taxes,
interest, brokerage and extraordinary expenses) do not exceed the following
rates: an annual rate of 1.85% of the fund's average daily net assets
attributable to Class A shares; and an annual rate of 2.6% of the fund's
average daily net assets attributable to Primary Class shares. These
voluntary waivers will continue until May 1, 2000, and may be terminated at
any time. With this waiver, management fees and total annual fund operating
expenses for the fiscal year ended December 31, 1998, were 0.92% and 1.81%,
respectively, for Class A shares and 0.92% and 2.51%, respectively, for
Primary Class shares.
EXAMPLE:
This example helps you compare the cost of investing in Europe 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
the 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) that you redeem all of your
shares at the end of the time periods shown. This example also assumes that the
maximum initial sales charge is deducted at the time of purchase.
1 Year 3 Years 5 Years 10 Years
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Class A $658 $1,041 $1,448 $2,582
Primary Class $262 $ 806 $1,375 $2,925
Legg Mason Global Trust 19
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[GRAPHIC] M A N A G E M E N T
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MANAGERS AND INVESTMENT ADVISERS:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland 21202, is
the manager of the funds. 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:
Global Income Trust 0.75%
International Equity Trust 0.75%
Emerging Markets Trust 0.72%
Prior to October 6, 1999, Bartlett & Co. served as Europe Fund's manager under
compensation arrangements substantially similar to those with the current
manager. For its services during the fiscal year ended December 31, 1998, the
fund paid Bartlett & Co. a fee equal to 0.92% of its average net assets.
Legg Mason Fund Adviser acts as manager or adviser to investment companies with
aggregate assets of $19.6 billion as of August 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 Batterymarch 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 $5.6 billion as of August 31, 1999.
20 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
Western Asset Management Company, 117 East Colorado Boulevard, Pasadena,
California 91105, is investment adviser to Global Income 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 Western Asset Management a monthly fee of 53 1/3% of
the fee it receives from Global Income Trust, net of any waivers.
Western Asset Management acts as investment adviser to investment companies and
private accounts with aggregate assets of $56.7 billion as of August 31, 1999.
Western Asset Global Management Limited, 155 Bishopgate, London, England, serves
as investment sub-adviser to Global Income Trust. The sub-adviser is responsible
for providing research and analytical and trading support for the fund's
investment programs, as well as exercising investment discretion for part of the
portfolio, subject to the supervision of Western Asset Management and Legg Mason
Fund Adviser.
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 $3.9 billion as of August 31,
1999. Western Asset Global has managed global fixed income assets for U.S. and
non-U.S. clients since 1984.
Lombard Odier International Portfolio Management Limited, Norfolk House, 13
Southampton Place, London, England, serves as investment sub-adviser to Europe
Fund. For its services, Lombard Odier receives a monthly fee from Legg Mason
Fund Adviser equal to 60% of the fee actually paid to Legg Mason Fund Adviser by
the fund (net of any waivers). Lombard Odier specializes in advising and
managing investment portfolios
Legg Mason Global Trust 21
<PAGE>
- --------------------------------------------------------------------------------
for institutional clients and mutual funds. Lombard Odier is an indirect wholly
owned subsidiary of Lombard Odier & Cie, a Swiss private bank.
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 is responsible for the
day-to-day management of Global Income Trust.
Neil Worsley and William Lovering are responsible for co-managing Europe Fund.
Mr. Worsley has been Director and Senior Investment Manager of Lombard Odier
since June 1, 1996. Prior thereto, he was an Assistant Director and Senior Fund
Manager. He joined Lombard Odier in 1990. Mr. Lovering has been Assistant
Director of Lombard Odier since June 1, 1996. Prior thereto, he was a Senior
Fund Manager. He joined the firm in 1994. Previously, Mr. Lovering was employed
at Arbuthnot Latham Investment Management.
DISTRIBUTOR OF THE FUNDS' 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/or shareholder service fees for the
sale of its shares and for services provided to shareholders. These fees are
calculated daily and paid monthly.
Each class of shares bears 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.
Under each plan, the funds may pay the distributor an annual fee equal to 0.50%
of Global Income Trust's average daily net assets attributable to Primary
shares, and 0.75% of International Equity Trust's, Emerging Markets Trust's and
Europe Fund's average daily net assets attributable to
22 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
Primary shares; and an annual service fee from each fund equal to 0.25% of its
average daily net assets attributable to Primary shares. For Class A shares,
Europe Fund may pay the distributor a service fee at an annual rate of 0.25% of
its average daily Class A net assets.
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 collects the sales charge imposed on purchases of Class A shares
and any CDSCs that may be imposed on certain redemptions of Class A shares. The
distributor reallows a portion of the sales charges on Class A shares to
broker/dealers that have sold such shares in accordance with the Class A
purchase schedule, and may from time to time reallow the full amount of the
sales charge.
The distributor may also pay special additional compensation and promotional
incentives to broker/dealers who sell Class A shares of the fund.
The distributor may enter into agreements with other brokers to sell Primary
Class 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.
Legg Mason Fund Adviser, Batterymarch, Western Asset Management, Western Asset
Global and the distributor are wholly owned subsidiaries of Legg Mason, Inc., a
financial services holding company.
Legg Mason Global Trust 23
<PAGE>
[GRAPHIC] HOW TO INVEST
- --------------------------------------------------------------------------------
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 the funds and answer any questions you may have. For each class
of shares the minimum initial investment 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.
When placing a purchase order for Europe Fund shares, please specify whether the
order is for Class A or Primary Class. All purchase orders that fail to specify
a class will automatically be invested in Primary Class shares.
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 or Call your financial advisor to transfer available cash
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 this
Investment Plan plan, you may arrange for automatic monthly investments in a
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 that 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 a fund. You may also reinvest
dividends from certain unit investment trusts in shares of a
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.
24 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
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.
EUROPE FUND -- CLASS A PURCHASE SCHEDULE:
Europe Fund's offering price for Class A purchases is equal to the net asset
value per share plus a front-end sales charge determined from the following
schedule (which may be amended from time to time):
Sales Charge Sales Charge Dealer Reallowance
as a % of as a % of as a % of
Amount of Purchase Offering Price Net Investment Offering Price
- --------------------------------------------------------------------------------
Less than $25,000 4.75% 4.99% 4.00%
$25,000 to $49,999 4.50 4.71 3.75
$50,000 to $99,999 4.00 4.17 3.25
$100,000 to $249,999 3.50 3.63 2.75
$250,000 to $499,999 2.50 2.56 2.00
$500,000 to $999,999 2.00 2.04 1.60
$1 million or more* 0.00 0.00 1.00
* For redemptions made within one year of the purchase date, a CDSC of 1% of the
shares' net value at the time of purchase or sale, whichever is less, may be
charged on redemptions of shares purchased pursuant to the front-end sales
charge waiver for purchases of $1 million or more. See "How to Sell Your
Shares" for a discussion of any CDSC applicable to Class A shares.
Legg Mason Global Trust 25
<PAGE>
- --------------------------------------------------------------------------------
The distributor will pay the following commissions to brokers that initiate and
are responsible for purchases of Class A shares of any single purchaser of $2
million or more in the aggregate: 0.80% up to $2,999,999, plus 0.50% of the
excess over $3 million up to $20 million, plus 0.25% of the excess over $20
million.
SALES CHARGE WAIVERS FOR CLASS A SHARES:
Purchases of Class A shares made by the following investors will not be subject
to a sales charge:
o Advisory clients (and related accounts) of Bartlett & Co.
o Certain employee benefit or retirement accounts (subject to the
discretion of Bartlett & Co.).
o Employees of Legg Mason, Inc. and its affiliates.
o Registered representatives or full-time employees of broker/dealers that
have dealer agreements with the distributor.
o The children, siblings and parents of such persons.
o Broker/dealers, registered investment advisers, financial institutions or
financial planners for the accounts of clients participating in "wrap
fee" advisory programs that adhere to certain standards and that are
subject to agreements between those entities and the distributor.
o Purchases of $1,000,000 or more.
Investors may be eligible for a reduced sales charge on purchases of Class A
shares through a Right of Accumulation or under a Letter of Intent.
RIGHT OF ACCUMULATION:
To receive the Right of Accumulation, investors must give the distributor or
their broker/dealer sufficient information to permit qualification. If
26 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
qualified, investors may purchase shares of the fund at the sales charge
applicable to the total of:
o the dollar amount being purchased, plus
o the dollar amount of the investors' concurrent purchases of Class A
shares of other Legg Mason funds, plus
o the price of all shares of Class A shares of Legg Mason funds already held
by the investor.
LETTER OF INTENT:
Investors may execute a Letter of Intent indicating an aggregate amount to be
invested in Class A shares of the fund in the following 13 months. All purchases
made during that period will be subject to the sales charge applicable to that
aggregate amount.
If a Letter of Intent is executed within 90 days of a prior purchase of Class A
shares, the prior purchase may be included under the Letter of Intent and an
adjustment will be made to the applicable sales charge. The adjustment will be
based on the current net asset value of the fund.
If the total amount of purchases does not equal the aggregate amount covered by
the Letter of Intent after the thirteenth month, you will be required to pay the
difference between the sales charges paid at the reduced rate and the sales
charge applicable to the purchases actually made.
Shares having a value equal to 5% of the amount specified in the Letter of
Intent will be held in escrow during the 13-month period (while remaining
registered in your name) and will be subject to redemption to assure any
necessary payment to the distributor of a higher applicable sales charge.
Navigator Class shares are offered through a separate prospectus only to certain
investors.
Legg Mason Global Trust 27
<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.
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.
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.
Payment of the proceeds of 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.
EUROPE FUND -- CONTINGENT DEFERRED SALES CHARGES:
If you redeem any Class A shares within one year that were purchased without a
sales charge because the purchase totaled $1,000,000 or more, you will be
subject to a CDSC of 1% of the lower of the original purchase
28 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
price or the net asset value of such shares at the time of redemption. You may
exchange such shares purchased without a sales charge for Class A shares of
another fund without being charged a CDSC. You will be subject to a CDSC if you
redeem shares acquired through exchange.
Class A shares that are redeemed will not be subject to the CDSC to the extent
that the value of such shares represents (i) reinvestment of dividends or other
distributions, or (ii) shares redeemed more than one year after their purchase.
The amount of any CDSC will be paid to the distributor.
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.
Legg Mason Global Trust 29
<PAGE>
[GRAPHIC] ACCOUNT POLICIES
- --------------------------------------------------------------------------------
CALCULATION OF NET ASSET VALUE:
Net asset value per Class A share and Primary Class share is determined daily as
of the close of the New York Stock Exchange (normally 4 p.m., Eastern time), on
every day the Exchange is open. To calculate each fund's Class A or Primary
Class share price, the fund's assets attributable to that class of shares are
valued and totaled, liabilities attributable to that class of shares are
subtracted, and the resulting net assets are divided by the number of shares of
that class outstanding. Each fund's securities are valued on the basis of market
quotations or, lacking such quotations, at fair value as determined under
procedures adopted by 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 Income 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 for reasons other than a drop in share price,
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.
30 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
Each fund reserves the right to:
o Reject any order for shares or suspend the offering of shares for a
period of time.
o Change its minimum investment amounts.
o Delay sending out redemption proceeds for up to seven days. The funds
expect to use this authority 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 31
<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
Class A shares or Primary Class shares (except a reinvestment of dividends or
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 you will receive
statements 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 when you are a participant in the plan.
EXCHANGE PRIVILEGE:
Fund shares may be exchanged for the corresponding class of 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, there is currently no fee for exchanges; however, you may be subject to
a sales charge when exchanging into a fund that has one.
32 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
A CDSC may apply to the redemption of Class A shares acquired through an
exchange. 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:
o Terminate or limit the exchange privilege of any shareholder who makes
more than four exchanges from the fund in one calendar year.
o Terminate or modify the exchange privilege after 60 days' written notice
to shareholders.
