<PAGE>
SUPPLEMENT DATED JULY 6, 1995
TO PROSPECTUS DATED MAY 1, 1995
OF
THE SIERRA VARIABLE TRUST
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
The prospectus dated May 1, 1995 (the "Prospectus") of The Sierra Variable Trust
(the "Trust") relating to shares of the GLOBAL MONEY, SHORT TERM HIGH QUALITY
BOND, SHORT TERM GLOBAL GOVERNMENT, U.S. GOVERNMENT, CORPORATE INCOME, GROWTH
AND INCOME, GROWTH, EMERGING GROWTH AND INTERNATIONAL GROWTH FUNDS of the Trust
is hereby amended and supplemented by the following.
The description of the use of segregated accounts in connection with hedging
forward foreign currency exchange contract positions is revised by deleting the
second to the last sentence in the second paragraph in the "SECURITIES AND
INVESTMENT PRACTICES - FOREIGN CURRENCY EXCHANGE TRANSACTIONS" section on
page A-6 and replacing it with the following sentence:
Except in circumstances where segregated accounts are not required by the
1940 Act and the rules adopted thereunder, each Fund maintains with its
custodian a segregated account of cash, U.S. Government Securities or
high-grade debt obligations in an amount at least equal to its obligations
under each forward foreign currency exchange contract.
<PAGE>
SUPPLEMENT DATED APRIL 8, 1996
TO PROSPECTUS DATED MAY 1, 1995
OF
THE SIERRA VARIABLE TRUST
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
The prospectus dated May 1, 1995 of The Sierra Variable Trust (the "Trust")
relating to shares of the GLOBAL MONEY, SHORT TERM HIGH QUALITY BOND, SHORT TERM
GLOBAL GOVERNMENT, U.S. GOVERNMENT, CORPORATE INCOME, GROWTH AND INCOME, GROWTH,
EMERGING GROWTH AND INTERNATIONAL GROWTH FUNDS of the Trust is hereby amended
and supplemented by the following:
Pursuant to the terms of a Sub-Adviser Agreement (the "J.P. Morgan Sub-Adviser
Agreement") by and between Sierra Investment Advisors Corporation, the Trust's
investment advisor (the "Advisor"), and J.P. Morgan Investment Management Inc.
("J.P. Morgan"), the J.P. Morgan Sub-Adviser Agreement and the role of J.P.
Morgan as investment sub-advisor to the INTERNATIONAL GROWTH FUND (the "Fund")
will be terminated as of April 8, 1996. The Advisor will enter into a
Sub-Adviser Agreement (the "Warburg Sub-Adviser Agreement"), subject to
shareholder approval, with Warburg, Pincus Counsellors, Inc. ("Warburg"),
pursuant to which Warburg will act as investment sub-advisor to the Fund, as of
April 8, 1996. Besides the change in the investment sub-advisor and reduced
sub-advisory fees, there will be no material differences between the J.P. Morgan
Sub-Adviser Agreement and the Warburg Sub-Adviser Agreement. Pursuant to
regulations of the Securities and Exchange Commission, without shareholder
approval, Warburg may receive no more than the sub-advisory fees as provided in
the J.P. Morgan Sub-Adviser Agreement. No material changes in the investment
objective or policies of the Fund are anticipated. At a special meeting of
shareholders called by the Board of Trustees for June 21, 1996, the shareholders
of the Fund will vote concerning approval of the Warburg Sub-Adviser Agreement.
The first sentence in the seventh paragraph of the "SUB-ADVISORS" section under
the headings "MANAGEMENT OF THE TRUST" -- "INVESTMENT MANAGEMENT" on page 24 is
amended and restated by deleting the reference to the International Growth Fund,
as follows:
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), Sub-Advisor of the
Global Money Fund and Growth and Income Fund, 522 Fifth Avenue, New York, New
York 10036, provides investment services to employee benefit plans of
corporations, labor unions and state and local governments and the accounts of
other institutional investors.
The second paragraph under the heading "SCUDDER, STEVENS & CLARK, INC." on page
25 is amended and restated as follows:
Adam M. Greshin is the lead portfolio manager for the Short Term Global
Government Fund. Mr. Greshin joined Scudder in 1986 as an international bond
analyst. Currently, he is Product Leader for Scudder's global and international
fixed-income investing. He was involved in the original design of the Short Term
Global Government Fund and has served as a member of that Fund's portfolio
management team since 1991. Mr. Greshin assumed responsibility for the Fund's
day-to-day management and investment strategies effective November 1995.
The "SUB-ADVISORS" section under the headings "MANAGEMENT OF THE TRUST" --
"INVESTMENT MANAGEMENT" on page 26 is amended by inserting the following
paragraph as the last paragraph:
WARBURG, PINCUS COUNSELLORS, INC. ("Warburg"), Sub-Advisor of the International
Growth Fund, is located at 466 Lexington Avenue, New York, New York 10017-3147.
Warburg is a professional investment counselling firm which provides investment
services to investment endowment funds, foundations and other institutions and
individuals. As of February 29, 1996, Warburg managed approximately $13.5
billion of assets, including approximately $7.5 billion of assets of twenty-six
mutual funds. Incorporated in 1970, Warburg is a wholly-owned subsidiary of
Warburg, Pincus Counsellors G.P. ("Counsellors G.P."), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ("EMW") controls Warburg through
its ownership of a class of voting preferred stock of Warburg. Lionel I. Pincus
may be deemed a controlling person of EMW. Counsellors G.P. has no business
other than being a holding company of Warburg and its subsidiaries.
The investment decisions of the Fund are made by a committee. Richard H. King is
primarily responsible for making recommendations to the committee. Richard King,
Senior Managing Director, joined the firm to found the department and has 28
years of investment experience. Prior to joining Warburg, Mr. King was chief
investment officer and a director at Fiduciary Trust Company International S.A.
in London beginning in 1984.
The portion of the table that sets forth the sub-advisory fees paid to the
investment sub-advisor of the International Growth Fund, located in the
"ADVISORY FEES" section under the headings "MANAGEMENT OF THE TRUST - INVESTMENT
MANAGEMENT" on page 27, is deleted and replaced by the following:
As investment sub-advisor to the International Growth Fund, Warburg is to be
paid monthly fees under the Sub-Adviser Agreement for the Fund at an annual rate
of 0.50% of the average net assets of the Fund.
PLEASE RETAIN THIS SUPPLEMENT
FOR FUTURE REFERENCE
SVTSAC (10M-4/96)
<PAGE>
THE SIERRA VARIABLE TRUST
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
The Sierra Variable Trust (the "Trust") is a mutual fund consisting of nine
different investment funds (the "Funds"), each of which has a different
investment objective. The Funds are GLOBAL MONEY, SHORT TERM HIGH QUALITY BOND,
SHORT TERM GLOBAL GOVERNMENT, U.S. GOVERNMENT, CORPORATE INCOME, GROWTH AND
INCOME, GROWTH, EMERGING GROWTH AND INTERNATIONAL GROWTH. These Funds are
currently available to the public only through certain variable annuity
contracts ("Contracts") issued by American General Life Insurance Company
("AGL").
Please read this Prospectus before allocating premiums to the Trust and keep it
on file for future reference. It contains useful information that can help you
decide if a Fund's investment goals match your own.
A Statement of Additional Information ("SAI") about the Trust and the Funds,
dated May 1, 1995, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. The SAI is available free upon
request by calling AGL at 800-247-6584 or by writing to American General Life
Insurance Company, Attention: Annuity Administration, P.O. Box 1401, Houston,
Texas 77251-1401.
Sierra Investment Services Corporation ("Distributor" or "Sierra Services"), the
distributor of the Trust's shares, is not a bank. THE FUNDS' SHARES ARE NOT
DEPOSITS OR OBLIGATIONS OF OR ENDORSED OR GUARANTEED BY ANY BANK, NOR ARE THEY
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN THE TRUST INVOLVE RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
INVESTMENTS IN THE GLOBAL MONEY FUND ARE NOT GUARANTEED OR INSURED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
<PAGE>
CONTENTS PAGE
Highlights ............................................................... 3
Investment Policies ...................................................... 15
Management of the Trust .................................................. 23
Board of Trustees ................................................ 23
Investment Management ............................................ 23
Distributor ...................................................... 29
Administration ................................................... 29
General Information and History .......................................... 30
The Trust ........................................................ 30
Purchase and Redemption .......................................... 31
Purchase through the SAM Program ................................. 31
Net Asset Value .................................................. 32
Dividends, Distributions and Taxes ....................................... 33
Performance .............................................................. 34
Appendix - Securities and Investment Practices ........................... A-20
Statement of Additional Information Table of Contents .................... A-21
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR HAS THE SEC PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS DATED MAY 1, 1995
<PAGE>
HIGHLIGHTS
INTRODUCTION
The Sierra Variable Trust (the "Trust") is a no-load, open-end management
investment company. The Trust is intended exclusively as an investment vehicle
for variable annuity or variable life insurance contracts offered by the
separate accounts of various insurance companies. Currently the Trust is
available only through The Sierra Advantage Annuity issued by AGL. Owners of The
Sierra Advantage Annuity may elect to participate in the Sierra Asset Management
program ("SAM Program"), which periodically reallocates account values in light
of financial and investment objectives and changing economic and market
conditions, through Sierra Investment Services Corporation, the Trust's
Distributor.
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers nine separate Funds, each with distinct investment objectives
and policies. Except for the Short Term Global Government Fund, each Fund is
diversified.
The GLOBAL MONEY FUND seeks to maximize current income consistent with safety of
principal and maintenance of liquidity. It will pursue this objective by
investing in U.S. dollar denominated money market instruments of foreign and
U.S. issuers. It also seeks to maintain a stable net asset value of $1.00 per
share.
The SHORT TERM HIGH QUALITY BOND FUND seeks as high a level of current income as
is consistent with prudent investment management and stability of principal. It
will pursue this objective by investing primarily in high quality short-term
bonds and other debt instruments.
The SHORT TERM GLOBAL GOVERNMENT FUND seeks to provide high current income
consistent with protection of principal. It will pursue this objective by
investing primarily in short-term bonds and money market instruments issued by
foreign and U.S. governments and denominated in foreign currencies or the U.S.
dollar.
The U.S. GOVERNMENT FUND seeks to maximize total rate of return while providing
investors with a high level of current income, consistent with reasonable safety
of principal. It will pursue this objective by investing primarily in
intermediate and long-term U.S. Government bonds.
The CORPORATE INCOME FUND seeks to provide a high level of current income,
consistent with the preservation of capital. It will pursue this objective by
investing primarily in investment grade corporate bonds of United States
issuers.
The GROWTH AND INCOME FUND seeks long-term capital growth and current income
consistent with reasonable investment risk. It will pursue this objective by
investing primarily in dividend-paying Common Stock.
The GROWTH FUND seeks long-term capital appreciation. It will pursue this
objective by investing primarily in Common Stock of U.S., multinational and
foreign companies of all sizes that offer potential for growth.
The EMERGING GROWTH FUND seeks long-term capital appreciation. It will pursue
this objective by investing primarily in equity securities of U.S. and foreign
companies having market capitalization of between $50 million and $1 billion.
The INTERNATIONAL GROWTH FUND is an equity fund that seeks long-term capital
appreciation. It will pursue this objective by investing primarily in equity
securities of foreign issuers.
The investment objective of each Fund and policies and restrictions specifically
cited as fundamental may not be changed without the approval of a majority of
the outstanding shares of that Fund. A complete list of investment restrictions
that identifies additional restrictions that cannot be changed without the
approval of a majority of an affected Fund's outstanding shares is contained in
the SAI. There is no assurance that a Fund will meet its stated objective.
INVESTMENT RISKS
The value of a Fund's shares will fluctuate with the value of the underlying
securities in its portfolio, and in the case of debt securities, with the
general level of interest rates. When interest rates decline, the value of a
portfolio invested in Fixed-Income Securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
Fixed-Income Securities can be expected to decline. In the case of foreign
currency denominated securities, these trends may be offset or amplified by
fluctuations in foreign currencies. High yielding Fixed-Income Securities, such
as those in which the Short Term Global Government Fund may invest up to 10% and
the Growth and Emerging Growth Funds up to 35% of total assets, are subject to
greater market fluctuations and risk of loss of income and principal than
investments in lower yielding Fixed-Income Securities. The Funds intend to
employ from time to time certain investment techniques which are designed to
enhance income or total return or hedge against market or currency risks but
which themselves involve additional risks. These techniques include Options on
Securities, Futures, Options on Futures, Options on Indexes, Options on Foreign
Currencies, Foreign Currency Exchange Transactions, Lending of Securities and
When-Issued Securities and Delayed-Delivery Transactions. Because the Short Term
Global Government Fund is non-diversified, it is permitted greater flexibility
to invest its assets in the securities of any one issuer and therefore will be
exposed to increased risk of loss if such an investment underperforms
expectations. The Funds may have higher than average portfolio turnover which
may result in higher than average brokerage commissions and transaction costs.
INVESTMENT ADVISORS
Subject to the authority of the Board of Trustees, Sierra Investment Advisors
Corporation ("Advisor" or "Sierra Advisors") serves as the Trust's investment
advisor and has overall management of the investment strategies and policies of
the Funds. The Trust has secured the services of sub-advisors for each Fund to
make investment decisions and place orders.
DISTRIBUTION
Sierra Investment Services Corporation ("Distributor" or "Sierra Services")
distributes the Funds' shares to the separate accounts, which purchase and
redeem these shares at net asset value without sales or redemption charges.
ADMINISTRATION
Sierra Fund Administration Corporation ("Sierra Administration") serves as
Administrator and Transfer Agent to the Trust and has responsibility for the
Trust's administrative and recordkeeping functions. It has engaged The
Shareholders Services Group, Inc. ("TSSG"), a subsidiary of First Data Corp, as
sub-administrator and Boston Safe Deposit & Trust Company ("Boston Safe") as
custodian.
TAXES
The tax consequences of your investment in the Trust depend upon the specific
provisions of your Contract. For more information, see the prospectus for that
Contract, which is attached to the front of this Prospectus.
