Filed pursuant to Rule 497(c)
of the Securities Act of 1933
THE PANAGORA INSTITUTIONAL FUNDS
P. O. Box 1537
Boston, Massachusetts 02205-1537
PROSPECTUS OCTOBER 1, 1996
The PanAgora Institutional Funds (the "Trust") is a diversified
open-end management investment company that currently consists of two investment
series (the "Funds"). PanAgora Asset Management, Inc. (the "Adviser" or
"PanAgora") serves as investment adviser to the Funds. Funds Distributor, Inc.
serves as the Trust's distributor.
Each Fund has a different investment objective which is described in
detail in this Prospectus and in the Statement of Additional Information of the
Trust. The following descriptions summarize the investment objectives of the
Funds:
PANAGORA ASSET ALLOCATION FUND. The Fund's investment objective is to
maximize total return, consisting of capital appreciation and current income.
The Fund attempts to achieve its objective by actively allocating assets among
U.S. equity securities, investment grade fixed-income securities, cash and cash
equivalents based on the Adviser's proprietary asset allocation disciplines.
When the Adviser determines that domestic capital markets are fairly priced
relative to each other and relative to corresponding risks, the Fund will invest
approximately 70% of its assets in equity securities, 25% in fixed-income
securities and 5% in cash and cash equivalents. However, as market conditions
warrant, the Adviser typically allocates the Fund's assets among asset classes
without regard to the stated percentages.
PANAGORA INTERNATIONAL EQUITY FUND. The Fund's primary investment
objective is to maximize total return, consisting primarily of capital
appreciation. Current income is a secondary objective. The Fund attempts to
achieve its objectives by actively allocating assets among international equity
markets based on the Adviser's proprietary asset allocation disciplines. When
the Adviser determines that international equity markets are fairly priced
relative to each other, the Fund's investments in international equity markets
will be generally weighted in accordance with the Morgan Stanley Capital
International-Europe Australia Far East GDP Index.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
Investor Summary...........................................................1
Expense Information........................................................3
Financial Highlights.......................................................5
Investment Objectives and Policies.........................................6
Description of Securities and Investment Techniques
and Related Risks.........................................................9
Additional Investment Information.........................................16
Management of the Trust...................................................18
Purchase of Shares........................................................20
Redemption of Shares......................................................21
Net Asset Value...........................................................22
Dividends, Distributions and Taxes........................................23
Organization and Shares of the Trust......................................24
Performance Information...................................................25
This Prospectus provides information about the Trust and each
Fund that investors should know before investing in the Trust. Investors should
carefully read this Prospectus and retain it for future reference. For investors
seeking more detailed information, the Statement of Additional Information dated
October 1, 1996, as amended or supplemented from time to time, is available upon
request without charge by calling 1-800-423-6041. The Statement of Additional
Information, which is incorporated by reference into this Prospectus, has been
filed with the Securities and Exchange Commission. Shares of the Funds are not
available in all states. Please call the phone number listed above to determine
availability in a particular state.
INVESTOR SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
THE PANAGORA INSTITUTIONAL FUNDS
The Trust, a diversified open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), currently consists of two separately managed investment series, the
PanAgora Asset Allocation Fund and the PanAgora International Equity Fund
(together , the "Funds"). The Funds commenced investment operations on June 1,
1993.
INVESTOR PROFILE
Primarily designed for institutional investors seeking to maximize
total return, the Funds are particularly suitable for the investment of funds
held by educational, religious and charitable organizations, banks and trust
companies acting in a fiduciary, advisory, agency, custodial or other similar
capacity as well as corporations, employee benefit plans, insurance companies,
investment counselors, municipalities, investment bankers and brokers and other
fiduciaries. Accordingly, purchases of shares are subject to certain minimum
investment requirements. See "Purchase of Shares", below.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the PanAgora Asset Allocation Fund is to
maximize total return, consisting of capital appreciation and current income. In
order to achieve its investment objective, the Fund actively allocates its
assets among U.S. equity securities, investment grade fixed-income securities,
cash and cash equivalents.
The PanAgora International Equity Fund's investment objective is to
maximize total return, consisting primarily of capital appreciation. Current
income is a secondary objective. In order to achieve its investment objective,
the Fund actively allocates its assets among international equity markets. When
the Adviser determines that international equity markets are fairly priced
relative to each other, the Fund's investments in international equity markets
will be generally weighted in accordance with the Morgan Stanley Capital
International-Europe Australia Far East GDP Index ("MSCI-EAFE GDP Index").
Both of the Funds' assets are actively allocated among asset classes
and markets in accordance with their respective investment objective and
policies by the Adviser, utilizing its proprietary asset allocation disciplines.
Underlying the Adviser's proprietary asset allocation disciplines is the belief
that investment opportunities (i.e., return) are primarily derived from asset
class and market selections. Investment opportunities arising from individual
security selection, while important, are viewed as secondary to opportunities
arising from asset class and market selections. For more complete information on
both Funds' investment objective and policies, including the Adviser's
proprietary asset allocation disciplines, see "Investment Objectives and
Policies."
1
MANAGEMENT
PanAgora Asset Management, Inc. serves as investment adviser to both of
the Funds and is paid an advisory fee at an annual rate of 0.60% of the PanAgora
Asset Allocation Fund's average daily net assets and 0.80% of the PanAgora
International Equity Fund's average daily net assets. The advisory fee paid by
the PanAgora International Equity Fund is higher than the advisory fee paid by
most investment companies but is not higher than the fees paid by many funds
investing primarily in a portfolio of international equity securities. Funds
Distributor, Inc. serves as distributor of the shares of each of the Funds.
Investors Bank & Trust Company serves as the Funds' Administrator, Transfer
Agent and Custodian. See "Management of the Trust."
PURCHASING SHARES
The minimum initial purchase for each Fund is $100,000 and the minimum
additional investment is $2,500. The Funds do not impose any sales charge or
redemption fees, nor do they bear any fees pursuant to a plan of distribution
under Rule 12b-1. The public offering price of shares of each Fund is the net
asset value per share next determined after receipt and acceptance of the
purchase order by the Transfer Agent in proper form. See "Purchase of Shares."
REDEEMING SHARES
Fund shares may be redeemed at the net asset value per share of the
Fund next determined after receipt by the Transfer Agent of a redemption request
in proper form. See "Redemption of Shares."
DIVIDENDS AND REINVESTMENT
Both Funds intend to pay dividends from net investment income, if any,
at least annually. Both Funds will make distributions of any net short and
long-term capital gains annually. Additional distributions may be made if
necessary for a Fund to avoid federal income or excise taxes. Any dividends and
distribution payments will be reinvested, at net asset value, in additional full
and fractional shares of a Fund unless the shareholder notifies the Transfer
Agent in writing requesting payments in cash. See "Dividends, Distributions and
Taxes."
RISK FACTORS
Neither Fund constitutes a complete investment program. In addition,
there can, of course, be no assurance that a Fund will achieve its investment
objectives. All investments involve risks; however, investors should be aware of
the following general observations. The market value of the fixed-income
securities in which the PanAgora Asset Allocation Fund may invest will vary
inversely in response to changes in prevailing interest rates. The foreign
securities in which the PanAgora International Equity Fund may invest, including
the foreign securities of issuers located in developing countries, may be
subject to certain risks in addition to those inherent in U.S. investments. The
Funds may make certain investments and employ certain investment techniques that
involve other risks, including entering into repurchase and reverse repurchase
agreements, lending portfolio securities, purchasing and selling options,
entering into futures contracts and related options and engaging in certain
currency hedging techniques. Finally, in the event a Fund has a high rate of
portfolio turnover, the Fund will incur correspondingly higher transaction
costs. These risks are fully described under "Description of Securities and
Investment Techniques and Related Risks" and "Additional Investment
Information."
2
EXPENSE INFORMATION
<TABLE>
<CAPTION>
PANAGORA
PANAGORA INTER-
ASSET NATIONAL
ALLOCATION EQUITY FUND
FUND
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases....... None None
Maximum Sales Charge Imposed on Reinvested Dividends None None
Deferred Sales Charge Imposed on Redemptions.............. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Advisory Fees (after expense limitation)*................ 0.00% 0.00%
Other Expenses (after expense limitation)*.............. 0.90% 1.10%
Rule 12b-1 Fees ....................................... None None
---- ----
Total Fund Operating Expenses*.............................. 0.90% 1.10%
- -------------------------
* The Advisory Fees, Other Expenses and Total Fund Operating Expenses shown in
the table for each Fund reflect an expense limitation currently in effect. The
Adviser has voluntarily agreed to waive all or a portion of its advisory fee and
to limit the expenses of each Fund to the extent necessary to limit Total Fund
Operating Expenses of each Fund, on an annualized basis, as follows: 0.90% of
the average daily net assets of the PanAgora Asset Allocation Fund; and 1.10% of
the average daily net assets of the PanAgora International Equity Fund. This
voluntary agreement may be terminated or modified by the Adviser in its sole
discretion at any time. The purpose of this policy is to enhance a Fund's total
return during the period when, because of its smaller size, fixed expenses have
a more significant impact on total return. In the absence of the expense
limitation, Advisory Fees for the PanAgora Asset Allocation Fund and PanAgora
International Equity Fund would have been 0.60% and 0.80%, respectively, Other
Expenses would have been 1.61%, and 1.37%, respectively, and Total Fund
Operating Expenses would have been 2.21%, and 2.17% , respectively, for the
fiscal year ended May 31, 1996.
</TABLE>
HYPOTHETICAL EXPENSE EXAMPLE:
Investors would pay the following expenses on a $1,000 investment assuming a 5%
total annual return and
redemption at the end of each time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
PanAgora Asset Allocation Fund $ 9 $29 $50 $111
PanAgora International Equity Fund $11 $35 $61 $134
The purpose of the table and hypothetical expense example is to assist
investors in understanding the various direct and indirect costs and expenses
that an investment in a Fund will bear. The costs and expenses included in the
table and hypothetical example are based on fees and expenses incurred during
the fiscal year ending May 31, 1996 . The hypothetical expense example above
assumes reinvestment of all dividends and distributions and that the percentage
amounts listed under "Annual Fund Operating Expenses" remain the same each year.
3
THE HYPOTHETICAL EXPENSE EXAMPLE IS DESIGNED FOR INFORMATION PURPOSES
ONLY, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE FUND
EXPENSES OR RETURN. ACTUAL FUND EXPENSES AND RETURN VARY FROM YEAR TO YEAR AND
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
For further information regarding advisory and administration fees, and
other expenses of the Funds, see "Management of the Trust".
4
FINANCIAL HIGHLIGHTS
The following selected financial highlights are derived from the
Trust's audited financial statements included in the Trust's Annual Report to
Shareholders. The financial statements and report of Coopers & Lybrand L.L.P.,
independent accountants, included in the Annual Report to Shareholders for the
Trust's fiscal year ended May 31, 1996 are incorporated by reference into the
Statement of Additional Information. The following data should be read in
conjunction with such financial statements, related notes, and other financial
information contained in the Annual Report. The Annual Report, which contains
additional unaudited performance information, is available without charge and
upon request by calling 1-800-423-6041.
For a portfolio share outstanding throughout each period:
<TABLE>
<CAPTION>
PANAGORA
PANAGORA ASSET INTERNATIONAL
ALLOCATION FUND EQUITY FUND
--------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994* MAY 31, 1996 MAY 31, 1995 MAY 31, 1994*
<S> <C> <C> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of period $11.26 $10.01 $10.00 $10.62 $10.75 $10.00
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income+............ 0.28 0.22 0.14 (0.01) 0.33 0.11
Net realized and unrealized gain
on investments++................. 1.97 1.18 0.02 0.81 0.19 0.89
---- ---- ---- ---- ---- ----
Total from investment operations 2.25 1.40 0.16 0.80 0.52 1.00
---- ---- ---- ---- ---- ----
Distributions:
Distributions from net investment
income (0.27) (0.15) (0.10) - (0.13) (0.03)
Distributions in excess of net
investment income - - - (0.20) (0.06) (0.22)
Distributions from capital gains.. (1.00) - (0.05) - (0.27) -
Distributions in excess of capital
gains - - - - (0.19) -
----- ----- ------ ----- ------ -----
Total from investment operations (1.27) (0.15) (0.15) (0.20) (0.65) (0.25)
----- ----- ----- ----- ----- -----
Net asset value, end of period......... $12.24 $11.26 $10.01 $11.22 $10.62 $10.75
====== ====== ====== ====== ====== ======
Total return+++........................ 21.05% 14.13% 1.63% 7.62% 5.09% 10.12%
===== ===== ==== ==== ==== =====
Ratios/supplemental data:
Net assets, end of period (in 000's) $9,939 $7,289 $2,871 $22,168 $17,960 $14,955
Ratio of operating expenses to
average net assets++++.......... 0.90% 0.90% 0.90% 1.10% 1.10% 1.10%
Ratio of net investment income
to average net assets........... 2.41% 2.46% 2.08% 1.24% 1.39% 0.93%
Portfolio turnover rate............... 59% 77% 50% 67% 218% 160%
____________________________
* The Funds commenced operations on June 1, 1993.
+ Net investment income (loss) per share before giving effect to
expense limitation arrangement by investment adviser was $0.13,
$0.03 and ($0.39) for the PanAgora Asset Allocation Fund and
($0.11), ($0.08) and ($0.05) for the PanAgora International Equity
Fund for the years ended May 31, 1996, May 31, 1995 and May 31,
1994, respectively.
++ The amount shown at this caption for each share outstanding
throughout the period may not accord with the change in the
aggregate gains and losses in the portfolio securities for the
period because of the timing of purchases and withdrawals of shares
in relation to the fluctuating market values of the portfolio.
+++ Total return represents aggregate total return for the period
indicated, based on the market value for the periods indicated.
++++ Annualized expense ratio before giving effect to expense limitation
arrangement by investment adviser was 2.21%, 3.07% and 8.96% for
the PanAgora Asset Allocation Fund and 2.17%, 2.85% and 2.42% for
the PanAgora International Equity Fund for the years ended May 31,
1996, May 31, 1995 and May 31, 1994, respectively.
</TABLE>
5
INVESTMENT OBJECTIVES AND POLICIES
The Adviser's proprietary asset allocation disciplines and the
investment objectives of both Funds together with the policies employed to
achieve these objectives are described below. Neither Fund alone constitutes a
complete investment program. There can, of course, be no assurance that a Fund
will achieve its investment objective.
THE ADVISER'S ASSET ALLOCATION DISCIPLINES
Both of the Funds rely exclusively on the Adviser's proprietary asset
allocation disciplines to actively allocate assets among various asset classes
(e.g., equity, fixed-income) and markets (e.g., U.S. or international) in
accordance with the Fund's stated investment objective and policies. Underlying
the Adviser's asset allocation disciplines is the belief that investment
opportunities, (i.e., return) are primarily derived from asset class and market
opportunities. Investment opportunities arising from individual security
selection, while important, are viewed as secondary to opportunities arising
from asset class and market selections. Since 1982, the Adviser and/or its
investment management professionals have developed and continue to develop
valuation techniques designed to evaluate worldwide asset classes and markets.
In implementing the disciplines, the Adviser establishes percentage
guidelines (the "Guidelines") that indicate the optimal allocation of a Fund's
portfolio securities among the asset classes and markets in which the Fund may
invest. The Guidelines reflect the Adviser's analysis of the potential
investment returns to be derived from each asset class or market. In evaluating
potential investment returns, the Adviser considers factors such as economic
conditions, monetary policy, asset class or market valuation as reflected by
established market indices, and competitive returns available in alternative
asset classes or markets.
The Adviser periodically reformulates the Guidelines in order to
achieve each Fund's investment objective on an ongoing basis. The asset
allocation disciplines employed by the Adviser dictate that shifts among asset
classes and markets should be frequent (at least monthly), but relatively modest
(a few percentage points). Under normal market conditions, the correlation
between the Guidelines and the allocation of a Fund's investments among asset
classes and markets will be relatively close. Under certain market conditions,
however, the allocation of a Fund's investments may not approximate the
Guidelines. For instance, if the Guidelines are adjusted substantially, it may
not be feasible for the Adviser to purchase or sell sufficient amounts of
different types of securities, under terms and conditions deemed by the Adviser
to be beneficial to the Fund, to conform the Fund's portfolio immediately to the
adjusted Guidelines. This reallocation process may take several days.
The Adviser's investment of assets within an asset class or market
utilizes more traditional analysis, focusing on such components as value and
growth potential, diversification and trading liquidity. Although individual
securities purchased by a Fund will generally be included in the underlying
indices used to formulate the Guidelines, the Funds may purchase securities not
included in such indices when deemed appropriate by the Adviser. A more detailed
discussion of each Fund's individual security selection process is included in
the section describing the investment objectives and policies of each Fund.
6
PANAGORA ASSET ALLOCATION FUND
The PanAgora Asset Allocation Fund's investment objective is to
maximize total return, consisting of capital appreciation and current income.
The Fund attempts to achieve its objective by actively allocating assets among
U.S. equity securities, investment grade fixed-income securities and cash and
cash equivalents based on the Adviser's proprietary asset allocation
disciplines. When the Adviser determines that domestic capital markets are
fairly priced relative to each other and relative to corresponding risks, the
Fund will invest approximately 70% of its assets in equity securities, 25% in
investment grade fixed-income securities and 5% in cash and cash equivalents.
However, as market conditions warrant, the Adviser typically allocates the
Fund's assets among asset classes without regard to the stated percentages.