EUROPE FUND -- REINSTATEMENT PRIVILEGE:
If you have redeemed your Class A shares, you may reinstate your fund account
without a sales charge up to the dollar amount redeemed by purchasing shares
within 90 days of the redemption. Within 90 days of a redemption, contact the
distributor or your broker/dealer and notify them of your desire to reinstate
and give them an order for the amount to be purchased. The reinstatement will be
made at the net asset value next determined after the notification and purchase
order have been received by the transfer agent.
Legg Mason Global Trust 33
<PAGE>
[GRAPHIC] DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Global Income Trust declares and pays dividends from its net investment income
monthly. International Equity Trust, Emerging Markets Trust and Europe Fund each
declares and pays these dividends on an annual basis.
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 gains from
foreign currency transactions generally are declared and paid after the end of
the tax 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 other distributions will be automatically reinvested in the
same class of shares of the fund, unless you elect to receive your dividends
and/or other distributions in cash. To change your election, you must notify the
fund at least 10 days before the next dividend and/or other 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
other 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 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 disposition of
foreign securities, may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions.
34 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
A tax statement will be 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
adviser about federal, state and local tax considerations.
Legg Mason Global Trust 35
<PAGE>
[GRAPHIC] FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand each fund's
financial performance for the past five 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.
The information for all periods other than January 1, 1999 through June 30,
1999, 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.
36 Legg Mason Global Trust
<PAGE>
- --------------------------------------------------------------------------------
Global income trust, international equity trust and emerging markets Trust
<TABLE>
<CAPTION>
Income From Investment Operations
- --------------------------------------------------------------------------------------------
Net Realized & Unrealized
Gain (Loss) On Total
Net Investments, Options, From
For the Years Net Asset Value, Investment Futures and Foreign Investment
Ended Dec. 31, Beginning of Year Income Currency Transactions Operations
- --------------------------------------------------------------------------------------------
Global Income Trust - Primary Class:
<S> <C> <C> <C> <C> <C> <C>
6/30/99* $10.14 $.18 $(1.04) $(.86)
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 Class:
6/30/99* $12.64 $.04 $.11 $.15
1998 11.78 .01 .99 1.00
1997 12.09 .02 .19 .21
1996 10.70 .02(b) 1.74 1.76
1995(c) 10.00 .04(b) .77 .81
- --------------------------------------------------------------------------------------------
Emerging MarketsTrust - Primary Class:
6/30/99* $6.96 $(.01)(d) $3.47 $3.46
1998 9.85 .01(d) (2.90) (2.89)
1997 10.51 (.02)(d) (.63) (.65)
1996(e) 10.00 (.03)(d) .57 .54
</TABLE>
Legg Mason Global Trust 37
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------
In Excess From In Excess of
For the From Net of Net Net Realized Net Realized Net
Years Ended Investment Investment Gains on Gain on Total Asset Value,
Dec. 31, Income Income Investments Investments Distributions End of Year
- ------------------------------------------------------------------------------------------------------
Global Income Trust - Primary Class:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6/30/99* $(.16) $-- $(.08) $-- $(.24) $ 9.04
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 Class:
6/30/99* $(.05) $-- $-- $-- (.05) 12.74
1998 (.14) -- -- -- (.14) 12.64
1997 (.08) -- (.44) -- (.52) 11.78
1996 (.05) -- (.32) -- (.37) 12.09
1995(c) (.04) -- -- (.07) (.11) 10.70
- ------------------------------------------------------------------------------------------------------
Emerging MarketsTrust - Primary Class:
6/30/99* $-- $-- $-- $-- $-- $10.42
1998 -- -- -- -- -- 6.96
1997 (.01) -- -- -- (.01) 9.85
1996(e) (.03) -- -- -- (.03) 10.51
</TABLE>
38 Legg Mason Global Trust
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------
Net Investment
For the Expenses to Income (Loss) Portfolio Net Assets,
Years Ended Total Return Average Net to Average Net Turnover End of Year
Dec. 31, (%) Assets (%) Assets (%) Rate (%) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Income Trust - Primary Class:
6/30/99* (8.65)(f) 1.87(g) 4.01(g) 314(g) $98,872
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) 5.71 127 145,415
- ------------------------------------------------------------------------------------------
International Equity Trust - Primary Class:
6/30/99* 1.19(f) 2.14(g) .78(g) 138(g) 253,699
1998 8.49 2.14 .06 72 258,521
1997 1.76 2.17 .17 59 227,655
1996 16.49 2.25(b) .21(b) 83 167,926
1995(c) 8.11(f) 2.25(b,g) .52(b,g) 58(g) 65,947
- ------------------------------------------------------------------------------------------
Emerging Markets - Primary Class:
6/30/99* 49.57(f) 2.50(d,g) (.38)(d,g) 165(g) 74,060
1998 (29.34) 2.50(d) .09(d) 76 42,341
1997 (6.18) 2.50(d) (.76)(d) 63 65,302
1996(e) 5.40(f) 2.50(d,g) (.68)(d,g) 46(g) 21,206
</TABLE>
Legg Mason Global Trust 39
<PAGE>
- --------------------------------------------------------------------------------
(a) Net of fees waived by the manager for expenses in excess of voluntary
expense limitations of 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. 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) 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 for each period
would have been as follows: 1996, 2.32%; and 1995, 2.91%.
(c) For the period February 17, 1995 (commencement of operations) to December
31, 1995.
(d) 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 as
follows: for the six months ended June 30, 1999, 2.99%; 1998, 2.78%; 1997,
2.86%; and 1996, 3.71%.
(e) May 28, 1996 (commencement of operations) to December 31, 1996.
(f) Not annualized.
(g) Annualized.
* Unaudited. For the period January 1, 1999 to June 30, 1999.
40 Legg Mason Global Trust
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Europe Fund
Income From Investment Operations
- ----------------------------------------------------------------------------------------------------
Net Realized & Unrealized
Net Gain (Loss) On Total
NeInvestment Investments From
For the Years Net Asset Value, Income and Foreign Investment
Ended Dec. 31, Beginning of Year (Loss) Currency Transactions Operations
- ----------------------------------------------------------------------------------------------------
Class A:
<S> <C> <C> <C> <C> <C> <C>
6/30/99* $24.77 $.05 $ (.38) $ (.33)
1998 20.97 .02(a) 8.52 8.54
1997 24.24 (.05)(a) 4.11 4.06
1996 21.13 .02 6.34 6.36
1995 17.68 .01 3.50 3.51
1994 18.46 (.03) (.75) (.78)
- ----------------------------------------------------------------------------------------------------
Primary Class:
6/30/99* $24.39 $(.03) $ (.39) $ (.42)
1998 20.86 .11(b) 8.09 8.20
1997(c) 26.56 (.10)(b) .23 .13
Distributions
- ----------------------------------------------------------------------------------------------------
For the From Net From Net Net
Years Ended Investment Realized Total Asset Value,
Dec. 31, Income Gains Distributions End of Year
- ----------------------------------------------------------------------------------------------------
Class A:
6/30/99* $(.07) $ (.02) $ (.09) $24.35
1998 (.43) (4.31) (4.74) 24.77
1997 -- (7.33) (7.33) 20.97
1996 -- (3.25) (3.25) 24.24
1995 (.06) -- (.06) 21.13
1994 -- -- -- 17.68
- ----------------------------------------------------------------------------------------------------
Primary Class:
6/30/99* $(.07) $ (.02) $ (.09) $23.88
1998 (.36) (4.31) (4.67) 24.39
1997(c) -- (5.83) (5.83) 20.86
</TABLE>
Legg Mason Global Trust 41
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment
For the Expenses to Income (Loss) Portfolio Net Assets,
Years Ended Total Return Average Net to Average Net Turnover End of Year
Dec. 31, (%)(d,e) Assets (%) Assets (%) Rate (%) (000)
- -------------------------------------------------------------------------------------------------------------------
Class A:
<S> <C> <C> <C> <C> <C> <C> <C>
6/30/99* (1.5)(f) 1.78(f) .24(f) 81(f) $60,237
1998 41.9 1.81(a) (.10)(a) 103 57,406
1997 17.5 1.90(a) (.12)(a) 123 52,253
1996 31.5 2.00 .10 109 70,991
1995 19.9 2.10 .10 148 62,249
1994 (4.2) 2.10 -- 75 53,135
- -------------------------------------------------------------------------------------------------------------------
Primary Class:
6/30/99* (1.9)(g) 2.57(f) (.51)(f) 81(f) 44,827
1998 40.5 2.51(b) (1.15)(b) 103 32,325
1997(c) .7(g) 2.50(b,f) (1.79)(b,f) 123 302
</TABLE>
(a) The expense ratio shown reflects both the operations of the fund's
predecessor, Worldwide Value Fund, prior to its merger with the fund on
July 21, 1997, and the fund's operations through December 31, 1997. For
the period July 21 to December 31, 1997, the fund's annualized expense
ratio was 1.71%, net of fees waived pursuant to a voluntary expense
limitation of 1.75% until April 30, 1998, and 1.85% until May 1, 2000. If
no fees had been waived, the annualized ratio of expenses to average
daily net assets for each period would have been: 1997, 2.08% and 1998,
1.89%.
Legg Mason Global Trust 42
<PAGE>
- --------------------------------------------------------------------------------
(b) Net of fees waived pursuant to a voluntary expense limitation of 2.50%
until April 30, 1998, and 2.60% until May 1, 2000. If no fees had been
waived, the annualized ratio of expenses to average daily net assets for
each period would have been: 1997, 2.68% and 1998, 2.59%.
(c) July 23, 1997 (commencement of sale of this class) to December 31, 1997.
(d) Prior to July 18, 1997, total return for Worldwide Value Fund, a
closed-end fund, was calculated using market value per share.
(e) Excluding sales charge.
(f) Annualized.
(g) Not annualized.
*Unaudited. For the period January 1, 1999 to June 30, 1999.
43 Legg Mason Global Trust
<PAGE>
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<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
Legg Mason Global Trust, Inc.
- --------------------------------------------------------------------------------
The following additional information about each fund 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) this prospectus. The SAI provides additional
details about each fund and its policies.
ANNUAL AND SEMI-ANNUAL REPORTS - Additional information about each fund's
investments is available in the funds' annual and semi-annual 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:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated 100
Light Street, P.O. Box 1476 Baltimore,
Maryland 21203-1476
Information about each fund, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, D.C. (phone 1-800-SEC-0330).
Reports and other information about each fund are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, D.C. 20549-6009. The SEC charges a fee for
making copies.
LMF-041 SEC file numbers: 811-7418
<PAGE>
LEGG MASON GLOBAL FUNDS
LEGG MASON GLOBAL TRUST, INC.:
LEGG MASON GLOBAL INCOME TRUST
LEGG MASON INTERNATIONAL EQUITY TRUST
LEGG MASON EMERGING MARKETS TRUST
LEGG MASON EUROPE FUND
PRIMARY SHARES, CLASS A SHARES AND NAVIGATOR SHARES
STATEMENT OF ADDITIONAL INFORMATION
October 5, 1999
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus for Primary and Class A Shares of the
funds and the Prospectus for Navigator Shares of the funds, both dated September
15, 1999, which have been filed with the Securities and Exchange Commission
("SEC"). Each fund's annual report is incorporated by reference into this
Statement of Additional Information. Copies of either the annual reports 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...............................................5
ADDITIONAL TAX INFORMATION...................................................45
TAX-DEFERRED RETIREMENT PLANS................................................48
PERFORMANCE INFORMATION......................................................50
VALUATION OF FUND SHARES.....................................................56
MANAGEMENT OF THE FUND.......................................................56
THE FUNDS' INVESTMENT ADVISER/MANAGER........................................58
SUB-ADVISORY AGREEMENT FOR GLOBAL INCOME TRUST...............................61
SUB-ADVISORY AGREEMENT FOR EUROPE FUND.......................................62
THE FUNDS'DISTRIBUTOR........................................................62
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................64
CAPITAL STOCK INFORMATION....................................................66
THE CORPORATION'S CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING
AGENT..................................................................66
THE CORPORATION'S LEGAL COUNSEL..............................................66
THE CORPORATION'S INDEPENDENT ACCOUNTANTS....................................66
FINANCIAL STATEMENTS.........................................................66
APPENDIX A............................................................A-1
APPENDIX B............................................................B-1
<PAGE>
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.