PURCHASING AND SELLING SHARES
You cannot purchase shares of the Trust directly, but only through a Contract
offered through an insurance company separate account. Please refer to the
prospectus for your Contract for information on how to make investments and
redemptions.
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below are the Trust's audited financial highlights for the periods
ended December 31, 1994 and 1993. The Financial Statements and Notes to
Financial Statements are included in the SAI. Further information about the
performance of the Trust is contained in the Annual Report. The SAI and Annual
Report can be obtained at no charge by calling AGL at 800-247-6584 or writing to
them at the address shown on the first page of this Prospectus.
<TABLE>
GLOBAL MONEY FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year........................................... $ 1.00 $ 1.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................................... 0.037 0.016
------ ------
Total from investment operations............................................. 0.037 0.016
------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income....................................... (0.037) (0.016)
------ ------
Total distributions.......................................................... (0.037) (0.016)
------ ------
Net asset value, end of year................................................. $ 1.00 $ 1.00
====== ======
TOTAL RETURN++............................................................... 3.69% 1.59%
====== ======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's).............................................. $6,159 $1,488
Ratio of operating expenses to average net assets........................... 0.49% 0.39%+
Ratio of net investment income to average net assets........................ 3.84% 2.54%+
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor
and administrator........................................................... 1.25% 6.42%+
Net investment income/(loss) per share before waiver of fees
and expenses reimbursed by investment advisor and
administrator................................................................ $0.030 ($0.022)
- ----------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 10, 1993.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
SHORT TERM HIGH QUALITY BOND FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PERIOD ENDED
12/31/94*
------------
Net asset value, beginning of period................................ $ 2.50
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................. 0.08
-------
Net realized and unrealized loss on investments................... (0.12)
--------
Total from investment operations.................................... (0.04)
--------
LESS DISTRIBUTIONS:
Dividends from net investment income.............................. (0.07)
--------
Total distributions................................................. (0.07)
--------
Net asset value, end of period...................................... $ 2.39
=======
TOTAL RETURN++...................................................... (1.62)%
=======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)................................... $15,547
Ratio of operating expenses to average net assets.................. 0.77%+
Ratio of net investment income to average net assets............... 5.63%+
Portfolio turnover rate............................................ 80%
Ratio of operating expenses to average net assets before
waiver of fees by investment advisor and administrator............. 1.10%+
Net investment income per share before waiver of fees
by investment advisor and administrator............................. $0.07
- --------------------------------------------------------------------------------
* The Fund commenced operations on January 12, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator.
<PAGE>
<TABLE>
SHORT TERM GLOBAL GOVERNMENT FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year.................................................... $ 2.49 $ 2.50
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.05 0.01
------- -------
Net realized and unrealized loss on investments..................................... (0.10) (0.01)
------- -------
Total from investment operations...................................................... (0.05) 0.00
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ (0.05) (0.01)
Distributions from capital**........................................................ (0.04) --
------- -------
Total distributions................................................................... (0.09) (0.01)
------- -------
Net asset value, end of year.......................................................... $ 2.35 $ 2.49
======= =======
TOTAL RETURN++........................................................................ (2.03)% 0.12%
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)....................................................... $29,804 $19,147
Ratio of operating expenses to average net assets.................................... 0.92% 0.52%+
Ratio of net investment income to average net assets................................. 5.84% 4.06%+
Portfolio turnover rate.............................................................. 286% 164%
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor
and administrator.................................................................... 1.28% 1.92%+
Net investment income per share before waiver of fees and
expenses reimbursed by investment advisor and administrator........................... $0.05 $0.01
- --------------------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 12, 1993.
** Amounts distributed in excess of accumulated net investment income as
determined for financial statement purposes have been reported as
distributions from paid-in capital at the fiscal year end in which the
distribution is made. Certain of these distributions which are reported as
being from paid-in capital for financial statement purposes may be reported
to shareholders as taxable distributions due to differing tax and accounting
rules.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
<TABLE>
U.S. GOVERNMENT FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year.................................................... $ 10.04 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.50 0.19
------- -------
Net realized and unrealized gain/(loss) on investments.............................. (0.90)# 0.04#
------- -------
Total from investment operations...................................................... (0.40) 0.23
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ (0.50) (0.19)
Distributions from net realized gains............................................... (0.01) --
------- -------
Total distributions................................................................... (0.51) (0.19)
Net asset value, end of year.......................................................... $ 9.13 $ 10.04
======= =======
TOTAL RETURN++........................................................................ (4.04)% 2.27%
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)....................................................... $43,582 $25,069
Ratio of operating expenses to average net assets.................................... 0.85% 0.44%+
Ratio of net investment income to average net assets................................. 5.75% 5.37%+
Portfolio turnover rate.............................................................. 74% 131%
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor and administrator.......................... 1.02% 1.47%+
Ratio of operating expenses to average net assets including
interest expense..................................................................... 0.86% 0.44%+
Net investment income per share before waiver of fees and expenses reimbursed by
investment advisor and administrator.................................................. $0.49 $0.15
- ------------------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 6, 1993.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to the timing of sales and redemptions of
Fund shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
<TABLE>
CORPORATE INCOME FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year.................................................... $ 10.34 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.47 0.23
------- -------
Net realized and unrealized gain/(loss) on investments.............................. (1.30) 0.33#
------- -------
Total from investment operations...................................................... (0.83) 0.56
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................. (0.40) (0.22)
Distributions from net realized gains................................................ (0.05) --
------- -------
Total distributions................................................................... (0.45) (0.22)
------- -------
Net asset value, end of year.......................................................... $ 9.06 $ 10.34
======= =======
TOTAL RETURN++........................................................................ (8.13)% 5.62%
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)....................................................... $54,705 $28,732
Ratio of operating expenses to average net assets.................................... 0.93% 0.54%+
Ratio of net investment income to average net assets................................. 7.28% 6.37%+
Portfolio turnover rate.............................................................. 23% 26%
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor
and administrator.................................................................... 1.07% 1.50%+
Net investment income per share before waiver of fees and expenses reimbursed by
investment advisor and administrator.................................................. $0.47 $0.19
- --------------------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 7, 1993.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to the timing of sales and redemptions of
Fund shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
GROWTH AND INCOME FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PERIOD ENDED
12/31/94*
Net asset value, beginning of period................................ $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................. 0.07
Net realized and unrealized loss on investments................... (0.24)
-------
Total from investment operations.................................... (0.17)
-------
Net asset value, end of period...................................... $ 9.83
-------
TOTAL RETURN++...................................................... (1.70)%
-------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)................................ $24,905
Ratio of operating expenses to average net assets.................. 1.20%+
Ratio of net investment income to average net assets............... 1.63%+
Portfolio turnover rate............................................ 44%
Ratio of operating expenses to average net assets before
waiver of fees by investment advisor and administrator............. 1.55%+
Net investment income per share before waiver of fees
by investment advisor and administrator............................. $0.05
- -------------------------------------------------------------------------------
* The Fund commenced operations on January 12, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator.
<PAGE>
<TABLE>
GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year.................................................... $ 11.19 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.04 0.02
Net realized and unrealized gain on investments..................................... 0.26 1.17
------- -------
Total from investment operations...................................................... 0.30 1.19
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ (0.01) --
------- -------
Total distributions................................................................... (0.01) --
------- -------
Net asset value, end of year.......................................................... $ 11.48 $ 11.19
======= =======
TOTAL RETURN++........................................................................ 2.69% 11.90%
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)....................................................... $62,763 $22,795
Ratio of operating expenses to average net assets.................................... 1.26% 0.78%+
Ratio of net investment income to average net assets................................. 0.74% 0.70%+
Portfolio turnover rate.............................................................. 257% 86%
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor
and/or administrator................................................................. 1.32% 1.92%+
Net investment income/(loss) per share before waiver of fees and expenses
reimbursed by investment advisor and/or
administrator......................................................................... $0.04 ($0.01)
- --------------------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 7, 1993.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
EMERGING GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PERIOD ENDED
12/31/94*
------------
Net asset value, beginning of period............................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.06
Net realized and unrealized gain on investments.................. 0.47
-------
Total from investment operations................................... 0.53
-------
Net asset value, end of period..................................... $ 10.53
-------
TOTAL RETURN++..................................................... 5.30%
========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............................... $19,885
Ratio of operating expenses to average net assets................. 1.23%+
Ratio of net investment income to average net assets.............. 1.03%+
Portfolio turnover rate........................................... 192%
Ratio of operating expenses to average net assets before
waiver of fees by investment advisor and administrator............ 1.38%+
Net investment income per share before waiver of fees
by investment advisor and administrator............................ $0.05
- ------------------------------------------------------------------------------
* The Fund commenced operations on January 12, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator.
<PAGE>
<TABLE>
INTERNATIONAL GROWTH FUND
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
---------- ------------
<S> <C> <C>
Net asset value, beginning of year.................................................... $ 11.31 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... 0.01 0.02
------- -------
Net realized and unrealized gain on investments..................................... 0.19# 1.29
------- -------
Total from investment operations...................................................... 0.20 1.31
------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................................................ (0.03) --
Distributions from net realized gains............................................... (0.01) --
------- -------
Total distributions................................................................... (0.04) --
------- -------
Net asset value, end of year.......................................................... $ 11.47 $ 11.31
======= =======
TOTAL RETURN++........................................................................ 1.88% 13.10%
======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)....................................................... $46,529 $10,638
Ratio of operating expenses to average net assets.................................... 1.34% 0.83%+
Ratio of net investment income to average net assets................................. 0.83% 0.61%+
Portfolio turnover rate.............................................................. 51% 24%
Ratio of operating expenses to average net assets before waiver of fees and
expenses reimbursed by investment advisor
and administrator.................................................................... 1.50% 2.85%+
Net investment income/(loss) per share before waiver of fees
and expenses reimbursed by investment advisor and
administrator......................................................................... $0.01 ($0.06)
- ---------------------------------------------------------------------------------------------------------------------
* The Fund commenced operations on May 7, 1993.
# The amount shown may not accord with the change in the aggregate gains and
losses of portfolio securities due to the timing of sales and redemptions of
Funds shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated. The
total return would have been lower if certain fees had not been waived by the
investment advisor and administrator and if certain expenses had not been
borne by the investment advisor.
</TABLE>
<PAGE>
INVESTMENT POLICIES
The nine Funds follow distinct investment policies. An investment in a single
Fund is not designed to be a complete investment program. In implementing its
policies, each Fund uses a variety of instruments, strategies and techniques
that are capitalized in the text and described in more detail in the Appendix
and in the SAI. With respect to each Fund's investment policies, use of the term
"primarily" means that under normal circumstances, at least 65% of the Fund's
assets will be invested as indicated, except for the Global Money Fund, where
all of its assets will meet the quality and maturity standards described in the
SAI. A description of the rating systems used by the following nationally
recognized statistical rating organizations ("NRSROs") is also contained in the
SAI: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), Duff & Phelps, Inc. ("Duff") and Fitch Investors Service, Inc.
("Fitch"). New instruments, strategies and techniques, however, are evolving
continually and the Trust reserves authority to invest in or implement them to
the extent consistent with its investment objectives and policies. If new
instruments, strategies or techniques would involve a material change to the
information contained herein, they will not be purchased or implemented until
this Prospectus is appropriately supplemented.
THE MONEY MARKET FUND
GLOBAL MONEY FUND. The Global Money Fund invests in the following U.S. dollar
denominated high-quality, money market instruments issued by U.S. and foreign
financial institutions and nonfinancial corporations and by the U.S. Government,
its agencies and instrumentalities:
1. Bank Obligations;
2. Commercial paper (including variable rate demand notes);
3. Short-term corporate obligations;
4. U.S. Government Securities; and
5. Repurchase Agreements collateralized by the securities listed in
1 and 4 above.
The Global Money Fund follows industry-standard guidelines on the quality and
maturity of its investments designed to help maintain a stable $1.00 share
price. The Fund does not, however, guarantee a $1.00 share price, and a major
change in interest rates or a default on an investment could cause the share
price to change. Generally, securities with longer maturities are more
vulnerable to price changes, although they provide higher yields.
The Fund may invest in Foreign Investments that are U.S. dollar denominated. The
Fund may invest up to 50% of its assets in any foreign country but will normally
include issues having activities in at least three countries, including the
United States. In addition, the Fund may invest in U.S. Government Securities
without limit and normally will invest at least 25% of its assets in Bank
Obligations.
THE BOND FUNDS
SHORT TERM HIGH QUALITY BOND FUND. To accomplish its objective, the Fund will
invest primarily in high quality short-term bonds and other debt securities.
Under normal market conditions the Fund will maintain a dollar-weighted average
portfolio maturity of three years or less. The Fund may hold individual
securities with remaining maturities of more than three years as long as the
dollar-weighted average portfolio maturity is three years or less. For purposes
of the weighted average maturity calculation, a mortgage instrument's average
life will be considered to be its maturity.
The Fund intends to invest 100% of its assets in a portfolio of debt securities
that are rated investment grade by one or more NRSROs, or, if unrated, are
judged to be of comparable quality by the Fund's Sub-Advisor. Securities which
are "investment grade" are rated in one of the four highest rating categories.
The Fund will invest primarily in U.S. Government Securities, corporate debt
obligations or Mortgage-Backed Securities rated in one of the two highest
categories by an NRSRO, that is, at least Aa by Moody's, at least AA by S&P,
Duff or Fitch, or, if unrated, which are judged to be of comparable quality by
the Sub-Advisor. Investment-grade bonds are generally of medium to high quality.
A bond rated in the lower end of the category (Baa/BBB) however, may have
speculative characteristics and may be more sensitive to economic changes and
changes in the financial condition of the issuer.
The debt securities in which the Fund may invest include obligations issued or
guaranteed by domestic and foreign governments and government agencies and
instrumentalities and high-grade corporate debt obligations, such as bonds,
debentures, notes, equipment lease and trust certificates, Mortgage-Backed
Securities, collateralized mortgage obligations and Asset-Backed Securities.