Equity securities in which the PanAgora Asset Allocation Fund may
invest consist of common stocks of U.S. companies and preferred stocks, debt
instruments convertible into common stocks and securities having common stock
characteristics (such as warrants and rights to purchase common stock) of such
companies. In selecting equity securities for the Fund, the Adviser gives
important consideration to diversification and trading liquidity. The Adviser
attempts to select equity securities which, as a portfolio, have investment
characteristics, such as industry representation, dividend yield and
capitalization, and investment performance similar to the stocks in the Standard
& Poor's 500 Stock Index ("S&P 500"). The Adviser expects that the Fund will
hold 50 or more larger capitalization stocks, most of which are traded on the
New York Stock Exchange (the "NYSE"). The Fund's holdings may include securities
of foreign issuers traded on the NYSE (excluding American Depository Receipts,
"ADRs"). In selecting equity securities, the Adviser also gives consideration to
the value and growth potential of such securities. The Fund may also invest in
securities of closed-end investment companies.
Fixed-income securities in which the PanAgora Asset Allocation Fund may
invest consist of all types of debt securities such as bonds, debentures, notes
and stocks, such as preferred stocks. The Fund invests in highly liquid
investment-grade securities issued by the U.S. government, its agencies and
instrumentalities and by major U.S. corporations. The Fund's investments in
fixed-income securities may also include mortgage-backed and mortgage-related
securities issued by the U.S. government, its agencies and instrumentalities and
private issuers. In general, debt securities purchased by the Fund are included
in the Lehman Brothers Aggregate Bond Index, a composite index of all U.S.
government and agency and publicly-traded investment-grade corporate debt
securities with a maturity of one year or longer (the "Lehman Aggregate Index").
Investment-grade fixed-income securities are securities rated Baa or higher by
Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard &
Poor's Corporation ("S&P"), and unrated securities and securities rated by other
nationally recognized statistical rating services that are of equivalent quality
in the opinion of the Adviser. For a description of these ratings, see the
Appendix to the Statement of Additional Information. The Adviser selects
fixed-income securities for the Fund to match the Lehman Aggregate Index in
maturity, quality, sector and coupon characteristics. Typically, the average
maturity of fixed-income securities selected by the Adviser is approximately 10
years, although the Fund may invest in longer- or shorter-term securities when,
in the opinion of the Adviser, investment opportunities warrant.
The Fund invests in a wide range of cash and cash equivalents,
consisting of short-term securities issued by the U.S. government, its agencies
and instrumentalities, bank certificates of deposit and time deposits, bankers'
acceptances, commercial paper, high-grade short-term corporate debt obligations
and repurchase agreements with respect to these securities.
7
In order to achieve its investment objective , the Fund may engage in
options and futures for hedging and other permissible purposes.
For a further description of the types of securities in which the
PanAgora Asset Allocation Fund may invest and the techniques and strategies
employed by the Adviser and related risks, see "Description of Securities and
Investment Techniques and Related Risks."
PANAGORA INTERNATIONAL EQUITY FUND
The PanAgora International Equity Fund's primary investment objective
is to maximize total return, consisting primarily of capital appreciation.
Current income is a secondary objective. The Fund attempts to achieve its
objectives by actively allocating assets among international equity markets
based on the Adviser's proprietary asset allocation disciplines. When the
Adviser determines that international equity markets are fairly priced relative
to each other, the Fund's investments in international equity markets will be
generally weighted in accordance with the MSCI-EAFE GDP Index, which is an index
consisting of twenty developed equity markets, weighted by their Gross Domestic
Products.
In establishing Guidelines for the PanAgora International Equity Fund,
the Adviser utilizes the MSCI-EAFE GDP Index. The Adviser will deviate from the
asset allocation weightings of the MSCI-EAFE GDP Index based on its views of the
potential investment return to be derived from such deviation.
The Fund seeks to achieve its investment objectives by investing in
equity securities allocated across a broad range of international markets.
Equity securities in which the Fund may invest include common stocks of non-U.S.
companies and preferred stocks, debt instruments convertible into common stocks
and securities having common stock characteristics (such as warrants and rights
to purchase common stock) of such companies. The Fund may also invest in
sponsored and unsponsored ADRs, European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs"). In allocating assets among equity markets, the
Fund places particular emphasis on countries that are considered to have above
average potential for long-term economic growth. In general, the Fund's
investments are expected to be broadly diversified over a number of countries
including, but not limited to: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom
and, subject to the limitation that no more than 10% of the Fund's assets taken
at cost will be invested in one or more developing countries including, but not
limited to: Argentina, Brazil, Chile, Greece, Indonesia, Korea, Malaysia,
Mexico, Philippines, Poland, Portugal, South Africa, Thailand and Turkey. Within
countries, equity investments are expected to be broadly diversified to spread
risk and to provide representation of the growth potential of the country.
Selection of securities is designed to include participation in economic and
industrial sectors which are important to the growth of the country. Within
countries, the Fund invests primarily in major established companies which are
listed and traded on principal exchanges. The Fund may also invest in securities
of closed-end investment companies.
For temporary defensive purposes, the Fund may invest, without
limitation, in a wide range of cash and cash equivalents, including short-term
securities issued by U.S. and non-U.S. governments, their agencies and
instrumentalities and U.S. and non-U.S. bank certificates of deposit and time
deposits, bankers' acceptances, commercial paper, high-grade short-term
corporate debt obligations and repurchase agreements with respect to these
securities.
In order to manage the currency risks associated with international
investing, the Fund engages in certain currency management techniques. These
techniques are described in detail in "Description of
8
Securities and Investment Techniques and Related Risks" below. In addition, in
order to achieve its investment objectives, the Fund may invest in options and
futures for hedging and other permissible purposes.
For a further description of the types of securities in which the
PanAgora International Equity Fund may invest and the techniques and strategies
employed by the Adviser and related risks, see "Description of Securities and
Investment Techniques and Related Risks".
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
AND RELATED RISKS
FIXED-INCOME SECURITIES
General. In order to achieve its investment objective , the PanAgora
Asset Allocation Fund may invest in a broad range of U.S. fixed-income
securities. In periods of declining interest rates, the Fund's yield (its income
from portfolio investments over a stated period of time) may tend to be higher
than prevailing market rates, and in periods of rising interest rates, the yield
of the Fund may tend to be lower. Also, when interest rates are falling, the
inflow of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the yield of the Fund. In
periods of rising interest rates, the opposite can be true. The net asset value
of the Fund investing in fixed-income securities may also change as general
levels of interest rates fluctuate. When interest rates increase, the value of a
portfolio of fixed-income securities can be expected to decline.
Securities rated BBB by S&P or Baa by Moody's, or their equivalents,
are generally regarded as having an adequate capacity to pay principal and
interest; however, such securities may have speculative characteristics and
therefore may involve greater risks than higher rated securities.
U.S. Government Securities. The Fund may invest in obligations issued
or guaranteed as to both principal and interest by the U.S. government, its
agencies or instrumentalities ("U.S. Government Securities"). Some U.S.
Government Securities, such as U.S. Treasury bills, notes and bonds, are
supported by the full faith and credit of the United States. Others, such as
obligations issued or guaranteed by U.S. government agencies or
instrumentalities are supported either by (i) the full faith and credit of the
U.S. government (such as securities of the Small Business Administration), (ii)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Federal Home Loan Banks), (iii) the discretionary authority of the U.S.
government to purchase the agency's obligations (such as securities of the
Federal National Mortgage Association ("FNMA")), or (iv) only the credit of the
issuer. No assurance can be given that the U.S. government will provide
financial support to U.S. government agencies or instrumentalities in the
future.
To secure advantageous prices or yields, the Fund may purchase U.S.
Government Securities on a when-issued basis or may purchase or sell securities
for delayed delivery. In such transactions, delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery is made by the
Fund prior to the actual delivery or payment by the other party to the
transaction and no income accrues prior to delivery of the securities. The
purchase of securities on a when-issued or delayed delivery basis may increase
the Fund's overall investment exposure and involves the risk that, as a result
of an increase in yields available in the marketplace, the value of the
securities purchased will decline prior to the settlement date. The sale of
securities for delayed delivery also involves the risk that the prices available
in the market on the delivery date may be greater than those obtained in the
sale transaction. Finally, such transactions involve some risk to the Fund if
the other party should default on its
9
obligations and the Fund is delayed or prevented from recovering the collateral
or completing the transaction. The Fund will establish a segregated account with
its custodian consisting of cash, U.S. Government Securities or other high-grade
debt obligations in an amount equal to the amounts of its when-issued and
delayed delivery commitments.
Mortgage-Backed and Mortgage-Related Securities. The Fund may invest in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and Government Stripped Mortgage-Backed Securities. Mortgage-backed
securities provide a monthly payment from interest and/or principal payments
made with respect to an underlying pool of mortgage loans. CMOs are types of
bonds secured by an underlying pool of mortgage pass-through certificates that
are structured to direct portions of principal and interest payments on
underlying collateral to different series or classes of the obligations. CMOs of
different classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to its maturity. Thus, the early retirement of a
particular class or series of CMO held by the Fund would have the same effect as
the prepayment of mortgages underlying other mortgage-backed securities.
Government Stripped Mortgage-Backed Securities are mortgage-backed
securities issued or guaranteed by FNMA, the Government National Mortgage
Association ("GNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent beneficial ownership interests in either periodic
principal distributions ("POs") or interest distributions ("IOs") on
mortgage-backed certificates issued by FNMA, GNMA or FHLMC, as the case may be.
The certificates underlying the Government Stripped Mortgage-Backed Securities
represent all or part of the beneficial interest in pools of mortgage loans.
Investing in Government Stripped Mortgage-Backed Securities involves the risks
normally associated with investing in mortgage-backed securities issued by
government or government-related entities.
To the extent that the Fund purchases mortgage-related or
mortgage-backed securities at a premium, mortgage foreclosures and prepayments
of principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Fund's principal investment to the extent of the
premium paid. The yield of the Fund may be affected by reinvestment of
prepayments at higher or lower rates than the original investment. In addition,
like other debt securities, the value of mortgage-related securities will
generally fluctuate in response to market interest rates.
The yield to maturity on an IO class of stripped mortgage-backed
securities is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
underlying assets, and a rapid rate of principal payments may have a material
adverse effect on the Fund's yield to maturity to the extent it invests in IOs.
If the underlying assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial investment in these
securities. Conversely, POs tend to increase in value if prepayments are greater
than anticipated and decline if prepayments are slower than anticipated.
Government Stripped Mortgage-Backed Securities are currently traded in an
over-the-counter market maintained by several large investment banking firms.
There can be no assurance that the Fund will be able to effect a trade of a
Government Stripped Mortgage-Backed Security at a time when it wishes to do so.
The Fund will acquire Government Stripped Mortgage-Backed Securities only if a
liquid secondary market for the securities exists at the time of acquisition.
10
FOREIGN SECURITIES
The PanAgora International Equity Fund may invest in securities of
non-U.S. issuers directly or in the form of sponsored and unsponsored ADRs,
EDRs, GDRs or similar securities representing interests in the common stock of
foreign issuers if such issues are available that are consistent with a Fund's
investment objective. Depository receipts generally evidence an ownership
interest in corresponding securities on deposit with a financial institution.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in the
U.S. securities markets and EDRs, in bearer form, are designed for use in
European securities markets. GDRs may be traded in any public or private
securities market and may represent securities held by institutions located
anywhere in the world. The underlying securities are not always denominated in
the same currency as the ADRs, EDRs or GDRs. Although investment in the form of
ADRs, EDRs or GDRs facilitates trading in foreign securities, it does not
mitigate the risks associated with investing in foreign securities. The issuers
of unsponsored ADRs, EDRs and GDRs are not obligated to disclose material
information in the United States and therefore such information may not be
reflected in the market value of the unsponsored ADRs, EDRs and GDRs.
Investment in securities of foreign issuers may involve greater risks
than those associated with U.S. investments. There is generally less publicly
available information regarding foreign issuers and foreign issuers are
generally not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to U.S. issuers. The securities markets
in many of the foreign countries in which the Fund invests will have
substantially less trading volume than the principal U.S. securities markets. As
a result, the securities of some foreign issuers may be less liquid and more
volatile than comparable U.S. securities. In addition, in some foreign
countries, there is a possibility of nationalization or expropriation of assets,
imposition of currency or exchange controls, or confiscatory taxation, as well
as political or social instability which could adversely affect U.S. investments
in those countries. Foreign settlement procedures and trade regulations may
involve certain risks (such as delay in payment or delivery of securities or in
the recovery of a Fund's assets held abroad) and investors in foreign securities
incur higher transaction costs than investors in U.S. securities, including
higher costs in making securities transactions, as well as foreign government
taxes which may reduce the investment return of the Fund. Finally, there is
generally less government regulation and supervision of foreign exchanges and
brokers.
Among the foreign securities in which the Fund may invest are those
issued by companies located in developing countries, which are countries in the
initial stages of their industrialization cycles. Investing in the equity and
debt markets of developing countries involves exposure to economic structures
that are generally less diverse and less mature, and to political systems that
can be expected to have less stability, than those of developed countries. The
markets of developing countries historically have been more volatile than the
markets of the more mature economies of developed countries, but often have
provided higher rates of return to investors.
Although the Fund may invest in securities denominated in foreign
currencies, it values its securities and other assets in U.S. dollars. As a
result, the net asset value of the Fund's shares may fluctuate with U.S. dollar
exchange rates as well as with price changes of the Fund's securities in the
various local markets and currencies. Thus, an increase in the value of the U.S.
dollar compared to the currencies in which the Fund makes its investments could
reduce or eliminate the effect of increases and magnify the effect of decreases
in the values of the Fund's investments. In addition to favorable and
11
unfavorable currency exchange-rate developments, the Fund is subject to the
possible imposition of exchange control regulations or currency blockages. See
"Currency Transactions" below.
CASH AND CASH EQUIVALENTS
Each of the Funds, subject to its investment objective and policies, in
addition to the cash equivalents described elsewhere in this Prospectus, invests
in the cash equivalents described below. Cash equivalents also include U.S.
Government Securities maturing within one year (including repurchase agreements
collateralized by such securities). The Funds may also invest in obligations of
banks which at the date of investment have capital, surplus, and undivided
profits (as of the date of their most recently published financial statements)
in excess of $100 million. Each Fund may also invest in commercial paper which
at the date of investment is rated at least A-2 by S&P or P-2 by Moody's, or
their equivalent ratings, or, if not rated, is issued or guaranteed as to
payment of principal and interest by companies which are rated, at the time of
purchase, A or better by S&P or Moody's, or their equivalents, and other debt
instruments, including unrated instruments, not specifically described if such
instruments are deemed by the Adviser to be of comparable quality.
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by U.S. or foreign banks or bank holding companies,
corporations and finance companies. The commercial paper purchased by the
PanAgora Asset Allocation Fund consists of U.S. dollar-denominated obligations
of domestic or foreign issuers. Bank obligations in which the Funds may invest
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Bank obligations also include U.S. dollar-denominated obligations of foreign
branches of U.S. banks or of U.S. branches of foreign banks, all of the same
type as domestic bank obligations. A Fund will invest in the obligations of
foreign branches of U.S. banks or of U.S. branches of foreign banks only when
the Adviser believes the credit risk with respect to the instrument is minimal.
Both Funds may invest in securities of other investment companies which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny rounding method.
Expenses imposed by investment companies in which a Fund may invest will be
borne indirectly by the shareholders of the Fund.
CURRENCY TRANSACTIONS
PanAgora International Equity Fund may make use of active currency
management from time to time. In addition, positions in foreign currencies may
be needed in connection with the taking of active equity positions. To
effectively manage the currency fluctuation and related effects that such
exposures give rise to, the Fund may in the normal course of taking or altering
asset-class and/or market exposures:
- buy or sell foreign currencies;
- enter into forward foreign currency exchange contracts;
- buy or sell options, futures or options on futures relating to
foreign currencies;
- purchase securities indexed to the performance of one or more
foreign currencies; and/or
- use currency management techniques to hedge against adverse
movements in exchange rates.
Such management actions as those described above are of a routine nature, are
undertaken only within the limits of and in accordance with the investment
policies of the Fund, and are, typically, limited in
12
scope and duration. See "Forward Foreign Currency Transactions," "Options" and
"Futures and Options on Futures" below.
FORWARD FOREIGN CURRENCY TRANSACTIONS
As described in "Currency Transactions" above, the PanAgora
International Equity Fund may conduct foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or by entering into forward contracts to purchase or sell
foreign currencies. A forward contract involves an obligation to purchase or
sell a specific currency amount at a future date, which may be any fixed number
of days from the date of the contract. These transactions will require that the
Fund segregate cash or liquid securities to the extent the Fund's obligations
are not otherwise "covered", by the Fund owning or having the right to acquire
or sell the underlying currency.
When the Adviser believes that the currency of a particular country may
suffer a significant decline against the U.S. dollar or against another
currency, the Fund may enter into a forward contract to sell, for a fixed amount
of U.S. dollars or other appropriate currency, the amount of foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since 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. At the
maturity of a forward contract, the Fund may either sell a portfolio security
and make delivery of the foreign currency, or it may retain the security and
terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
The Fund may realize a gain or loss from currency transactions. The Fund's
ability to engage in forward contracts may also be limited by tax
considerations.
