<PAGE>
SUPPLEMENT DATED APRIL 8, 1996
TO STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995
OF
THE SIERRA VARIABLE TRUST
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
The Statement of Additional Information dated May 1, 1995 of The Sierra Variable
Trust (the "Trust") relating to 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 "INVESTMENT ADVISOR AND SUB-ADVISORS, CUSTODIAN AND TRANSFER AGENT" section
under the heading "MANAGEMENT OF THE TRUST" on page 7 is amended by inserting
the following paragraph after the first paragraph:
Warburg, Pincus Counsellors, Inc. ("Warburg") replaced J.P. Morgan
Investment Management Inc. as the sub-advisor of the International Growth
Fund on April 8, 1996. The sub-adviser agreement with Warburg is subject to
shareholder approval at a Special Meeting of the Shareholders of the Trust
to be held on June 21, 1996. The sole shareholder of the Trust currently is
AGL. Those persons who are Contract owners of record of the investment
division that corresponds to the International Growth Fund of AGL's
Separate Account D as of the close of business on April 23, 1996 will be
given the opportunity to instruct AGL as to how it should vote at the
Special Meeting.
By deleting all references to the International Growth Fund in the "CERTAIN
MATTERS RELATING TO J.P. MORGAN INVESTMENT MANAGEMENT INC. AND ITS AFFILIATES"
section under the heading "MANAGEMENT OF THE TRUST" on page 11.
PLEASE RETAIN THIS SUPPLEMENT
FOR FUTURE REFERENCE
PH02/111745.1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
THE SIERRA VARIABLE TRUST
9301 Corbin Avenue, Suite 333
Northridge, California 91324
o GLOBAL MONEY FUND
o SHORT TERM HIGH QUALITY BOND FUND
o SHORT TERM GLOBAL GOVERNMENT FUND
o U.S. GOVERNMENT FUND
o CORPORATE INCOME FUND
o GROWTH AND INCOME FUND
o GROWTH FUND
o EMERGING GROWTH FUND
o INTERNATIONAL GROWTH FUND
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS
BUT SUPPLEMENTS THE INFORMATION CONTAINED IN THE CURRENT PROSPECTUS OF THE
SIERRA VARIABLE TRUST (THE "TRUST") DATED MAY 1, 1995. IT SHOULD BE READ IN
CONJUNCTION WITH THAT PROSPECTUS, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME.
THE TRUST'S PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO AMERICAN
GENERAL LIFE INSURANCE COMPANY ("AGL"), ATTENTION: ANNUITY ADMINISTRATION, P.O.
BOX 1401, HOUSTON, TEXAS 77251-1401 OR BY CALLING AGL AT 800-247-6584. THIS
STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED BY REFERENCE INTO THE
PROSPECTUS IN ITS ENTIRETY.
<PAGE>
CONTENTS
For ease of reference, the same section headings are used in the
Prospectuses and in this Statement of Additional Information, except as
indicated below.
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
<PAGE>
GENERAL INFORMATION AND HISTORY
The Sierra Variable Trust (the "Trust") is an open-end management
investment company. Under the rules and regulations of the Securities and
Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. Some of the information required to be
in this SAI is also included in the Trust's current Prospectus. To avoid
unnecessary repetition, references are made to related sections of the
Prospectus. In addition, the Prospectus and this SAI omit certain information
about the Trust and its business that is contained in "Part C" of the
Registration Statement respecting the Trust and its Shares filed with the SEC.
Copies of the Registration Statement as filed, including Part C, may be obtained
from the SEC by paying the charges prescribed under its rules and regulations.
The Trust was organized under the laws of the Commonwealth of
Massachusetts on January 29, 1993. The Trust filed a registration statement with
the SEC registering itself as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and its shares under the Securities Act of 1933, as amended.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS OF THE TRUST
The names of the Trustees and executive officers of the Trust, together
with information as to their principal business occupations during the past five
years, are set forth below. Each Trustee who is an "interested person" of the
Trust, as defined in the 1940 Act, is indicated by an asterisk.
NAME, POSITION PRINCIPAL OCCUPATION(S)
AND ADDRESS DURING THE PAST 5 YEARS
David E. Anderson Retired President and Chief Executive Officer,
Trustee GTE California, Inc. (a telephone operating
17960 Seabreeze Drive company providing telecommunications services
Pacific Palisades, CA 90272 to California customers). President of Board of
Trustees, Children's Bureau Foundation. Director,
Upward Bound House of Santa Monica, Inc. Director,
Values in Practice.