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 Income Trust,
Legg Mason International Equity Trust, Legg Mason Emerging Markets Trust, and
Legg Mason Europe Fund are separate series of Legg Mason Global Trust, Inc.
Global Income is non-diversified; International Equity, Emerging Markets and
Europe Fund are diversified.
FUND POLICIES
Global Income'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. Europe Fund's investment
objective is to seek long-term growth of capital.
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 Income 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;
<PAGE>
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.
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;
-2-
<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.
Europe Fund may not:
1. Borrow money, except (a) from a bank, provided that immediately
after such borrowing there is an asset coverage of 300% for all borrowings of
the fund; or (b) from a bank or other persons for temporary purposes only,
provided that such temporary borrowings are in an amount not exceeding 5% of the
fund's total assets at the time when the borrowing is made. The fund will not
borrow money in excess of 15% of the total value of its assets (including the
amount borrowed) less its liabilities (not including its borrowings), and will
not purchase securities at any time when borrowings exceed 5% of its total
assets.
2. Issue senior securities except to evidence borrowings permitted
by limitation (1) above.
3. Act as underwriter of securities issued by other persons.
This limitation is not applicable to the extent that, in connection with the
disposition of portfolio securities (including restricted securities), the fund
may be deemed an underwriter under certain federal securities laws.
4. Purchase, hold or deal in real estate. This limitation is not
applicable to investments in securities which are secured by or represent
interests in real estate or to securities issued by companies, including real
estate investment trusts, that invest in real estate or interests in real
estate. This limitation does not preclude the fund from investing in
mortgage-related securities or investing directly in mortgages.
5. Purchase, hold or deal in commodities or commodities futures
contracts except as described in this Statement of Additional Information. This
does not preclude the fund from investing in futures contracts, put and call
options on foreign currencies or forward currency exchange contracts.
6. Lend money to other persons except through the use of
publicly distributed debt obligations and the entering into of repurchase
agreements consistent with its investment policies.
7. Purchase securities or evidences of interest thereon on "margin."
This limitation is not applicable to short term credit obtained by the fund for
the clearance of purchases and sales or redemption of securities, or to
arrangements with respect to transactions involving options, futures contracts,
short sales and other permitted investments and techniques (including foreign
currency exchange contracts).
8. Invest 25% or more of its total assets in a particular industry.
This limitation is not applicable to investments in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities or
repurchase agreements with respect thereto.
-3-
<PAGE>
9. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities), if as a result (a) more than 25%
of the value of the fund's total assets would then be invested in securities of
any singer issuer, or (b) as to 75% of the value of the fund's total assets (i)
more than 5% of the value of the fund's total assets would then be invested in
securities of any single issuer, or (ii) the fund would own more than 10% of the
voting securities of any single issuer. For purposes of this limitation, the
fund will treat both the corporate borrower and the financial intermediary as
issuers of a loan participation interest.
Additional Fundamental Limitations Applicable to Europe Fund:
1. Short Sales. Europe Fund may not make short sales of securities
or maintain a short position in any security.
2. Restricted Securities. Europe Fund will not purchase securities
for which there are legal restrictions on resale and other securities that are
not readily marketable if as a result of such purchase more than 15% of the
value of the fund's net assets would be invested in such securities, provided
that securities that are not subject to restrictions on resale in the country in
which they are principally traded are not considered subject to this
restriction.
3. Oil and Gas Programs. Europe Fund may not invest in oil, gas,
mineral exploration or development programs, except that the fund may invest in
issuers which invest in such programs.
4. "Unseasoned" Companies. Europe Fund may not purchase any security
if as a result the fund would have more than 5% of its net assets invested in
securities of companies which together with any predecessors have been in
continuous operation for less than three years.
5. Warrants. Europe Fund may not invest more than 5% of its net assets
in warrants issued by U.S. entities, provided that no more than 2% of its net
assets will be invested in warrants that are not listed on the New York Stock
Exchange or American Stock Exchange; except that these limitations are not
applicable to warrants issued by non-U.S. issuers.
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
limitation regarding the borrowing of money (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.
Global Income, International Equity and Emerging Markets each 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 Income 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);
-4-
<PAGE>
International Equity intends to:
3. 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:
4. Under normal circumstances, invest at least 65% of its total
assets in emerging market equity securities.
Statement of Intention by Europe Fund:
Europe Fund will monitor the level of illiquid securities in its portfolio
and may determine at times to sell certain securities to maintain adequate
liquidity.
Global Income 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 GLOBAL INCOME, INTERNATIONAL EQUITY, AND
EMERGING MARKETS:
RATINGS OF DEBT OBLIGATIONS
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor'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.
EMERGING MARKET SECURITIES
Each fund may invest in securities of issuers based in emerging markets
(including, but not limited to, countries in Asia, Latin America, the Indian
Sub-continent, Southern and Eastern Europe, the Middle East, and Africa). The
risks of foreign investment are greater for investments in emerging markets.
Because of the special risks associated with investing in emerging markets, an
investment in any of the funds should be considered speculative. With respect to
Global Income, debt securities of governmental and corporate issuers in such
countries will typically be rated below investment grade or be of comparable
quality. Emerging markets will include any country: (i) having an "emerging
stock market" as defined by the International Finance Corporation; (ii) with
low- to middle-income economies according to the International Bank for
Reconstruction and Development ("World Bank"); (iii) listed in World Bank
publications as developing or (iv) determined by Batterymarch to be an emerging
-5-
<PAGE>
market in accordance with the criteria of those organizations. The following are
considered emerging market securities; (1) securities publicly traded on
emerging market stock exchanges, or whose principal trading market is
over-the-counter (i.e., off-exchange) in an emerging market; (2) securities (i)
denominated in any emerging market currency or (ii) denominated in a major
currency if issued by companies to finance operations in an emerging market; (3)
securities of companies that derive a substantial portion of their total
revenues from goods or services produced in, or sales made in, emerging markets;
(4) securities of companies organized under the laws of an emerging market
country or region, which are publicly traded in securities markets elsewhere;
and (5) American depositary receipts ("ADRs") (or similar instruments) with
respect to the foregoing.
Investors are strongly advised to consider carefully the special risks
involved in emerging markets, which are in addition to the usual risks of
investing in developed markets around the world. Many emerging market countries
have experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging markets.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by economic conditions, trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.
Over the last quarter of a century, inflation in many emerging market
countries has been significantly higher than the world average. While some
emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may continue
to have significant effects both on emerging market economies and their
securities markets. In addition, many of the currencies of emerging market
countries have experienced steady devaluations relative to the U.S. dollar, and
major devaluations have occurred in certain countries.
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly affect
the debt service obligations of those countries. This could, in turn, affect
local interest rates, profit margins and exports which are a major source of
foreign exchange earnings. Although it might be theoretically possible to hedge
for anticipated income and gains, the ongoing and indeterminate nature of the
foregoing risks (and the costs associated with hedging transactions) makes it
virtually impossible to hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on the
outflow of any foreign exchange. Repatriation is ultimately dependent on the
ability of the fund to liquidate its investments and convert the local currency
proceeds obtained from such liquidation into U.S. dollars. Where this conversion
must be done through official channels (usually the central bank or certain
authorized commercial banks), the ability to obtain U.S. dollars is dependent on
the availability of such U.S. dollars, through those channels, and if available,
upon the willingness of those channels to allocate those U.S. dollars to the
fund. In such a case, the fund's ability to obtain U.S. dollars may be adversely
affected by any increased restrictions imposed on the outflow of foreign
exchange. If the fund is unable to repatriate any amounts due to exchange
controls, it may be required to accept an obligation payable at some future date
by the central bank or other governmental entity of the jurisdiction involved.
If such conversion can legally be done outside official channels, either
directly or indirectly, the fund's ability to obtain U.S. dollars may not be
affected as much by any increased restrictions except to the extent of the price
which may be required to be paid for the U.S. dollars.
Many emerging market countries have little experience with the corporate
form of business organization, and may not have well developed corporation and
business laws or concepts of fiduciary duty in the business context.
The securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the U.S.
and other more developed countries. Disclosure and regulatory standards in many
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respects are less stringent than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets; enforcement of existing regulations has
been extremely limited.
The risk also exists than an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a fund's portfolio securities in such
markets may not be readily available.
INVESTMENT IN JAPAN
International Equity may invest more than 25% of its total assets in
securities of Japanese issuers. Japan is the largest capitalized stock market
outside the United States. The performance of the fund may therefore be
significantly affected by events affecting the Japanese economy and the exchange
rate between the Japanese yen and the U.S. dollar. Japan has recently
experienced a recession, including a decline in real estate values that
adversely affected the balance sheets of many financial institutions. The
strength of the Japanese currency may adversely affect industries engaged
substantially in export. Japan's economy is heavily dependent on foreign oil.
Japan is located in a seismically active area, and severe earthquakes may damage
important elements of the country's infrastructure. Japanese economic prospects
may be affected by the political and military situations of its nearby
neighbors, notably North and South Korea, China, and Russia.
DEPOSITARY RECEIPTS
The funds may invest in ADRs or similar non-U.S. instruments issued by
foreign banks or trust companies. ADRs are securities issued by a U.S.
depositary (usually a bank) and represent a specified quantity of underlying
non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depositary which has an
exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositaries. The funds may
invest in either type of ADR. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly, the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security. ADRs may
also be subject to exchange rate risks if the underlying securities are
denominated in foreign currency. Some of these depositary receipts may be issued
in bearer form. For purposes of their investment policies, each fund will treat
ADRs and similar instruments as equivalent to investment in the underlying
securities.
THE FOLLOWING INFORMATION ABOUT INVESTMENT POLICIES APPLIES ONLY TO GLOBAL
INCOME:
LOWER-RATED DEBT SECURITIES
The fund may invest in debt obligations of any grade. Western Asset seeks
to minimize the risks of investing in all securities through in-depth credit
analysis and attention to current developments in interest rates and market
conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium grade" obligations; they are "neither highly protected nor poorly
secured . . . [I]nterest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well." Where one rating organization has assigned an
investment grade rating to an instrument and others have given it a lower
rating, the fund may consider the instrument to be investment grade. The ratings
do not include the risk of market fluctuations.
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The fund may invest up to 25% of its total assets in high-yield, high-risk
securities rated below investment grade. The fund may invest in lower-rated debt
securities of domestic issuers, those issued by foreign corporations, those
issued or guaranteed by foreign governmental issuers, and those issued by
domestic corporations but linked to the performance of such foreign-issue debt.
Such securities are deemed by Moody's and S&P to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal. Those
in the lowest rating categories may involve a substantial risk of default or may
be in default. Changes in economic conditions or developments regarding the
individual issuer are more likely to cause price volatility and weaken the
capacity of such securities to make principal and interest payments than is the
case for higher grade debt securities. An economic downturn affecting the
issuers may result in an increased incidence of default.
Although the market for lower-rated debt securities is not new, and the
market has previously weathered economic downturns, there has been in recent
years a substantial increase in the use of such securities to fund corporate
acquisitions and restructurings. Accordingly, the past performance of the market
for such securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates. Although the
prices of lower-rated bonds are generally less sensitive to interest rate
changes than those of higher-rated bonds, the prices of lower-rated bonds may be
more sensitive to adverse economic changes and developments regarding the
individual issuer. Issuers of lower-rated debt securities are often highly
leveraged and may not have access to more traditional methods of financing.