In the alternative, the Fund may engage in currency "cross hedging"
when, in the opinion of the Adviser, the historical relationship among foreign
currencies suggests that the Fund may achieve the same protection for a foreign
security at reduced cost through the use of a forward foreign currency contract
relating to a currency other than the U.S. dollar or the foreign currency in
which the security is denominated. By engaging in cross hedging transactions,
the Fund assumes the risk of imperfect correlations between the subject
currencies.
OPTIONS
The Funds may write (sell) covered put and call options on equity
securities and enter into related closing transactions. The PanAgora Asset
Allocation Fund may also write (sell) covered put and call options on debt
securities. A Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. However, in return for the premium, the Fund
forfeits the right to any appreciation in the underlying security while the
option is outstanding. A put option gives to its purchaser the right to compel
the writer of the option to purchase from the option holder an underlying
security at the specified price at any time during the option period. In
contrast, a call option gives to its purchaser the right to compel the writer of
the option to sell the option holder an underlying security at a specified price
at any time during the option period. Upon the exercise of a put option written
by a Fund, the Fund may suffer a loss equal to the difference between the price
at which the Fund is required to purchase the underlying security and its market
value at the time of the option exercise, less the premium received for writing
the option. All call options written by a Fund are covered, which means that the
Fund will own the securities subject to the option as long as the option is
outstanding. All put
13
options written by a Fund are covered, which means that the Fund will deposit
cash or cash equivalents or a combination of both in a segregated account with
the custodian with a value at least equal to the exercise price of the put
option.
The Funds may also purchase put and call options on securities. The
advantage to the purchaser of a call option is that it may hedge against an
increase in the price of portfolio securities it ultimately wishes to buy. The
advantage to the purchaser of a put option is that it may hedge against a
decrease in the price of portfolio securities it ultimately wishes to sell.
Closing transactions essentially permit the Funds to offset put options
or call options prior to exercise or expiration. If a Fund cannot effect closing
transactions, it may have to retain a security in its portfolio it would
otherwise sell or deliver a security it would otherwise retain.
The Funds may purchase and sell options traded on U.S. exchanges and,
to the extent permitted by law, options traded over-the-counter. It is the
position of the Securities and Exchange Commission (the "Commission") that
over-the-counter options are illiquid. Accordingly, each Fund will only invest
in such options to the extent consistent with its 15% limitation on investments
in illiquid securities. The PanAgora International Equity Fund may also purchase
and sell options traded on recognized foreign exchanges.
The PanAgora International Equity Fund may purchase and write put and
call options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for the same reasons for which they use currency forwards.
Call options on foreign currency written by the Fund will be covered, which
means that the Fund will own an equal amount of the underlying foreign currency.
With respect to put options on foreign currency written by the Fund, the Fund
will deposit cash or cash equivalents or a combination of both in a segregated
account with the custodian in an amount equal to the amount the Fund would be
required to pay upon exercise of the put.
STOCK INDEX OPTIONS
The Funds may purchase and write exchange-listed put and call options
on stock indices to hedge against risks of market-wide price movements. A stock
index measures the movement of a certain group of stocks by assigning relative
values to the common stocks included in the index. Examples of well-known stock
indices are the S&P 500 Composite Stock Index, the NYSE Composite Index, the
Toronto Stock Exchange Composite 100 and the Financial Times Stock Exchange 100.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date.
The advisability of using stock index options to hedge against the risk
of market-wide movements will depend on the extent of diversification of a
Fund's stock investments and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock index options as a hedging technique will depend upon the extent to which
price movements in the portion of the portfolio being hedged correlate with
price movements in the stock index selected. When a Fund writes an option on a
stock index, it will deposit cash or cash equivalents or a combination of both
in an amount equal to the market value of the option, in a segregated account
with the custodian, and will maintain the account while the option is open.
14
FUTURES AND OPTIONS ON FUTURES
When deemed advisable by the Adviser, the Funds may enter into futures
contracts and purchase and write options on futures contracts to hedge against
changes in interest rates, securities prices or currency exchange rates or for
certain non-hedging purposes (but not for leverage). The Funds may purchase and
sell financial futures contracts, including stock index futures, and purchase
and write related options. A Fund will engage in futures and related options
transactions only for bona fide hedging and non-hedging purposes as defined in
regulations of the Commodity Futures Trading Commission. A Fund will not enter
into futures contracts or options thereon for non-hedging purposes, if
immediately thereafter, the aggregate initial margin and premiums required to
establish non-hedging positions in futures contracts and options on futures will
exceed 5 percent of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase.
These transactions will require that a Fund segregate cash or liquid securities
to the extent the Fund's obligations are not otherwise "covered", by the Fund
owning or having the right to acquire or sell the underlying security or
financial instrument.
The use of futures contracts and options on futures contracts involves
several risks. There can be no assurance that there will be a correlation
between price movements in the underlying securities, on the one hand, and price
movements in the securities which are the subject of the hedge, on the other
hand. The successful use of the strategies described above further depends on
the Adviser's ability to forecast market movements correctly. Positions in
futures contracts and options on futures contracts may be closed out only on an
exchange or board of trade that provides an active market for them, and there
can be no assurance that a liquid market will exist for the contract or the
option at any particular time. Losses incurred by hedging transactions and the
costs of these transactions will affect a Fund's performance. The use of futures
contracts and options on futures contracts requires special skills in addition
to those needed to select portfolio securities. Certain provisions of the
Internal Revenue Code and certain regulatory requirements may limit a Fund's
ability to engage in index futures and options transactions.
INTEREST RATE SWAPS
In order to attempt to protect fixed-income investments from interest
rate fluctuations, the PanAgora Asset Allocation Fund may engage in interest
rate swaps. Interest rate swaps involve the exchange by a Fund with another
party of their respective rights to receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). The Fund will enter into interest
rate swaps only on a net basis (i.e., the two payment streams will be netted
out, with a Fund receiving or paying, as the case may be, only the net amount of
the two payments). The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess, will be maintained in a segregated account by the Fund's custodian.
The use of interest rate swaps involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Adviser is incorrect in its forecasts of market values, interest rates
and other applicable factors, the investment performance of the Fund will be
less favorable than it would have been if this investment technique were never
used. Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Thus, if the other party to an interest rate
swap defaults, the Fund's risk of loss will consist of the net amount of
interest payments that the Fund is contractually entitled to receive.
15
MISCELLANEOUS INVESTMENT TECHNIQUES
Repurchase Agreements. In a repurchase agreement, a Fund buys a
security subject to the right and obligation to sell it back to the seller at
the same price plus accrued interest. These transactions must be fully
collateralized at all times, but they involve some credit risk to the Funds if
the other party defaults on its obligations and the Fund is delayed in or
prevented from liquidating the collateral. The Funds will enter into repurchase
agreements with Investors Bank & Trust Company, the custodian of the Funds, or
with member banks of the Federal Reserve System having total assets of at least
$100 million or dealers on the Federal Reserve Bank of New York's list of
reporting dealers.
Restricted and Illiquid Securities. Neither Fund will invest more than
15% of its net assets in illiquid securities, which include repurchase
agreements or fixed time deposits maturing in more than seven days and
securities that are not readily marketable, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific security, that such security is liquid. In addition, neither Fund will
invest more than 5% of its net assets in securities that are not registered, but
are otherwise required to be registered, under the Securities Act of 1933, as
amended (the "1933 Act").
Lending Securities. For the purpose of realizing additional income,
each Fund may lend to broker-dealers portfolio securities amounting to not more
than 30% of its total assets taken at current value. These transactions must be
fully collateralized at all times but involve some credit risk to a Fund if the
other party should default on its obligation and that Fund is delayed in or
prevented from recovering the collateral. Securities loaned by a Fund will
remain subject to fluctuations of market value.
Reverse Repurchase Agreements. The Funds may enter into reverse
repurchase agreements with banks and broker-dealers. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities. The Funds will
deposit cash or cash equivalents or a combination of both in a segregated
account with their custodian equal in value to their obligations with respect to
reverse repurchase agreements. Reverse repurchase agreements involve the risk
that the market value of the securities retained by a Fund may decline below the
price of the securities the Fund has sold but is obligated to repurchase under
the agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements are considered
borrowings by the Fund, and as such are subject to the investment limitations on
borrowing.
---------------------
For more information concerning the Funds' investments and the
investment techniques employed by the Adviser, see "Additional Information on
Fund Investments and Strategies and Related Risks" in the Statement of
Additional Information.
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT RESTRICTIONS
The Funds have adopted certain fundamental investment restrictions
which are described in detail in the Statement of Additional Information. Each
Fund's investment objective and those
16
investment restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. All other investment
restrictions and policies are non-fundamental and can be changed by the Board of
Trustees of the Trust at any time without the approval of the shareholders.
Each Fund's fundamental investment restrictions with respect to
borrowing, investment concentration and lending are as follows:
1. Neither Fund may borrow money, except from banks, or by entering
into reverse repurchase agreements, on a temporary basis for extraordinary or
emergency purposes in amounts not to exceed 33 1/3% of the Fund's total assets
(including the amount borrowed) taken at market value; provided, that no
purchases of securities will be made if such borrowings exceed 5% of the value
of the Fund's total assets. This restriction does not apply to cash collateral
received as a result of portfolio securities lending.
2. Neither Fund may purchase the securities of issuers conducting their
principal business activities in the same industry if, immediately after such
purchase, the value of a Fund's investments in such industry would exceed 25% of
its total assets taken at market value at the time of each investment. For
purposes of this restriction, telephone companies are considered to be a
separate industry from water, gas or electric utilities, personal credit finance
companies and business credit finance companies are deemed to be in separate
industries and all quasi-governmental and supranational entities are deemed to
be in a single industry.
3. Neither Fund may make loans; provided, that the lending of portfolio
securities, the purchase of debt securities and the entry into repurchase
agreements pursuant to a Fund's investment objectives and policies shall not be
limited by this restriction.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for making specific decisions to buy and
sell securities for the Funds. The Adviser is also responsible for selecting
brokers and dealers to effect these transactions and negotiating, if possible,
brokerage commissions and dealers' charges. The PanAgora International Equity
Fund generally trades non-U.S. securities in non-U.S. countries, since the best
available market for non-U.S. securities is generally on non-U.S. markets.
Brokerage commissions in transactions on non-U.S. markets are generally fixed
and are often higher than in the U.S. where commissions are negotiated. In the
over-the-counter markets, securities (i.e., debt securities) are generally
traded on a net basis with the dealers acting as principal for their own
accounts without a stated commission.
The primary consideration in selecting broker-dealers to execute
portfolio security transactions is the execution of such portfolio transactions
at the most favorable prices. Subject to this requirement and the provisions of
Section 28(e) of the Securities Exchange Act of 1934, as amended, securities may
be bought from or sold to broker-dealers who have furnished statistical,
research and other information or services to the Adviser. Higher commissions
may be paid to broker-dealers that provide research services. See "Portfolio
Transactions and Brokerage Commissions" in the Statement of Additional
Information for a more detailed discussion of portfolio transactions. The
Trustees will review periodically both Funds' portfolio transactions.
17
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is responsible for the overall
supervision and management of the Trust. The day-to-day operations of the Trust,
including investment decisions, have been delegated to the Adviser. The
Statement of Additional Information contains general background information
regarding each Trustee and executive officer of the Trust.
THE ADVISER
PanAgora, located at 260 Franklin Street, Boston, Massachusetts, acts
as investment adviser to the Funds. PanAgora is registered as an investment
adviser with the Commission and provides a full range of investment advisory
services to its institutional clients throughout the world. Fifty percent of
PanAgora's outstanding voting stock is owned by Nippon Life Insurance Company
and fifty percent of such stock is owned by Lehman Brothers, Inc. As of May 31,
1996 , PanAgora managed approximately $14 billion in assets for various
individual and institutional accounts, including the following registered
investment companies: the S&P 100 Plus Portfolio, a portfolio of Principal
Preservation Portfolios, Inc.; the Preferred Asset Allocation Fund, a portfolio
of the Preferred Group of Mutual Funds; and Trust for TRAK Investments.
Under its Advisory Agreements with the Trust, the Adviser continually
manages each Fund. Its responsibilities include the purchase, retention and
disposition of each Fund's portfolio securities and other assets. In addition,
the Adviser administers certain of the Trust's business affairs, performs
various shareholder servicing functions to the extent these services are not
provided by other organizations and monitors and evaluates the performance of
the Trust's service providers. For these services, the Trust, on behalf of each
Fund, pays the Adviser a monthly fee at the following annual rates of each
Fund's average daily net assets:
FUND ANNUAL RATE
PanAgora Asset Allocation Fund...................................... 0.60%
PanAgora International Equity Fund.................................. 0.80%
The Trust, on behalf of each Fund, is responsible for all expenses
other than those expressly assumed by the Adviser under the terms of the
Advisory Agreement for each Fund. The expenses borne by each Fund include the
Fund's advisory fee, transfer agent fee and taxes and its proportionate share of
custodian fees, expenses of issuing reports to shareholders, legal fees,
auditing and tax fees, blue sky fees, fees of the Commission, insurance expenses
and disinterested Trustees' fees. The Adviser has temporarily agreed, under
certain circumstances, to reduce or not impose its management fee and absorb
certain expenses of the Funds as described under "Expense Information." In the
event that the expenses of a Fund (including the advisory fee, but excluding
interest, taxes, brokerage commissions, litigation and indemnification expenses
and other extraordinary expenses) for any fiscal year exceed the limits
established by certain state securities administrators, the Adviser will reduce
its fee payable on behalf of such Fund by the amount of such excess but only to
the extent of the Fund's advisory fee. For the fiscal year ended May 31, 1996,
the Funds did not exceed any state expense limitations.
Kristine M. Lino, Portfolio Manager of the Adviser since April, 1990,
has been the portfolio manager primarily responsible for the day-to-day
management of the PanAgora International Equity
18
Fund since October, 1994. From the commencement of operations of the Fund on
June 1, 1993 to October, 1994, Ms. Lino was responsible for the management of
the PanAgora Asset Allocation Fund.
Edgar E. Peters has been Director of Tactical Asset Allocation for the
Adviser since 1990. He has been responsible for the day-to-day management of the
PanAgora Asset Allocation Fund since its inception on June 1, 1993.
Peter L. Rathjens has been the Director of Global Investments for the
Adviser since May 1996, and oversees the management of the PanAgora
International Equity Fund . Prior to that, Mr. Rathjens was the Director of
Research for the Adviser. From January 1991 to September 1991, he was an Equity
Analyst at Colonial Management, having previously served as an Assistant
Professor at Brandeis University.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
The Trust has entered into Administration, Custodian and Transfer
Agency and Service Agreements with Investors Bank & Trust Company ("Investors
Bank"), 89 South Street, Boston, Massachusetts 02111.
Investors Bank generally assists in all matters relating to the
administration of the Funds, including the coordination and monitoring of any
third parties furnishing services to the Funds, the preparation and maintenance
of financial and accounting records, and the provision of the necessary office
space, equipment and personnel to perform administrative and clerical functions.
Investors Bank is not involved in the investment decisions made with respect to
the Funds.
Investors Bank also serves as the custodian and transfer agent of the
Trust. As the Trust's custodian, Investors Bank has custody of the Funds' assets
and maintains certain financial and accounting records. As transfer agent of the
Trust, Investors Bank maintains the records of each shareholder's account,
processes purchases and redemptions of the Funds' shares, acts as dividend and
distribution disbursing agent and performs other shareholder servicing
functions. Shareholder inquiries should be addressed to: The PanAgora
Institutional Funds at P.O. Box 1537, Boston, Massachusetts 02205-1537.
As compensation for its services as Administrator, Custodian and
Transfer Agent of the Trust, Investors Bank receives a monthly fee at the annual
rate of 0.10% of the average daily net assets of each Fund, subject to certain
annual minimum fees, plus transaction fees and any applicable shareholder
account charges.
DISTRIBUTOR
Funds Distributor, Inc., ("Funds Distributor") serves as the
distributor of shares of the Trust pursuant to a Distribution Agreement with the
Trust. Funds Distributor assists in the sale of shares of the Funds upon the
terms described herein. The Adviser has agreed to pay to Funds Distributor, as
compensation for certain distribution services rendered to the Trust, a monthly
fee at the annual rate of 0.03% of the average daily net assets of each Fund, or
a minimum annual fee of $15,000, whichever is higher.
---------------
Additional information regarding the services performed by the
Administrator, Custodian, Distributor and Transfer Agent is provided in the
Statement of Additional Information.
19
PURCHASE OF SHARES
Shares of either Fund may be purchased on any Business Day at the net
asset value next determined after receipt of the order in proper form by the
Transfer Agent. A "Business Day" means any day on which the NYSE is open. There
is no sales charge in connection with the purchase of shares. The Trust reserves
the right, in its sole discretion, to reject any purchase offer and to suspend
the offering of shares. The minimum initial investment is $100,000 and
subsequent investments will be accepted only in amounts of $2,500 or greater.
The Trust reserves the right to vary the initial investment minimum and minimums
for additional investments at any time. In addition, the Trust may waive the
minimum initial investment requirement for any investor. The Trust does not
issue share certificates.