The Fund may invest up to 10% of its assets in foreign debt securities,
primarily bonds of foreign governments or their political subdivisions, foreign
companies and supranational organizations, including non-U.S. dollar denominated
securities and U.S. dollar denominated debt securities issued by foreign issuers
and foreign branches of U.S. banks. As discussed in the Appendix under
"Securities and Investment Practices - Foreign Investments," investment in
foreign securities is subject to special risks, such as future adverse political
and economic developments; possible seizure, nationalization, or expropriation
of foreign investments; less stringent disclosure and accounting requirements;
the possible establishment of exchange controls or taxation at the source; or
the adoption of other foreign governmental restrictions.
The Fund may also invest in high-quality, short-term obligations (with
maturities of 12 months or less), such as commercial paper issued by domestic
and foreign corporations, Bank Obligations and Repurchase Agreements. In
addition, the Fund may engage in certain Strategic Transactions, which include
Dollar Roll Transactions, Reverse Repurchase Agreements, Interest Rate
Transactions, Options on Securities and Indexes, Futures and Options on Futures,
Options on Foreign Currencies, Foreign Exchange Transactions and Over the
Counter Options. The Fund currently intends to invest up to 10% of its total
assets in Reverse Repurchase Agreements and Dollar Roll Transactions.
The Fund may invest in certain Illiquid Securities.
SHORT TERM GLOBAL GOVERNMENT FUND. Under normal conditions, the Fund invests
primarily in at least three different countries, one of which may be the United
States. The Fund maintains a dollar-weighted average portfolio maturity not
exceeding three years but may hold individual securities with longer maturities.
This policy helps minimize the effect of interest rate changes on the Fund's
share price. The Sub-Advisor's expected average life of a portfolio mortgage
security is used as that security's maturity with regard to determining the
above average dollar-weighted portfolio maturity calculation. The Fund's share
price and yield will fluctuate primarily due to the movement of foreign
currencies against the U.S. dollar and changes in worldwide interest rates.
The Fund is not meant to be a substitute for a money market fund, which seeks to
maintain a fixed net asset value per share. The Fund seeks to maintain greater
price stability than longer-term bond funds.
Under normal market conditions, the Fund will invest primarily in: (i)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions (including any security
which is majority owned by such government, agency, instrumentality, or
political subdivision); (ii) U.S. Government Securities; and (iii) debt
securities issued or guaranteed by Supranational Organizations, considered to be
"government securities."
The Fund may also invest in non-government foreign and domestic debt securities,
including corporate debt securities, Bank Obligations, Mortgage-Backed or
Asset-Backed Securities, and Repurchase Agreements.
To protect against credit risk, the Fund invests primarily in high-grade debt
securities. At least 65% of the Fund's investments will consist of securities
rated within the three highest rating categories of S&P (AAA, AA, A) or Moody's
(Aaa, Aa or A) or, if unrated, will be considered by the Sub-Advisor to be of
equivalent quality. The Fund may invest in Lower-Rated Securities.
In addition to U.S. dollar holdings, the Fund may invest in securities
denominated in foreign currencies and in multinational currency units, such as
the European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain states of the European Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in the relative values
of the underlying currencies. Securities of issuers within a given country may
be denominated in the currency of another country. In addition, when the Fund's
Sub-Advisor believes that U.S. securities offer superior opportunities for
achieving the Fund's investment objective, or for temporary defensive purposes,
the Fund may invest substantially all of its assets in securities of U.S.
issuers or securities denominated in U.S. dollars.
The Fund may engage in certain Strategic Transactions, which include Dollar Roll
Transactions, Reverse Repurchase Agreements, Interest Rate Transactions, Options
on Securities and Indexes, Futures and Options on Futures, Options on Foreign
Currencies, Foreign Exchange Transactions and Over the Counter Options.
The Fund's net asset value per share fluctuates, depending on (i) current
worldwide market interest rates, (ii) the value of the currencies in which the
Fund's portfolio securities are denominated when compared to the U.S. dollar,
(iii) the success of the Sub-Advisor's currency hedging techniques, and (iv) the
creditworthiness of the issuers in which the Fund is invested. In pursuing the
Fund's investment objective, however, the Sub-Advisor actively manages the Fund
in an effort to minimize the effect of such factors on the Fund's net asset
value per share. The Sub-Advisor allocates the Fund's investments among those
markets, issuers and currencies that it believes offer the most attractive
combination of high income and principal stability. In evaluating investments
for the Fund, the Sub-Advisor analyzes relative yields and appreciation
potential of securities in particular markets; world interest rates and monetary
trends; economic, political and financial market conditions in different
countries; credit quality; and the relationship of individual foreign currencies
to the U.S. dollar. The Sub-Advisor relies on internally and externally
generated financial, economic, and credit research to evaluate alternative
investment opportunities. In addition, Sierra Advisors may, from time to time,
direct the Sub-Advisor with respect to investment strategies and specific Fund
investments including, but not limited to, the Fund's currency hedging strategy,
U.S. dollar currency exposure and certain investments which are unrated or rated
below investment grade.
The Short Term Global Government Fund is classified as a "non-diversified"
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. The Fund may assume large positions in the obligations of a small number
of issuers which may subject the Fund to greater credit and other risks than a
more broadly diversified portfolio. The Fund must, however, meet certain
diversification standards to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxes" in the SAI.
U.S. GOVERNMENT FUND. The Fund pursues its objective by investing at least 65%
and up to 100% of its assets in intermediate- and long-term U.S. Government
Securities. Depending on current market conditions, the Fund may invest in U.S.
Government Securities of varying maturities, which may range up to 40 years.
Securities in the Fund's portfolio are high quality securities that will
generally yield less income than lower quality securities; higher quality
securities, however, generally have less credit and market risk and are more
readily marketable than lower quality securities. Depending on market
conditions, the Fund's portfolio will consist of various types of U.S.
Government Securities in varying proportions; it may invest up to 35% of its
assets in the types of securities in which the Corporate Income Fund may invest
except as otherwise prohibited in this Prospectus or the SAI, including
preferred stock, Convertible Securities, U.S. Government Securities (including
Government Stripped Mortgage-Backed Securities), Asset-Backed Securities and
interests in Lease Obligations Bonds. A substantial portion of the Fund's assets
at any time may consist of Mortgage-Backed Securities. For more detailed
information regarding the types of securities in which the Corporate Income Fund
may invest, see "Corporate Income Fund."
The Fund may invest up to 20% of its assets in money market instruments
consisting of short-term U.S. Government Securities and Repurchase Agreements
with respect to such U.S. Government Securities, and for temporary defensive
purposes may invest in these instruments without limitation. In addition, the
Fund may engage in Reverse Repurchase Agreements, Dollar Roll Transactions and
certain Strategic Transactions.
GUARANTEES OF THE FUND'S SECURITIES BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES GUARANTEE ONLY THE PAYMENT OF PRINCIPAL AND INTEREST ON THE
GUARANTEED SECURITIES, AND DO NOT GUARANTEE THE SECURITIES' YIELD OR VALUE OR
THE YIELD OR VALUE OF THE FUND'S SHARES.
CORPORATE INCOME FUND. The Fund pursues its investment objective by investing
primarily in corporate bonds of United States issuers that are rated investment
grade by one or more NRSROs, or, if not rated, that the Fund's Sub-Advisor
believes to have credit characteristics equivalent to such investment grade
rated corporate bonds. Securities which are rated "investment grade" are rated
in one of the four highest categories. Generally, at least 65% of the corporate
bonds held by the Fund will have had remaining maturities of 10 years or more at
the date of purchase, unless the Sub-Advisor believes that investing in
corporate bonds with shorter maturities would be appropriate in light of
prevailing market conditions. Corporate bonds with longer maturities generally
tend to produce higher yields and are subject to greater market risk than debt
securities with shorter maturities. The value of the Fund's portfolio securities
can be expected to vary inversely with changes in the prevailing interest rates.
The Fund may also invest in preferred stock and Convertible Securities, which
are rated investment grade by an NRSRO, or, if not rated, that the Sub-Advisor
believes to have credit characteristics equivalent to such investment grade
rated bonds; U.S. Government Securities (including Government Stripped
Mortgage-Backed Securities); Asset-Backed Securities; interests in Lease
Obligation Bonds for which the payment of interest and principal is
unconditionally guaranteed by companies with debt that is rated at least
investment grade by an NRSRO, provided that, no more than 20% of the Fund's
assets will be invested in such Lease Obligation Bonds. The Fund also may invest
in bonds issued by foreign governments and corporations, provided that no more
than 20% of the Fund's assets will be invested in such bonds and no more than 5%
will be denominated in any one currency. For temporary defensive purposes, the
Fund may also invest, without limitation, in money market instruments, including
short-term U.S. Government Securities, commercial paper rated in the highest
category by an NRSRO, Bank Obligations and cash and cash equivalents. In
addition, the Fund may engage in Reverse Repurchase Agreements, Dollar Roll
Transactions and certain Strategic Transactions.
THE EQUITY FUNDS
GROWTH AND INCOME FUND. The Fund invests primarily in dividend-paying Common
Stock. The Fund may also invest in other equity securities, consisting of Common
Stock (nondividend-paying), preferred stock and Convertible Securities, such as
convertible preferred stock, convertible bonds rated in the highest three rating
categories by Moody's or S&P, or, if unrated, are determined to be of equal
quality by the Fund's Sub-Advisor, and warrants. The Fund is not subject to any
limit on the size of companies in which it may invest, but intends to be
primarily invested, under normal circumstances, in the large- and medium-sized
companies included in the S&P 500 Index. The Fund may also invest up to 10% of
its total assets in American Depositary Receipts. The Fund is designed for
investors who want an actively managed diversified portfolio of selected equity
securities that seeks to outperform the total return of the S&P 500 Index.
The Fund attempts to reduce risk by investing in many different economic
sectors, industries and companies. The Fund's Sub-Advisor may under- or
over-weight selected economic sectors against the S&P 500 Index's sector
weightings to seek to enhance the Fund's total return or reduce fluctuations in
market value relative to the S&P 500 Index.
During ordinary market conditions, the Sub-Advisor will keep the Fund
essentially fully invested in the equity securities described above. The
Sub-Advisor may, however, invest in money market instruments including U.S.
Government Securities; Bank Obligations; and commercial paper and corporate
obligations, including variable rate demand notes, that are issued by U.S. and
foreign issuers and that are rated in the highest three rating categories by
Moody's or S&P, or, if unrated, are determined to be of equal quality by the
Sub-Advisor. Under normal circumstances, the Fund will invest in such money
market instruments to invest temporary cash balances or to maintain liquidity to
meet redemptions. The Fund may also, however, invest in these instruments,
without limitation, as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions. In addition, the Fund may engage in
certain Strategic Transactions.
GROWTH FUND. The Fund invests primarily in Common Stock of U.S., multinational
and foreign companies of all sizes that offer potential for growth. Generation
of income is not an objective of the Fund, and any income received is only an
incidental consideration of the Fund.
The Fund intends to invest primarily in Common Stock believed by management to
have appreciation potential. However, no class of security represents at all
times the greatest promise for capital appreciation. Therefore, the Fund may
invest in debt securities, bonds, convertible bonds, preferred stock and
convertible preferred stock, including Lower-Rated Securities, if in the opinion
of management, doing so would further the long-term capital appreciation
objective of the Fund.
The Fund may invest up to 25% of its assets in foreign securities, usually
foreign Common Stocks. The Fund may also, for temporary defensive purposes, in
an effort to protect its assets against major adverse market declines or when
investment opportunities with desirable risk/reward characteristics are
unavailable, pursue a policy of retaining cash or investing part or all of its
assets in cash equivalents or investment-grade debt securities. In addition the
Fund may engage in certain Strategic Transactions.
EMERGING GROWTH FUND. The Fund invests primarily in Common Stock of companies
with market capitalization between $50 million and $1 billion at the time of
purchase. Income is only an incidental consideration of the Fund. A company's
market capitalization is calculated by multiplying the total number of shares of
its Common Stock outstanding by the market price per share of its stock.
Small capitalization companies typically are subject to a greater degree of
change in earnings and business prospects than larger, more established
companies. In addition, securities of small capitalization companies are traded
in lower volume than those issued by larger companies and may be more volatile
and less liquid than those of larger companies. In light of these
characteristics of small capitalization companies and their securities, the Fund
may be subject to greater investment risk than that assumed when investing in
the equity securities of larger capitalization companies.
The Fund has been designed to provide investors with potentially greater
long-term rewards than those provided by an investment in a fund that seeks
capital appreciation from equity securities of larger, more established
companies. In a recent study prepared by Ibbottson & Associates for periods
since 1925, it has been demonstrated that the historical long-term returns on
investments in equity securities of small capitalization companies have been
higher than returns on those of large capitalization companies. In addition,
small capitalization companies generally are not as well known to the investing
public and have less of an investor following than larger companies, and
therefore may provide opportunities for greater investment gains as a result of
relative inefficiencies in the marketplace.
In selecting investments for the Fund, the Fund's Sub-Advisor seeks small
capitalization companies that it believes are undervalued in the marketplace, or
that the Sub-Advisor believes have earnings that may be expected to grow faster
than the United States economy in general. These companies typically would
possess one or more characteristics, including high quality management, a
leading or dominant position in a major product line, a sound financial position
and a relatively high rate of return on invested capital so that future growth
can be financed from internal sources. The Fund also may invest in companies
that offer the possibility of accelerating earnings growth because of management
changes, new products or structural changes in the economy.
The Fund may invest up to 25% of its assets in similar securities of foreign
issuers.
The Fund may invest in other equity securities, including Convertible Securities
and warrants to purchase Common Stock, as well as cash and cash equivalents. In
addition, the Fund may invest in Lower Rated Securities and engage in certain
Strategic Transactions.
INTERNATIONAL GROWTH FUND. The Fund invests primarily in equity securities of
foreign issuers located in countries that the Fund's Sub-Advisor deems to have
attractive investment opportunities. Income is only an incidental consideration
of the Fund. The Fund will emphasize established companies, although it may
invest in companies of varying sizes as measured by assets, sales and
capitalization.