The market for lower-rated securities may be thinner and less active than
that for higher-rated securities. As a result of the limited liquidity of high
yield securities, the valuation of these securities may require greater judgment
than is necessary with respect to securities having more active markets. In
addition, their prices have at times experienced rapid decline when a
significant number of holders of such securities decided to sell them.
Widespread sales may result from adverse publicity and investor perceptions,
whether or not based on fundamental analysis.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities offered by private issuers include
pass-through securities comprised of pools of conventional residential mortgage
loans; mortgage-backed bonds which are considered to be obligations of the
institution issuing the bonds and are collateralized by mortgage loans; and
bonds and collateralized mortgage obligations ("CMOs") which are collateralized
by mortgage-related securities issued by Freddie Mac, Fannie Mae, GNMA or by
pools of conventional mortgages.
CMOs are typically structured with two or more classes or series which
have different maturities and are generally retired in sequence. Although full
payoff of each class of bonds is contractually required by a certain date, any
or all classes of obligations may be paid off sooner than expected because of an
increase in the payoff speed of the pool.
Mortgage-related securities created by non-governmental issuers generally
offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payments in the former securities. However, many issuers or servicers of
mortgage-related securities guarantee timely payment of interest and principal
on such securities. Timely payment of principal may also be supported by various
forms of insurance, including individual loan, title, pool and hazard policies.
There can be no assurance that the private issuers or insurers will be able to
meet their obligations under the relevant guarantees and insurance policies.
Where non-governmental securities are collateralized by securities issued by
Freddie Mac, Fannie Mae or GNMA, the timely payment of interest and principal is
supported by the governmental-related securities collateralizing such
obligations.
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Some mortgage-related securities will be considered illiquid and will be
subject to the fund's investment limitation that no more than 15% of its net
assets will be invested in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES
The fund may invest in stripped mortgage-backed securities, which are
classes of mortgage-backed securities that receive different proportions of
interest and principal distributions from an underlying pool of mortgage assets.
These securities are more sensitive to changes in prepayment and interest rates
and the market for them is less liquid than is the case for traditional
mortgage-backed and other debt securities. A common type of stripped
mortgage-backed security will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest only or
"IO" class), while the other class will receive all of the principal (the
principal or the "PO" class). The yield to maturity of an IO class is extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets. If the fund purchases an IO and the underlying principal is repaid
faster than expected, the fund will recoup less than the purchase price of the
IO, even one that is highly rated. Extensions of maturity resulting from
increases of market interest rates may have an especially pronounced effect on
POs. Most IOs and POs are regarded as illiquid and will be included in the
fund's 15% limit on illiquid securities. U.S. government-issued IOs and POs
backed by a fixed-rate mortgages may be deemed liquid by Western Asset,
following guidelines and standards established by the Corporation's Board of
Directors.
CAPITAL APPRECIATION AND RISK
The market value of fixed income and other debt securities is partially a
function of changes in the current level of interest rates. An increase in
interest rates generally reduces the market value of existing fixed income and
other debt securities, while a decline in interest rates generally increases the
market value of such securities. The longer the maturity, the more pronounced is
the rise or decline in the security's price. When interest rates are falling, a
fund with a shorter maturity generally will not generate as high a level of
total return as a fund with a longer maturity. Conversely, when interest rates
are rising, a fund with a shorter maturity will generally outperform longer
maturity portfolios. When interest rates are flat, shorter maturity portfolios
generally will not generate as high a level of total return as longer maturity
portfolios (assuming that long-term interest rates are higher than short-term,
which is commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt securities will
also affect their prices.
CORPORATE FIXED INCOME SECURITIES
The fund may invest in U.S. and foreign high-yielding corporate fixed
income securities, including securities of corporate issuers rated Ba or lower
by Moody's or BB or lower by S&P. The fund may invest in corporate fixed income
securities rated as low as C by Moody's or D by S&P or in non-rated securities
deemed by the advisor to be of comparable quality. Such ratings indicate that
the obligations are highly speculative and may be in default or in danger of
default as to principal and interest High-yielding corporate fixed income
securities of foreign issuers in which the fund may invest include securities of
companies that have their principal business activities and interests outside
the U.S.
FIXED INCOME SECURITIES ISSUED BY SUPRANATIONAL ORGANIZATIONS
The fund may invest in fixed income securities issued by supranational
organizations. Supranational organizations are entities designated or supported
by a government or governmental group to promote economic development. Included
among these organizations are the Asian Development Bank, the European
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Community, the European Investment Bank, the Inter-American Development Bank,
the International Monetary Fund, the United Nations, the World Bank and the
European Bank for Reconstruction and Development. Supranational organizations
have no taxing authority and are dependent on their members for payments of
interest and principal. Further, the lending activities of such entities are
limited to a percentage of their total capital, reserves, and net income.
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 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
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to increase overall return. Interest rate swap transactions involve an agreement
between two parties under which one makes to the other periodic payments based
on a fixed rate of interest and receives in return periodic payments based on a
variable rate of interest; the rates are calculated on the basis of a specified
amount of principal (the "notional principal amount") for a specified period of
time. A currency swap is an agreement to exchange cash flows based on changes in
the value of an exchange rate; participants in currency swaps may also exchange
the principal amount. Index swaps link one of the payments to the total return
of a market portfolio. Cap and floor transactions involve an agreement between
two parties in which one agrees to pay the other when a designated market
interest rate, currency rate or index value goes above (in the case of a cap) or
below (in the case of a floor) a designated level on predetermined dates or
during a specified time period. In an interest rate collar, one party agrees to
pay the other when a designated market interest rate either goes above a
specified cap level or below a specified floor level, either on predetermined
dates or during a specified time period.
As with options and future transactions, successful use of swap agreements
depends on the adviser's ability to predict movements in the direction of the
overall currency and interest rate markets. There might be imperfect correlation
between the value of a swap, cap, collar or floor agreement and movements in the
underlying interest rate or currency markets. While swap agreements can offset
the potential for loss on a position, they can also limit the opportunity for
gain by offsetting favorable price movements.
Swaps, caps, collars and floors can be highly volatile instruments. The
value of these agreements is dependent on the ability of the counterparty to
perform and is therefore linked to the counterparty's creditworthiness. The fund
may also suffer a loss if it is unable to terminate an outstanding swap
agreement.
The fund will enter into swaps, caps, collars and floors only with parties
deemed by its adviser to present a minimal risk of default during the period of
agreement. When the fund enters into a swap, cap, collar or floor, it will
maintain a segregated account containing cash and 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
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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.
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
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designed to provide monthly payments of interest and, in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed through" to investors such as the fund. Many issuers or
poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. These guarantees are often backed by various forms
of credit, insurance and collateral, although these may be in amounts less than
the full obligation of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. In addition to fixed-rate, fixed-term
mortgages, the fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The average life of mortgage-related securities varies with the maturities
and the nature of the underlying mortgage instruments, as well as with market
interest rates. For example, securities issued by GNMA 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 GNMAs, 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.
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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 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.
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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.
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.
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INDEXED SECURITIES
The fund may purchase various fixed income and debt securities whose
principal value or rate of return is linked or indexed to relative exchange
rates among two or more currencies or linked to commodities prices or other
financial indicators. Such securities may be more volatile than the underlying
instruments, resulting in a leveraging effect on the fund. The value of such
securities may fluctuate in response to changes in the index, market conditions,
and the creditworthiness of the issuer. These securities may vary directly or
inversely with the underlying investments. The value of such securities may
change significantly if their principal value or rate of return is linked or
indexed to relative exchange rates involving a foreign currency for which there
is not a readily available market.
THE FOLLOWING INFORMATION ABOUT INVESTMENT POLICIES APPLIES TO GLOBAL INCOME,
INTERNATIONAL EQUITY AND EMERGING MARKETS UNLESS OTHERWISE STATED:
RISKS OF FIXED-INCOME SECURITIES
Global Income 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. Such investments
are subject to interest rate risk, credit risk, and call risk, among others.
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 the funds invest. 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 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.
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
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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.
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.
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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-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.
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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 contra-
party 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
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.
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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 Income 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 Income 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 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.
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OPTIONS AND FUTURES
As described in the Prospectuses, Global Income 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 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
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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 Income 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 Income may purchase and write covered straddles on securities,
currencies or bond indices. A long straddle is a combination of a call and a put
option purchased on the same security, index or currency where the exercise
price of the put is less than or equal to the exercise price of the call. The
fund would enter into a long straddle when its adviser believes that it is
likely that interest rates or currency exchange rates will be more volatile
during the term of the options than the option pricing implies. A short straddle
is a combination of a call and a put written on the same security, index or
currency where the exercise price of the put is less than or equal to the
exercise price of the call. In a covered short straddle, the same issue of
security or currency is considered cover for both the put and the call that the
fund has written. The fund would enter into a short straddle when its adviser
believes that it is unlikely that interest rates or currency exchange rates will
be as volatile during the term of the options as the option pricing implies. In
such 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
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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 Income 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 INCOME:
The fund will limit its use of futures contracts and options on futures
contracts to hedging transactions or other circumstances permitted by regulatory
authorities. For example, the fund might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the fund's securities or the price of the securities that
the fund intends to purchase. The fund's hedging may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce exposure to interest rate fluctuations, the fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts.
The fund may also purchase call or put options on foreign currency futures
contracts to obtain a fixed foreign exchange rate at limited risk. The fund may
purchase a call option on a foreign currency futures contract to hedge against a
rise in the foreign exchange rate while intending to invest in a foreign
security of the same currency. The fund may purchase put options on foreign
currency futures contracts as a hedge against a decline in the foreign exchange
rates or the value of its foreign portfolio securities. The fund may write a
call option on a foreign currency futures contract as a partial hedge against
the effects of declining foreign exchange rates on the value of foreign
securities. The fund may sell a put option on a foreign currency to partially
offset the cost of a security denominated in that currency that the fund
anticipates purchasing; however, the cost will only be offset to the extent of
the premium received by the fund for writing the option.
The fund also may use futures contracts on fixed income instruments and
options thereon to hedge its investment portfolio against changes in the general
level of interest rates. A futures contract on a fixed income instrument is a
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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 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
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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 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.
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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 GLOBAL INCOME, INTERNATIONAL EQUITY AND EMERGING MARKETS:
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 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.
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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
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
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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 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.
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(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.
With respect to Global Income,
(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.
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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.
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
Income, 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
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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 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
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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.
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.
THE FOLLOWING INFORMATION APPLIES TO EUROPE FUND:
ILLIQUID SECURITIES
The portfolio of the fund may contain illiquid securities. Securities may
be illiquid due to contractual or legal restrictions on resale or lack of a
ready market. Illiquid securities generally include securities which cannot be
sold promptly without taking a reduced price.
The following securities are considered generally to be illiquid (although
if they are liquid they will be treated as such): repurchase agreements and time
deposits maturing in more than seven days, options traded in the OTC market,
nonpublicly offered securities, stripped collateralized mortgage obligations
("CMOs"), CMOs for which there is no established market, direct investments in
mortgages and restricted securities.
Up to 15% of the fund's net assets may be invested in illiquid securities.
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RESTRICTED SECURITIES
The fund may invest in restricted securities, which are subject to legal
or contractual restrictions. Restricted securities may be sold only: in
privately negotiated transactions, in a public offering with respect to which a
registration statement is in effect under the Securities Act of 1933 or pursuant
to Rule 144 or Rule 144A. If registration is required, the fund may be obligated
to pay all or part of the registration expense. A considerable period may elapse
between the time of the decision to sell and the time such security may be sold
under an effective registration statement. The fund may obtain a less favorable
price if adverse market conditions were to develop during this period. Rule 144A
securities will be treated as liquid to the extent they are determined to be so.
To the extent the fund is invested in Rule 144A securities, the level of
illiquidity of the fund could increase to the extent qualified buyers become
disinterested.