At the discretion of the Trust, investors may be permitted to purchase
Fund shares by transferring securities to a Fund that meet that Fund's
investment objectives and policies. Securities transferred to a Fund will be
valued in accordance with the same procedures used to determine the Fund's net
asset value at the time of the next determination of net asset value after such
acceptance. Shares issued by a Fund in exchange for transferred securities will
be issued at net asset value determined as of the same time. All dividends,
interest, subscription, or other rights pertaining to such securities shall
become the property of the Fund and must be delivered to the Fund by the
investor upon receipt from the issuer. Investors who are permitted to transfer
such securities should consult their tax adviser to determine any tax
consequences, including the recognition of gains or losses, associated with such
transfer. Securities will not be accepted in exchange for shares of a Fund
unless: (i) such securities are, at the time of the exchange, eligible to be
included in the Fund and current market quotations are readily available for
such securities; and (ii) the investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions on resale
imposed by the 1933 Act or under the laws of the country in which the principal
market for such securities exists, or otherwise. For additional information and
restrictions regarding this policy, see "Purchase and Redemption Information" in
the Statement of Additional Information.
PURCHASES BY MAIL
Shares may be purchased initially by completing The PanAgora
Institutional Funds Account Application accompanying this Prospectus and mailing
it, together with a check payable to the appropriate Fund for each account an
investor wishes to open, to:
The PanAgora Institutional Funds
P. O. Box 1537
Boston, Massachusetts 02205-1537
Subsequent investments in an existing account in either Fund may be
made at any time by sending to the Transfer Agent at the above address a check
payable to the appropriate Fund, along with either (i) a subsequent order form
which may be obtained from the Transfer Agent or (ii) a letter stating the
amount of the investment, the name of the Fund and the account number in which
the investment is to be made. Investors should indicate the name of the
appropriate Fund and account number on all correspondence.
20
PURCHASES BY WIRE
Shares of either Fund may be purchased by wiring federal funds to the
Transfer Agent. Orders for shares purchased by wire must be transmitted by
telephone by calling The PanAgora Institutional Funds at 1-800-423-6041.
Following notification to the Transfer Agent, federal funds and
registration instructions should be wired through the Federal Reserve System to:
Investors Bank & Trust Company
Boston, Massachusetts
ABA No. 011001438
For: The PanAgora Institutional Funds DDA No. 999273824
[Name of Fund]
[Account Registration, including account number]
All investors making initial investments by wire must promptly complete
The PanAgora Institutional Funds Account Application accompanying this
Prospectus and forward it to the Transfer Agent. Investors should be aware that
some banks may charge wire fees. REDEMPTIONS WILL NOT BE PROCESSED UNTIL THE
PANAGORA INSTITUTIONAL FUNDS ACCOUNT APPLICATION HAS BEEN RECEIVED BY THE
TRANSFER AGENT.
RETIREMENT PLANS
The Funds' investment objectives may make them a suitable investment
for part or all of the assets held in various tax-deferred retirement plans,
including Individual Retirement Accounts, simplified employee pension plans,
403(b) plans and employer-sponsored retirement plans. Investors desiring further
information concerning investment in the Funds by these plans should contact the
Transfer Agent.
REPORTS TO SHAREHOLDERS
Shareholders of each Fund receive an annual report containing audited
financial statements and a semi-annual report. A printed confirmation for each
transaction will be provided by the Transfer Agent. Any dividends and
distributions paid by a Fund are also reflected in the monthly statements issued
by the Transfer Agent. A year-to-date statement for any account will be provided
upon request made to the Transfer Agent. Shareholders with inquiries regarding a
Fund may call The PanAgora Institutional Funds at 1-800-423-6041 or write to The
PanAgora Institutional Funds at P.O. Box 1537, Boston, Massachusetts 02205-1537.
REDEMPTION OF SHARES
HOW TO REDEEM
Shareholders may redeem shares of a Fund without charge upon request on
any Business Day at the net asset value next determined after receipt of the
redemption request. Redemption requests may be made by telephoning The PanAgora
Institutional Funds at 1-800-423-6041 or by a written request addressed to the
Transfer Agent. The letter of instruction must specify the dollar amount to be
redeemed, the Fund from which shares are being redeemed, the account number,
payment instructions
21
and the exact registration on the account. Signatures must be guaranteed in
accordance with the procedures set forth below under "Payment of Redemption
Proceeds." A shareholder may request redemptions by telephone if the optional
telephone redemption privilege is elected on The PanAgora Institutional Funds
Account Application. In order to verify the authenticity of telephone redemption
requests, the Trust's telephone representatives will request that the caller
provide certain information unique to the account. If the caller is unable to
provide such information, telephone redemption requests will not be processed
and the redemption must be completed by mail. As long as the Trust's telephone
representatives comply with the procedures described above, neither the Trust
nor Investors Bank will be liable for any losses due to fraudulent or
unauthorized transactions. Finally, it may be difficult to implement telephone
redemptions in times of drastic economic or market changes.
Additional documentation may be required by the Transfer Agent in order
to establish that a redemption request has been properly authorized. A
redemption request will not be considered to have been received in proper form
until such additional documentation has been submitted to the Transfer Agent.
The payment of redemption proceeds for shares of a Fund recently purchased by
check will be delayed for 15 days or more until the check has cleared.
PAYMENT OF REDEMPTION PROCEEDS
Redemption proceeds will be wired to the bank account designated on The
PanAgora Institutional Funds Account Application, unless payment by check has
been requested. For redemption requests received by the Transfer Agent by 4:00
p.m., Eastern time, redemption proceeds ordinarily will be wired the next
Business Day.
After a wire has been initiated by the Transfer Agent, neither the
Transfer Agent nor the Trust assumes any further responsibility for the
performance of intermediaries or the shareholder's bank in the transfer process.
If a problem with such performance arises, the shareholder should deal directly
with such intermediaries or bank.
A shareholder may change the bank designated to receive redemption
proceeds by providing written notice to the Transfer Agent which has been signed
by the shareholder or its authorized representative. This signature must be
guaranteed by a financial institution which is an acceptable guarantor, as
defined under Rule 17AD-15 of the Securities Exchange Act of 1934 as amended;
for example, certain banks, savings and loan institutions, credit unions,
securities dealers, securities exchanges, and clearing agencies. If the
financial institution participates in the medallion program, it must use the
"Medallion Guaranteed" stamp. Notarization is not acceptable.
NET ASSET VALUE
The net asset value per share of each Fund is normally calculated as of
the close of regular trading on the NYSE, generally 4:00 p.m. Eastern time, on
each Business Day (i.e., Monday through Friday, except for New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday, respectively).
The net asset value of each Fund's shares is determined by adding the value of
all securities, cash and other assets of the Fund, subtracting liabilities
(including accrued expenses and dividends payable) and dividing the result by
the total number of outstanding shares of the Fund.
22
For purposes of calculating each Fund's net asset value per share,
equity securities traded on a recognized U.S. or foreign securities exchange are
valued at their last sale price on the principal exchange on which they are
traded on the valuation day or, if no sale occurs, at the mean between the
closing bid and asked price. Unlisted equity securities for which market
quotations are readily available are valued at the mean between the most recent
bid and asked price. Debt securities and other fixed-income investments of the
Funds will be valued at prices supplied by independent pricing agents selected
by the Board of Trustees, which prices reflect broker-dealer supplied valuations
and electronic data processing techniques. Short-term obligations maturing in
sixty days or less are valued at amortized cost, which method does not take into
account unrealized gains or losses on the portfolio securities. Amortized cost
valuation involves initially valuing a security at its cost, and thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the security. While this method provides certainty in valuation, it may result
in periods in which the value of the security, as determined by the amortized
cost method, may be higher or lower than the price the Fund would receive if the
Fund sold the security. Other assets and assets whose market value does not, in
the Adviser's opinion, reflect fair value are valued at fair value using methods
determined in good faith by the Board of Trustees.
A Fund's portfolio securities from time to time may be listed on
foreign exchanges which trade on days when the NYSE is closed. As a result, the
net asset value of the Fund may be significantly affected by such trading on
days when shareholders have no access to the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to pay dividends from its net investment income at
least annually and may make distributions from net short-term gains annually.
Each Fund also distributes at least annually substantially all of the net
long-term capital gains in excess of available net short-term capital losses, if
any, for each taxable year. Additional distributions may be made if necessary
for a Fund to avoid federal income or excise taxes. Dividends and distributions
are made in additional shares of the same Fund or, at the shareholder's
election, in cash. The election to reinvest dividends and distributions or
receive them in cash may be changed at any time upon written notice to the
Transfer Agent. If no election is made, all dividends and capital gain
distributions will be reinvested. Dividends will be reinvested on the
ex-dividend date (the "ex-date") at the net asset value determined at the close
of business on that date. Cash dividends will generally be paid one week after
the ex-date.
TAXES
Each Fund is treated as a separate entity for federal income tax
purposes and has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to qualify for such treatment for each taxable year. To qualify as a
regulated investment company, each Fund must satisfy certain requirements
relating to the sources of its income, diversification of its assets and
distribution of its income to shareholders. As a regulated investment company, a
Fund will not be subject to federal income or excise tax on any net investment
income and net realized capital gains that are distributed to its shareholders
in accordance with certain timing requirements of the Code.
Dividends paid by a Fund from its net investment income, certain net
realized foreign exchange gain, the excess of net short-term capital gain over
net long-term capital loss and original issue discount or market discount income
will be taxable to shareholders as ordinary income. Dividends paid by a Fund
from any excess of net long-term capital gain over net short-term capital loss
will be taxable as
23
long-term capital gains regardless of how long the shareholders have held their
shares. These tax consequences will apply regardless of whether distributions
are received in cash or reinvested in shares. A portion of a Fund's dividends
attributable to the dividends it receives (if any) from U.S. domestic
corporations is generally expected to qualify, in the hands of corporate
shareholders, for the corporate dividends-received deduction, subject to the
limitations on such deduction applicable under the Code. Certain distributions
declared in October, November or December and paid in January of the following
year are taxable to shareholders as if received on December 31 of the year in
which they are declared. Shareholders will be informed annually about the amount
and character of distributions received from a Fund for federal income tax
purposes.
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on dividends, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications or if they are otherwise subject to such withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to withholding at
the rate of 30% (or a lower rate provided by an applicable tax treaty) on
amounts treated as ordinary dividends from a Fund.
A Fund that invests in foreign securities may be subject to foreign
withholding or other foreign taxes on income (possibly including, in some cases,
capital gains) earned on such securities. In any year in which the PanAgora
International Equity Fund qualifies, it may make an election that would permit
certain of its taxable shareholders to take a credit or a deduction for foreign
income taxes paid by such Fund. Each shareholder would then treat as additional
income his or her proportionate share of the amount of foreign income taxes paid
by such Fund. For some years, the Fund may be unable or may not elect to pass
such taxes through to its shareholders, who consequently would not be entitled
to tax credits or deductions with respect to such taxes.
Investors should consider the tax implications of buying shares
immediately prior to a distribution. Investors who purchase shares shortly
before the record date for a distribution will pay a per share price that
includes the value of the anticipated distribution and will be taxed on any
taxable distribution even though it may represent a return of a portion of the
purchase price. Redemptions and exchanges of shares are taxable events on which
a shareholder may recognize a gain or loss.
If for any taxable year, a Fund's total distributions exceed its
current and, if any, accumulated earnings and profits, the excess distributions
generally will be treated as a tax-free return of capital up to the amount of
the shareholder's tax basis in its shares (and will reduce a shareholder's
adjusted basis in the shares) and thereafter as a gain from a deemed sale of the
shares.
In addition to federal taxes, a shareholder may be subject to state,
local or foreign taxes on payments received from a Fund. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent a Fund's distributions are derived from interest on (or,
in the case of intangible taxes, the value of its assets is attributable to)
certain U.S. Government obligations, provided in some states that certain
thresholds for holdings of such obligations and/or reporting requirements are
satisfied. Shareholders should consult their tax advisers regarding specific
questions about Federal, state or local taxes and special rules applicable to
certain classes of investors, such as financial institutions, tax-exempt
entities, insurance companies and non-U.S. persons.
ORGANIZATION AND SHARES OF THE TRUST
The PanAgora Funds was formed as a business trust under the laws of the
Commonwealth of Massachusetts on January 27, 1993, commenced investment
operations on June 1, 1993, and a name
24
change was approved by the Board of Trustees of The PanAgora Institutional Funds
on July 21, 1995, with an effective date of August 1, 1995. A copy of the
Declaration of Trust is on file with the Secretary of State of the Commonwealth
of Massachusetts. The Board of Trustees of the Trust is responsible for the
overall management and supervision of the affairs of the Trust. The Trust is an
open-end, diversified management investment company with an unlimited number of
authorized shares of beneficial interest. The Declaration of Trust authorizes
the Board of Trustees to create separate investment series or portfolios of
shares. On April 10, 1993, the Trustees authorized the establishment of the
PanAgora Asset Allocation Fund, PanAgora Global Fund and PanAgora International
Equity Fund, each a separate investment series of the Trust. On July 5, 1996 the
assets of the PanAgora Global Fund were liquidated. The Trustees may in the
future establish additional series without the need for shareholder approval.
The Declaration of Trust further authorizes the Trustees to classify or
reclassify any series or portfolio of shares into one or more classes. As of the
date hereof, the Trustees have not authorized the issuance of any classes of
shares of the Funds.
Each share of a Fund represents an equal proportionate interest in the
assets belonging to that Fund. It is contemplated that most shares of the Funds
will be held in accounts of which the record owner is a bank or other
institution acting as nominee for its customers who are the beneficial owners of
the shares.
When issued, shares of the Funds are fully paid and nonassessable. In
the event of liquidation, shareholders are entitled to share pro rata in the net
assets of the applicable Fund available for distribution to shareholders. Shares
of the Funds entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights.
Shares of a Fund will be voted separately with respect to matters
pertaining to that Fund except for the election of Trustees and the ratification
of independent accountants. For example, shareholders of each Fund are required
to approve the adoption of any advisory agreement relating to such Fund and any
change in the investment objective or fundamental investment restrictions of
such Fund. Approval by the shareholders of one Fund is effective only as to that
Fund. The Trust does not intend to hold shareholder meetings, except as may be
required by the 1940 Act. The Trust's Declaration of Trust provides that special
meetings of shareholders shall be called for any purpose, including the removal
of a Trustee, upon written request of shareholders entitled to vote at least 10%
of the outstanding shares of the Trust, or Fund, as the case may be. In
addition, if ten or more shareholders of record who have held shares for at
least six months and who hold in the aggregate either shares having a net asset
value of $25,000 or 1% of the outstanding shares, whichever is less, seek to
call a meeting for the purpose of removing a Trustee, the Trust has agreed to
provide certain information to such shareholders and generally assist their
efforts.
As of September 3, 1996, the following entities owned 25% or more of
the outstanding voting securities of the Funds: PanAgora Asset Allocation Fund:
American Express Trust Company f/b/o American Express Trust Retirement Service
Plans (40.7%) ; Information Alliance Pension Plan Trust (38.5%) ; PanAgora
International Equity Fund: Bankers Trust TR Premark Retirement Savings Plan
(61.55%).
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and
yield for a Fund, may be quoted in advertisements or in communications to
shareholders. A Fund's total return may be calculated on an annualized and
aggregate basis for various periods (which periods will be stated in the
advertisement). Average annual return reflects the average percentage change per
year in value of an
25
investment in a Fund. Aggregate total return reflects the total percentage
change over the stated period. In calculating total return, dividends and
capital gain distributions made by the Fund during the period are assumed to be
reinvested in the Fund's shares. A Fund's yield reflects a Fund's overall rate
of income on portfolio investments as a percentage of the share price. Yield is
computed by annualizing the result of dividing the net investment income per
share over a 30-day period by the net asset value per share on the last day of
that period.
To help investors better evaluate how an investment in a Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss total return as reported by various financial publications.
Advertisements may also compare total return as reported by other investments,
indices and averages. The following publications, indices and averages may be
used: Lipper Mutual Fund Performance Analysis; Lipper Fixed Income Analysis;
Lipper Mutual Fund Indices; Morgan Stanley Capital International - Europe
Australia Far East GDP Index; Morgan Stanley Capital International World Index;
Salomon Brothers Corporate Bond Index; Dow Jones Composite Average or its
component indices; Standard & Poor's 500 Composite Stock Index or its component
indices; The New York Stock Exchange composite or component indices; CDA Mutual
Fund Report; Weisenberger - Mutual Funds Panorama and Investment Companies;
Mutual Fund Values and Mutual Fund Services Book, published by Morningstar,
Inc.; and financial publications such as Business Week, Kiplinger's Personal
Finance, Financial World, Forbes, Fortune, Institutional Investor, Money
Magazine, The Wall Street Journal, Changing Times, Financial Times and Barron's,
which analyze and rate fund performance over various time periods.
Performance quotations of a Fund represent the Fund's past performance
and, consequently, should not be considered representative of the future
performance of the Fund. The value of Fund shares, when redeemed, may be more or
less than the original cost. Any fees charged by banks or other institutional
investors directly to their customer accounts in connection with investments in
shares of a Fund will not be included in the Fund's calculations of total
return.
26
THE PANAGORA INSTITUTIONAL FUNDS
P. O. BOX 1537
BOSTON, MASSACHUSETTS 02205-1537
1-800-423-6041
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1996
The PanAgora Institutional Funds (the "Trust"), is an open-end,
management investment company currently consisting of two separate investment
series (individually, a "Fund" and together, the "Funds"), both having separate
and distinct investment objectives and policies. This Statement of Additional
Information provides supplementary information pertaining to the following
Funds:
* PanAgora Asset Allocation Fund
* PanAgora International Equity Fund
This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Trust's Prospectus dated October 1,
1996, as amended or supplemented from time to time. A copy of the Prospectus may
be obtained without charge from Funds Distributor, Inc., the Trust's
Distributor, by calling 1-800-423-6041 or writing to the address above.