The Fund may invest in securities of issuers located in a variety of different
foreign regions and countries which includes, but is not limited to, the
following: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico,
The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Thailand and The United Kingdom. More than 25% of the Fund's total
assets may be invested in the securities of issuers located in the same country.
The relative strength or weakness of a particular country's currency or economy
may dictate whether securities of issuers located in such country will be
purchased or sold. Criteria for determining the appropriate distribution of
investments among various countries and regions include prospects for relative
economic growth among foreign countries, expected levels of inflation,
government policies influencing business conditions, the outlook for currency
relationships, and the range of investment opportunities available to
international investors.
The Fund invests in Common Stock and may invest in other securities with equity
characteristics, consisting of trust or limited partnership interests, preferred
stock, rights and warrants. The Fund may also invest in Convertible Securities.
The Fund invests in securities listed on foreign or domestic securities
exchanges and securities traded in foreign or domestic over-the-counter markets,
and may invest in restricted or unlisted securities.
The Fund intends to stay invested in the securities described above to the
extent practical. Fund assets may be invested in short-term debt instruments to
meet anticipated day-to-day operating expenses, and for temporary defensive
purposes. In addition, when the Fund experiences large cash inflows, the Fund
may hold short-term investments pending availability of desirable equity
securities.
The short-term instruments in which the Fund may invest include foreign and
domestic: (i) short-term obligations of foreign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated in one of the three highest categories by an NRSRO, or if
unrated, of comparable quality in the opinion of the Fund's Sub-Advisor; (iii)
commercial paper, including master notes; (iv) Bank Obligations; and (v)
Repurchase Agreements. At the time the Fund invests in any commercial paper,
Bank Obligations or Repurchase Agreements, the issuer must have outstanding debt
rated in one of the three highest categories by an NRSRO, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by S&P; or, if no such ratings are available, the investment must
be of comparable quality in the opinion of the Fund's Sub-Advisor.
The Fund may invest up to 25% of its assets in the securities of companies or
governments of developing countries. For temporary defensive purposes, the Fund
may invest a major portion of its assets in securities of United States issuers.
Furthermore, the Fund may invest up to 5% of its total assets in corporate debt
securities having maturities longer than one year and which are rated BBB or
better by S&P, including Euro-currency instruments and securities.
In addition, the Fund may engage in certain Strategic Transactions, which
include Options on Securities and Indexes, Futures and Options on Futures,
Options on Foreign Currencies, Foreign Exchange Transactions and Over the
Counter Options.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Board of Trustees is responsible for the management of the business and
affairs of the Trust as provided in the laws of the Commonwealth of
Massachusetts and the Trust's Declaration of Trust and By-Laws. The Trustees are
experienced business persons who meet several times during the year to oversee
the Trust's activities, review contractual arrangements with companies that
provide services to the Trust, and review performance. The majority of the
Trustees are not otherwise affiliated with Sierra Advisors or any of the
Sub-Advisors.
INVESTMENT MANAGEMENT
INVESTMENT ADVISOR. Sierra Advisors, 9301 Corbin Avenue, Northridge, California
91324, is the Investment Advisor to the Trust. Sierra Advisors is an indirect
wholly-owned subsidiary of Great Western Financial Corporation ("Great
Western"), a publicly owned financial services company listed on the New York,
London and Pacific stock exchanges, and has general oversight responsibility for
the investment advisory services provided to the Funds. Responsibilities of
Sierra Advisors include formulating the Funds' investment policies, analyzing
economic trends affecting the Funds, and directing and evaluating the investment
services provided by the Sub-Advisors, including their adherence to the Funds'
investment objectives and policies and the Funds' investment performance. In
connection with these activities, Sierra Advisors may initiate action to change
a Sub-Advisor if it deems such action to be in the best interest of shareholders
of a Fund. Sierra Advisors is registered as an investment advisor under the
Investment Advisers Act of 1940. Sierra Advisors performs similar services for
Sierra Trust Funds which had approximately $2.6 billion in assets as of December
31, 1994. For its services, Sierra Advisors is paid a monthly fee at annual
rates equal to percentages of each Fund's average net assets, described in
"Advisory Fees."
SUB-ADVISORS. In accordance with each Fund's investment objective and policies
and under the supervision of Sierra Advisors and the Trust's Board of Trustees,
each Fund's Sub-Advisor is responsible for the day-to-day investment management
of the Fund, makes investment decisions for the Fund and places orders on behalf
of the Fund to effect the investment decisions made.
The following organizations act as Sub-Advisors to Funds indicated below:
BLACKROCK FINANCIAL MANAGEMENT, INC. ("BlackRock"), Sub-advisor of the
U.S. Government Fund, 345 Park Avenue, New York, New York 10154,
provides investment advice to a wide variety of institutional and
investment company-related clients. BlackRock, a Delaware corporation,
is an indirectly, wholly-owned subsidiary of PNC Bank, N.A. PNC Bank,
N.A. is an indirectly, wholly-owned subsidiary of PNC Bank Corp.
("PNC"). PNC is a publicly-owned multi-bank holding company
incorporated under the laws of the Commonwealth of Pennsylvania in 1983
and registered under the Bank Holding Company Act of 1956, as amended.
As of December 31, 1994, BlackRock had aggregate assets under
management or supervision of more than $23 billion.
The day-to-day management of the U.S. Government Fund's portfolio is
the responsibility of a committee composed of individuals who are
officers of BlackRock. Keith Anderson and E.G. Fisher are members of
the committee and have had primary responsibility for the day-to-day
management of the Fund's portfolio since December 8, 1994. Mr.
Anderson, a Managing Director of BlackRock, has been co-head of the
Portfolio Management Group since 1988. Mr. Fisher has been a portfolio
manager of BlackRock since 1990 and a Principal of BlackRock since
1994.
JANUS CAPITAL CORPORATION ("Janus"), Sub-Advisor of the Growth Fund and
Emerging Growth Fund, 100 Fillmore Street, Suite 300, Denver, Colorado
80206, provides investment advice to mutual funds and other large
institutional clients. Janus is an indirect majority owned subsidiary
of Kansas City Southern Industries, Inc., a publicly traded holding
company whose primary subsidiaries are engaged in transportation,
financial services and real estate. As of December 31, 1994, Janus'
assets under management were in excess of $22 billion.
Warren B. Lammert, Senior Analyst and Portfolio Manager of Janus, has
been the portfolio manager for the Growth Fund since its inception. Mr.
Lammert is a graduate of Yale University and is a Chartered Financial
Analyst. He served as a securities analyst at Janus from 1987-1988,
before leaving to receive his Masters in Economic History with
Distinction from the London School of Economics. He rejoined Janus as
Senior Analyst in January, 1990, and is Portfolio Manager to a number
of equity funds, including the Growth Fund.
James P. Goff, Portfolio Manager and Senior Analyst at Janus, has been
the portfolio manager of the Emerging Growth Fund since inception. Mr.
Goff joined Janus in 1988, and also manages the Janus Enterprise Fund.
He holds a Bachelor of Arts in Economics from Yale University and is a
Chartered Financial Analyst. His duties at Janus also include the
management of separate equity accounts.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), Sub-Advisor of
the Global Money Fund, Growth and Income Fund and International Growth
Fund, 522 Fifth Avenue, New York, New York 10036, provides investment
services to employee benefit plans of corporations, labor unions and
state and local governments and the accounts of other institutional
investors. As of December 31, 1994, J.P. Morgan had investment
management authority with respect to approximately $121 billion.
Douglas J. Dooley, Vice President of J.P. Morgan, has been the
portfolio manager for the International Growth Fund since inception.
Mr. Dooley received his Bachelor of Science from American University
and an M.B.A. from Columbia University. Additionally, he is a Chartered
Financial Analyst. Mr. Dooley joined J.P. Morgan's research department
in 1979. He served as head of International Research Group in London
from 1986-1990, responsible for managing institutional equity and
balanced accounts. Prior to that position, Mr. Dooley was the Portfolio
Manager for U.S. portfolios from 1985-1986.
Henry D. Cavanna, Managing Director of J.P. Morgan, and William M.
Riegel, Vice President of J.P. Morgan, have been the portfolio managers
for the Growth and Income Fund since inception. Mr. Cavanna is a senior
portfolio manager in the Equity and Balanced Accounts Group. Mr.
Cavanna was with the Wall Street firm, Harris Upham & Co., prior to
joining J.P. Morgan in 1971. He received his B.A. degree from Boston
College and LL.B. degree from the University of Pennsylvania. Mr.
Riegel is also a senior portfolio manager in the Equity and Balanced
Accounts Group. He joined J.P. Morgan in 1979 as an investment research
analyst in energy and machinery companies after completing the firm's
commercial bank management training program. Mr. Riegel joined the
Equity Group in 1984, assisting with the management of the Convertible
Fund and separately managed accounts. Mr. Riegel graduated from
Williams College in 1978 and is a Chartered Financial Analyst.
SCUDDER, STEVENS & CLARK, INC. ("Scudder"), Sub-Advisor of the Short
Term High Quality Bond Fund and Short Term Global Government Fund, Two
International Place, Boston, Massachusetts 02110, provides investment
management services for institutions, individuals and mutual funds. As
of December 31, 1994, Scudder's assets under management were in excess
of $90 billion. Scudder is a privately held corporation, owned and
operated by active firm employees, concentrating primarily on
investment management.
Margaret Craddock, Vice President of Scudder, has been the portfolio
manager for the Short Term Global Government Fund since its inception.
She received her B.A. in Economics from Smith College, and her Masters
of Science in Economics from the London School of Economics. Ms.
Craddock was part of the international bond team at Alliance Capital
from 1987-1991, before she joined Scudder.
Thomas M. Poor, Managing Director of Scudder, has been the portfolio
manager of the Short Term High Quality Bond Fund since inception. Mr.
Poor graduated from Amherst College in 1965 and taught mathematics
before joining Scudder in 1970. He has worked entirely in fixed-income
research and institutional bond portfolio management and is currently
director of the firm's Limited Volatility Bond Product, where he is
responsible for the policy, coordination and promotion of this style.
In addition, he manages institutional portfolios, Scudder Short Term
Bond Fund and Scudder Managed GIC Trust. He became a Certified
Financial Analyst in 1975 and has received that organization's
Certificate of Achievement in 1987-1992.
TCW FUNDS MANAGEMENT, INC. ("TCW"), Sub-Advisor of the Corporate Income
Fund, 865 S. Figueroa Street, Suite 1800, Los Angeles, California
90017, along with the other wholly-owned subsidiaries of The TCW Group,
Inc., is a privately held company, and provides a variety of investment
management and investment advisory services for institutional
investors, including investment companies. As of December 31, 1994,
these companies had aggregate assets under management of almost $49
billion.
James M. Goldberg, Managing Director of TCW and Chairman of its
Fixed-Income Policy Committee, has been the portfolio manager for the
Corporate Income Fund since its inception. Mr. Goldberg joined TCW in
1984 after serving as Senior Vice President and Director of Portfolio
Management at Crocker National Corporation. He received his B.S. and
M.B.A. in Finance from the University of California at Berkeley. He is
a guest lecturer at Berkeley and Stanford and is a Chartered Financial
Analyst and a Chartered Investment Counselor.
ADVISORY FEES. For investment advisory services, monthly fees are paid to Sierra
Advisors by each Fund based upon a percentage of the average net assets of such
Fund. Absent fee waivers, the Advisor is paid the following effective annual
rates:
MONEY MARKET AND BOND FUND ADVISORY FEES
<TABLE>
===============================================================================================================================
<CAPTION>
Short Term
Short Term High Global U.S.
Global Money Quality Bond Government Bond Government Corporate
Assets Fund Fund Fund Fund Income Fund
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $200 million .50% .50% .75% .60% .65%
- -------------------------------------------------------------------------------------------------------------------------------
From $200 million to $500 million .50% .45% .75% .60% .65%
- -------------------------------------------------------------------------------------------------------------------------------
More than $500 million .40% .40% .65% .50% .50%
===============================================================================================================================
</TABLE>
EQUITY FUND ADVISORY FEES
<TABLE>
=========================================================================================================================
<CAPTION>
Growth and Emerging International
Assets Income Fund Growth Fund Growth Fund Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $25 million .80% .95% .90% .95%
- -------------------------------------------------------------------------------------------------------------------------
From $25 million to $50 million .80% .875% .85% .95%
- -------------------------------------------------------------------------------------------------------------------------
From $50 million to $100 million .80% .875% .85% .85%
- -------------------------------------------------------------------------------------------------------------------------
From $100 million to $125 million .75% .875% .85% .85%
- -------------------------------------------------------------------------------------------------------------------------
From $125 million to $200 million .75% .875% .85% .75%
- -------------------------------------------------------------------------------------------------------------------------
From $200 million to $400 million .70% .875% .85% .75%
- -------------------------------------------------------------------------------------------------------------------------
From $400 to $500 million .65% .875% .85% .75%
- -------------------------------------------------------------------------------------------------------------------------
More than $500 million .575% .875% .75% .75%
=========================================================================================================================
</TABLE>
Out of the investment advisory fee received by the Advisor for each Fund, the
Advisor would pay monthly to the Sub-Advisor, absent fee waivers by the
Sub-Advisor, the following percentages of average net assets for each Fund:
MONEY MARKET AND BOND FUND SUB-ADVISORY FEES
<TABLE>
=============================================================================================================================
<CAPTION>
Short Term
Short Term Global U.S.
Global High Quality Government Government Corporate
Assets Money Fund Bond Fund Bond Fund Fund* Income Fund
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $200 million .15% .15% .28% .185% .30%
- -----------------------------------------------------------------------------------------------------------------------------
From $200 million to $500 million .15% .10% .10% .185% .30%
- -----------------------------------------------------------------------------------------------------------------------------
From $500 million to $650 million .15% .10% .10% .185% .25%
- -----------------------------------------------------------------------------------------------------------------------------
From $650 million to $1 billion .15% .10% .10% .15% .25%
- -----------------------------------------------------------------------------------------------------------------------------
More than $1 billion .15% .10% .10% .10% .25%
=============================================================================================================================
</TABLE>
* For purposes of calculating the annual rate of compensation for the U.S.