OPTION TRANSACTIONS
The fund may engage in option transactions involving equity securities,
debt securities, futures contracts and stock indexes. An option involves either
(a) the right or the obligation to buy or sell a specific instrument at a
specific price until the expiration date of the option, or (b) the right to
receive payments or the obligation to make payments representing the difference
between the closing price of a market index and the exercise price of the option
expressed in dollars times a specified multiple until the expiration date of the
option. Options are sold (written) on equity securities, debt securities,
futures contracts and stock indexes. The purchaser of an option on an equity
security, debt security or futures contract pays the seller (the writer) a
premium for the right granted but is not obligated to buy or sell the underlying
security or futures contract. The purchaser of an option on a stock index pays
the seller a premium for the right granted, and in return the seller of such an
option is obligated to make the payment. A writer of an option may terminate the
obligation prior to expiration of the option by making an offsetting purchase of
an identical option. Options are traded on organized exchanges and in the OTC
market. Options on equity securities, debt securities or options on futures
contracts which the fund sells (writes) will be covered or secured, which means
that the fund will own the underlying security or futures contracts in the case
of a call option and that the fund will segregate with the custodian, State
Street Bank and Trust Company ("State Street" or "Custodian"), high grade liquid
debt securities sufficient to purchase the underlying security or futures
contracts in the case of a put option. The fund will also segregate and maintain
with its Custodian liquid assets equal to the market value of each put option
sold (written) by the fund on a stock index. In addition, when the fund writes
options, it may be required to maintain a margin account, to pledge the
underlying securities or U.S. Government obligations or to deposit high grade
liquid debt securities in escrow with its Custodian.
The purchase and writing of options involves certain risks. The purchase
of options limits the fund's potential loss to the amount of the premium paid
and can afford the fund the opportunity to profit from favorable movements in
the price of an underlying security to a greater extent than if transactions
were effected in the security directly. However, the purchase of an option could
result in the fund losing a greater percentage of its investment than if the
transaction were effected directly. When the fund writes a covered call option,
it will receive a premium, but it will give up the opportunity to profit from a
price increase in the underlying security above the exercise price as long as
its obligation as a writer continues, and it will retain the risk of loss should
the price of the security decline. When the fund writes a secured put option, it
will assume the risk that the price of the underlying security will fall below
the exercise price, in which case the fund may be required to purchase the
security at a higher price than the market price of the security. In addition,
there can be no assurance that the fund can effect a closing transaction on a
particular option it has written.
The fund may engage in option transactions involving foreign currencies,
foreign stock indexes or futures contracts. A foreign currency option or an
option on a futures contract involves either the right or the obligation to buy
or sell a specific currency or futures contract at a specific price until the
expiration date of the option. A foreign stock index option involves either the
right to receive payments or the obligation to make payments representing the
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difference between the closing price of a market index and the exercise price of
the option until the expiration date of the option. The purchaser of an option
on a foreign currency or futures contract pays the seller (the writer) a premium
for the right granted but is not obligated to buy or sell the underlying
currency or futures contract. The purchaser of an option on a stock index pays
the seller a premium for the right granted, and in return the seller of such an
option is obligated to make the payment. A writer of an option may terminate the
obligation prior to expiration of the option by making an offsetting purchase of
an identical option.
Options on foreign currencies and futures contracts which the fund sells
(writes) will be covered or secured, which means that the fund will own the
underlying currency or futures contract in the case of a call option and that
the fund will segregate with its Custodian liquid assets sufficient to purchase
the underlying currency or futures contract in the case of a put option. The
fund will also segregate and maintain with its Custodian high grade liquid
assets equal to the market value of each put option sold (written) by the fund
on a stock index. In addition, when the fund writes options, it may be required
to maintain a margin account, to pledge the underlying currency, futures
contract or U.S. Government obligations, or to deposit high grade liquid assets
in escrow with its Custodian.
There is no restriction on the percentage of the fund's total assets which
may be committed to transactions in options (except options on futures
contracts). However, the SEC considers OTC options to be illiquid. Therefore,
the fund will not engage in an OTC option transaction if such transaction would
cause the value of such options purchased by the fund and the assets used to
cover such options written by the fund, together with the value of other
illiquid securities to exceed 15% of its net assets.
HEDGING TRANSACTIONS
(1) U. S. Securities
The fund may hedge all or a portion of its portfolio investments through
the use of options, futures contracts and options on futures contracts. The
objective of a hedging program is to protect a profit or offset a loss in a
portfolio security from future price erosion or to assure a definite price for a
security by acquiring the right or option to purchase or to sell a fixed amount
of the security at a future date. For example, in order to hedge against an
anticipated rise in interest rates that might cause the value of the fund's
portfolio securities to decline, the fund might sell interest rate futures
contracts. When hedging of this character is successful, any depreciation in the
value of the hedged portfolio securities will be substantially offset by an
increase in the fund's equity in the interest rate futures position.
Alternatively, an interest rate futures contract may be purchased when the fund
anticipates the future purchase of a security but expects the rate of return
then available in the securities market to be less favorable than rates
currently available in the futures markets.
There is no assurance that the objective of the hedging program will be
achieved, since the success of the program will depend on Lombard Odier's
ability to predict the future direction of stock prices or interest rates and
incorrect predictions Lombard Odier may have an adverse effect on the fund. In
this regard, it should be noted that the skills and techniques necessary to
arrive at such predictions are different from those needed to predict price
changes in individual stocks.
The hedging strategy involves the use of one or more techniques, including
buying and selling options (described above), futures contracts and options on
such futures contracts. A futures contract is a binding contractual commitment
which involves either (a) the delivery and payment for a specified amount of
securities or currency at a price agreed upon at the time the contract is
entered into but with actual delivery made during a specified period in the
future, or (b) the payment or receipt of payments representing, respectively,
the loss or gain of a specified group of stocks or market index. The securities
or currency underlying the contract may be government or corporate bonds (an
interest rate futures contract), foreign currency (a foreign currency futures
contract), or a group of stocks such as a popular market index (a stock index
futures contract). Interest rate futures contracts are currently available in
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standardized amounts on government obligations (such as U.S. Treasury bills,
notes and bonds), GNMA certificates, corporate bonds, domestic certificates of
deposit and Eurodollar certificates of deposit. It is expected that other
financial instruments will at later dates be subject to other futures contracts.
As new futures contracts are developed and offered to investors, Lombard Odier
will, consistent with the fund's investment objectives and policies, consider
making investments in such new futures contracts. Ordinarily the fund will enter
into interest rate futures contracts to hedge its investments in fixed income
securities such as preferred stocks and money market obligations, stock index
futures contracts to hedge its investments in common stocks and foreign currency
futures contracts to hedge currency risks associated with investments in foreign
securities.
Futures contracts are traded on exchanges licensed and regulated by the
CFTC. Interest rate futures contracts are principally traded on the Chicago
Board of Trade and International Monetary Market. Stock index futures contracts
are principally traded on the New York Futures Exchange, Chicago Mercantile
Exchange, Kansas City Board of Trade, New York Stock Exchange and Chicago Board
of Trade. The fund will be subject to any limitations imposed by these boards of
trades and exchanges with respect to futures contracts trading and positions. A
clearing corporation associated with the particular exchange assumes
responsibility for all purchases and sales and guarantees delivery and payment
on the contracts. Although most futures contracts call for actual delivery or
acceptance of the underlying securities or currency, in most cases the contracts
are closed out before settlement date without the making or taking of delivery.
Closing out is accomplished by entering into an offsetting transaction, which
may result in a profit or a loss. There is no assurance that the fund will be
able to close out a particular futures contract.
(2) International Securities
In general, the strategies and risks associated with hedging portfolio
investments in international securities are similar to those involved in hedging
U.S. securities, but have some differences.
The fund may hedge the international securities in its portfolio by
engaging in futures contracts transactions involving foreign currencies or stock
indexes. A foreign currency futures contract is a binding contractual commitment
which involves either the delivery and payment for a specified period in the
future. A foreign stock index futures contract involves either the payment or
receipt of payments representing, respectively, the loss or gain of a specified
group of stocks or market index. Ordinarily the fund would enter into foreign
stock index futures contracts to hedge its investments in foreign common stocks
and foreign currency futures contracts to hedge currency risks associated with
investments in foreign securities.
There is no assurance that the objective of any hedging strategy used by
the fund will be achieved, since the success of the strategy will depend on
Lombard Odier's ability to predict the future direction of the relevant
currency, stock index or futures contract and incorrect predictions by Lombard
Odier may have an adverse effect on the fund. The forecasting of currency market
movement is extremely difficult and whether a hedging strategy involving foreign
currency transactions will be successful is highly uncertain. In addition, it
should be noted that the skills and techniques necessary to predict movements in
a stock index are different from those needed to predict price changes in
individual stocks.
Futures contracts are traded on exchanges licensed and regulated by the
CFTC and analogous foreign regulatory agencies. The fund will be subject to any
limitations imposed by the exchanges with respect to futures contracts trading
and positions. A clearing corporation associated with the particular exchange
assumes responsibility for all purchases and sales and guarantees delivery and
payment on the contracts. Although foreign currency futures contracts call for
actual delivery or acceptance of the currency, in most cases the contracts are
closed out before settlement date without the making or taking of delivery.
Closing out is accomplished by entering into an offsetting transaction, which
may result in a profit or a loss. There is no assurance that the fund will be
able to close out a particular futures contract or that a liquid secondary
market will exist for any particular futures contract at any specific time.
Futures contracts transactions entail some risks. For example, it is
possible that the futures contracts selected by the fund will not follow the
price movement of the underlying currency or stock index. If this occurs, the
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hedging strategy may not be successful. Further, if the fund sells a stock index
futures contract and is required to pay an amount measured by any increase in
the index, it will be exposed to an indeterminate liability. In addition, a
liquid secondary market may not exist for any particular futures contract at any
specific time.
(3) Risks of Hedging Strategies
A hedging strategy involving options and futures contracts entail some
risks. For example, the total premium paid for an option on a futures contract
may be lost if the fund does not exercise the option or the writer does not
perform his obligations. It is also possible that the futures contracts selected
by the fund will not follow the price movement of the underlying securities,
currencies or stock index. If this occurs, the hedging strategy may not be
successful. Further, if the fund sells a stock index futures contract and is
required to pay an amount measured by any increase in the market index, it will
be exposed to an indeterminate liability. In addition, a liquid secondary market
may not exist for any particular option or futures contract at any specific
time.
The fund will incur transactional costs in connection with the hedging
program. When the fund purchases or sells a futures contract, an amount of cash
and liquid assets will be deposited in a segregated account with the Custodian
to guarantee performance of the futures contract. The amount of such deposits
will depend upon the requirements of each exchange and broker and will vary with
each futures contract. Because open futures contract positions are
marked-to-market and gains and losses are settled on a daily basis, the fund may
be required to deposit additional funds in such a segregated account if it has
incurred a net loss on its open futures contract positions on any day.
The fund has filed a supplemental notice of eligibility with the CFTC to
claim relief from regulation as a commodity "pool" within the meaning of the
CFTC's regulations. In its filing, the fund has represented that its
transactions in futures contracts and options on future contracts will
constitute bona fide hedging transactions within the meaning of such regulations
and that the fund will enter into commitments which require as deposits for
initial margin for futures contracts or premiums for options on futures
contracts no more than 5% of the fair market value of its total assets.
The fund may not purchase or sell futures contracts or purchase related
options if, immediately thereafter, more than one-third of its net assets would
be hedged. In addition, the fund may not enter into transactions involving
futures contracts and related option if such transactions would result in more
than 5% of the fair market value of the fund's assets being deposited as initial
margin for such transactions.
FORWARD CONTRACTS
The fund may wish to lock in the U.S. dollar value of a transaction at or
near the time of the purchase or sale at the exchange rate or rates then
prevailing between the U.S. dollar and the currency in which the foreign
security is denominated. To do this, the fund may enter into a forward contract.
Which involves an obligation to purchase or sell a specified currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded directly between currency traders (usually large commercial
banks) and their customers.