Arthur H. Bernstein, Esq. Managing General Partner, California Capital
Trustee Investors (an investment management company)
11661 San Vicente Blvd., #608 since 1981. President, Bancorp Capital Group,
Los Angeles, CA 90049 Inc. since 1988. Director, Ryder System, Inc.
(transportation) and Redken Laboratories, Inc.
Trustee, California Family Study Center.
F. Brian Cerini* President and Chief Executive Officer, Great
Trustee and President Western Investment Management Corporation ("GW
Investment"); Chairman, Sierra Advisors since
1990. President and Chief Executive Officer,
Sierra Investment Services Corporation ("Sierra
Services") and Great Western Financial Securities
Corporation ("GW Securities"). Director, Sierra
Fund Administration Corporation.
Edmond R. Davis, Esq. Counselor-at-Law; Partner at Brobeck, Phleger &
Trustee Harrison since 1987. Director, Fifield
550 South Hope Street, Manors, Children's Bureau of Southern California,
21st Floor Children's Bureau Foundation and Braille Institute
Los Angeles, CA 90071-2604 of America, Inc.
John W. English Retired Vice President and Chief Investment
Trustee Officer, the Ford Foundation (a non-profit
50-H New England Avenue charitable organization). Chairman of the Board
P.O. Box 640 and Director, The China Fund, Inc. (a closed-end
Summit, NJ 07902-0640 mutual fund). Director, Paribas Trust for
Institutions (an open-end mutual fund).
Trustee, Benchmark Funds (an open-end mutual
fund). Trustee, Retail Property Trust (a company
providing management services for a shopping
center).
Keith Pipes Senior Vice President, Chief Financial Officer
Executive Vice President, and Secretary of GW Investment and GW Securities.
Treasurer and Secretary Director, Executive Vice President and
Secretary of Sierra Advisors. Director, Secretary
and Treasurer, Sierra Fund Administration
Corporation.
Michael D. Goth Chief Operating Officer and Portfolio Manager,
Senior Vice President Sierra Advisors, since 1991. Prior thereto, Senior
Manager of Transfer Agent Operations, The
Shareholder Services Group, Inc. and The Boston
Company.
Stephen C. Scott President and Chief Investment Officer, Sierra
Senior Vice President Advisors. Prior to August 1988, President and
Chairman, SDS Investment Advisors.
John D. Ruocco Senior Vice President, Sierra Services and GW
Senior Vice President, Sales Securities. Prior thereto, Regional Director of
Sales in Southern California, GW Securities.
Richard W. Grant, Esq. Counselor-at-Law; Partner, Morgan, Lewis &
Assistant Secretary Bockius since 1989. Prior thereto, Partner,
2000 One Logan Square Ballard, Spahr, Andrews & Ingersoll.
Philadelphia, PA 19103
Craig M. Miller Vice President and Controller, GW Investment
Assistant Treasurer since July 1993. Prior thereto, Audit Manager,
Coopers & Lybrand.
Richard H. Rose Senior Vice President and Assistant Treasurer
Assistant Treasurer of the Treasury Group at the Boston Company
Exchange Place Advisors, Inc.
Boston, MA 02109-2873
Each of the Trustees and officers of the Trust is also a trustee or
officer of Sierra Trust Funds, an investment company advised by Sierra Advisors.
The address of each trustee and officer of the Trust affiliated with
Sierra Advisors is 9301 Corbin Avenue, Suite 333, Northridge, California 91324.
REMUNERATION. No director, officer or employee of Sierra Advisors, the
sub-advisors of the Funds (the "Sub-Advisors"), or of any affiliate of Sierra
Advisors or the Sub-Advisors will receive any compensation from the Trust for
serving as an officer or Trustee of the Trust. The Trust pays each Trustee, who
is not a director, officer or employee of Sierra Advisors or the Sub-Advisors,
or any of their affiliates, a fee of $5,000 per annum plus $1,250 per Board
meeting attended and $1,000 per Audit and Nominating Committee meeting attended
(except that the Audit Committee chairman receives $1,500 per committee meeting
attended), and reimburses them for travel and out-of-pocket expenses.
The aggregate remuneration paid to Trustees by the Trust for attendance
at Board and committee meetings for the period ended December 31, 1994 was
$54,000 (including reimbursement for travel and out-of-pocket expenses). As of
December 31, 1994, the Trustees and officers of the Trust owned, in the
aggregate, less than 1% of the outstanding shares of any of the Funds.