1
TABLE OF CONTENTS PAGE
----
Introduction 3
Additional Information on Fund Investments
and Strategies and Related Risks 3
Investment Restrictions 15
Trustees and Officers 17
Investment Advisory and Other Services 21
Portfolio Transactions 22
Purchase and Redemption Information 24
Net Asset Value 24
Performance Information 25
Taxes 26
General Information About the Trust 29
Miscellaneous 30
Appendix 32
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or its Distributor. The Prospectus does not
constitute an offering by the Trust or by the Distributor in any jurisdiction in
which such offering may not lawfully be made. Shares of the Funds are not
available in certain states. Please call 1-800-423-6041 to determine
availability in your state.
2
INTRODUCTION
The Trust is an open-end, management investment company currently
offering shares in the following two separate investment series: PanAgora Asset
Allocation Fund, and PanAgora International Equity Fund (each a "Fund", together
the "Funds"). Both of the Funds are classified as "diversified" within the
meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust was organized as a Massachusetts business trust on January 27, 1993 and
commenced investment operations on June 1, 1993.
PanAgora Asset Management, Inc. (the "Adviser") serves as the Funds'
investment adviser. Funds Distributor, Inc. (the "Distributor") serves as the
Funds' principal underwriter and distributor.
The information contained in this Statement of Additional Information
generally supplements the information contained in the Trust's Prospectus. No
investor should invest in a Fund without first reading the Prospectus.
Capitalized terms used herein and not otherwise defined have the same meaning
ascribed to them in the Prospectus. Appendix A attached hereto contains a
description of the securities ratings provided by certain nationally recognized
statistical ratings organizations.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of each Fund.
COMMERCIAL PAPER
Commercial paper is a short-term, unsecured negotiable promissory note
of a U.S. or non-U.S. issuer. A Fund may invest in short-term debt obligations
denominated in U.S. dollars or selected foreign currencies that at the time of
investment are rated at least A-2 by Standard & Poor's Corporation ("S&P") or
P-2 by Moody's Investors Service, Inc. ("Moody's") or, if unrated, are issued or
guaranteed as to payment of principal and interest by companies having an
outstanding unsecured debt issue currently rated A or better by S&P or A or
better by Moody's, or if unrated, are, in the opinion of the Adviser, of
comparable quality. A Fund also may invest in variable rate master demand notes
which typically are issued by large corporate borrowers providing for variable
amounts of principal indebtedness and periodic adjustments in the interest rate
according to the terms of the instrument. Demand notes are direct lending
arrangements between a Fund and an issuer, and are not normally traded in a
secondary market. A Fund, however, may demand payment of principal and accrued
interest at any time. In addition, while demand notes generally are not rated,
their issuers must satisfy the same criteria as those set forth above for
issuers of commercial paper. The Adviser will consider the earning power, cash
flow and other liquidity ratios of issuers of demand notes and continually will
monitor their financial ability to meet payment on demand. See also "Variable
and Floating Rate Instruments."
BANK OBLIGATIONS
Certificates of Deposit ("CDs") are short-term negotiable obligations
of commercial banks. Time Deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn on commercial banks
by borrowers usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). U.S. banks organized under state law are supervised
and examined by state banking authorities but are members of the Federal Reserve
System only if they elect to join. Most state banks are insured by the FDIC
(although such insurance may not be of material benefit to a Fund, depending
upon
3
the principal amount of CDs of each bank held by the Fund) and are subject to
federal examination and to a substantial body of federal law and regulation. As
a result of governmental regulations, U.S. branches of U.S. banks, among other
things, generally are required to maintain specified levels of reserves, and are
subject to other supervision and regulation designed to promote financial
soundness.
U.S. savings and loan associations, the CDs of which may be purchased
by the Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Non-U.S. bank obligations include Eurodollar Certificates of Deposit
("ECDs"), which are U.S. dollar-denominated certificates of deposit issued by
offices of non-U.S. and U.S. banks located outside the United States; Eurodollar
Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a non-U.S.
branch of a U.S. bank or a non-U.S. bank; Canadian Time Deposits ("CTDs"), which
are essentially the same as ETDs except they are issued by Canadian offices of
major Canadian banks; Yankee Certificates of Deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
non-U.S. bank and held in the United States; and Yankee Bankers' Acceptances
("Yankee BAs"), which are U.S. dollar-denominated bankers' acceptances issued by
a U.S. branch of a non-U.S. bank and held in the United States.
REPURCHASE AGREEMENTS
Both of the Funds may enter into repurchase agreements as described in
the Prospectus.
For purposes of the 1940 Act and for certain tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For other purposes, it is not clear whether a court would consider
such an obligation as being owned by the Fund or as being collateral for a loan
by the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the obligation before its
repurchase, under the repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Such delays may result in a
loss of interest or decline in price of the obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the obligation, the Fund may be treated as an unsecured
creditor of the seller and required to return the obligation to the seller's
estate. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below the repurchase price (including accrued interest), the seller of the
obligation will be required to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
U.S. GOVERNMENT SECURITIES
The term "U.S. Government Securities" refers to a variety of securities
which are issued or guaranteed by the U.S. government, and by various agencies
and instrumentalities which have been established or sponsored by the U.S.
government.
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States.
In the case of securities not backed by the full faith and credit of
the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment. Agencies which
are backed by the full faith and credit of the United States include, among
4
others, the Export-Import Bank, Farmers Home Administration, Federal Financing
Bank and others. Certain agencies and instrumentalities, such as the Government
National Mortgage Association are, in effect, backed by the full faith and
credit of the United States through provisions in their charters that they may
make "indefinite and unlimited" drawings on the Treasury, if needed to service
their debt. Debt from certain other agencies and instrumentalities, including
the Federal Home Loan Bank and Federal National Mortgage Association, is not
guaranteed by the United States, but those institutions are protected by the
discretionary authority of the U.S. Treasury to purchase certain amounts of
their securities to assist the institutions in meeting their debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. government. No
assurance can be given that the U.S. government will provide financial support
to U.S. government agencies and instrumentalities in the future.
Both of the Funds may acquire U.S. Government Securities and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are generally held in book-entry form
at a Federal Reserve Bank. Counsel to the underwriters of these certificates or
other evidences of ownership of U.S. Treasury securities have stated that, in
their opinion, purchasers of the stripped securities most likely will be deemed
the beneficial holders of the underlying U.S. government securities for federal
tax and securities purposes. In the case of CATS and TIGRs, the Internal Revenue
Service ("IRS") has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Funds, but the IRS conclusion is contained only in a general counsel
memorandum, which is an internal document of no precedential value or binding
effect, and a private letter ruling, which also may not be relied upon by the
Funds. The Trust is not aware of any binding legislative, judicial or
administrative authority on this issue.
MORTGAGE-RELATED AND MORTGAGE-BACKED SECURITIES
The PanAgora Asset Allocation Fund may invest in mortgage-related and
mortgage-backed securities.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S.
Treasury to make payments under its guarantee.
Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA, are
not backed by or entitled to the full faith and credit of the United States and
are supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal
5
Home Loan Banks. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Banks and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after such amount becomes payable.
COLLATERALIZED MORTGAGE OBLIGATION (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal are paid, in most cases, monthly. CMOs may be collateralized by whole
mortgage loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC or FNMA, and the income
streams on such securities.
CMOs are usually structured in multiple classes or tranches, each
bearing a different stated maturity. Actual maturity and average life will
depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
pool of mortgages according to how quickly the loans are repaid. Under a common
structure, monthly payment of principal received from the pool of underlying
mortgages, including prepayments, is first returned to investors holding the
shortest maturity class. Investors holding the longer maturity classes receive
principal only after the first class has been retired. Such investors are
partially guarded against earlier than desired returns of principal.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B or C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
buildings or savings and loan associations) to borrow against their loan
portfolios.
A Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes or tranches having different
maturity dates which are secured by the pledge of a pool of conventional
mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and
interest on the CMOs are made semiannually, as opposed to monthly. The amount of
principal payment on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of the FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be repaid in advance of its scheduled maturity date.
6
If collection of principal (including pre-payments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general fund.
Criteria for the mortgage loans in the pools backing FHLMC CMOs are
identical to those for FHLMC PCs. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
The Funds may borrow for temporary or emergency purposes. This
borrowing may be unsecured. Among the forms of borrowing in which each Fund may
engage is entering into reverse repurchase agreements. A reverse repurchase
agreement involves the sale of a portfolio security by the Fund, coupled with
its agreement to repurchase the security at a specified time and price. Each
Fund will maintain a segregated account with the Trust's custodian consisting of
cash or cash equivalents equal (on a daily mark-to-market basis) to its
obligations under reverse repurchase agreements with banks and broker-dealers.
Reverse repurchase agreements involve the risk that the market value of the
securities subject to the reverse repurchase agreement may decline below the
repurchase price at which the Fund is required to repurchase such securities.
The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the asset coverage should decline
below 300% as a result of market fluctuations or for other reasons, a Fund may
be required to sell some of its portfolio securities within three days to reduce
its borrowings and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
To avoid the potential leveraging effects of a Fund's borrowings, additional
investments will not be made while borrowings are in excess of 5% of a Fund's
total assets. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio. 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. See "Investment
Restrictions."
VARIABLE AND FLOATING RATE INSTRUMENTS
Debt instruments purchased by a Fund may be structured to have variable
or floating interest rates. These instruments may include variable amount master
demand notes that permit the indebtedness to vary in addition to providing for
periodic adjustments in the interest rates. The Adviser will consider the
earning power, cash flows and other liquidity ratios of the issuers and
guarantors of such instruments and, if the instrument is subject to a demand
feature, will continuously monitor their financial ability to meet payment on
demand. Where necessary to ensure that a variable or floating rate instrument is
equivalent to the quality standards applicable to a Fund's fixed-income
investments, the issuer's obligation to pay the principal of the instrument will
be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. Any bank providing such a bank letter, line of credit,
guarantee or loan commitment will meet the Fund's investment quality standards
relating to investments in bank obligations. A Fund will invest in variable and
floating rate instruments only when the Adviser deems the investment to involve
minimal credit risk. The Adviser will also continuously monitor the
creditworthiness of issuers of such instruments to determine whether a Fund
should continue to hold the investments.
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the instruments, and a
Fund could suffer a loss if the issuer defaults or during periods in which a
Fund is not entitled to exercise its demand rights.
7
Variable and floating rate instruments held by a Fund will be subject
to the Fund's 15% limitation on investments in illiquid securities when a
reliable trading market for the instruments does not exist and the Fund may not
demand payment of the principal amount of such instruments within seven days.
"WHEN-ISSUED" PURCHASES AND FORWARD COMMITMENTS (DELAYED DELIVERY)
These transactions, which involve a commitment by a Fund to purchase or
sell particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Fund to lock in a price or
yield on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed appropriate by the Adviser, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a taxable gain or loss.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or high-grade debt
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitments. The
market value of a Fund's net assets may fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. Because a Fund's liquidity and ability to manage its portfolio
might be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Fund expects that its commitments to purchase
when-issued securities and forward commitments will not exceed 25% of the value
of its total assets absent unusual market conditions. When a Fund engages in
"when-issued" and forward commitment transactions, it relies on the other party
to the transaction to consummate the trade. Failure of such party to do so may
result in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest or dividends on the securities it has committed to
purchase until the settlement date.
LENDING PORTFOLIO SECURITIES
Both of the Funds may lend portfolio securities to brokers, dealers and
other financial organizations. These loans, if and when made, may not exceed 30%
of the value of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, cash equivalents or U.S. government securities. The cash
or instruments collateralizing the Fund's loans of securities will be maintained
at all times in a segregated account with the Trust's custodian, in an amount at
least equal to the current market value of the loaned securities. From time to
time, a Fund may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and is acting as a "placing broker." No fee
will be paid to affiliated persons of the Fund. The Board of Trustees will make
a determination that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by
continuing to receive interest or dividends on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. government
securities are used as collateral. A Fund will comply with the following
conditions whenever it loans securities: (i) the Fund must receive at least 100%
cash collateral or equivalent securities from the borrower; (ii) the borrower
must increase the collateral whenever the market value of the securities loaned
rises above the level of the collateral; (iii) the Fund must be able to
terminate the loan at any time; (iv) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities
8
may pass to the borrower except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Fund must terminate the loan
and regain the right to vote the securities.
PREFERRED STOCK
As stated in the Prospectus, both of the Funds may purchase preferred
stock. Preferred stocks are equity securities, but possess certain attributes of
debt securities and are generally considered fixed-income securities. Holders of
preferred stocks normally have the right to receive dividends at a fixed rate
when and as declared by the issuer's board of directors, but do not participate
in other amounts available for distribution by the issuing corporation.
Dividends on the preferred stock may be cumulative, and all cumulative dividends
usually must be paid prior to dividend payments to common stockholders. Because
of this preference, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stocks. However, preferred stocks
are equity securities in that they do not represent a liability of the issuer
and therefore do not offer as great a degree of protection of capital or
assurance of continued income as investments in corporate debt securities. In
addition, preferred stocks are subordinated in right of payment to all debt
obligations and creditors of the issuer, and convertible preferred stocks may be
subordinated to other preferred stock of the same issuer. See "Convertible
Securities" below for a description of certain characteristics of convertible
preferred stock.
CONVERTIBLE SECURITIES
As stated in the Prospectus, both of the Funds may purchase convertible
securities. Convertible securities are fixed-income securities that may be
converted at either a stated price or stated rate into underlying shares of
common stock of the same issuer. Convertible securities have general
characteristics similar to both fixed-income and equity securities. Although to
a lesser extent than with fixed-income securities, the market value of
convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stocks and
therefore will also react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and consequently may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer. However, as with all
fixed-income securities, the issuers of convertible securities may default on
their obligations.
WARRANTS
As stated in the Prospectus, both of the Funds may purchase warrants,
which are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a specified
price during a specified period of time. The purchase of warrants involves a
risk that a Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its total assets, taken at market value, in warrants,
or more than 2% of its total assets, taken at market value, in warrants not
listed on a recognized securities exchange. Warrants acquired by a Fund in units
or attached to other securities shall not be included in determining compliance
with these percentage limitations. See "Investment Restrictions."
9
AMERICAN, EUROPEAN, CONTINENTAL AND GLOBAL DEPOSITORY RECEIPTS
The PanAgora International Equity Fund may invest in the securities of
foreign and domestic issuers in the form of American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"). These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts ("CDRs"), are receipts issued in Europe typically by
non-U.S. banking and trust companies that evidence ownership of either foreign
or U.S. securities. Generally, ADRs, in registered form, are designed for use in
U.S. securities markets and EDRs and CDRs, in bearer form, are designed for use
in European securities markets. GDRs may be traded in any public or private
securities market and may represent securities held by institutions located
anywhere in the world.
OPTIONS ON SECURITIES, SECURITIES INDICES AND FOREIGN CURRENCIES
Both of the Funds may write covered put and covered call options and
purchase put and call options. Such options may relate to particular U.S. or
non-U.S. securities or to various U.S. or non-U.S. stock indices and may or may
not be listed on a national securities exchange and issued by the Options
Clearing Corporation (the "OCC"). PanAgora International Equity Fund may write
and purchase put and call options on non-U.S. currencies (traded on U.S. and
non-U.S. exchanges and over-the-counter) to manage exposure to changes in U.S.
dollar exchange rates.
Options trading is a highly specialized activity which entails greater
than ordinary investment risk. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a percentage basis,
subject to greater fluctuation than an investment in the underlying securities
themselves.
A put option for a particular security gives the purchaser the right to
sell the underlying security at the stated exercise price at any time prior to
the option's expiration date, regardless of the security's market price. A call
option for a particular security gives the purchaser of the option the right to
buy, and the writer the obligation to sell, the underlying security at a stated
exercise price if the option is exercised at any time prior to the option's
expiration, regardless of the underlying security's market price. In contrast to
an option on a particular security, an option on a securities index provides the
holder with the right to receive a cash payment upon exercise of the option if
the market value of the underlying index exceeds the option's exercise price.
The amount of this payment will be equal to the difference between the closing
price of the index at the time of exercise and the exercise price of the option
expressed in U.S. dollars or a foreign currency, times a specified multiple. A
put option on a currency gives its holder the right to sell an amount (specified
in units of the underlying currency) of the underlying currency at the stated
exercise price at any time prior to the option's expiration. Conversely, a call
option on a currency gives its holder the right to purchase an amount (specified
in units of the underlying currency) of the underlying currency at the stated
exercise price at any time prior to the option's expiration.
The Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the OCC, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options. OTC options will be deemed
illiquid for purposes of a Fund's 15% limitation on investments in illiquid
securities.
A Fund will write call options only if they are "covered." In the case
of a call option on a security, the option is "covered" if a Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or high-grade debt securities in such amount as
are held in a segregated account by the Trust's custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if the Fund maintains with the Fund's custodian cash or cash
equivalents equal to the contract value. A call option on a
10
security or an index is also covered if the Fund holds a call on the same
security or index as the call written by the Fund where the exercise price of
the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with the Fund's custodian. A call option on currency written
by a Fund is covered if the Fund owns an equal amount of the underlying
currency.