When it is desirable to limit or reduce exposure in a foreign currency in
order to moderate potential changes in the U.S. dollar value of the portfolio,
the fund may enter into a forward contract to sell, for a fixed amount of U.S.
dollars, the amount of foreign currency approximating the value of some or all
of that fund's portfolio securities denominated in such foreign currency. This
is known as portfolio hedging. Hedging against a decline in the value of
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline.
The fund may also employ forward contracts to hedge against an increase in
the value of the currency in which the securities the fund intends to buy are
denominated. The fund may also hedge its foreign currency exchange rate risk by
engaging in currency futures contracts and options transactions. The fund will
not engage in foreign currency transactions for speculative purposes.
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REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements. In a repurchase agreement
transaction, the fund purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price and date. In the event of a
bankruptcy or other default of the seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and losses.
The fund may enter into repurchase agreements with respect to securities
issued by the U.S. Government, its agencies or instrumentalities. Under normal
circumstances, no more than 25% of the fund's total assets will be invested in
repurchase agreements at any time.
EMERGING MARKET SECURITIES
Because of the high levels of foreign-denominated debt owed by many
emerging market countries, fluctuating exchange rates can significantly affect
the debt service obligations of those countries. This could, in turn, affect
local interest rates, profit margins and exports which are a major source of
foreign exchange earnings. Although it might be theoretically possible to hedge
for anticipated income and gains, the ongoing and indeterminate nature of the
foregoing risk (and the costs associated with hedging transactions) makes it
virtually impossible to hedge effectively against such risks.
To the extent an emerging market country faces a liquidity crisis with
respect to its foreign exchange reserves, it may increase restrictions on the
outflow of any foreign exchange. Repatriation is ultimately dependent on the
ability of the fund to liquidate its investments and convert the local currency
proceeds obtained from such liquidation into U.S. dollars. Where this conversion
must be done through official channels (usually the central bank or certain
authorized commercial banks), the ability to obtain U.S. dollars is dependent on
the availability of U.S. dollars through those channels and, if available, upon
the willingness of those channels to allocate those U.S. dollars to the fund. In
such a case, the fund's ability to obtain U.S. dollars may be adversely affected
by any increased restrictions imposed on the outflow of foreign exchange. If the
fund is unable to repatriate any amounts due to exchange controls, it may be
required to accept an obligation payable at some future date by the central bank
or other government entity of the jurisdiction involved. If such conversion can
legally be done outside official channels, either directly or indirectly, the
fund's ability to obtain U.S. dollars may not be affected as much by any
increased restrictions except to the extent of the price which may be required
to be paid for the U.S. dollars.
Many emerging market countries have little experience with the corporate
form of business organization, and may not have well developed corporation and
business laws or concepts of fiduciary duty in the business context.
The securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the U.S.
and other more developed countries. Disclosure and regulatory standards in many
respects are less stringent than in the U.S. and other major markets. There also
may be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets; enforcement of existing regulations has
been extremely limited.
Some emerging markets have different settlement and clearance procedures.
In certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. The inability of the fund to make intended securities
purchases due to settlement problems could cause the fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security caused by
settlement problems could result either in losses to the fund due to subsequent
declines in the value of the portfolio security or, if the fund has entered into
a contract to sell the security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the fund's portfolio securities in such
markets may not be readily available.
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ADRs and EDRs
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") and other similar securities convertible into securities of foreign
companies provide a means for investing directly in foreign equity securities.
ADRs are receipts typically issued by a U.S. bank evidencing ownership of the
underlying foreign securities. EDRs are receipts typically issued by a European
bank evidencing ownership of the underlying foreign securities. To the extent an
ADR or EDR is issued by a bank unaffiliated with the foreign company issuer of
the underlying security, the bank has no obligation to disclose material
information about the foreign company issuer. The fund may invest in ADRs and
EDRs.
CORPORATE DEBT SECURITIES
Corporate debt securities are bonds or notes issued by corporations and
other business organizations, including business trusts, in order to finance
their credit needs. Corporate debt securities include commercial paper which
consists of short-term (usually from 1 to 270 days) unsecured promissory notes
issued by corporations in order to finance their current operations. The fund
may invest in foreign corporate debt securities denominated in U.S. dollars or
foreign currencies. Foreign debt securities include Yankee dollar obligations
(U.S. dollar denominated securities issued by foreign corporations and traded on
U.S. markets) and Eurodollar obligations (U.S. dollar denominated securities
issued by foreign corporations and traded on foreign markets).
U.S. GOVERNMENT OBLIGATIONS AND RELATED SECURITIES
U.S. Government obligations include a variety of securities that are
issued or guaranteed by the U.S. Treasury, by various agencies of the U.S.
Government or by various instrumentalities that have been established or
sponsored by the U.S. Government. U.S. Treasury securities and securities
issued by the GNMA and Small Business Administration are backed by the "full
faith and credit" of the U.S. Government. Other U.S. Government obligations
may or may not be backed by the "full faith and credit" of the U.S. In the
case of securities not backed by the "full faith and credit" of the U.S., the
investor must look principally to the agency issuing or guaranteeing the
obligation (such as the Federal Farm Credit System, the Federal Home Loan
Banks, Fannie Mae and Freddie Mac) for ultimate repayment and may not be able
to assert a claim against the U.S. itself in the event the agency or
instrumentality does not meet its commitments.
Participation interests in U.S. Government obligations are pro rata
interests in such obligations which are generally underwritten by government
securities dealers. Certificates of safekeeping for U.S. Government obligations
are documentary receipts for such obligations. Both participation interests and
certificates of safekeeping are traded on exchanges and in the over-the-counter
market.
The fund may invest in U.S. Government obligations and related
participation interests. In addition, the fund may invest in custodial receipts
that evidence ownership of future interest payments, principal payments or both
on certain U.S. Government obligations. Such obligations are held in custody by
a bank on behalf of the owners. These custodial receipts are known by various
names, including Treasury Receipts, Treasury Investors Growth Receipts ("TIGRs")
and Certificates of Accrual on Treasury Securities ("CATS"). Custodial receipts
generally are not considered obligations of the U.S. Government for purposes of
securities laws. The fund will consider all interest-only or principal-only
fixed income securities as illiquid.
MUNICIPAL OBLIGATIONS
Municipal obligations are debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia, and their political subdivisions, agencies, authorities and
instrumentalities and other qualifying issuers which pay interest that is, in
the opinion of bond counsel to the issuer, exempt from federal income tax. The
fund may invest no more than 5% of its net assets in municipal obligations
(including participation interests). Municipal obligations are issued to obtain
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funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works, to pay general operating expenses or to refinance outstanding
debts. They also may be issued to finance various private activities, including
the lending of funds to public or private institutions for construction of
housing, educational or medical facilities or the financing of privately owned
or operated facilities. Municipal obligations consist of tax-exempt bonds,
tax-exempt notes and tax-exempt commercial paper. Tax-exempt notes generally are
used to provide short term capital needs and generally have maturities of one
year or less. Tax-exempt commercial paper typically represents short-term,
unsecured, negotiable promissory notes.
The two principal classifications of municipal obligations are "general
obligations" and "revenue" bonds. General obligation bonds are backed by the
issuers full credit and taxing power. Revenue bonds are backed by the revenues
of a specific project, facility or tax. Industrial development revenue bonds are
a specific type of revenue bond backed by the credit of the private issuer of
the facility, and therefore investments in these bonds have more potential risk
that the issuer will not be able to meet scheduled payments of principal and
interest.
ZERO COUPON AND PAY-IN-KIND BONDS
Corporate debt securities and municipal obligation include so-called "zero
coupon" bonds and "pay-in-kind" bonds. The fund may invest no more than 5% of
its net assets in zero coupon bonds or pay-in-kind bonds, respectively. Zero
coupon bonds are issued at a significant discount from their principal amount in
lieu of paying interest periodically. Pay-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The value of zero coupon and pay-in-kind bonds is subject to
greater fluctuation in response to changes in market interest rates than bonds
which make regular payments of interest. Both of these types of bonds allow an
issuer to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds which make
regular payments of interest. Even though zero coupon and pay-in-kind bonds do
not pay current interest in cash, the fund holding those bonds is required to
accrue interest income on such investments and may be required to distribute
that income at least annually to shareholders. Thus, such fund could be required
at times to liquidate other investments in order to satisfy its dividend
requirements.
MORTGAGE-RELATED SECURITIES
The fund may invest no more than 5% of its net assets in mortgage-related
securities. Mortgage-related securities provide capital for mortgage loans made
to residential homeowners, including securities which represent interests in
pools of mortgage loans made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled for sale to investors (such as the fund) by various governmental,
government-related and private organizations, such as dealers. The market value
of mortgage-related securities will fluctuate as a result of changes in interest
rates and mortgage rates.
Interests in pools of mortgage loans generally provide a monthly payment
which consists of both interest and principal payments. In effect these payments
are a "pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by GNMA) are described as
"modified pass-through" because they entitle the holder to receive all interest
and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether the mortgagor actually makes the payment.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers, such
as dealers, create pass-through pools of conventional residential mortgage
loans. Such issuers also may be the originators of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
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such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payments with respect to such pools. However, timely
payment of interest and principal of these pools is supported by various forms
of insurance or guarantees, including individual loan, title, pool and hazard
insurance. There can be no assurance that the private insurers can meet their
obligations under the policies. The fund may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the persons creating the pools, Lombard Odier
determines that the securities are appropriate investments for the fund.
Another type of security representing an interest in a pool of mortgage
loans is known as a collateralized mortgage obligation ("CMO"). CMOs represent
interests in a short-term, intermediate-term or long-term portion of a mortgage
pool. Each portion of the pool receives monthly interest payments, but the
principal repayments pass through to the short-term CMO first and the long-term
CMO last. A CMO permits an investor to more accurately predict the rate of
principal repayments. CMOs are issued by private issuers, such as broker/dealers
and government agencies, such as Fannie Mae and Freddie Mac. Investments in CMOs
are subject to the same risks as direct investments in the underlying
mortgage-backed securities. In addition, in the event of a bankruptcy or other
default of a broker who issued the CMO held by the fund, the fund could
experience both delays in liquidating its position and losses. The fund may
invest in CMOs in any rating category of the recognized rating services and may
invest in unrated CMOs. The fund may also invest in "stripped" CMOs, which
represent only the income portion or the principal portion of the CMO.
The fund's sub-adviser expects that governmental, government-related or
private entities may create mortgage loan pools offering pass-through
investments in addition to those described above. The mortgages underlying these
securities may be second mortgages or alternative mortgage instruments (for
example, mortgage instruments whose principal or interest payments may vary or
whose terms to maturity may differ from customary long-term fixed rate
mortgages). As new types of mortgage-related securities are developed and
offered to investors, the sub-adviser will, consistent with the fund's
investment objective and policies, consider making investments in such new types
of securities. The Prospectuses will be amended with any necessary additional
disclosure prior to the fund investing in such securities.
The average life of securities representing interests in pools of mortgage
loans is likely to be substantially less than the original maturity of the
mortgage pools a result of prepayments or foreclosures of such mortgages.
Prepayments are passed through to the registered holder with the regular monthly
payments of principal and interest, and have the effect of reducing future
payments. To the extent the mortgages underlying a security representing an
interest in a pool of mortgages are prepaid, the fund may experience a loss (if
the price at which the respective security was acquired by the fund was at a
premium over par, which represents the price at which the security will be
redeemed upon prepayment) or a gain (if the price at which the respective
security was acquired by the fund was at a discount from par). In addition,
prepayments of such securities held by the fund will reduce the share price of
the fund to the extent the market value of the securities at the time of
prepayment exceeds their par value, and will increase the share price of the
fund to the extent the par value of the securities exceeds their market value at
the time of prepayment. Prepayments may occur with greater frequency in periods
of declining mortgage rates because, among other reasons, it may be possible for
mortgagors to refinance their outstanding mortgages at lower interest rates.