The following Compensation Table shows aggregate compensation paid to
each of the Fund's Directors by the Fund and the Fund Complex, respectively in
the year ended December 31, 1994.
<TABLE>
<CAPTION>
COMPENSATION TABLE
==================================================================================================================================
(1) Name of Person, Position (2) Aggregated (3) Pension or (4) Estimated Annual (5) Total Compensation
Compensation From Retirement Benefits Benefits Upon From Registrant and Fund
Registrant for the Accrued as Part of Retirement Complex Paid to Directors
fiscal year ended Fund Expenses for the fiscal year ended
December 31, 1994 December 31, 1994
==================================================================================================================================
<S> <C> <C> <C> <C>
*F. Brian Cerini $0 $0 $0 $0
Chairman of the Board,
President and Trustee
Arthur H. Bernstein, Esq. $13,500 $0 $0 $35,250**
Trustee for service on 2 boards
David E. Anderson $13,500 $0 $0 $35,750**
Trustee for service on 2 boards
Edmond R. Davis, Esq. $13,500 $0 $0 $35,250**
Trustee for service on 2 boards
John W. English $13,500 $0 $0 $35,250**
Trustee for service on 2 boards
==================================================================================================================================
* A Trustee who is an "interested person" as defined in the 1940 Act.
** Of this amount, $1,250 represents payment and reimbursement of expenses for a Board meeting held during the fiscal year 1993.
</TABLE>
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISORS, CUSTODIAN AND TRANSFER AGENT
Sierra Advisors serves as Investment Advisor to each of the Funds and
each Sub-Advisor serves as Investment Sub-Advisor to one or more Funds pursuant
to separate written agreements. Certain of the services provided by, and the
fees paid to, Sierra Advisors and the Sub-Advisors, are described in the
Prospectus under "Management - Investment Advisor and - Sub-Advisors." Sierra
Advisors and the Sub-Advisors each (i) compensates its respective Directors and
pays the salaries of its respective officers and employees employed by such
companies, (ii) compensates its respective officers and employees that are
employed by the Trust, and (iii) maintains office facilities for the Trust.
BlackRock Financial Management L.P. replaced Van Kampen Merritt
Management Inc. ("Van Kampen") as the sub-advisor of the U.S. Government Fund on
December 8, 1994. On February 28, 1995, BlackRock Financial Management L.P. was
acquired and reorganized as BlackRock Financial Management, Inc. ("BlackRock"),
a Delaware corporation, by a wholly-owned subsidiary of PNC Bank Corp.
The assets of the Trust are held under bank custodianship in accordance
with the 1940 Act. Boston Safe Deposit and Trust Company ("Boston Safe") serves
as Custodian for the Funds. Sierra Fund Administration Corporation ("Sierra
Administration") serves as the Funds' Transfer Agent. Under its custodial
agreement with the Trust, Boston Safe is authorized to appoint one or more U.S.
banking institutions as sub-custodians of assets owned by any of the Funds. In
addition, the Trust may employ foreign sub-custodians that are approved by the
Board of Trustees to hold foreign assets.
For the fiscal years ended December 31, 1993 and 1994, the Funds paid
to Sierra Advisors the following advisory fees*:
1994
-----------------------------------------
Fees Expenses
Fees Paid Waived Reimbursed
-----------------------------------------
Global Money Fund $ 0 $19,714 $2,983
Short Term High Quality Bond Fund $ 19,651 $23,014 $ 0
Short Term Global Government Fund $142,816 $63,650 $ 0
U.S. Government Fund $211,737 $23,870 $ 0
Corporate Income Fund $284,782 $22,786 $ 0
Growth and Income Fund $ 55,204 $30,881 $ 0
Growth Fund $423,638 $ 0 $ 0
Emerging Growth Fund $ 85,541 $ 8,613 $ 0
International Growth Fund $270,165 $23,985 $ 0
1993
-----------------------------------------
Fees Expenses
Fees Paid Waived Reimbursed
-----------------------------------------
Global Money Fund $ 0 $ 2,408 $25,747
Short Term High Quality Bond Fund -- -- --
Short Term Global Government Fund $ 0 $26,934 $16,855
U.S. Government Fund $ 0 $38,193 $15,862
Corporate Income Fund $ 0 $44,712 $ 9,066
Growth and Income Fund -- -- --
Growth Fund $ 0 $49,497 $ 481
Emerging Growth Fund -- -- --
International Growth Fund $ 0 $19,018 $17,769
- ------------
*The Global Money, the Short Term High Quality Bond, the Short Term Global
Government, the U.S. Government, the Corporate Income, the Growth and Income,
the Growth, the Emerging Growth and the International Growth Funds commenced
operations on May 10, 1993, January 12, 1994, May 12, 1993, May 6, 1993, May 7,
1993, January 12, 1994, May 7, 1993, January 12, 1994 and May 7, 1993,
respectively. As noted in the Prospectus, Sierra Advisors has undertaken
voluntarily and until further notice to waive all or a portion of its fees in
respect of each Fund and to bear expenses of each Fund to the extent necessary
to limit the expenses of each Fund.