When a Fund purchases a put option, the premium paid by it is recorded
as an asset of the Fund. When the Fund writes an option, an amount equal to the
net premium (the premium less the commission paid by the Fund) received by the
Fund is included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be marked-to-market on an ongoing basis to reflect the current value of the
option purchased or written. The current value of a traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by the Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities, securities indices and currencies. For example, there are
significant differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
FUTURES CONTRACTS AND RELATED OPTIONS
To hedge against changes in interest rates or securities prices and for
certain non-hedging purposes, the Funds may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. The Funds may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices and other financial instruments and indices. The
Funds will engage in futures and related options transactions only for bona fide
hedging or other non-hedging purposes as defined in regulations promulgated by
the Commodity Futures Trading Commission (the "CFTC"). All futures contracts
entered into by the Funds are traded on U.S. exchanges or boards of trade that
are licensed and regulated by the CFTC or on foreign exchanges approved by the
CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell a particular financial instrument
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Futures contracts obligate the long or short holder to take or make delivery of
a specified quantity of a commodity or financial instrument, such as a security
or the cash value of a securities index, during a specified future period at a
specified price.
11
When interest rates are rising or securities prices are falling, a Fund
can seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities will usually
be liquidated in this manner, the Funds may instead make, or take, delivery of
the underlying securities whenever it appears economically advantageous to do
so. A clearing corporation associated with the exchange on which futures on
securities are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that a Fund owns or proposes to acquire. The
Funds may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated rise in interest
rates or a decline in market prices that would adversely affect the value of a
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. If, in the
opinion of the Adviser, there is a sufficient degree of correlation between
price trends for a Fund's portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the Fund may
also enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Adviser will attempt
to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Funds may take a "long" position by purchasing
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options
on futures contracts will give the Funds the right (but not the obligation) for
a specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract if the option is exercised, which may have a value higher than
the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that a Fund intends to purchase. However, a Fund becomes obligated
to purchase a futures contract if the option is exercised which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
12
The Funds may use options on futures contracts solely for bona fide
hedging or other non-hedging purposes as described below.
OTHER CONSIDERATIONS. The Funds will engage in futures and related
options transactions only for bona fide hedging or other non-hedging purposes as
permitted by CFTC regulations. A Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities or instruments held by
the Fund or securities or instruments which they expect to purchase. The Funds'
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities that a Fund owns or futures contracts will be purchased to protect
a Fund against an increase in the price of securities that a Fund intends to
purchase. As evidence of this hedging intent, each Fund expects that, on 75% or
more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Fund will have purchased, or
will be in the process of purchasing, equivalent amounts of related securities
or assets in the cash market at the time when the futures or option position is
closed out. However, in particular cases, when it is economically advantageous
for a Fund to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition,
a CFTC regulation permits a Fund to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
in futures contracts and related options for non-hedging purposes (net of the
amount the positions are "in the money") may not exceed 5% of the Fund's net
assets. The Funds will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended, for maintaining
their qualification as regulated investment companies for federal income tax
purposes. See "Taxes."
A Fund will be required, in connection with transactions in futures
contracts and the writing of options on futures contracts to make margin
deposits, which will be held by the Trust's custodian for the benefit of the
futures commission merchant through whom the Fund engages in such futures
contracts and option transactions. These transactions involve brokerage costs
and require margin deposits. To eliminate potential investment leverage, a Fund
using futures contracts and options is required to (i) segregate cash or liquid
securities with the Trust's custodian in an amount at least equal to the Fund's
commitment, or (ii) otherwise "cover" the commitment by owning or having the
right to acquire or sell, as applicable, the underlying security or financial
instrument in accordance with policies established by the staff of the
Securities and Exchange Commission.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, unanticipated changes in interest rates or securities prices may result in
a weaker overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures position prior to its maturity date.
In the event of an imperfect correlation between a futures position and
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Fund may be exposed to risk of loss. The risk of
imperfect correlation may be minimized by investing in contracts whose price
behavior is expected to resemble that of a Fund's underlying securities. The
risk that the Funds will be unable to close out a futures position will be
minimized by entering into such transactions on a national exchange with an
active and liquid secondary market.
CURRENCY TRANSACTIONS
In addition to engaging in options and future transactions to offset
the effect of fluctuating currency exchange rates as described above, the
PanAgora International Equity Fund will exchange currencies in the
13
normal course of managing its investments and may incur costs in so doing
because a foreign exchange dealer will charge a fee for conversion. A Fund may
exchange currencies on a "spot" basis (i.e., for prompt delivery and settlement)
at the prevailing spot rate for purchasing or selling currency in the foreign
currency exchange market. A Fund also may enter into forward currency exchange
contracts or other contracts to purchase and sell currencies for settlement at a
future date. A foreign exchange dealer, in that situation, will expect to
realize a profit based on the difference between the price at which a foreign
currency is sold to the Fund and the price at which the dealer will cover the
purchase in the foreign currency market. Foreign exchange transactions are
entered into at prices quoted by dealers, which may include a mark-up over the
price that the dealer must pay for the currency.
Forward currency exchange contracts are agreements to exchange one
currency for another - for example, to exchange a certain amount of U.S. Dollars
for a certain amount of German Deutsche Marks - at a future date. The date
(which may be any agreed upon fixed number of days in the future), the amount of
currency to be exchanged and the price at which the exchange will take place
will be negotiated and fixed for the term of the contract at the time that the
Fund enters into the contract. Forward currency exchange contracts are (a)
traded in an interbank market conducted directly between currency traders
(typically, commercial banks or other financial institutions) and their
customers, (b) generally have no deposit requirements and (c) are consummated
without payment of any commissions. A Fund, however, may enter into forward
currency exchange contracts containing either or both deposit requirements and
commissions. To eliminate potential investment leverage, a Fund using forward
currency exchange contracts is required to (i) segregate cash or liquid
securities with the Trust's custodian in an amount at least equal to the Fund's
commitment, or (ii) otherwise "cover" the commitment by owning or having the
right to acquire or sell, as applicable, the underlying currency in accordance
with policies established by the staff of the Securities and Exchange
Commission.
Upon maturity of a forward currency exchange contract, a Fund may (a)
pay for and receive the underlying currency, (b) negotiate with the dealer to
roll over the contract into a new forward currency exchange contract with a new
future settlement date or (c) negotiate with the dealer to terminate the forward
contract by entering into an offset with the currency trader whereby the Fund
pays or receives the difference between the exchange rate fixed in the contract
and the then current exchange rate. A Fund also may be able to negotiate such an
offset prior to maturity of the original forward contract. There can be no
assurance that new forward contracts or offsets will always be available to a
Fund.
The Fund, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in the Fund's underlying currency. A
Fund could purchase a U.S. Dollar-denominated security and at the same time
enter into a forward currency exchange contract to exchange U.S. Dollars for its
underlying currency at a future date. By matching the amount of U.S. Dollars to
be exchanged with the anticipated value of the U.S. Dollar-denominated security,
a Fund may be able to "lock in" the foreign currency value of the security and
adopt a synthetic investment position whereby the Fund's overall investment
return from the combined position is similar to the return from purchasing a
foreign currency-denominated instrument.
Synthetic investment positions will typically involve U.S. Dollar-
denominated securities and, because of the range of highly liquid short-term
instruments available in the U.S., may provide greater liquidity to a Fund than
actual purchases of foreign currency-denominated securities in addition to
providing superior returns in some cases. Depending on (a) each Fund's liquidity
needs, (b) the relative yields of securities denominated in different currencies
and (c) spot and forward currency exchange rates, a significant portion of a
Fund's assets may be invested in synthetic investment positions, subject to tax
diversification and other tax requirements.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of the U.S.
Dollar-denominated security is not exactly matched with the Portfolio's
obligation under a forward currency exchange contract on the date of maturity,
the Fund may be exposed to some risk of loss from fluctuations in U.S. Dollars.
Although the Adviser will attempt to hold such mismatching to a minimum, there
can be no assurance that the Adviser will be able to do so.
14
Although the foreign currency market is not believed to be necessarily
more volatile than the market in other commodities, there is less protection
against defaults in the forward trading of currencies than there is in trading
such currencies on an exchange because such forward contracts are not guaranteed
by an exchange or clearing house. The CFTC has indicated that it may assert
jurisdiction over forward contracts in foreign currencies and attempt to
prohibit certain entities from engaging in such transactions. In the event that
such prohibition included the Funds, the Adviser would review whether or not it
would be appropriate for the Funds to cease trading such contracts. Cessation of
trading might adversely affect the performance of the Funds.
YIELDS AND RATINGS
The yields on certain obligations, including the money market
instruments in which both Funds may invest (such as commercial paper and bank
obligations), are dependent on a variety of factors, including general money
market conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the
obligation and the ratings of the issue. The ratings of S&P, Moody's and Duff &
Phelps Credit Rating Co. and other nationally recognized statistical ratings
organizations represent their respective opinions as to the quality of the
obligations they undertake to rate. Ratings, however, are general and are not
absolute standards of quality or value. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices. See
Appendix A for a description of the ratings provided by nationally recognized
statistical ratings organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees or the Adviser, pursuant to
guidelines established by the Board of Trustees, will consider such an event in
determining whether the Fund should continue to hold the security in accordance
with the interests of the Fund and applicable regulations of the Securities and
Exchange Commission (the "Commission").
INVESTMENT RESTRICTIONS
The following investment restrictions may not be changed with respect
to either Fund without the approval of "a majority of the outstanding shares" of
such Fund (as such term is defined in this Statement of Additional Information
under "Miscellaneous"). INVESTMENT RESTRICTIONS THAT INVOLVE A MAXIMUM
PERCENTAGE OF SECURITIES OR ASSETS SHALL NOT BE CONSIDERED TO BE VIOLATED UNLESS
AN EXCESS OVER THE PERCENTAGE OCCURS IMMEDIATELY AFTER, AND IS CAUSED BY, AN
ACQUISITION OR ENCUMBRANCE OF SECURITIES OR ASSETS OF, OR BORROWINGS BY OR ON
BEHALF OF, A FUND, WITH THE EXCEPTION OF BORROWINGS PERMITTED BY INVESTMENT
RESTRICTION NO. 1.
Accordingly, the Trust may not, on behalf of a Fund:
1. Borrow money, except from banks, or by entering into reverse
repurchase agreements, on a temporary basis for extraordinary or emergency
purposes in amounts not to exceed 33 1/3% of the Fund's total assets (including
the amount borrowed) taken at market value; provided, that no purchases of
securities will be made if such borrowings exceed 5% of the value of the Fund's
total assets. This restriction does not apply to cash collateral received as a
result of portfolio securities lending.
2. With respect to 75% of its total assets taken at market value,
invest more than 5% of the value of the total assets of the Fund in the
securities of any one issuer, except securities issued by the U.S. government,
its agencies and instrumentalities and repurchase agreements collateralized by
such securities.
3. With respect to 75% of its total assets taken at market value,
purchase the securities of any one issuer if, as a result of such purchase, the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
15
4. Mortgage, pledge or hypothecate its assets except to secure
indebtedness permitted by Investment Restriction No. 1 above. For purposes of
this restriction, collateral arrangements with respect to options on securities
and indices, futures contracts and options on futures contracts and payments of
initial and variation margin in connection therewith are not considered a pledge
of assets.
5. Act as underwriter of securities issued by others, except to the
extent that, in connection with the disposition of portfolio securities, the
Fund may be deemed to be an underwriter for the purposes of the Securities Act
of 1933, as amended (the "1933 Act").
6. Purchase the securities of issuers conducting their principal
business activities in the same industry if, immediately after such purchase,
the value of the Fund's investments in such industry would exceed 25% of its
total assets taken at market value at the time of each investment. For purposes
of this restriction, telephone companies are considered to be a separate
industry from water, gas or electric utilities; personal credit finance
companies and business credit finance companies are deemed to be in separate
industries; and all quasi-governmental and supranational entities are deemed to
be in a single industry.
7. Make loans; provided, that the lending of portfolio securities, the
purchase of debt securities and the entry into repurchase agreements pursuant to
the Fund's investment objectives and policies shall not be limited by this
restriction.
8. Invest in commodities or commodity contracts, except options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward
commitments, securities index put or call warrants and repurchase agreements
entered into in accordance with the Fund's investment objectives and policies.
9. Invest in real estate or interests therein, except that the Fund may
invest in readily marketable securities, other than limited partnership
interests, of companies that invest in real estate;
10. Issue senior securities, except as permitted by Investment
Restriction No. 1 above; provided, that for the purposes of this restriction,
the issuance of shares of beneficial interest in multiple classes or series, the
purchase or sale of options, futures contracts and options on futures contracts,
forward commitments and repurchase agreements entered into in accordance with
the Fund's investment objectives and policies, and the pledge, mortgage or
hypothecation of the Fund's assets within the meaning of Investment Restriction
No. 4 above are not deemed to be senior securities.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following non-fundamental policies that
may be changed or amended by action of the Board of Trustees without shareholder
approval.
Accordingly, the Trust may not, on behalf of a Fund:
(a) invest in repurchase agreements maturing in more than seven days
and securities which are illiquid, if, as a result thereof, more than 15% of the
net assets of the Fund (taken at market value) would be invested in such
investments;
(b) purchase securities on margin or make short sales of securities or
maintain a short position, except that (i) this investment limitation shall not
apply to the Fund's transactions in futures contracts and related option
transactions or the Fund's transactions in securities on a "when-issued" or
forward commitment basis and (ii) the Fund may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities;
(c) invest in other companies for the purpose of exercising control or
management;
16
(d) acquire the securities of any other domestic or foreign investment
company or investment fund if after any such acquisition the Fund would have
invested more than 5% of its total assets in, or own more than 3% of the
outstanding voting securities of, such investment company or fund or have more
than 10% of its total assets invested in all such investment companies or funds
(except in connection with a plan of merger or consolidation with or acquisition
of substantially all the assets of such other investment company);
(e) purchase or retain the securities of any company if any officer or
Trustee of the Trust or officer or director of the Adviser or the Distributor
individually owns more than one-half of 1% of the securities of such company or,
collectively, such individuals own more than 5% of the securities of such
company;
(f) invest more than 2% of its assets in warrants, valued at the lower
of cost or market, provided that the Fund may invest up to 5% of its total
assets, as so valued, in warrants listed on a recognized securities exchange,
and provided, further, that warrants acquired in units or attached to securities
shall not be included for this purpose;
(g) write (sell) uncovered calls or uncovered puts or any combination
thereof or purchase uncovered calls, puts, straddles, spreads or any combination
thereof;
(h) invest in interests in oil, gas or other mineral exploration or
development leases or programs; and
(i) purchase the securities of any enterprise which has a business
history of less than three years, including the operation of any predecessor
business to which it has succeeded, if such purchase would cause the Fund's
investment in such enterprise taken at cost to exceed 5% of the Fund's total
assets taken at market value.
The staff of the Commission has taken the position that fixed time
deposits maturing in more than seven days that cannot be traded on a secondary
market and participation interests in loans are illiquid. Until such time (if
any) as this position changes, the Trust, on behalf of each Fund, will include
such investments in determining compliance with the 15% limitation on
investments in illiquid securities. Restricted securities (including commercial
paper issued pursuant to Section 4(2) of the 1933 Act) which the Board of
Trustees has determined are readily marketable will not be deemed to be illiquid
for purposes of such restriction.
"Value" for the purposes of all investment restrictions shall mean the
market value used in determining each Fund's net asset value.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. An asterisk indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
17
<TABLE>
<CAPTION>
Positions Principal Occupation During
Name, Address and Age With Trust Past Five Years
- --------------------- ---------- ---------------
<S> <C> <C>
Richard A. Crowell, Ph.D.* Chairman and Vice Chairman of Adviser since
260 Franklin Street President October 1994; President and
Boston, MA 02110 Managing Director of the
Age: 55 Adviser from January 1990 to
October 1994; Senior Vice
President, Boston Safe Deposit
& Trust Company, October
1984 to February 1993;
Senior Vice President,
The Boston Company
Advisors Inc., December
1986 to June 1991; and
Senior Vice President,
The Boston Company
Institutional Investors,
May 1985 to June 1991.
Susan Smick Trustee Vice President of Pricing and
6 Kimball Court Estimating and Information
Apartment G12 Systems; Quebecor Printing
Woburn, MA 01801 (U.S.) Corporation, since
Age: 36 August 1992; Vice President
Pricing and Estimating,
Quebecor Printing (U.S.)
Corporation, May 1991 to July
1992; Controller of Quebecor
Sales, Inc., July 1990 to
April 1991; Sales Executive,
Quebecor Printing, Inc., June
1989 to June 1990; Director of
Financial Analysis, Quebecor
Printing, Inc., July 1988 to
May 1989; and Financial
Analyst, Quebecor Printing,
Inc., April 1988 to June 1988.
James R. Vertin Trustee Principal, Alpine Counselors,
136 Pecora Way an investment consulting firm,
Menlo Park, CA 94028 since 1982; and previously,
Age: 70 1952 to 1982, employed by
Wells Fargo Bank, most
recently as Chief Investment
Officer and Manager, Wells
Fargo Investment Advisors.
Paul J. Jasinski Chief Accounting Managing Director, Investors
Investors Bank & Trust Officer, Chief Bank & Trust Company, since
Company Financial May 1990; Vice President, Bank
89 South Street Officer and of New England, July
Boston, MA 02111 Treasurer 1985 to May 1990.