Government Fund's Sub-Advisor, (i) the assets reflected in the table above
include the combined assets of the Trust's U.S. Government Fund and the Sierra
Trust Fund's U.S. Government Fund, and (ii) the percentages indicated at a
given asset level apply to the entire amount of assets in the Fund to the
extent that the Fund's assets exceed the asset level indicated.
EQUITY FUND SUB-ADVISORY FEES
<TABLE>
===============================================================================================================================
<CAPTION>
Growth and Emerging International
Assets Income Fund Growth Fund Growth Fund Growth Fund
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $25 million .45% .55% .55% .60%
- -------------------------------------------------------------------------------------------------------------------------------
From $25 million to $50 million .45% .50% .50% .60%
- -------------------------------------------------------------------------------------------------------------------------------
From $50 million to $100 million .45% .50% .50% .50%
- -------------------------------------------------------------------------------------------------------------------------------
From $100 million to $200 million .40% .50% .50% .50%
- -------------------------------------------------------------------------------------------------------------------------------
From $200 million to $400 million .35% .50% .50% .50%
- -------------------------------------------------------------------------------------------------------------------------------
More than $400 million .30% .50% .50% .50%
===============================================================================================================================
</TABLE>
The management fees for the Short Term Global Government, Growth and Income,
Growth, Emerging Growth and International Growth Funds are higher than those
paid by most mutual funds, but comparable to other mutual funds with like
investment objectives and policies.
Sierra Advisors and certain Fund Sub-Advisors may voluntarily waive fees payable
to them from time to time. Any fee waivers by a Sub-Advisor may be retained by
Sierra Advisors, or it may pass part or all of such fee waivers through to the
Funds. The investment adviser and the administrator of the Funds have each
voluntarily undertaken to waive its fees and/or bear certain expenses, if
necessary, from time to time so that average annual total expenses will not
exceed 1.00%, 1.45%, 1.30%, 1.40%, 1.55%, 1.10%, 1.00%, 1.15% and 1.35% for the
Global Money, Growth, Growth and Income, Emerging Growth, International Growth,
U.S. Government, Short Term High Quality Bond, Corporate Income and Short Term
Global Government Funds, respectively. In addition, the investment adviser and
administrator have each agreed to further limit the average annual total
expenses of the Global Money Fund so that they will not exceed 0.50%. Expenses
for a Fund may be accrued at a rate in excess of such limits for short periods
of time so long as the limit is met on an annual basis. Absent these voluntary
waivers and reimbursements, the annual management fees, other expenses and total
expenses for the Global Money Fund would be 0.50%, 0.75% and 1.25%,
respectively. Actual expenses for a Fund may vary from day to day. The
investment adviser and the administrator retain the ability to be repaid by a
Fund if expenses fall below the specified limit prior to the end of the fiscal
year, but will not recover these amounts in later years. The investment adviser
and the administrator may each, at its sole discretion, vary the level of or
eliminate its voluntary fee waivers and expense reimbursements at any time.
Waivers of fees and reimbursement of expenses have the effect of increasing
yield or improving total return for the period when such waivers and
reimbursements are in effect. During the fiscal year ended December 31, 1994,
the following fees based upon the average net assets of each Fund were paid by
the Trust to Sierra Advisors: Global Money Fund - 0.00%; Short Term High Quality
Bond Fund - 0.23%; Short Term Global Government Fund - 0.52%; U.S. Government
Fund - 0.54%; Corporate Income Fund - 0.60%; Growth and Income Fund - 0.51%;
Growth Fund - 0.92%; Emerging Growth Fund - 0.82%; and International Growth Fund
- - 0.87%.
TRUST EXPENSES. In addition to investment advisory and certain administrative
expenses incurred by Sierra Administration, each Fund pays all expenses not
assumed by Sierra Advisors. Such expenses include or could include
investment-related expenses, such as brokers' commissions, transfer taxes and
fees related to the purchase, sale, or loan of securities; fees and expenses for
Trustees not affiliated with Sierra Advisors or the Sub-Advisors; fees and
expenses of its independent auditors and legal counsel; costs of Trustee and
shareholder meetings; SEC fees; expenses of preparing and filing registration
statements; the cost of the printing and mailing to existing Contract owners of
proxy statements, prospectuses and statements of additional information; proxy
solicitors' fees; expenses of preparation, printing and mailing to Contract
owners of semi-annual shareholder reports; bank transaction charges and certain
custodians' fees and expenses; federal, state or local income or other taxes;
costs of maintaining the Trust's corporate existence; membership fees for the
Investment Company Institute and similar organizations; fidelity bond and
Trustees' liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses will be passed on to the shareholders through a daily charge
made to the assets held in the Funds, which will be reflected in share prices.
PORTFOLIO TRANSACTIONS AND TURNOVER. All orders for the purchase or sale of
securities on behalf of a Fund are placed by its Sub-Advisor with broker-dealers
that it selects. A Fund may, at the discretion of its Sub-Advisor, utilize Great
Western Financial Securities Corporation, an indirect wholly-owned subsidiary of
Great Western, or other brokers affiliated with a Sub-Advisor (such as J.P.
Morgan Securities Inc. or J.P. Morgan Securities Limited) in connection with a
purchase or sale of securities, in accordance with procedures adopted by
Trustees and in accordance with the 1940 Act which require periodic review of
these transactions.
Under certain market conditions, a Fund may experience high portfolio turnover
as a result of its investment strategies. For example, the purchase or sale of
securities by a Fund in anticipation of a rise or decline in interest rates or
to take advantage of yield disparities among different issues of U.S. Government
Securities could result in high portfolio turnover. As a result of their
investment strategies, the Short Term High Quality Bond, Short Term Global
Government and U.S. Government Funds' annual portfolio turnover rates are
expected to be as high as 200%. The Growth Fund's rate is expected to be as high
as 150%. Higher portfolio turnover rates for the Funds can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. The Funds will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objectives and policies.
DISTRIBUTOR
Sierra Services is the distributor of the Trust's shares on a best efforts
basis. Sierra Services is located at 9301 Corbin Avenue, Northridge, California
91324. Sierra Services, as principal underwriter, or insurance companies whose
variable products are funded by the Trust, will bear all of the Trust's
marketing expenses. This includes the cost of reproducing prospectuses,
statements of additional information or any other Trust documents (such as
semi-annual reports) used as sales materials.
ADMINISTRATION
Subject to the authority of the Board of Trustees, Sierra Administration is
responsible for all administrative and recordkeeping functions of the Trust. It
provides office facilities and supplies; provides clerical, executive,
accounting and administrative services; prepares reports to shareholders and
filings with regulatory authorities; prepares materials for the Board of
Trustees' meetings; computes and pays dividends to shareholders; and provides
securities accounting and calculates net assets. Pursuant to the terms of the
Administration Agreement, Sierra Administration has delegated certain of these
functions to TSSG and Boston Safe. In addition, Sierra Administration acts as
the Trust's transfer and dividend paying agent. Sierra Administration is also an
indirect wholly-owned subsidiary of Great Western. Boston Safe, One Boston
Place, Boston, Massachusetts 02108, acts as custodian of the Funds' assets.
For its services, Sierra Administration is paid a monthly fee at an effective
annual rate of 0.18% of each Fund's average net assets. Sierra Administration
pays TSSG a fee based on the average daily assets of the Trust and its expenses.
In addition, Sierra Administration pays the basic fees and charges of Boston
Safe. Sierra Administration may voluntarily waive fees payable to it and
reimburse expenses from time to time. During the fiscal year ended December 31,
1994, the following fees based upon the average net assets of each Fund were
paid by the Trust to Sierra Administration: Global Money Fund - 0.00%; Short
Term High Quality Bond Fund - 0.11%; Short Term Global Government Fund - 0.05%;
U.S. Government Fund - 0.09%; Corporate Income Fund - 0.09%; Growth and Income
Fund - 0.12%; Growth Fund - 0.12%; Emerging Growth Fund - 0.11%; and
International Growth Fund - 0.10%.
GENERAL INFORMATION AND HISTORY
THE TRUST
The Trust is a diversified, open-end management investment company. It was
organized on January 29, 1993 under the laws of the Commonwealth of
Massachusetts as a "Massachusetts business trust." The Trust has the power to
issue separate series of shares and has authorized nine separate series. The
Trust offers shares of beneficial interest, each without par value. Additional
series may be established.
Currently, the shares of the Funds are sold only to separate accounts of AGL to
fund Contracts. In the future, the Trust may offer its shares to separate
accounts funding variable annuities of insurance companies affiliated or
unaffiliated with AGL and to separate accounts which fund variable life
insurance or other variable funding arrangements. The Trust's Board of Trustees
will monitor potential conflicts between variable life insurance policies and
variable annuity contracts or among insurance company shareholders and will
determine what, if any, action should be taken to resolve any conflicts. Until
other insurance companies have made investments in the Funds, AGL will be the
sole shareholder of the Trust.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholders' meetings. On occasion, however, special meetings may be called to
elect or remove trustees, change fundamental policies, approve management
contracts, or for other purposes. Generally, shares of the Trust vote by
individual Fund on all matters except when the 1940 Act permits shares of the
Funds to be voted in the aggregate. The shareholders of the Trust are the
insurance companies whose separate accounts invest in it. The Trust expects that
its shareholders will offer their Contract owners the opportunity to instruct
them as to how shares allocable to their Contracts will be voted with respect to
certain matters, such as approval of investment advisory agreements. AGL has
advised the Trust that, whenever a shareholder vote is taken, AGL will give
Contract owners and annuitants the opportunity to instruct them how to vote the
number of shares attributable to such Contracts. AGL also stated that it will
vote any shares that it is entitled to vote directly, because of their
attributable interests in the Trust, and any shares attributable to Contracts
for which instructions are not received, in the same proportion that Contract
owners vote.
Under Massachusetts law, in certain circumstances, shareholders may be held
personally liable as partners for the obligations of a business trust such as
the Trust. The Trust's Declaration of Trust contains provisions designed to
protect shareholders from such liability to the extent of the Trust's assets. As
a result, the risk of personal liability for the insurance company shareholders
is remote.
PURCHASE AND REDEMPTION
The shares of the Funds are sold in a continuous offering to separate accounts
of insurance companies to fund Contracts. Net purchase payments under the
Contracts are placed in one or more of the divisions of the relevant separate
accounts and the assets of each division of each separate account are invested
in the shares of the Funds corresponding to such divisions. Each of the separate
accounts purchases and redeems shares of these Funds for its divisions at net
asset value without sales or redemption charges.
For each day on which a Fund's net asset value is calculated, each separate
account transmits to the Trust any orders to purchase or redeem shares of the
Fund(s) based on the purchase payments, redemption (surrender) requests and
transfer requests from Contract owners, annuitants or beneficiaries which are
priced as of that day. The separate accounts purchase and redeem shares of each
Fund at the Fund's net asset value per share calculated as of that same day.
Orders which are not based on actions by Contract owners, annuitants or
beneficiaries or routine deductions of charges by AGL will be effected at the
Fund's net asset value per share next computed after the order is placed.
All redemption requests will be processed and payment with respect thereto will
be made according to applicable regulations. The Trust may also suspend
redemption, if permitted by the 1940 Act, for any period during which the New
York Stock Exchange ("NYSE") is closed or during which trading is restricted by
the SEC or the SEC declares that an emergency exists. Redemption may also be
suspended during other periods permitted by the SEC for the protection of the
Trust's shareholders.
PURCHASE THROUGH THE SAM PROGRAM
Owners of the Sierra Advantage Annuity may elect to participate in the Sierra
Asset Management Program ("SAM Program"). The SAM Program is an active
investment management service offered through Sierra Services, the SAM Program
investment advisor, that allocates separate account values across a number of
investment divisions selected to meet different long-term investment objectives.
Depending on market conditions, Sierra Services from time to time changes or
reallocates the combination of separate account divisions, or the amount
invested in each, to implement the various SAM strategies. In addition, account
balances of Contract owners participating in the SAM Program will be
periodically rebalanced to maintain the chosen strategy's current asset
allocation mix, if and when Fund performance unbalances the strategy's mix.
Normally, Sierra Services will reallocate once a quarter.
From time to time, one or more of the separate account investment divisions may
experience relatively large investments or redemptions due to SAM Program
allocations or rebalancings recommended by Sierra Services. These transactions
will affect the Funds that are available through the SAM Program, since Funds
that experience redemptions as a result of reallocations or rebalancings in the
separate account may have to sell portfolio securities and Funds that receive
additional cash will have to invest it. While it is impossible to predict the
overall impact of these transactions over time, there could be adverse effects
on portfolio management to the extent that Funds may be required to sell
securities or invest cash at times when they would not otherwise do so. These
transactions could also increase transaction costs. The Advisor, representing
the interests of the Trust, is committed to minimizing the impact of SAM Program
transactions on the Funds; Sierra Services, representing the interests of SAM
Program participants, is also committed to minimizing such impact on the Funds
to the extent it is consistent with pursuing the investment objective of the SAM
Program. The Advisor and Sierra Services will nevertheless face conflicts in
fulfilling their respective responsibilities, because they are affiliates and
employ some of the same professionals. In addition, Sierra Services is the
Trust's Distributor and the Distributor of the Sierra Advantage Annuity.
Although Sierra Services is not compensated for sales of Trust shares, it is
compensated for sales of the Sierra Advantage Annuity. Sierra Services is
registered as an investment advisor under the Investment Advisers Act of 1940,
as amended. The SAM Program is currently being offered at no additional cost to
Contract owners, although Sierra Services has reserved the right to impose a
charge for this service in the future. All of the Funds are available through
the SAM Program.
Sierra Services may restrict or terminate the participation of Sierra Advantage
Contract owners in the SAM Program at any time. In addition, AGL has reserved
the rights to place restrictions on transactions permitted by the Sierra
Advantage Annuity that could result in restrictions or terminations of the SAM
Program.