Although the market for mortgage-related securities issued by private
organizations is becoming increasingly liquid, such securities may not be
readily marketable. The fund will not purchase mortgage-related securities for
which there is no established market (including CMOs and direct investments in
mortgages as described below) or any other investments which the sub-adviser
deems to be illiquid pursuant to criteria established by the Board of Directors
if, as a result, more than 15% of the value of the fund's net assets would be
invested in such illiquid securities and investments. Government-related
organizations which issue mortgage-related securities include GNMA, Fannie Mae
and Freddie Mac. Securities issued by GNMA and Fannie Mae are fully modified
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pass-through securities, i.e., the timely payment of principal and interest is
guaranteed by the issuer. Freddie Mac securities are modified pass-through
securities, i.e., the timely payment of interest is guaranteed by Freddie Mac,
principal is passed through as collected but payment thereof is guaranteed not
later than one year after it becomes payable.
DIRECT INVESTMENT IN MORTGAGES
Mortgage-related securities include investments made directly in mortgages
secured by real estate. When the fund makes a direct investment in mortgages,
the fund, rather than a financial intermediary, becomes the mortgagee with
respect to such loans purchased by the fund. Direct investments in mortgages are
normally available from lending institutions which group together a number of
mortgages for resale (usually from 10 to 50 mortgages) and which act as
servicing agent for the purchaser with respect to, among other things, the
receipt of principal and interest payments. (Such investments are also referred
to as "whole loans.") The vendor of such mortgages receives a fee from the
purchaser for acting as servicing agent. The vendor does not provide any
insurance or guarantees covering the repayment of principal or interest on the
mortgages. The fund will invest in such mortgages only if the sub-adviser has
determined through an examination of the mortgage loans and their originators
that the purchase of the mortgages should not present a significant risk of loss
to the fund.
FLOATING AND VARIABLE RATE OBLIGATIONS
Fixed income securities may be offered in the form of floating and
variable rate obligations. The fund may invest no more than 5% of its net assets
in floating and variable rate obligations, respectively. Floating rate
obligations have an interest rate which is fixed to a specified interest rate,
such as bank prime rate, and is automatically adjusted when the specified
interest rate changes. Variable rate obligations have an interest rate which is
adjusted at specified intervals to a specified interest rate. Periodic interest
rate adjustments help stabilize the obligations' market values.
The fund may purchase these obligations from the issuers or may purchase
participation interests in pools of these obligations from banks or other
financial institutions. Variable and floating rate obligations usually carry
demand features that permit the fund to sell the obligations back to the issuers
or to financial intermediaries at par value plus accrued interest upon short
notice at any time or prior to specific dates. The inability of the issuer or
financial intermediary to repurchase an obligation on demand could affect the
liquidity of the fund's portfolio. Frequently, obligations with demand features
are secured by letters of credit or comparable guarantees. Floating and variable
rate obligations which do not carry unconditional demand features that can be
exercised within seven days or less are deemed illiquid unless the Board
determines otherwise. The fund's investment in illiquid floating and variable
rate obligations would be limited to the extent that it is not permitted to
invest more than 15% of the value of its net assets in illiquid investments.
LOANS OF PORTFOLIO SECURITIES
The fund may make short- and long-term loans of their portfolio
securities. Under an authorized lending policy, the borrower must agree to
maintain collateral, in the form of cash or U.S. Government obligations, with
the fund on a daily mark-to-market basis in an amount at least equal to 100% of
the value of the loaned securities.
The fund will continue to receive dividends or interest on the loaned
securities and may terminate such loans at any time or reacquire such securities
in time to vote on any matter which the Board of Directors determines to be
serious. There is a risk that the borrower may fail to return the loaned
securities or may not be able to provide additional collateral.
No loans will be made if, as a result, the aggregate amount of such loans
would exceed 25% of the fund's total assets.
INVESTMENT COMPANIES
The fund is permitted to invest in other investment companies. The fund
will not: (a) invest more than 10% of its total assets in securities of other
investment companies; (b) invest more than 5% of its total assets in securities
of any investment company; and (c) purchase more than 3% of the outstanding
voting stock of any investment company.
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If the fund acquires securities of another investment company, you may be
subject to duplicative management fees.
The fund may invest in any closed-end investment company that holds
foreign equity securities in its portfolio. Investments in shares of closed-end
investment companies that invest primarily in equity securities of European
issuers will be included in the 65% of total assets that Europe Fund normally
would expect to invest in European issuers.
BOND RATINGS
The fund may invest in debt obligations (such as corporate debt securities
and municipal obligations) in any rating category of the recognized rating
services, including issues that are in default, and may invest in unrated debt
obligations. Most foreign debt obligations are not rated.
Generally, investments in securities in the lower rating categories or
comparable unrated securities provide higher yields but involve greater price
volatility and risk of loss of principal and interest than investments in
securities with higher ratings. Securities rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's ("S&P")
(commonly known as "junk bonds"), are below investment grade and have
speculative characteristics, and those in the lowest rating categories are
extremely speculative and may be in default with respect to payment of principal
and interest. The fund does not intend to invest more than 5% of its net assets
in securities rated below investment grade.
Lower ratings reflect a greater possibility that an adverse change in
financial condition will affect the ability of the issuer to make payments of
principal and interest than is the case with higher grade securities. In
addition, lower-rated securities will also be affected by the market's
perceptions of their credit quality and the outlook for economic growth. In the
past, economic downturns or an increase in interest rates have under certain
circumstances caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high yield
securities. An effect of such legislation may be to significantly depress the
prices of outstanding lower-rated securities. The market for lower-rated
securities may be less liquid than the market for securities with higher
ratings. Furthermore, the liquidity of lower-rated securities may be affected by
the market's perception of their credit quality. Therefore, judgment may at
times play a greater role in valuing these securities than in the case of
higher-rated securities, and it also may be more difficult during certain
adverse market conditions to sell lower-rated securities at their face value to
meet redemption requests or to respond to changes in the market.
Although the above risks apply to all lower-rated securities, the
investment risk increases when the rating of the security is below investment
grade. The lowest-rated securities (D by S&P and C by Moody's) are regarded as
having extremely poor prospects of ever attaining any real investment standing
and, in fact, may be in default of payment of interest or repayment of
principal. To the extent the fund invests in these lower-rated securities, the
achievement of its investment objective may be more dependent on Lombard Odier's
own credit analysis than in the case of a fund investing in higher-rated
securities.
The fund may invest in securities which are in lower rating categories or
are unrated if the sub-adviser determines that the securities provide the
opportunity of meeting the fund's objective without presenting excessive risk.
The respective sub-adviser will consider all factors which it deems appropriate,
including ratings, in making investment decisions for the fund and will attempt
to minimize investment risks through diversification, investment analysis and
monitoring of general economic conditions and trends. While the sub-adviser may
refer to ratings, they do not rely exclusively on ratings, but make their own
independent and ongoing review of credit quality.
PORTFOLIO TURNOVER
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Europe Fund anticipates that in the future its portfolio turnover rate
will not exceed 115%. The portfolio turnover rate is computed by dividing the
lesser of purchases or sales of securities for the period by the average value
of portfolio securities for that period. Short-term securities are excluded from
the calculation. High portfolio turnover rates (100% or more) will involve
correspondingly greater transaction costs which will be borne directly by the
fund. It may also increase the amount of short-term capital gains realized by
the fund and thus may affect the tax treatment of distributions paid to
shareholders, because distributions of net short-term capital gains are taxable
as ordinary income. The fund will take these possibilities into account as part
of its investment strategies.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund offers two classes of shares, known as Primary Shares and
Navigator Shares. Europe Fund also offers a third class of shares: Class A
shares. Primary Shares and Class A 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 of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the customers
with such Institutional Clients, to qualified retirement plans managed on a
discretionary basis and having net assets of at least $200 million, to clients
of Bartlett & Co., who as of December 19, 1996, were shareholders of Bartlett
Short-Term Bond Fund or Bartlett Fixed Income Fund and for whom Bartlett acts as
an ERISA fiduciary, to Class Y shareholders of Bartlett Europe Fund or Bartlett
Financial Services Fund on October 5, 1999, to any qualified retirement plan of
Legg Mason, Inc. or of any of its affiliates and to certain institutions who
were clients of Fairfield Group, Inc. as of February 28, 1999. Navigator Shares
may not be purchased by individuals directly, but Institutional Clients may
purchase shares for Customer Accounts maintained for individuals. Primary Shares
and Class A shares are available to all other investors.
FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
If you invest in Primary Shares or Class A shares, the Prospectus for
those shares explains that you may buy additional Primary Shares or Class A
shares through the Future First Systematic Investment Plan. Under this plan, you
may arrange for automatic monthly investments in Primary Shares or Class A
shares of $50 or more by authorizing Boston Financial Data Services ("BFDS"),
the funds' transfer agent, to transfer funds to be used to buy those 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 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." 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 or Class A 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 or Class A 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
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which you have an account. Redemptions will be made at the 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 shares in your account must be
automatically reinvested in the applicable class of 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 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 of any class of shares of Global Income
or International Equity. No charge is made for redemption of Primary Shares or
Navigator Shares of Europe Fund. Class A shares of Europe Fund that were
purchased pursuant to the front-end sales charge waiver on purchases of $1
million or more and are redeemed within one year of their purchase are subject
to a CDSC of 1.00% of the shares' net asset value at the time of purchase or
redemption, whichever is less. There is a 2% redemption transaction fee charged
for redemptions within one year of purchase of Emerging Markets. The redemption
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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
taxed at 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.
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.
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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 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
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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 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
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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 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 Primary Shares or Class A 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.
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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 Primary Shares or Class A
shares of a fund through non-deductible IRA contributions, up to certain limits,
because all dividends and other distributions on your Primary Shares or Class A
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).
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 Primary Shares or Class A 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),
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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 in Primary Shares or Class A shares should consult
their plan administrator or tax advisor for further information.
PERFORMANCE INFORMATION
The following performance information for Global Income and Emerging
Markets relates to Primary Shares; the performance information for Europe Fund
relates to Class A Shares. As of the date of this Statement of Additional
Information, Navigator Shares of Global Income 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 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 INCOME:
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
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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 Income 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.
- --------------------------------------------------------------------------------
Value of Shares
Value of Original Shares Plus Acquired Through
Shares Reinvestment of Total
Fiscal Year Obtained Through Reinvestment of Income Dividends Value
Capital
Gain Distributions
- --------------------------------------------------------------------------------
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 Income'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.
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- --------------------------------------------------------------------------------
Value of Shares
Value of Original Shares Plus Acquired Through
Shares Reinvestment of Total
Fiscal Year Obtained Through Reinvestment of Income Dividends Value
Capital
Gain Distributions
- --------------------------------------------------------------------------------
1995* $10,771 $ 40 $10,811
- --------------------------------------------------------------------------------
1996 12,501 93 12,594
- --------------------------------------------------------------------------------
1997 12,641 174 12,815
- --------------------------------------------------------------------------------
1998 13,564 339 13,903
- --------------------------------------------------------------------------------
* 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 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's 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.
- --------------------------------------------------------------------------------
Value of Shares
Value of Original Shares Plus Acquired Through
Shares Reinvestment of Income Total
Fiscal Year Obtained Through Reinvestment of Dividends Value
Capital
Gain Distributions
- --------------------------------------------------------------------------------
1998* $8,895 $163 $9,058
- --------------------------------------------------------------------------------
* 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.
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- --------------------------------------------------------------------------------
Value of Shares
Value of Original Shares Plus Acquired Through
Shares Reinvestment of Total
Fiscal Year Obtained Through Reinvestment of Income Dividends Value
Capital
Gain Distributions
- --------------------------------------------------------------------------------
1996* $10,510 $30 $10,540
- --------------------------------------------------------------------------------
1997 9,850 39 9,889
- --------------------------------------------------------------------------------
1998 6,960 27 6,987
- --------------------------------------------------------------------------------
* 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's adviser had
not waived certain fees during the fiscal years ended 1997 and 1998.