Age: 49
</TABLE>
18
<TABLE>
<CAPTION>
Positions Principal Occupation During
Name, Address and Age With Trust Past Five Years
- --------------------- ---------- ---------------
<S> <C> <C>
George M. Boyd Secretary Director, Mutual Fund Administration -
Investors Bank & Trust Legal and Regulatory, Investors Bank &
Company Company since July 1995; Counsel, The
89 South Street Shareholder Services Group, First Data
Boston, MA 02111 Corporation March - July 1995; Vice
Age: 51 President and Counsel, 440 Financial
Group of Worcester, Inc., Allmerica Financial
January 1992 - March 1995; Vice President,
Secretary and General Counsel, Carnegie Capital
Management Company 1986 - January 1992.
Susan C. Mosher Assistant Director, Investors Bank & Trust Company
Investors Bank & Trust Secretary since 1995; Associate Counsel, 440 Financial
Company Group of Worcester, Inc. 1993 - 1995; Associate
89 South Street and Partner Gallagher, Callahan and Gartrell, P.A.,
Boston, MA 02111 1987 - 1992.
Age: 41
Timothy F. Osborne Assistant Account Manager
Investors Bank & Trust Treasurer Reporting and Compliance,
Company Investors Bank & Trust
89 South Street Company, since May 1995; and
Boston, MA 02111 previously Supervisor, Mutual
Age: 29 Fund Administration and
Compliance with Mutual Fund
Services Company from December
1992 to May 1995; and Senior
Associate, Coopers & Lybrand
L.L.P. from June 1989 to
December 1992.
Joseph P. Barri, Esq. Assistant Partner, the law firm of Hale
Hale and Dorr Secretary and Dorr and secretary to the
60 State Street mutual funds in The Pioneer
Boston, MA 02109 Family of Funds.
Age: 50
</TABLE>
Ms. Smick and Mr. Vertin are members of the Audit Committee of the
Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent public
accountants, and reviewing with such accountants and the Treasurer of the Fund
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent. Mr. Crowell and Ms. Smick are
members of the Dividend Committee and Valuation Committee of the Board of
Trustees.
The Trust pays each Trustee who is not affiliated with the Adviser a
fee of $5,000 per year, plus $1,000 for each Board meeting attended by a
Trustee. The Trustees are also reimbursed for expenses incurred by them in
connection with their duties as Trustees. The following table provides
information concerning the compensation
19
paid to Trustees during the fiscal year ended May 31, 1996 . The Fund does not
provide any pension or retirement benefits to Trustees. In addition, Mr.
Crowell, an officer and employee of the Fund, was paid no remuneration during
the fiscal year ended May 31, 1996 for his service as a Trustee.
Total Compensation from
Aggregate Compensation Registrant and Fund
Name of Person, Position from Registrant Complex Paid to Trustees
- ------------------------ ---------------------- ------------------------
Susan Smick, Trustee $9,000 $9,000
James R. Vertin, Trustee $9,000 $9,000
As of the date of this Statement of Additional Information, the
Trustees and officers of the Trust, as a group, owned less than 1% of the
outstanding shares of any Fund. Each of the following shareholders owned 5% or
more of a Fund's shares as of September 3, 1996 :
<TABLE>
<CAPTION>
NAME OF PORTFOLIO SHAREHOLDER AND ADDRESS PERCENTAGE OF SHARES OWNED OF RECORD
- ----------------- ----------------------- ------------------------------------
<S> <C> <C>
Asset Allocation Fund American Express Trust Company 40.71%*
FBO American Express Trust
Retirement Services Plans
c/o Nancy Jendro N10/996
P.O. Box 534
Minneapolis, MN 55440-0534
Information Alliance Pension 38.53%*
Plan Trust
Box 3079
Pittsfield, MA 01202
PanAgora Asset Management, Inc. 12.33%
PanAgora Corporate Account
Attn: Mike Turpin
260 Franklin Street
22nd Floor
Boston, MA 02110
International Equity Bankers Trust TR 61.55%*
Fund Premark Retirement Savings Plan
34 Exchange Place
Jersey City, NJ 07302
The Minneapolis Foundation Investment
Partnership 21.13%
733 Marquette Avenue
Minneapolis, MN 554790036
Bankers Trust TR 10.24%
Tupperware Retirement Services Plan
34 Exchange Place
Jersey City, NJ 07302
* A shareholder who owns greater than 25% of the shares of a Fund is deemed to be a controlling person of such Fund.
</TABLE>
20
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
PanAgora Asset Management, Inc. serves as the Trust's investment
adviser. The Adviser, the services provided by it pursuant to the advisory
agreement with respect to the Funds (the "Advisory Agreement"), and the fees
payable by each Fund to the Adviser for such services are described in detail in
the Prospectus. As described in the Prospectus, the Adviser manages the
investment portfolio of both Funds pursuant to the terms of the Advisory
Agreement between the Adviser and the Trust with respect to each Fund. On July
5, 1996, the assets of the PanAgora Global Fund were liquidated. During the
fiscal year ended May 31, 1994, the total dollar amounts earned by the Adviser
with respect to the advisory services provided to each Fund were as follows:
PanAgora Asset Allocation Fund, $10,719; PanAgora Global Fund, $218,254; and
PanAgora International Equity Fund, $110, 440. During the fiscal year ended May
31, 1994, the Adviser waived fees and/or reimbursed expenses as follows:
PanAgora Asset Allocation Fund, $144,044; PanAgora Global Fund, $160,977; and
PanAgora International Equity Fund, $186,509. During the fiscal year ended May
31, 1995, the total dollar amounts earned by the Adviser with respect to the
advisory services provided to each Fund were as follows: PanAgora Asset
Allocation Fund, $35,173; PanAgora Global Fund, $313,880; and PanAgora
International Equity Fund, $120,808. During the fiscal year ended May 31, 1995,
the Adviser waived fees and/or reimbursed expenses as follows: PanAgora Asset
Allocation Fund, $127,269; PanAgora Global Fund, $185,514; and PanAgora
International Equity Fund, $264,572. During the fiscal year ended May 31, 1996,
the total dollar amounts earned by the Adviser with respect to the advisory
services provided to each Fund were as follows: PanAgora Asset Allocation Fund,
$52,084; PanAgora Global Fund, $364,312; and PanAgora International Equity Fund,
$160,017. During the fiscal year ended May 31, 1996, the Adviser waived fees
and/or reimbursed expenses as follows: PanAgora Asset Allocation Fund, $114,381;
PanAgora Global Fund, $133,329; and PanAgora International Equity Fund,
$213,870.
The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust or either Fund in connection with the performance of the Adviser's
obligations under its agreement with the Trust, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard of its duties and
obligations thereunder.
The Advisory Agreement provides that it will continue in effect only if
such continuance is specifically approved annually by the Trustees, including a
majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" (as such term is defined in the 1940 Act) of such parties,
or by a vote of a majority of the outstanding shares of the affected Fund. The
Advisory Agreement is terminable as to each Fund by vote of the Board of
Trustees, or by the holders of a majority of the outstanding shares of the
affected Fund, at any time without penalty on 60 days' written notice to the
Adviser. The Adviser may terminate the Advisory Agreement as to one or more
Funds at any time without penalty on 60 days' written notice to the Trust. The
Advisory Agreement terminates automatically in the event of its assignment (as
such term is defined in the 1940 Act).
THE ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
As described in the Prospectus, Investors Bank & Trust Company
("Investors Bank"), 89 South Street, Boston, Massachusetts 02111, serves as the
Trust's administrator pursuant to an administration agreement (the
"Administration Agreement"). Pursuant to the Administration Agreement, Investors
Bank has agreed to maintain certain office facilities for the Trust, furnish
statistical and research data, clerical services, and stationery and office
supplies; prepare and file various reports with the appropriate regulatory
agencies including the Commission and state securities commissions; and provide
accounting and bookkeeping services for the Funds.
The Administration Agreement provides that Investors Bank shall not be
liable under the Administration Agreement except for bad faith or gross
negligence in the performance of its duties or from the reckless disregard by it
of its duties and obligations thereunder.
21
As described in the Prospectus, Investors Bank also serves as the
custodian and the transfer and dividend disbursing agent for the Trust.
Pursuant to a custodian agreement with the Trust, Investors Bank (i)
maintains custody of both Funds' assets, (ii) maintains a separate account in
the name of both Funds, (iii) holds and transfers portfolio securities on
account of both Funds, (iv) accepts receipts and makes disbursements of money on
behalf of both Funds, (v) collects and receives all income and other payments
and distributions on account of both Funds' portfolio securities, (vi) computes
both Funds' net asset value, net investment income and realized capital gains,
if any, and (vii) makes periodic reports to the Trust's Board of Trustees
concerning each Fund's operations. Subject to approval by the Trust's Board of
Trustees, Investors Bank may contract with one or more foreign or domestic banks
or companies to serve as foreign sub-custodian on behalf of the Trust, provided
that, with respect to such sub-custodians, Investors Bank remains responsible
for the performance of all its duties under the custodian agreement with the
Trust.
Pursuant to a transfer agency agreement with the Trust, Investors Bank
(i) maintains shareholder accounts, and (ii) makes periodic reports to the
Trust's Board of Trustees concerning the operations of each Fund.
For a description of the fees payable by the Funds under the
administration, transfer agency and custodian agreements, see "Management of the
Trust" in the Prospectus. During the fiscal year ended May 31, 1996, Investors
Bank received $479,896 with respect to administrative services provided to the
Funds. During the fiscal year ended May 31, 1995, Investors Bank received
$322,060 and The Boston Company Advisors, Inc. received $217,321 with respect to
administrative services provided to each Fund. During the fiscal year ended May
31, 1994, The Boston Company Advisers, Inc. received $212,866 with respect to
administrative services provided to each Fund.
THE DISTRIBUTOR
The Trust has entered into a distribution agreement (the "Distribution
Agreement") pursuant to which Funds Distributor, Inc. (the "Distributor"), 60
State Street, Boston, MA 02109, as agent, serves as principal underwriter for
the continuous offering of shares of both Funds. The Distributor has agreed to
use its best efforts to solicit orders for the purchase of shares of both Funds,
although it is not obligated to sell any particular amount of shares. No
compensation is payable by the Trust to the Distributor for such distribution
services; however, the Adviser has agreed to pay to the Distributor a monthly
fee at an annual rate of 0.03% of the average daily net assets of each Fund or a
minimum annual fee of $15,000, whichever is higher. For the fiscal years ended
May 31, 1996, 1995 and 1994, the Distributor received $24,287, $19,741 and
$15,000, respectively, for services as principal underwriter.
The Distribution Agreement provides that it will continue in effect
only if such continuance is specifically approved annually by the Trustees,
including a majority of the disinterested Trustees who are not parties to the
Distribution Agreement or "interested persons" (as such term is defined in the
1940 Act) of any such party. The Distribution Agreement is terminable, as to a
Fund, by vote of the Board of Trustees, or by the holders of a majority of the
outstanding shares of the Fund, at any time without penalty on 60 days' written
notice to the Distributor. The Distributor or Adviser may terminate the
Distribution Agreement at any time without penalty on 90 days' written notice to
the Trust.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the
Adviser makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Funds. In executing portfolio
transactions, the Adviser seeks to obtain the best net results for the Fund,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. The primary consideration of the
Adviser in selecting broker-dealers is best execution at the most favorable
price.
22
OTC issues, including corporate debt securities and securities issued
by the U.S. government, its agencies and instrumentalities, are normally traded
on a "net" basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. The cost of
foreign and domestic securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down. With
respect to OTC transactions, the Adviser will normally deal directly with
dealers who make a market in the instruments involved except in those
circumstances where more favorable prices and execution are available elsewhere.
In the Advisory Agreement, the Adviser agrees to select broker-dealers
in accordance with guidelines established by the Trust's Board of Trustees from
time to time and in accordance with Section 28(e) of the Securities Exchange Act
of 1934, as amended. In assessing the terms available for any transaction, the
Adviser shall consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker-dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition, the Advisory Agreement authorizes the Adviser, subject to the prior
approval of the Trust's Board of Trustees, to cause a Fund to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Adviser determines in good
faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker- dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Adviser to the Fund. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of bonds and their comparative earnings and yields, or broad overviews of
the securities markets and the economy. Management of the Trust does not believe
that it is possible to estimate the proportion or amount of the Funds' portfolio
transactions directed to broker-dealers solely because such services were
provided.
Supplemental research information utilized by the Adviser is in
addition to, and not in lieu of, services required to be performed by the
Adviser and does not reduce the advisory fees payable to the Adviser by each
Fund. The Trustees will periodically review the commissions paid by the Funds to
consider whether the commissions paid over representative periods of time appear
to be reasonable in relation to the benefits inuring to the Funds. It is
possible that certain of the supplemental research or other services received
will primarily benefit one or more other investment companies or other accounts
of the Adviser for which investment discretion is exercised. Conversely, a Fund
may be the primary beneficiary of the research or services received as a result
of portfolio transactions effected for such other account or investment company.
Investment decisions for each Fund and for other investment accounts
managed by the Adviser are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to a Fund. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in executing transactions.
Portfolio securities will not be purchased from or sold to the Adviser
or any affiliated person (as such term is defined in the 1940 Act) of the
Adviser except to the extent permitted by an exemptive order issued by the
Commission or by applicable law. In addition, a Fund will not purchase
securities during the existence of any underwriting or selling group relating to
such securities of which the Adviser or any affiliated person (as such term is
defined in the 1940 Act) thereof is a member, except pursuant to procedures
adopted by the Trust's Board of Trustees in accordance with Rule 10f-3 under the
1940 Act.
During the fiscal year ended May 31, 1994, PanAgora Asset Allocation
Fund and PanAgora International Equity Fund paid
23
brokerage commissions in the amounts of $1,942 and $90,530,
respectively. During the fiscal year ended May 31, 1995, PanAgora Asset
Allocation Fund and PanAgora International Equity Fund paid brokerage
commissions in the amounts of $7,898 and $119,291, respectively. During the
fiscal year ended May 31, 1996, PanAgora Asset Allocation Fund and PanAgora
International Equity Fund paid brokerage commissions in the amounts of $7,144
and $31,833, respectively. Due to efforts by the Adviser to reduce transaction
expenses, brokerage commissions paid by the PanAgora International Equity Fund
decreased in the fiscal year ended May 31, 1996, compared to the year ended May
31, 1995.
PORTFOLIO TURNOVER
The annual portfolio turnover rate is calculated by dividing the lesser
of the dollar amount of annual sales or purchases of portfolio securities by the
average monthly value of a Fund's portfolio securities for the year, excluding
securities having a maturity at the date of purchase of one year or less. A high
rate of portfolio turnover (i.e. 100% or higher) will result in correspondingly
higher transaction costs to a Fund and, in order for the Fund to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, its gross gains from the sale of stock, securities and certain other
investments held for less than three months must constitute less than 30% of its
gross income for its taxable year. The portfolio turnover for the PanAgora Asset
Allocation Fund and PanAgora International Equity Fund was 59% and 67%,
respectively for the fiscal year ended May 31, 1996. The portfolio turnover for
the PanAgora Asset Allocation Fund and PanAgora International Equity Fund was
77% and 218%, respectively for the fiscal year ended May 31, 1995. Due to
efforts by the Adviser to reduce transaction costs, the PanAgora International
Equity Fund had a lower turnover rate for the fiscal year ended May 31, 1996
than for the year ended May 31, 1995.
PURCHASE AND REDEMPTION INFORMATION
The Trust will not generally issue shares of the Funds for
consideration other than cash. At the Trust's sole discretion, however, it may
issue shares of the Funds for consideration other than cash in connection with a
bona fide reorganization, statutory merger, or other acquisition of portfolio
securities (other than municipal debt securities issued by state political
subdivisions or their agencies or instrumentalities), provided (i) the
securities meet the investment objectives and policies of the relevant Fund;
(ii) the securities are acquired by the relevant Fund for investment and not for
resale; (iii) the securities are not restricted as to transfer either by law or
liquidity of market; and (iv) the securities have a value which is readily
ascertainable (and not established only by evaluation procedures) as evidenced
by a listing on a recognized exchange or through quotation on the Nasdaq Stock
Market. See "Purchase of Shares" in the Prospectus.
The Trust reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of a
Fund's shares by making payment in whole or in part in readily marketable
portfolio securities chosen by the Trust and valued in the same way as they
would be valued for purposes of computing a Fund's net asset value. If payment
is made in portfolio securities, a shareholder may incur transaction costs in
converting the securities into cash.
Under the 1940 Act, the right to redeem can be suspended and the
payment of the redemption price deferred when the New York Stock Exchange (the
"NYSE") is closed (other than for customary weekend and holiday closings),
during periods when trading on the NYSE is restricted as determined by the
Commission, during any emergency as determined by the Commission which makes it
impracticable for a Fund to dispose of its securities or value its assets, or
during any other period permitted by order of the Commission for the protection
of investors.
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible
for determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each Fund is calculated by determining the net worth of the Fund
(assets, including securities at value, minus liabilities) divided by the number
of shares outstanding. All securities are valued as of the close of regular
trading on the NYSE. The Funds compute their net asset values once daily at the
close of such regular trading, which is generally 4:00 p.m. New York time, on
each Business Day (as defined in the Prospectus).
24
For purposes of calculating each Fund's net asset value per share,
equity securities traded on a recognized U.S. or foreign securities exchange or
the National Association of Securities Dealers Stock Market ("NSM") are valued
at their last sale price on the principal exchange on which they are traded or
NSM (if NSM is the principal market for such securities) on the valuation day
or, if no sale occurs, at the mean between the closing bid and asked price.