NET ASSET VALUE
The net asset value (the current market value of a Fund share) of each Fund's
shares is determined at the close of regular trading on the NYSE (currently 1:00
p.m., Pacific Time), each business day the NYSE is open, except as noted. The
NYSE is currently scheduled to be closed on New Year's Day, Washington's
Birthday, 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. In addition, net
asset values will not be calculated on the Friday following Thanksgiving. Net
asset value per share is calculated for purchases and redemptions of shares of
each Fund by dividing the value of total Fund assets, less liabilities
(including Trust expenses, which are accrued daily), by the total number of
shares of that Fund outstanding. The net asset value per share of each Fund is
determined each business day at the close of business. Values of assets in each
Fund's portfolio (except the Global Money Fund and certain short-term debt
securities) are determined on the basis of their market values or valuations
determined as described in the SAI. The Global Money Fund values its assets by
the amortized cost method, which approximates market value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The tax consequences of your investment in the Trust depend upon the specific
provisions of your Contract. For more information, see the attached prospectus
for that Contract. The following discussion is only a brief summary of the
federal income tax consequences to the Funds and their insurance company
shareholders based on current tax laws and regulations, which may be changed by
subsequent legislative, judicial, or administrative action.
Each Fund intends to qualify separately each year as a "regulated investment
company" ("RIC") as defined under Subchapter M of the Code. The requirements for
qualification may cause a Fund to restrict the extent of its short-term trading
or its transactions in options or futures contracts.
As a RIC, each Fund will not be subject to federal income tax on its net
investment income and net realized capital gains which are timely distributed to
its insurance company shareholders. Accordingly, each Fund intends to distribute
all or substantially all of its net investment income and net realized capital
gains to its shareholders. Very generally, an insurance company which is a
shareholder of a Fund will determine its federal income tax liability with
respect to distributions from that Fund pursuant to the special rules of
Subchapter L of the Code.
Although the Trust intends that it and the Funds will be operated so that they
will have no federal income tax liability, if any such liability is nevertheless
incurred, the investment performance of the Fund or Funds incurring such
liability will be adversely affected. In addition, Funds investing in foreign
securities and currencies may be subject to foreign taxes. These taxes would
reduce the investment performance of such Funds.
Because the Trust funds certain types of variable annuities, each Fund is also
subject to the investment diversification requirements of Subchapter L of the
Code. Were any Fund to fail to comply with those requirements, owners of annuity
contracts (other than certain tax-qualified retirement Contracts) funded
through the Trust would be taxed on investment earnings under their Contracts
and would thereby lose any benefit of tax deferral. Accordingly, the Trust will
carefully monitor compliance with the diversification requirements.
Certain additional tax information appears in the SAI.
The amounts of dividends of net investment income (i.e., all income other than
long-term and short-term capital gains) and distributions of net realized long-
and short-term capital gains payable to shareholders will be determined
separately for each Fund. Dividends and distributions paid by a Fund will be
automatically reinvested (at current net asset value) in additional full and
fractional shares of that Fund. The Global Money Fund intends to distribute its
net income as dividends every day net asset value is determined. Such dividends
will be declared daily and paid monthly. The Bond Funds will declare and pay
quarterly dividends from net investment income, and the Equity Funds will
declare and pay such dividends annually. All Funds will distribute any net
long-term capital gains annually. Distributions of any net short-term capital
gains earned by a Fund will be distributed no less frequently than annually at
the discretion of the Board of Trustees.
PERFORMANCE
The Trust may, from time to time, calculate the yield and effective yield of the
Global Money Fund, the yield of other Funds or total return of all Funds, and
may include such information in reports to shareholders. Performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the portfolios, and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
Current yield for the Global Money Fund will be based on income received by a
hypothetical investment over a given 7-day period (less expenses accrued during
the period), and then annualized (i.e., assuming that the 7-day yield would be
received for 52 weeks, stated in terms of an annual percentage return on the
investment). Effective yield for the Global Money Fund is calculated in a manner
similar to that used to calculate yield, but reflects the compounding effect of
earnings on reinvested dividends. For the remaining Funds, any quotations of
yield will be based on all investment income per share earned during a given
30-day period (including dividends and interest), less expenses accrued during
the period (net investment income), and will be computed by dividing net
investment income by the maximum public offering price per share on the last day
of the period. Quotations of average annual total return for a Fund will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in the Fund over certain periods that will include
periods of 1, 5, and 10 years (up to the life of the Fund), will reflect the
deduction of a proportional share of Trust's expenses (on an annual basis), and
will assume that all dividends and distributions are reinvested when paid.
For a description of the methods used to determine yield and total return for
the Funds, see the SAI.
<PAGE>
APPENDIX
SECURITIES AND INVESTMENT PRACTICES
In attempting to achieve its investment objective or polices each Fund employs a
variety of instruments, strategies and techniques, which are described in
greater detail below. Risks and restrictions associated with these practices are
also described. Policies and limitations are considered at the time a security
or instrument is purchased or a practice initiated. Generally, securities need
not be sold if subsequent changes in market value would prevent applicable
limitations to be met.
A Fund might not buy all of these securities or use all of these techniques to
the full extent permitted unless its Sub-Advisor, subject to oversight by Sierra
Advisors, believes that doing so will help the Fund achieve its goal. Sierra
Advisors may, from time to time, direct a Sub-Advisor with respect to
investment policies and strategies. As a shareholder, you will receive fund
reports every six months detailing your Fund's holdings and describing recent
investment practices.
Except for the limitations on borrowing, the investment guidelines set forth
below may be changed at any time without shareholder consent by vote of the
Board of Trustees of the Trust. A complete list of investment restrictions that
identifies additional restrictions that cannot be changed without the approval
of a majority of an affected Fund's outstanding shares is contained in the SAI.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
All Funds except the U.S. Government Fund may invest in securities of foreign
issuers directly or in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or other similar securities representing
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities they represent. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying foreign securities. EDRs are receipts issued by a
European financial institution evidencing a similar arrangement. Generally,
ADRs, in registered form, are designed for use in the United States securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets.
ASSET-BACKED SECURITIES
The Short Term High Quality Bond, Short Term Global Government, U.S. Government,
Corporate Income and Growth and Income Funds may purchase Asset-Backed
Securities, which represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool of
assets similar to one another. Assets generating such payments will consist of
motor vehicle installment purchase obligations, credit card receivables and home
equity loans. The Short Term High Quality Bond Fund will not invest more than
25%, and the Short Term Global Government, U.S. Government, Corporate Income and
Growth and Income Funds will not invest more than 10%, of their respective total
assets in Asset-Backed Securities.
BANK OBLIGATIONS
All of the Funds may invest in Bank Obligations, which include certificates of
deposit, time deposits and bankers' acceptances of U.S. commercial banks or
savings and loan institutions with assets of at least $500 million as of the end
of their most recent fiscal year. All of the Funds, except the Global Money and
U.S. Government Funds may invest in foreign-currency denominated Bank
Obligations, including Euro-currency instruments and securities of U.S. and
foreign banks and thrifts. The Global Money Fund may invest in U.S. dollar
denominated Bank Obligations of foreign banks and thrifts.
BORROWING
The Funds may borrow money for temporary or emergency purposes. However, if a
Fund borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off. If the Fund makes additional investments while
borrowings are outstanding, this may be construed as a form of leverage.
A Fund may borrow money from banks solely for temporary or emergency purposes,
but not in an amount exceeding 30% of its total assets. For each of the Funds
except the Short Term High Quality Bond, Short Term Global Government, U.S.
Government, Corporate Income, Growth and Income and Emerging Growth Funds,
whenever borrowings by a Fund, including Reverse Repurchase Agreements, exceed
5% of the value of a Fund's total assets, the Fund will not purchase any
securities. The Short Term High Quality Bond, Short Term Global Government, U.S.
Government, Corporate Income, Growth and Income and Emerging Growth Funds are
prohibited from borrowing money or entering Reverse Repurchase Agreements or
Dollar Roll Transactions in the aggregate in excess of 33 1/3% of the Fund's
total assets (after giving effect to such borrowings). This investment guideline
may be changed only with shareholder consent.
Borrowing, including reverse repurchase agreements and, in certain
circumstances, dollar rolls, creates leverage which increases a Fund's
investment risk. If the income and gains on the securities purchased with the
proceeds of borrowings exceed the cost of the arrangements, the Fund's earnings
or net asset value will increase faster than would be the case otherwise.
Conversely, if the income and gains fail to exceed the costs, earnings or net
asset value will decline faster than would otherwise be the case.
COMMON STOCK AND OTHER EQUITY SECURITIES
The Equity, U.S. Government and Corporate Income Funds may invest in Common
Stocks, which represent an equity (ownership) interest in a corporation. This
ownership interest generally gives a Fund the right to vote on measures
affecting the company's organization and operations.
The Funds may also buy securities such as convertible debt, preferred stock,
warrants or other securities exchangeable for shares of Common Stock. In
selecting equity investments for a Fund, each Fund's Sub-Advisor will invest the
Fund's assets in industries and companies that it believes are experiencing
favorable demand for their products and services and which operate in a
favorable competitive and regulatory climate.
The Funds may not own more than 10% of the outstanding voting securities of a
single issuer and may not invest more than 10% of the Fund's assets in
securities in the aggregate where a market quotation is not readily available.
CONVERTIBLE SECURITIES
A convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of Common Stock. By investing in Convertible Securities, the Fund seeks
the opportunity, through the conversion feature, to participate in the capital
appreciation of the Common Stock into which the securities are convertible,
while using a higher fixed rate of return than is available in Common Stocks.
CURRENCY MANAGEMENT
A Fund's flexibility to participate in higher yielding debt markets outside of
the United States may allow the Fund to achieve higher yields than those
generally obtained by domestic money market funds and short-term bond
investments. When a Fund invests significantly in securities denominated in
foreign currencies, however, movements in foreign currency exchange rates versus
the U.S. dollar are likely to impact the Fund's share price stability relative
to domestic short-term income funds. Fluctuations in foreign currencies can have
a positive or negative impact on returns. Normally, to the extent that the Fund
is invested in foreign securities, a weakening in the U.S. dollar relative to
the foreign currencies underlying a Fund's investments should help increase the
net asset value of the Fund. Conversely, a strengthening in the U.S. dollar
versus the foreign currencies in which a Fund's securities are denominated will
generally lower the net asset value of the Fund. The Fund's Sub-Advisor may
attempt to minimize exchange rate risk through active portfolio management,
including hedging currency exposure through the use of futures, options and
forward currency transactions and may attempt to identify bond markets with
strong or stable currencies.
DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS
Funds authorized to invest in securities of foreign issuers may invest assets in
debt securities issued or guaranteed by Supranational Organizations, such as
obligations issued or guaranteed by the Asian Development Bank, Inter-American
Development Bank, International Bank for Reconstruction and Development (World
Bank), African Development Bank, European Coal and Steel Community, European
Economic Community, European Investment Bank and the Nordic Investment Bank.
DOLLAR ROLL TRANSACTIONS
Any Fund which seeks a high level of current income, except the Equity and
Global Money Funds, may enter into dollar rolls or "covered rolls" in which the
Fund sells securities (usually Mortgage-Backed Securities) and simultaneously
contracts to purchase, typically in 30 or 60 days, substantially similar, but
not identical, securities on a specified future date. The proceeds of the
initial sale of securities in the Dollar Roll Transactions may be used to
purchase long-term securities which will be held during the roll period. During
the roll period, the Fund forgoes principal and interest paid on the securities
sold at the beginning of the roll period, but may earn interest on the
reinvested cash proceeds of the initial sale. The Fund is compensated either by
the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop"), or by a fee paid by the
dealer at the time of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or cash equivalent
securities position that matures on or before the forward settlement date of the
Dollar Roll Transaction. As used herein the term "dollar roll" refers to dollar
rolls that are not "covered rolls." At the end of the roll commitment period,
the Fund may or may not take delivery of the securities the Fund has contracted
to purchase. The risks of engaging in Dollar Roll Transactions include the
following: if the dealer to whom the Fund sells the security becomes insolvent,
the Fund's right to purchase or repurchase the security may be restricted; the
value of the security may change adversely over the term of the dollar roll; the
security that the Fund is required to repurchase may be worth less than the
security that the Fund originally held; and the return earned by the Fund with
the proceeds of a dollar roll may not exceed transaction costs.
The Fund will establish a segregated account with its custodian in which it will
maintain cash, U.S. Government Securities or other liquid high-grade debt
obligations equal in value at all times to its obligations in respect of dollar
rolls, and, accordingly, the Fund will not treat such obligations as senior
securities for purposes of the 1940 Act. "Covered rolls" are not subject to
these segregation requirements. Dollar Roll Transactions may be considered
borrowings and are, therefore, subject to the borrowing limitations applicable
to the Funds. See "Borrowing." Each of the Short Term High Quality Bond, Short
Term Global Government, U.S. Government and Corporate Income Funds may invest up
to 33 1/3% of its total assets in such transactions.
EXCHANGE RATE-RELATED SECURITIES
A Fund may invest in securities that are indexed to certain specific foreign
currency exchange rates. The terms of such security provide that the principal
amount or interest payments are adjusted upwards or downwards (but not below
zero) at payment to reflect fluctuations in the exchange rate between two
currencies while the obligation is outstanding, depending on the terms of the
specific security. The Fund will purchase such security with the currency in
which it is denominated and will receive interest and principal payments thereon
in the currency, but the amount of principal or interest payable by the issuer
will vary in proportion to the change (if any) in the exchange rate between the
two specified currencies between the date the instrument is issued and the date
the principal or interest payment is due. The staff of the SEC is currently
considering whether a mutual fund's purchase of this type of security would
result in the issuance of a "senior security" within the meaning of the 1940
Act. The Fund believes that such investments do not involve the creation of such
a senior security, but nevertheless undertakes, pending the resolution of this
issue by the staff, to establish a segregated account with respect to such
investments and to maintain in such account cash not available for investment or
U.S. Government Securities or other liquid high quality debt securities having a
value equal to the aggregate principal amount of outstanding securities of this
type.