FOR EUROPE FUND:
The average annual total returns of Class A shares of Europe Fund for the
one, five and ten year periods ended December 31, 1998 were 35.09%, 19.42% and
10.72%, respectively.
The following table shows the one year and cumulative rates of total
return (based on net asset value) for the indicated period as well as the value
of a $10,000 investment made on August 19, 1986 (the date of the initial public
offering of shares of Worldwide Value Fund, Inc. (the fund's predecessor)), as
of the end of the specified period. Sales charges have not been deducted from
total returns for the periods ended December 31, 1986 through December 31, 1997.
For the year ended December 31, 1998, total returns do reflect the sales charge.
Year End Value of Total
Year Net Asset Dividends $10,000 Return Total Return
Ended Value Paid Investments(a) One Year Cumulative(b)
- --------------------------------------------------------------------------------
12/31/86 $17.41 $0.00 $10,990 n/a (12.95)%
12/31/87 16.46 1.11 8,925 2.52% (10.75)%
12/31/88 19.53 1.00 11,208 25.59% 12.09%
12/31/89 20.14 1.61 12,606 12.47% 26.06%
12/31/90 14.65 1.38 10,002 (20.66)% .02%
12/31/91 15.44 0.21 10,709 7.07% 15.78%
12/31/92 14.29 0.04 9,941 (7.17)% (0.59)%
12/31/93 18.46 0.10 12,915 29.91% 29.15%
12/31/94 17.68 0.00 12,369 (3.68)% 24.39%
12/31/95 21.13 0.06 14,831 19.94% 48.35%
12/31/96 24.24 3.25 19,555 31.53% 95.07%
12/31/97 20.97 7.33 21,834 17.52% 129.25%
12/31/98 24.77 4.31 29,049 35.09% 210.10%
(a) Value at end of fiscal year of $10,000 investment made on August 19, 1986.
(b) Not annualized and from August 19, 1986.
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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 Income invests primarily in fixed-income securities, Europe Fund
invests primarily in European equity 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,
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tax-loss selling, or actual or anticipated 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.
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
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<PAGE>
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 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.
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<PAGE>
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,
D.C. 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.
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 Coopers
& Lybrand L.L.P. (Aug. 1992 - June 1995).
SUE SILVA*, [3/29/67] Secretary and Assistant Treasurer; Secretary and/or
Assistant Treasurer 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.
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.
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION FROM CORPORATION AND FUND COMPLEX
NAME OF PERSON AND CORPORATION* PAID TO DIRECTORS**
POSITION
- --------------------------------------------------------------------------------
John F. Curley, Jr. - None None
Chairman of the Board
and Director
- --------------------------------------------------------------------------------
Edward A. Taber, III - None None
President and Director
- --------------------------------------------------------------------------------
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 eleven open-end
investment companies in the Legg Mason Complex (with a total of twenty
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 Income's investment adviser and manager
under a Management Agreement ("Management Agreement"). Pursuant to the
Management Agreement, and subject to overall direction by the Board of
Directors, LMFA manages the investment and other affairs of Global Income. 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 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
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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 Income 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 Income'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 $934,846, $1,155,558, and $1,150,265, respectively.
LMFA also serves as the manager for International Equity and Emerging
Markets under separate Management Agreements, and for Europe Fund under an
Investment Advisory and Administration Agreement (each a "Management
Agreement"). 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, Emerging Markets and Europe Fund. LMFA is
responsible for managing International Equity's, Emerging Markets's and Europe
Fund's 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
has delegated the portfolio management functions for Europe Fund to the fund's
sub-adviser, Lombard Odier International Portfolio Management Limited.
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, 1.00% of Emerging Markets's average daily net assets
and 1.00% of Europe Fund's 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's 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 Emerging
Markets will expire on May 1, 2000, unless extended by LMFA and Batterymarch.
LMFA has voluntarily agreed to waive its fees to the extent that Europe Fund's
total annual operating expenses attributable to Class A shares, Primary Shares
and Navigator Class shares exceed 1.85%, 2.60% and 1.60%, respectively until May
1, 2000.
For the years ended December 31, 1998, 1997, and 1996, LMFA waived $0, $0
and $91,764, respectively, in management fees for International Equity under the
agreement. 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.
From July 18, 1997 through October 5, 1999, Bartlett & Co. served as
the manager of Europe Fund. For the fiscal year ended December 31, 1998, and the
period July 18, 1997 through December 31, 1997, Europe Fund paid management fees
of $674,633 and $846,703, respectively, to Bartlett & Co.
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<PAGE>
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.
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 Income 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
Income 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 Income'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.
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<PAGE>
BATTERYMARCH
Batterymarch Financial Management, Inc. ("Batterymarch"), 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's 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 actual
management of International Equity's and Emerging Markets's assets, including
the responsibility for making decisions and placing orders to buy, sell or hold
a particular security. For Batterymarch's services, LMFA (not the 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 INCOME 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 Income 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 Income 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,
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<PAGE>
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations or duties thereunder.
The Sub-Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the fund's outstanding voting securities, by
LMFA, 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.
SUB-ADVISORY AGREEMENT
FOR EUROPE FUND
Lombard Odier International Portfolio Management Limited ("Lombard
Odier"), Norfolk House, 13 Southampton Place, London WC1A 2AJ, England, serves
as investment sub-adviser to Europe Fund under a Sub-Advisory Agreement between
Lombard Odier and LMFA. 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, LMFA, or Lombard Odier, on August 6, 1999 and by
the sole shareholder of Europe Fund on October 5, 1999.
Lombard Odier is responsible for providing investment advice to Europe
Fund in accordance with its investment objective and policies, and for placing
orders to purchase and sell portfolio securities pursuant to directions from the
fund's officers. For Lombard Odier's services to Europe Fund, LMFA (not the
fund) pays Lombard Odier a fee, computed daily and payable monthly, at an annual
rate equal to 60% of the monthly fee actually paid to LMFA under the Management
Agreement. From July 18, 1997 to October 5, 1999, Bartlett & Co. served as
manager to Europe Fund under compensation arrangements substantially similar to
those currently in place for the fund. For the year ended December 31, 1998 and
the period July 18, 1997 to December 31, 1997, Bartlett & Co. paid $407,642 and
$151,145 to Lombard Odier.
Under the Sub-Advisory Agreement, Lombard Odier will not be liable for any
error of judgment or mistake of law or for any loss suffered by LMFA or by the
fund in connection with the performance of the Sub-Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Sub-Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the fund's outstanding voting securities, by
LMFA, or by Lombard Odier 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 Management Agreement or upon the mutual written consent of
LMFA, Lombard Odier 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, Inc. ("Legg Mason"), 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
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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 for
Primary Shares ("Primary Shares Plans"), and Europe Fund has also adopted a
Distribution and Shareholder Services Plan for Class A shares ("Class A Plan"),
each of which, among other things, permits a fund to pay Legg Mason fees for
services related to sales and distribution of Primary Shares or Class A Shares
and the provision of ongoing services to the holders of those shares.
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 Primary Shares Plans were each adopted, as required by Rule 12b-1
under the 1940 Act, by a vote of the Board of Directors ("Board"), 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 any Plan or the Underwriting Agreement
("12b-1 Directors") on February 5, 1993 (for Global Income), October 21, 1994
(for International Equity), February 7, 1996 (for Emerging Markets) and August
6, 1999 (for Europe Fund) and the Class A Plan was adopted by a vote of the
12b-1 Directors, on August 6, 1999. Amendment of the Primary Shares Plans to
conform to new rules of the National Association of Securities Dealers, Inc.
("NASD"), was approved by the Board on May 14, 1993. Continuation of the Primary
Shares Plans for Global Income, International Equity and Emerging Markets was
most recently approved by the Board on November 13, 1998, including a majority
of the 12b-1 Directors. In approving the Class A Plan, and approving the
continuance of the Primary Shares Plans, in accordance with the requirements of
Rule 12b-1, the directors determined that there was a reasonable likelihood that
the Plans would benefit the applicable fund and its shareholders. The directors
noted that, to the extent a Plan results in additional sales of shares of a
fund, the Plan may enable that 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 Income),
0.75% (for International Equity, Emerging Markets and Europe Fund) 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 Primary Shares Plan. For Legg Mason's services in
connection with Class A shares, Legg Mason receives from Europe Fund an annual
service fee equivalent to 0.25% of its average daily net assets attributable to
Class A shares in accordance with the Class A Plan. All distribution and service
fees are calculated daily and payable monthly. Legg Mason voluntarily agreed to
waive its fees and reimburse each fund if and to the extent its expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage and
extraordinary expenses) exceeded during any month an annual rate of each fund's
average daily net assets attributable to Primary Shares in accordance with the
following schedule:
Global Income: 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 Income paid
full distribution and service fees of $934,846, $1,155,558, and $1,150,140,
respectively.
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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).
Each 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 that Plan. A Plan may be terminated with respect to each
fund by a vote of a majority of 12b-1 Directors or by vote of a majority of the
outstanding voting securities of the applicable class of that fund. Any change
in a Plan that would materially increase the distribution costs to a fund
requires approval by the shareholders of the applicable class of the fund;
otherwise, a 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 a Plan or any related agreement
shall provide to that fund's Board, 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 a 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 of
the following funds:
- --------------------------------------------------------------------------------
Global International Emerging
Government Markets Equity
- --------------------------------------------------------------------------------
Compensation to sales $582,000 $1,564,000 $346,000
personnel
- --------------------------------------------------------------------------------
Advertising 85,000 100,000 102,000
- --------------------------------------------------------------------------------
Printing and mailing of 105,000 154,000 149,000
prospectuses to prospective
shareholders
- --------------------------------------------------------------------------------
Other 657,000 1,119,000 656,000
- --------------------------------------------------------------------------------
Total $1,429,000 $2,937,000 $1,253,000
- --------------------------------------------------------------------------------
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 Income'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. For
the years ended December 31, 1998 and 1997, Europe Fund's portfolio turnover
rates were 103% and 123%, respectively.
Under each Advisory Agreement, each fund's adviser is responsible for the
execution of portfolio transactions. Corporate and government debt securities
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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 Income 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 year ended
December 31, 1998 and 1997, Emerging Markets paid $297,253, and $496,536 in
brokerage commissions. For the years ended December 31, 1998 and 1997, Europe
Fund paid $700,947 and $363,662 in brokerage commissions.
Although Global Income 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.
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, Western Asset
Global or Lombard Odier. 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.
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CAPITAL STOCK INFORMATION
The articles of incorporation authorize the Corporation to issue one
billion two hundred fifty million 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 Primary Shares and Navigator Class shares.
Europe Fund also offers Class A shares. Classes of shares of each fund represent
interests in the same pool of assets of that fund. 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 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
The Custodian acts as the Trust's depository, safekeeps its portfolio
securities, collects all income and other payments with respect thereto,
disburses funds at the Trust's request and maintains records in connection with
its duties. State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts, is the custodian of the Trust. The Chase Manhattan Bank, N.A., 1
Chaseside, Bournemouth, Dorset BH7 7DB, England, is the sub-custodian for Europe
Fund. 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.
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, each with respect to
Global Income, International Equity and Emerging Markets, are included in the
Corporation's annual report for the year ended December 31, 1998, and are hereby
incorporated by reference in this Statement of Additional Information.
The Statement of Net Assets as of December 31, 1998; the Statement of
Operations for the period ended December 31, 1998; the Statement of Changes in
Net Assets for the years ended December 31, 1998 and 1997; the Financial
Highlights for the periods presented; the Notes to Financial Statements and the
Report of Independent Public Accountants, each with respect to Europe Fund, are
included in Bartlett Capital Trust's annual report for the year ended December
31, 1998, and are hereby incorporated by reference in this Statement of
Additional Information.
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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.
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.
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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 be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
A-2
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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."
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APPENDIX B
The funds may use the following instruments:
OPTIONS ON DEBT SECURITIES AND FOREIGN CURRENCIES (Global Income)
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 Income)
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
Income)
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