Unlisted equity securities for which market quotations are readily available are
valued at the mean between the most recent bid and asked price.
Debt-securities and other fixed-income investments of the Funds are
valued at prices supplied by independent pricing agents selected by the Board of
Trustees, which prices reflect broker-dealer supplied valuations and electronic
data processing techniques. Short-term obligations maturing in sixty days or
less are valued at amortized cost. Amortized cost valuation involves initially
valuing a security at its cost, and thereafter, assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets whose market value does not, in the Adviser's
opinion, reflect fair value are valued at fair value using methods determined in
good faith by the Board of Trustees.
PERFORMANCE INFORMATION
Each Fund that advertises its "average annual total return" computes
such return by determining the average annual compounded rate of return during
specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:
T = [(ERV) 1/n - 1]
-------------------
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
Each Fund that advertises its "aggregate total return" computes such
returns by determining the aggregate compounded rates of return during specified
periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:
Aggregate Total Return = [(ERV) - 1]
-----------
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
The average annual total return for PanAgora Asset Allocation Fund and
PanAgora International Equity Fund was 21.05% and 7.62%, respectively for the
one year period ended May 31, 1996 , and 11.98% and 7.59%,
25
respectively, for the life of the Funds through that date. The aggregate total
return for PanAgora Asset Allocation Fund and PanAgora International Equity Fund
was 21.05% and 7.62%, respectively for the one year period ended May 31, 1996,
and 40.41% and 24.55%, respectively, for the life of the Funds through that
date.
TAXES
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended, (the
"Code") and intends to qualify for such treatment for each taxable year. Such
qualification does not involve supervision of management or investment practices
or policies by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must,
among other things, (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or foreign currencies or
income from certain other investments including options, futures or forward
contracts derived with respect to its business of investing in such stock,
securities or foreign currencies (the "90% gross income test"); (b) derive less
than 30% of its annual gross income from the sale or other disposition of stock
or securities or other investments, including options and futures contracts on
stocks, securities or indices and certain foreign currencies or foreign currency
options, futures or forward contracts, held less than three months (the
"short-short test"); and (c) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the market value of the Fund's
total (gross) assets is represented by cash and cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies and other securities limited, in respect of any one issuer,
to an amount not greater in value than 5% of the value of the Fund's total
assets and to an amount not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the Fund and engaged in the same,
similar or related trades or businesses.
Gains from the sale or other disposition of foreign currencies (or
options, futures or forward contracts on foreign currencies) that are not
directly related to a Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the disposition of investments held for less than three
months under the short-short test (even though characterized as ordinary income
for some purposes) if such currencies or instruments were held for less than
three months. In addition, future Treasury regulations may provide that
qualifying income under the 90% gross income test will not include gains from
foreign currency transactions or instruments that are not directly related to a
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward contracts (including
synthetic positions) for purposes other than hedging currency risk with respect
to existing or future portfolio securities may not qualify as "directly-related"
under these tests. The federal income tax rules applicable to interest rate
swaps and synthetic investments involving currency positions are unclear in
certain respects, and PanAgora International Equity Fund may be required to
limit its use of these transactions in order to comply with the requirements for
qualification as a regulated investment company.
Each Fund will not be subject to federal income tax on any of its
investment company taxable income (generally all of its taxable net income other
than the excess of net long-term capital gain over net short-term capital loss)
and net capital gain (which equals the excess, if any, of net long-term capital
gain over net short-term capital loss) that are distributed to shareholders in
accordance with certain timing requirements with respect to any taxable year,
provided that the Fund timely distributes at least 90% of its investment company
taxable income for such year and qualifies as a regulated investment company.
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to federal income tax at regular corporate rates on the
amount retained. Further, in order to avoid a nondeductible 4% federal excise
tax, each Fund must distribute (or be deemed to have distributed) by December 31
of each calendar year at least 98% of its ordinary income for such year, at
least 98% of the excess of its capital gains over its capital losses (generally
computed on the basis of the one-year period ending on October 31 of such year),
and all ordinary income and the excess of capital gains over
26
capital losses for the previous year that were not distributed in such year and
on which the Fund paid no federal income tax. In determining amounts to be
distributed, each Fund will take into account capital loss carryforwards, if
any, from prior years.
The Funds are not subject to Massachusetts corporate excise or
franchise taxes. Provided that each Fund qualifies as a regulated investment
company under the Code, such Fund will also not be liable for Massachusetts
income tax.
If PanAgora International Equity Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital
gains) or hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gain from the sale of stock in
such companies, even if all income or gain actually received by a Fund is timely
distributed to its shareholders. The Fund would not be able to pass through to
its shareholders any credit or deduction for such a tax. Certain elections may,
if available, ameliorate these adverse tax consequences, but any such election
could require a Fund to recognize taxable income or gain without the concurrent
receipt of cash. Accordingly, a Fund may limit and/or manage its investments in
such passive foreign investment companies to minimize its tax liability or
maximize its return from these investments.
A Fund's transactions in options or financial futures contracts will
give rise to taxable gain or loss and will be subject to special tax rules, the
effect of which may be to accelerate income to the Fund, defer Fund losses,
cause adjustments in the holding periods of Fund securities and/or convert
long-term capital gains into short-term capital gains (or short-term capital
losses into long-term capital losses). For example, certain listed non-equity
options written or purchased by a Fund (including options and futures contracts
on securities and securities indices) are required to be "marked to market"
(i.e., treated as if closed out) on the last day of each taxable year, and any
associated gain or loss is generally required to be treated as 60% long-term and
40% short-term capital gain or loss, with adjustments subsequently made to any
gain or loss realized upon an actual disposition of these positions. When the
Fund enters into certain hedging positions involving options or futures
contracts that substantially diminish its risk of loss with respect to other
positions, certain tax "straddle" rules may operate to alter the amount, timing
or character of gains or losses realized. The tax provisions described above
applicable to options and futures contracts may affect the amount, timing and
character of each Fund's distributions to shareholders. The short-short test
described above may limit each Fund's ability to use options and futures
transactions. Certain tax elections may be available to a Fund to mitigate some
of the unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by PanAgora
International Equity Fund and hence of its distributions to shareholders. Under
these rules, foreign exchange gain or loss realized with respect to foreign
currencies and certain futures and options thereon, foreign currency-denominated
debt instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If the net foreign exchange loss treated as
ordinary loss under Section 988 of the Code were to exceed a Fund's investment
company taxable income (computed without regard to such loss) for a taxable
year, the resulting loss would not be deductible by the Fund or its shareholders
in future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either the omission of one or more
dividends or a portion of a Fund's dividends being treated as a return of
capital for tax purposes, nontaxable to the extent of a shareholder's tax basis
in his shares and, once such basis is exhausted, generally giving rise to
capital gains.
A Fund's investment in zero coupon securities or other securities
bearing original issue discount or, if such Fund elects to include market
discount in income currently, market discount will generally cause it to realize
income prior to the receipt of cash payments with respect to these securities.
In order to distribute this income,
27
maintain its qualification as a regulated investment company, and avoid federal
income or excise taxes, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
PanAgora International Equity Fund anticipates that it will be subject
to foreign withholding or other foreign taxes on its income (possibly including,
in some cases, capital gains) from foreign securities. Tax conventions between
certain countries and the U.S. may reduce or eliminate such taxes. If more than
50% of the Fund's total assets at the close of a taxable year of the Fund
consists of stock or securities of foreign corporations, the Fund will qualify
to file an election with the Internal Revenue Service for such year pursuant to
which shareholders of the Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) its pro rata
share of foreign income taxes paid by the Fund even though not actually received
by such shareholders, and (ii) treat such respective pro rata portions as
foreign income taxes paid by them, for which they may be entitled to U.S.
federal income tax credits or deductions, subject to applicable limitations
under the Code. The Fund will consider making such an election if it is eligible
to do so and, if it cannot or does not so elect, will be entitled to deduct such
taxes in computing its distributable income.
For federal income tax purposes, distributions by a Fund, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders. Shareholders receiving a distribution in the form of newly issued
shares will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the amount of cash they would have received
had they elected to receive cash and will have a cost basis in each share
received equal to such amount divided by the number of shares received.
Distributions designated as derived from a Fund's dividend income, if any, that
would be eligible for the dividends received deduction if the Fund were not a
regulated investment company will be eligible, subject to certain holding period
and debt-financing restrictions, for the 70% dividends received deduction for
corporations. Eligible dividends are those received by a Fund from U.S. domestic
corporations and distributed to shareholders and properly designated as eligible
by the Fund. The entire eligible dividend, including the deducted amount, is
considered in determining the excess, if any, of a corporate shareholder's
adjusted current earnings over its alternative minimum taxable income, which may
increase its liability for the federal alternative minimum tax, and the dividend
may, if it is treated as an "extraordinary dividend" under the Code, reduce such
shareholder's tax basis in its shares of the Fund.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
When a shareholder's shares are sold, redeemed or otherwise disposed
of, the shareholder will generally recognize gain or loss equal to the
difference between the shareholder's adjusted tax basis in the shares and the
cash, or fair market value of any property, received. Assuming the shareholder
holds the shares as a capital asset at the time of such sale or other
disposition, such gain or loss should be capital in nature, and long-term if the
shareholder has held the shares for more than one year, otherwise short-term.
If, however, a shareholder receives a capital gain dividend with respect to
shares and such shares are sold or redeemed when they have a tax holding period
of six months or less, then any loss the shareholder realizes on the sale or
redemption will be treated as a long-term capital loss to the extent of such
capital gain dividend. Additionally, any loss realized on a sale or redemption
of shares of a Fund will be disallowed to the extent the shares disposed of are
replaced with other shares of the same Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to an automatic dividend reinvestment.
Each Fund will be required to report for federal tax purposes all
taxable distributions and proceeds from the redemption or exchange of shares,
except in the case of certain shareholders exempt from such reporting
requirements. Under the backup withholding provisions of the Code, all such
distributions may be subject to withholding of federal income tax at the rate of
31% in the case of non-exempt shareholders who fail to furnish a Fund with their
correct taxpayer identification number or with certain required certifications
or if the Internal Revenue Service or a broker notifies a Fund that the number
furnished by the shareholder is incorrect or that the shareholder is subject to
backup withholding as a result of failure to report interest or dividend income.
The Funds may refuse to accept an application that does not contain any required
taxpayer identification number or certification that the number provided is
correct or that the investor is an exempt recipient. If the withholding
28
provisions are applicable, any such distributions, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
The foregoing discussion relates solely to U.S. federal income tax law
as it applies to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to U.S. federal
income tax. Each shareholder who is not a U.S. person should consult his or her
tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of
shares of and receipt of distributions from a Fund, including the possibility
that such a shareholder may be subject to a U.S. nonresident alien withholding
tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax
treaty) on certain distributions.
This discussion of the tax treatment of a Fund and its shareholders is
based on the tax law in effect as of the date of this Statement of Additional
Information.
GENERAL INFORMATION ABOUT THE TRUST
The Trust is a Massachusetts business trust. Under the Trust's
Declaration of Trust, the beneficial interest in the Trust may be divided into
an unlimited number of full and fractional transferable shares. The Declaration
of Trust authorizes the Trust's Board of Trustees to classify or reclassify any
unissued shares of the Trust into one or more series or classes by setting or
changing, in any one or more respects, their respective designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations, qualifications and terms and conditions of redemption. On July 21,
1995, the Board of Trustees approved a name change of the Trust from The
PanAgora Institutional Funds, effective August 1, 1995.
In the event of a liquidation or dissolution of the Trust or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund. Shareholders of a
Fund are entitled to participate in the net distributable assets of the
particular Fund involved on liquidation, based on the number of shares of the
Fund that are held by each shareholder.
Shareholders of the Trust will vote together in the aggregate and not
separately by Fund except as otherwise required by law or when the Trust's Board
of Trustees determines that the matter to be voted upon affects only the
interests of the shareholders of a particular Fund. Rule 18f-2 under the 1940
Act provides that any matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as the Trust shall
not be deemed to have been effectively acted upon unless approved by the holders
of a majority of the outstanding shares of each investment portfolio affected by
the matter. A Fund is affected by a matter unless it is clear that the interests
of each Fund in the matter are substantially identical or that the matter does
not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in a fundamental investment policy
would be effectively acted upon with respect to a Fund only if approved by a
majority of the outstanding shares of such Fund. However, Rule 18f-2 also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to a particular Fund.
Shares of the Trust have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Trust's outstanding shares (irrespective of
series) may elect all of the Trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, shares will be fully
paid and non-assessable by the Trust.
Shareholder meetings, including meetings held to elect Trustees, will
not be held unless and until such time as required by law. At that time, the
Trustees then in office will call a shareholders' meeting to elect Trustees.
Except as set forth above, the Trustees will continue to hold office and may
appoint successor Trustees.
The Trust's Declaration of Trust authorizes the Trust's Board of
Trustees, without shareholder approval (unless otherwise required by applicable
law), to terminate the Trust or any series or class thereof if it determines
that the continuation of the Trust or a series or class thereof is not in the
best interest of the Trust or such series or
29
class, or their respective shareholders as a result of factors or events
adversely affecting the ability of the Trust or such series or class to conduct
its business and operations in an economically viable manner.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that shareholders shall not be subject to any personal liability in connection
with the assets of the Trust, for the acts or obligations of the Trust or any
series thereof, and that every note, bond, contract, order or other undertaking
made by the Trust shall contain a provision to the effect that the shareholders
are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of a Fund's property of any shareholder of the Fund held
personally liable solely by reason of his being or having been a shareholder of
the Fund and not because of his acts or omissions or some other reason. Thus,
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund would be unable to meet
its obligations.
The Declaration of Trust further provides that all persons having any
claim against the Trustees or the Trust shall look solely to the Trust property
for payment; that no Trustee, officer, employee or agent of the Trust or any
series thereof, shall be subject to any personal liability to any person, other
than to the Trust or its shareholders, in connection with the Trust property or
the affairs of the Trust (subject to the exception set forth below); and that no
Trustee shall be personally liable to any person for any action or failure to
act except by reason of his or her own bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties as a Trustee. Subject to such
exception, the Declaration of Trust provides that a Trustee is entitled to be
indemnified against all liabilities and expenses reasonably incurred by him in
connection with the defense or disposition of any proceeding in which he may be
involved or with which the Trustee may be threatened by reason of being or
having been a Trustee, and that the Trust will indemnify officers of the Trust
to the same extent that Trustees are entitled to indemnification.
MISCELLANEOUS
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Trust with the Commission and tax authorities. The Report of Independent
Accountants and financial statements included in the Fund's Annual Report for
the fiscal year ended May 31, 1996, filed electronically on July 30, 1996, are
incorporated by reference into this Statement of Additional Information. The
financial highlights in the Prospectus and the financial statements incorporated
by reference into the Prospectus and Statement of Additional Information have
been so included and incorporated in reliance upon the report of the independent
accountants, given on their authority as experts in auditing and accounting.
COUNSEL
The law firm of Hale and Dorr, 60 State Street, Boston, Massachusetts
02109, serves as counsel to the Trust.
SHAREHOLDER APPROVALS
As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding shares" of a Fund means the lesser of
(a) 67% of the shares of the particular Fund represented at a meeting at which
the holders of more than 50% of the outstanding shares of such Fund are present
in person or by proxy, or (b) more than 50% of the outstanding shares of such
Fund.
30
REGISTRATION STATEMENT
The Trust has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the shares of the Funds to which this
Statement of Additional Information relates. If further information is desired
with respect to the Trust, the Funds or such shares, reference is made to the
Registration Statement and the exhibits filed as a part thereof.
31
APPENDIX
DESCRIPTION OF BOND RATINGS
The following summarizes the highest four ratings used by Standard &
Poor's Corporation ("S&P") for bonds:
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for those in higher rated categories.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the highest four ratings used by Moody's
Investors Service, Inc. ("Moody's") for bonds:
Aaa - Bonds that 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 by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that 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 that 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 that 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.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa, A and Baa. The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds:
AAA - Debt rated AAA is of the highest credit quality. The risk factors are
considered to be negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt rated AA is of high credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions. The AA rating may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating category.
A - Bonds that are rated A have protection factors which are average but
adequate. However risk factors are more variable and greater in periods of
economic stress.
BBB - Bonds that are rated BBB have below average protection factors but are
still considered sufficient for prudent investment. Considerable variability in
risk during economic cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the ratings used by IBCA Limited and IBCA Inc.
("IBCA") for bonds:
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA bank
rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Ratings and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support provided by central banks or shareholders
if it experienced difficulties, and such ratings are considered by IBCA to be a
prime factor in its assessment of credit risk. Individual Ratings, which range
in gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted in A-1+. Capacity for timely payment
on commercial paper rated A-2 is satisfactory but the relative degree of safety
is not as high as for issues designated A-1.
The rating P-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated P-1 (or related supporting institutions) are considered
to have a superior capacity for repayment of short-term promissory obligations.
Issuers rated P-2 (or related supporting institutions) are considered to have
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of issuers rated P-1 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.
The highest rating of D&P for commercial paper is Duff 1. D&P employs
three designations, Duff 1 plus, Duff 1 and Duff 1 minus, within the highest
rating category. Duff 1 plus indicates highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or ready
access to alternative sources of funds, is judged to be "outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations." Duff 1 indicates
very high certainty of timely payment. Liquidity factors are excellent and
supported by strong fundamental protection factors. Risk factors are considered
to be minor. Duff 1 minus indicates high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