Investments in Exchange Rate-Related Securities entail certain risks. There is
the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. In addition, there is no assurance that sufficient trading interest to
create a liquid secondary market will exist for a particular Exchange
Rate-Related Security due to conditions in the debt and foreign currency
markets. Illiquidity in the forward foreign exchange market and the high
volatility of the foreign exchange market may from time to time combine to make
it difficult to sell an Exchange Rate-Related Security prior to maturity without
incurring a significant price loss.
FIXED-INCOME SECURITIES
The market value of fixed-income obligations held by the Funds and,
consequently, the net asset value per share of the Funds can be expected to vary
inversely to changes in prevailing interest rates. Investors should also
recognize that, in periods of declining interest rates, the yields of the Bond
Funds will tend to be somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Bond Funds' yields will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Bond Funds from the continuous sale of their shares will likely be
invested in instruments producing lower yields than the balance of their assets,
thereby reducing current yields. In periods of rising interest rates, the
opposite can be expected to occur. In addition, obligations purchased by certain
of the Bond Funds that are rated in the lowest of the top four ratings (Baa by
Moody's or BBB by S&P, Duff or Fitch) are considered to have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade securities.
FLOATING RATE, INVERSE FLOATING RATE AND VARIABLE RATE OBLIGATIONS
The Corporate Income Fund may purchase floating rate, inverse floating rate and
variable rate obligations, including mortgage-backed securities. Floating rate
obligations have an interest rate that changes whenever there is a change in the
external interest rate, while variable rate obligations provide for a specified
periodic adjustment in the interest rate. The interest rate on an inverse
floating rate obligation (an "inverse floater") can be expected to move in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. The Fund may purchase floating rate, inverse floating rate and
variable rate obligations that carry a demand feature which would permit the
Fund to tender them back to the issuer or remarketing agent at par value prior
to maturity. Frequently, floating rate, inverse floating rate and variable rate
obligations are secured by letters of credit or other credit support
arrangements provided by banks.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
All Funds except the Global Money and U.S. Government Funds may engage in
foreign currency exchange transactions. Funds that buy and sell securities
denominated in currencies other than the U.S. dollar, and receive interest,
dividends and sale proceeds in currencies other than the U.S. dollar, may enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. The Fund either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement, and is traded at a net
price without commission. The Fund maintains with its custodian a segregated
account of high grade liquid assets in an amount at least equal to its
obligations under each forward foreign currency exchange contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.
A Fund may enter into foreign currency transactions in an attempt to protect
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of these 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.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain. In addition,
when the Sub-Advisor believes that the currency of a specific country may
deteriorate against another currency, it may enter into a forward contract to
sell the less attractive currency and buy the more attractive one. The amount in
question could be less than or equal to the value of the Fund's securities
denominated in the less attractive currency. The Fund may also enter into a
forward contract to sell a currency which is linked to a currency or currencies
in which some or all of the Fund's portfolio securities are or could be
denominated, and to buy U.S. dollars. These practices are referred to as "cross
hedging" and "proxy hedging."
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 Japanese Yen -- at a future date and specified price.
Typically, the other party to a currency exchange contract will be a commercial
bank or other financial institution. Because there is a risk of loss to the Fund
if the other party does not complete the transaction, the Fund's Sub-Advisor
will enter into foreign currency exchange contracts only with parties approved
by the Fund's Board of Trustees.
A Fund may maintain "short" positions in forward currency exchange transactions
in which the Fund agrees to exchange currency that it currently does not own for
another currency -- for example, to exchange an amount of Japanese Yen that it
does not own for a certain amount of U.S. dollars -- at a future date and
specified price in anticipation of a decline in the value of the currency sold
short relative to the currency that the Fund has contracted to receive in the
exchange.
When such actions are intended to protect the Fund from adverse currency
movements, there is a risk that currency movements involved will not be properly
anticipated. Use of this technique may also be limited by management's need to
protect the status of the Fund as a regulated investment company under the Code.
The projection of currency market movements is extremely difficult, and the
successful execution of currency strategies is highly uncertain.
FOREIGN INVESTMENTS
All of the Funds except the U.S. Government Fund may invest in securities of
foreign issuers. There are certain risks involved in investing in foreign
securities, including those resulting from fluctuations in currency exchange
rates, devaluation of currencies, future political or economic developments and
the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, and the fact that foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic companies. Moreover, securities of many foreign companies may be less
liquid and the prices more volatile than those of securities of comparable
domestic companies. Although the Funds' Sub-Advisors do not intend to expose the
Funds to such risks, with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Funds,
including the withholding of dividends. When the Fund's Sub-Advisor believes
that currency in which a portfolio security or securities is denominated may
suffer a decline against the U.S. dollar, it may hedge such risk by entering
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Funds hold various foreign currencies
from time to time, the value of the net assets of the Funds as measured in U.S.
dollars will be affected favorably or unfavorably by changes in exchange rates.
The cost of the Funds' currency exchange transactions will generally be the
difference between the bid and offer spot rate of the currency being purchased
or sold. In order to protect against uncertainty in the level of future foreign
currency exchange rates, the Funds are authorized to enter into certain foreign
currency exchange transactions. Investors should be aware that exchange rate
movements can be significant and can endure for long periods of time. The
Sub-Advisors of the Short Term Global Government and International Growth Funds
attempt to manage exchange rate risk through active Currency Management.
Extensive research of the economic, political and social factors that influence
global markets is conducted by the Sub-Advisors. Particular attention is given
to country-specific analysis, reviewing the strength or weakness of a country's
overall economy, the government policies influencing business conditions and the
outlook for the country's currency.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the NYSE. Accordingly, the Funds' foreign investments may be less
liquid and their prices may be more volatile than comparable investments in
securities of United States companies. Moreover, the settlement periods for
foreign securities, which are often longer than those for securities of United
States issuers, may affect portfolio liquidity. In buying and selling securities
on foreign exchanges, the Fund normally pays fixed commissions that are
generally higher than the negotiated commissions charged in the United States.
In addition, there is generally less governmental supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
FUTURES AND OPTIONS ON FUTURES
When deemed advisable by its Sub-Advisor, all Funds except the Global Money Fund
may enter into financial futures and related options that are traded on a U.S.
exchange or board of trade. If entered into, these transactions may be made for
the purpose of hedging against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and market conditions,
when transactions are economically appropriate to the reduction of risks
inherent in the management of the Funds and for other purposes described under
"Strategic Transactions." A Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premiums paid for
unexpired futures options entered into for purposes other than "bona fide
hedging" positioning as defined in regulations adopted by the Commodities Future
Trading Commission exceed 5% of the fair market value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract will always be covered by cash and cash equivalents set aside plus
accrued profits held at the futures commission merchant.
A financial futures contract provides for the future sale by one party and the
purchase by the other party of a specified amount of a particular financial
instrument (debt security) at a specified price, date, time and place. An index
futures contract is an agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index contract was originally written. An option on a financial or
index futures contract generally gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract at a specified
exercise price at any time prior to the expiration date of the option.
The purpose of entering into a futures contract by a Fund is to either enhance
return or to protect the Fund from fluctuations in the value of its securities
caused by anticipated changes in interest rate or market conditions without
necessarily buying or selling the securities. 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, currencies or index, on the one hand, and price movements in the
securities which are the subject of the futures contract or option on futures
contract, on the other hand. Positions in futures contracts and options on
futures contracts may be closed out only on the exchange or board of trade on
which they were entered into, and there can be no assurance that an active
market will exist for a particular contract or option at any particular time. If
a Fund has hedged against the possibility of an increase in interest rates or
bond prices adversely affecting the value of securities held in its portfolio
and rates or prices decreased instead, a Fund will lose part or all of the
benefit of the increased value of securities that it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if a Fund had insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices that reflect the decline in interest rates
or bond prices, as the case may be. In addition, the Fund would pay commissions
and other costs in connection with such investments, which may increase the
Fund's expenses and reduce its return. While utilization of options, futures
contracts and similar instruments may be advantageous to the Fund, if the Fund's
Sub-Advisor is not successful in employing such instruments in managing the
Fund's investments, the Fund's performance will be worse than if the Fund did
not make such investments.
Losses incurred in futures contracts and options on futures contracts and the
costs of these transactions will adversely affect a Fund's performance.
GEOGRAPHICAL AND INDUSTRY CONCENTRATION
The Global Money Fund will invest at least 25% of its assets in Bank Obligations
unless the Fund is in a temporary defensive position. As a result of this
concentration policy, which is a fundamental policy of the Fund, the Fund's
investments may be subject to greater risk than a fund that does not concentrate
in the banking industry. In particular, Bank Obligations may be subject to the
risks associated with interest rate volatility, changes in federal and state
laws and regulations governing banking and the inability of borrowers to pay
principal and interest when due. In addition, foreign banks present the risks of
investing in foreign securities generally and are not subject to reserve
requirements and other regulations comparable to those of U.S. Banks.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES
All of the Funds may invest in Government Stripped Mortgage-Backed Securities
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). These securities represent beneficial ownership interests
in either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage-backed certificates issued by GNMA,
FNMA 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. The Funds will invest in interest-only
Government Stripped Mortgage-Backed Securities in order to enhance yield or to
benefit from anticipated appreciation in value of the securities at times when
the appropriate Sub-Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the value of interest-only
Government Stripped Mortgage-Backed Securities may be expected to increase
because of the diminished expectation that the underlying mortgages will be
prepaid. In this situation the expected increase in the value of interest-only
Government Stripped Mortgage-Backed Securities may offset all or a portion of
any decline in value of the portfolio securities of the Funds. 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. See "Mortgage-Backed Securities." In addition, the
yields on interest-only and principal-only Government Stripped Mortgage-Backed
Securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only Government
Stripped Mortgage-Backed Securities and increasing the yield to maturity on
principal-only Government Stripped Mortgage-Backed Securities. Conversely, if an
increase in the level of prevailing interest rates results in a rate of
principal prepayments lower than anticipated, distributions of principal will be
deferred, thereby increasing the yield to maturity on interest-only Government
Stripped Mortgage-Backed Securities and decreasing the yield to maturity on
principal-only Government Stripped Mortgage-Backed Securities. Sufficiently high
prepayment rates could result in the Fund not fully recovering its initial
investment in an interest-only Government Stripped Mortgage-Backed Security.
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 Funds will acquire Government Stripped Mortgage-Backed Securities only if a
liquid secondary market for the Securities exists at the time of acquisition.
ILLIQUID SECURITIES
Up to 15% (10% for the Global Money Fund) of the net assets of a Fund may be
invested in securities that are not readily marketable, including, where
applicable: (1) Repurchase Agreements with maturities greater than seven
calendar days; (2) time deposits maturing in more than seven calendar days; (3)
to the extent a liquid secondary market does not exist for the instruments,
futures contracts and options thereon; (4) certain over-the-counter options, as
described in the SAI; (5) certain variable rate demand notes having a demand
period of more than seven days; and (6) securities the disposition of which is
restricted under Federal securities laws (excluding Rule 144A Securities,
described below). The Funds will not include for purposes of the restrictions on
illiquid investments securities sold pursuant to Rule 144A under the Securities
Act of 1933, as amended, so long as such securities meet liquidity guidelines
established by the Trust's Board of Trustees. Under Rule 144A, securities which
would otherwise be restricted may be sold by persons other than issuers or
dealers to qualified institutional buyers.
INTEREST RATE TRANSACTIONS
All of the Funds except the Global Money Fund may engage in certain Interest
Rate Transactions, such as swaps, caps, floors and collars. Interest rate swaps
involve the exchange with another party of commitments to pay or receive
interest (e.g., an exchange of floating rate payments for fixed rate payments).
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor. An interest rate collar combines the elements
of purchasing a cap and selling a floor. The collar protects against an interest
rate rise above the maximum amount but gives up the benefits of an interest rate
decline below the minimum amount. The net amount of the excess, if any, of a
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 securities
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Trust's custodian. If there is a
default by the other party to the transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transactions.
INVESTMENT COMPANIES
When a Fund's Sub-Advisor believes that it would be beneficial to the Fund and
appropriate under the circumstances, the Sub-Advisor may invest up to 10% of the
Fund's assets in securities of mutual funds that are not affiliated with Sierra
Advisors or any Sub-Advisor. As a shareholder in any such mutual fund, the Fund
will bear its ratable share of the mutual fund's expenses, including management
fees, and will remain subject to the Fund's advisory and administration fees
with respect to the assets so invested.
LEASE OBLIGATION BONDS
Lease Obligation Bonds are mortgages on a facility that is secured by the
facility and are paid by a lessee over a long term. The rental stream to service
the debt as well as the mortgage are held by a collateral trustee on behalf of
the public bondholders. The primary risk of such instrument is the risk of
default. Under the lease indenture, the failure to pay rent is an event of
default. The remedy to cure default is to rescind the lease and sell the asset.
If the lease obligation is not readily marketable or market quotations are not
readily available, such lease obligations will be subject to a Fund's 15% (10%
for the Global Money Fund) limit on Illiquid Securities.
LENDING OF SECURITIES
All of the Funds except the U.S. Government Fund have the ability to lend
portfolio securities to brokers and other financial organizations. By lending
its securities, a Fund can increase its income by continuing to receive interest
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. These loans, if
and when made, may not exceed 20% of a Fund's total assets taken at value. Loans
of portfolio securities by a Fund will be collateralized by cash, letters of
credit or U.S. Government Securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund involved. Each
Fund's Sub-Advisor will monitor on an ongoing basis the creditworthiness of the
institutions to which the Fund lends securities.
LOWER-RATED SECURITIES
The Growth and Emerging Growth Funds may each invest up to 35%, and the Short
Term Global Government Fund up to 10%, of their total assets in debt securities
rated below the fourth highest rating by an NRSRO or of equivalent quality as
determined by the Sub-Advisor. Securities rated BB or lower are commonly
referred to as "junk bonds."
Securities rated below investment grade as well as unrated securities are often
considered to be speculative and usually entail greater risk (including the
possibility of default or bankruptcy of the issuers). Such securities generally
involve greater price volatility and risk of principal and income, and may be
less liquid, than securities in higher rated categories. Both price volatility
and illiquidity may make it difficult for the Fund to value certain of these
securities at certain times and these securities may be difficult to sell under
certain market conditions. Prices for securities rated below investment grade
may be affected by legislative and regulatory developments. For further
information, see "Investment Objectives and Policies of the Funds -- Growth Fund
- -- Emerging Growth Fund and -- Short Term Global Government Fund" in the SAI and
the Appendix.
MORTGAGE-BACKED SECURITIES
All of the Funds may invest in Mortgage-Backed Securities, which represent an
interest in a pool of mortgage loans. The primary government issuers or
guarantors of Mortgage-Backed Securities are GNMA, FNMA and FHLMC.
Mortgage-Backed Securities provide a monthly payment consisting of interest and
principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on Mortgage-Backed Securities may tend to increase due
to refinancing of mortgages as interest rates decline. Prompt payment of
principal and interest on GNMA mortgage pass-through certificates is backed by
the full faith and credit of the U.S. Government. FNMA guaranteed mortgage
pass-through certificates and FHLMC participation certificates are solely the
obligations of those entities but are supported by the discretionary authority
of the U.S. Government to purchase the agencies' obligations. Collateralized
Mortgage Obligations are a type of bond secured by an underlying pool of
mortgages or mortgage pass-through certificates that are structured to direct
payments on underlying collateral to different series or classes of the
obligations.
To the extent that a Fund purchases mortgage-related or mortgage-backed
securities at a premium, prepayments 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, including government and government-related
mortgage pools, will generally fluctuate in response to market interest rates.
NEW ISSUERS
A Fund may invest up to 5% of its assets in the securities of issuers which have
been in continuous operation for less than three years.
OPTIONS ON SECURITIES
OPTION PURCHASE. All Funds except the Global Money Fund may purchase put and
call options on portfolio securities in which it may invest that are traded on a
U.S. or foreign securities exchange or in the over-the-counter market. A Fund
may utilize up to 10% of its assets to purchase put options on portfolio
securities and may do so at or about the same time that it purchases the
underlying security or at a later time. By buying a put, the Funds limit their
risk of loss from a decline in the market value of the security until the put
expires. Any appreciation in the value of the underlying security, however, will
be partially offset by the amount of the premium paid for the put option and any
related transaction costs. A Fund may also utilize up to 10% of its assets to
purchase call options on securities in which it is authorized to invest. Call
options may be purchased by the Fund in order to acquire the underlying
securities for the Fund at a price that avoids any additional cost that would
result from a substantial increase in the market value of a security. The Funds
may also purchase call options to increase its return to investors at a time
when the call is expected to increase in value due to anticipated appreciation
of the underlying security. Prior to their expirations, put and call options may
be sold in closing sale transactions (sales by the Fund, prior to the exercise
of options that it has purchased, of options of the same series), and profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the option plus the related transaction costs.
COVERED OPTION WRITING. All Funds except the Global Money Fund may write put and
call options on securities for hedging purposes. The Funds realize fees
(referred to as "premiums") for granting the rights evidenced by the options. A
put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying security at a specified
price at any time during the option period. In contrast, a call option embodies
the right of its purchaser to compel the writer of the option to sell to 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. Upon the exercise of
a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the Fund's acquisition cost of the security, less the premium received for
writing the option.
The U.S. Government and Corporate Income Funds may also write covered options on
portfolio securities to enhance current return. Accordingly, whenever a Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security without the payment of additional consideration
for as long as it remains obligated as the writer of the option. To support its
obligation to purchase the underlying security if a put option is exercised, the
Funds will either (1) deposit with Boston Safe in a segregated account cash,
U.S. Government Securities or other short-term high-grade debt obligations
having a value at least equal to the exercise price of the underlying securities
or (2) continue to own an equivalent number of puts on the same "series" (that
is, puts on the same underlying security having the same exercise prices and
expiration dates as those written by the Fund), or an equivalent number of puts
on the same "class" (that is, puts on the same underlying security) with
exercise prices greater than those that it has written (or, if the exercise
prices of the puts it holds are less than the exercise prices of those it has
written, it will deposit the difference with Boston Safe in a segregated
account).
The principal reason for writing covered call and put options on portfolio
securities is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a premium,
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of the covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the premiums that the Funds may receive may be adversely affected as new or
existing institutions, including other investment companies, engage in or
increase their option-writing activities.
The Funds may engage in closing purchase transactions to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Funds would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desires to terminate its
obligation. The obligation of the Fund under an option that it has written would
be terminated by a closing purchase transaction, but the Fund would not be
deemed to own an option as the result of the transaction. There can be no
assurance that the Fund will be able to effect closing purchase transactions at
a time when it wishes to do so. The ability of the Fund to engage in closing
transactions with respect to options depends on the existence of a liquid
secondary market. While the Fund will generally purchase or write options only
if there appears to be a liquid secondary market for the options purchased or
sold, for some options no such secondary market may exist or the market may
cease to exist. To facilitate closing purchase transactions, however, the Fund
will ordinarily write options only if a secondary market for the options exists
on a U.S. securities exchange or in the over-the-counter market.
Option writing for the Funds may be limited by position and exercise limits
established by U.S. securities exchanges and the National Association of
Securities Dealers, Inc. and by requirements of the Code for qualification as a
regulated investment company. In addition to writing covered put and call
options to generate current income, the Funds may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain on the portfolio position's being offset by a loss on the hedge
position. The Funds bear the risk that the prices of the securities being hedged
will not move in the same amount as the hedge. A Fund will engage in hedging
transactions only when deemed advisable by its Sub-Advisor. Successful use by
the Fund of options will depend on its Sub-Advisor's ability to correctly
predict movements in the direction of the stock underlying the option used as a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will adversely affect the Fund's performance.
OPTIONS ON FOREIGN CURRENCIES
A Fund may purchase and write put and call options on foreign currencies for the
purpose of hedging against declines in the U.S. dollar value of foreign
currency-denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. Generally, transactions relating
to Options on Foreign Currencies occur in the over-the-counter market. As in the
case of other kinds of options, however, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates, although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. There is no specific percentage limitation on the
Fund's investments in Options on Foreign Currencies. See the SAI for further
discussion of the use, risks and costs of Options on Foreign Currencies and
Over-the-Counter Options.
OPTIONS ON INDEXES
A Fund may, subject to applicable securities regulations, purchase and write put
and call options on stock and fixed-income indexes listed on foreign and
domestic stock exchanges. A stock index fluctuates with changes in the market
values of the stocks included in the index. An example of a domestic stock index
is the Standard and Poor's 500 Stock Index. Examples of foreign stock indexes
are the Canadian Market Portfolio Index (Montreal Stock Exchange), The Financial
Times -- Stock Exchange 100 (London Stock Exchange) and the Toronto Stock
Exchange Composite 300 (Toronto Stock Exchange). Examples of fixed-income
indexes include the Lehman Government/Corporate Bond Index and the Lehman
Treasury Bond Index.
Options on Indexes are generally similar to options on securities except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option 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 date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. The
amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or the option
may expire unexercised.
The effectiveness of purchasing or writing index options as a hedging technique
will depend upon the extent to which price movements in the portion of the
securities portfolio of the Fund correlate with price movements of the stock
index selected. Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock, whether the
Fund will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use of Options on Indexes by the Fund will be subject to its
Sub-Advisor's ability to predict correctly movements in the direction of the
market generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Options on securities indexes entail risks in addition to the risks of options
on securities. Because exchange trading of options on securities indexes is
relatively new, the absence of a liquid secondary market to close out an option
position is more likely to occur, although the Fund generally will only purchase
or write such an option if the Sub-Advisor believes the option can be closed
out. Because options on securities indexes require settlement in cash, the Fund
may be forced to liquidate portfolio securities to meet settlement obligations.
The Fund will engage in stock index options transactions only when determined by
its Sub-Advisor to be consistent with its efforts to control risk. There can be
no assurance that such judgment will be accurate or that the use of these
portfolio strategies will be successful.
When the Fund writes an option on an index, it will establish a segregated
account with Boston Safe or with a foreign sub-custodian in which the Fund will
deposit cash or cash equivalents or a combination of both in an amount equal to
the market value of the option, and will maintain the account while the option
is open.
OVER THE COUNTER OPTIONS
All Funds except the Global Money Fund may write or purchase options in
privately negotiated domestic or foreign transactions ("OTC Options"), as well
as exchange-traded or "listed" options. OTC Options can be closed out only by
agreement with the other party to the transaction, and thus any OTC Options
purchased by a Fund will be considered an Illiquid Security. In addition,
certain OTC Options on foreign currencies are traded through financial
institutions acting as market-makers in such options and the underlying
currencies. A Fund may not invest more than 15% of its net assets in Illiquid
Securities and Repurchase Agreements which have a maturity of longer than seven
days.
OTC Options entail risks in addition to the risks of exchange-traded options.
Exchange-traded options are in effect guaranteed by the Options Clearing
Corporation while a Fund relies on the party from whom it purchases an OTC
Option to perform if the Fund exercises the option. With OTC Options, if the
transacting dealer fails to make or take delivery of the securities or amount of
foreign currency underlying an option it has written, in accordance with the
terms of that option, the Fund will lose the premium paid for the option as well
as any anticipated benefit of the transaction. Furthermore, OTC Options are less
liquid than exchange-traded options.
REPURCHASE AGREEMENTS
Repurchase Agreements are agreements to purchase underlying debt obligations
from financial institutions, such as banks and broker-dealers, subject to the
seller's agreement to repurchase the obligations at an established time and
price. The collateral for such Repurchase Agreements will be held by the Fund's
custodian or a duly appointed sub-custodian. The Fund will enter into Repurchase
Agreements only with banks and broker-dealers that have been determined to be
creditworthy by the Fund's Board of Trustees under criteria established with the
assistance of the Advisor. The seller under a Repurchase Agreement would be
required to maintain the value of the obligations subject to the Repurchase
Agreement at not less than the repurchase price. Default by the seller would,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the obligations, the Fund may be delayed or limited in its ability to sell the
collateral.
REVERSE REPURCHASE AGREEMENTS
All Funds except the Global Money Fund may engage in Reverse Repurchase
Agreements. Reverse Repurchase Agreements are the same as repurchase agreements
except that, in this instance, the Funds would assume the role of
seller/borrower in the transaction. The Funds will maintain segregated accounts
with the Trust's custodian consisting of U.S. Government Securities, cash or
money market instruments that at all times are in an amount equal to their
obligations under Reverse Repurchase Agreements. Reverse Repurchase Agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the repurchase price of the securities and, if the proceeds from
the reverse purchase agreement are invested in securities, that the market value
of the securities bought may decline below the repurchase price of the
securities sold. Each Fund's Sub-Advisor, acting under the supervision of the
Board of Trustees, reviews on an ongoing basis the creditworthiness of the
partners with which it enters into Reverse Repurchase Agreements. Under the 1940
Act, Reverse Repurchase Agreements may be considered borrowings by the seller.
Whenever borrowings by a Fund, including Reverse Repurchase Agreements, exceed
5% of the value of a Fund's total assets, the Fund will not purchase any
securities. See "Borrowing."
STRATEGIC TRANSACTIONS
Subject to the investment limitations and restrictions for each of the Funds as
stated elsewhere in the Prospectus and SAI of the Funds, each of the Funds may,
but is not required to, utilize various investment strategies as described in
this Appendix to hedge various market risks, to manage the effective maturity or
duration of Fixed-Income Securities, or to seek potentially higher returns.
Utilizing these investment strategies, the Fund may purchase and sell, to the
extent not otherwise limited or restricted for such Fund, exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indexes and other financial instruments, purchase and sell financial futures
contracts and options thereon, enter into various Interest Rate Transactions
such as swaps, caps, floors or collars, and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures (collectively, all
the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to seek potentially higher returns, although no more than 5% of the
Fund's assets will be used as the initial margin or purchase price of options
for Strategic Transactions entered into for purposes other than "bona fide
hedging" positions as defined in the regulations adopted by the Commodity
Futures Trading Commission. Any or all of these investment techniques may be
used at any time, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Sub-Advisor's ability to
predict, which cannot be assured, pertinent market movements. The Fund will
comply with applicable regulatory requirements when utilizing Strategic
Transactions. Strategic Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities include direct obligations of the U.S. Treasury (such
as U.S. Treasury bills, notes and bonds) and obligations directly issued or
guaranteed by U.S. Government agencies or instrumentalities. Some obligations
issued or guaranteed by agencies or instrumentalities of the U.S. Government are
backed by the full faith and credit of the U.S. Government (such as GNMA Bonds),
others are backed only by the right of the issuer to borrow from the U.S.
Treasury (such as securities of Federal Home Loan Banks) and still others are
backed only by the credit of the instrumentality (such as FNMA and FHLMC Bonds).
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
In order to secure yields or prices deemed advantageous at the time, all Funds
except the Global Money Fund may purchase or sell securities on a when-issued or
a delayed-delivery basis. The Funds will enter into a when-issued transaction
for the purpose of acquiring portfolio securities and not for the purpose of
leverage. In such transactions delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is made by, and no
interest accrues to, the Funds prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased on a when-issued or a delayed-delivery basis, the yields obtained on
such securities may be higher or lower than the yields available in the market
on the dates when the investments are actually delivered to the buyers.
Similarly, the sale of securities for delayed-delivery can involve the risk that
the prices available in the market when delivery is made may actually be higher
than those obtained in the transaction itself. The Funds will establish a
segregated account with Boston Safe consisting of cash, U.S. Government
Securities or other high grade debt obligations in an amount equal to the amount
of its when-issued and delayed-delivery commitments.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
Page
----
General Information and History .................................... B-3
Management of the Trust ............................................ B-3
Investment Objectives and Policies of the Funds .................... B-13
(See the Prospectus "Highlights" and "Investment Policies")
Purchase and Pricing of Shares ..................................... B-40
(See the Prospectus "Highlights" and "Purchase and Redemption")
Net Asset Value .................................................... B-40
Performance ........................................................ B-43
Taxes .............................................................. B-47
(See the Prospectus "Dividends, Distributions and Taxes")
Appendix - Description of Ratings .................................. B-50
Financial Statements ............................................... F-1