For the fiscal years ended December 31, 1993 and 1994, Sierra Advisors
paid to the Sub-Advisors the following sub-advisory fees*:
1994 1993
------------------ --------------------
Fees Fees
Fees Paid Waived Fees Paid Waived
--------- ------ --------- ------
Global Money Fund $ 5,914 $ 0 $ 722 $ 0
Short Term High Quality Bond Fund $ 12,800 $ 0 $ 0 $ 0
Short Term Global Government Fund $ 77,081 $ 0 $10,055 $ 0
U.S. Government Fund $ 78,536 $ 0 $12,731 $ 0
Corporate Income Fund $141,954 $ 0 $20,638 $ 0
Growth and Income Fund $ 48,423 $ 0 $ 0 $ 0
Growth Fund $243,892 $ 0 $28,657 $ 0
Emerging Growth Fund $ 57,538 $ 0 $ 0 $ 0
International Growth Fund $185,779 $ 0 $12,012 $ 0
- ------
* The Global Money, the Growth, the International Growth, the U.S. Government,
the Corporate Income, the Short Term Global Government, the Growth and Income,
the Emerging Growth and the Short Term High Quality Bond Funds commenced
operations on May 10, 1993, January 12, 1994, May 12, 1993, May 6, 1993, May 7,
1993, January 12, 1994, May 7, 1993, January 12, 1994 and May 7, 1993,
respectively. As noted in the Prospectus, Sierra Advisors has undertaken
voluntarily and until further notice to waive all or a portion of its fees in
respect of each Fund and to bear expenses of each Fund to the extent necessary
to limit the expenses of each Fund.
For the fiscal years ended December 31, 1993 and 1994, the Funds paid
to Sierra Administration the following administration fees*:
1994 1993
------------------ --------------------
Fees Fees
Fees Paid Waived Fees Paid Waived
--------- ------ --------- ------
Global Money Fund $ 0 $ 7,097 $0 $ 868
Short Term High Quality Bond Fund $ 9,777 $ 5,583 -- --
Short Term Global Government Fund $14,152 $35,400 $0 $ 6,464
U.S. Government Fund $33,462 $37,220 $0 $11,458
Corporate Income Fund $41,686 $43,487 $0 $12,382
Growth and Income Fund $12,587 $ 6,782 -- --
Growth Fund $54,385 $28,906 $0 $ 9,376
Emerging Growth Fund $11,510 $ 7,321 -- --
International Growth Fund $32,169 $23,565 $0 $ 3,603
- -----------------
* The Global Money, the Short Term High Quality Bond, the Short Term Global
Government, the U.S. Government, the Corporate Income, the Growth and Income,
the Growth, the Emerging Growth and the International Growth Funds commenced
operations on May 10, 1993, January 12, 1994, May 12, 1993, May 6, 1993, May 7,
1993, January 12, 1994, May 7, 1993, January 12, 1994 and May 7, 1993,
respectively.
COUNSEL AND AUDITOR
O'Melveny & Myers serves as counsel to the Trust and provides legal
services to Great Western Financial Corporation and a number of its
subsidiaries, including Sierra Advisors, Sierra Administration and GW
Securities. Morgan, Lewis & Bockius also provides legal services to the Trust.
Price Waterhouse LLP, independent accountants, located at 160 Federal
Street, Boston, Massachusetts 02110, serves as auditor of the Trust.
ORGANIZATION OF THE TRUST
The Trust is organized as an unincorporated business trust under the
laws of the Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated January 27, 1993, as amended from time to time (the
"Declaration of Trust"). Certificates representing shares in the Trust are not
physically issued. Boston Safe, the Trust's Custodian, and Sierra
Administration, the Trust's Transfer Agent, maintain a record of each
shareholder's ownership of Trust shares. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights. Shareholders generally vote by
Fund, except with respect to the election of Trustees and the selection of
independent accountants.
Under normal circumstances, there will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office promptly will call a shareholders'
meeting for the election of Trustees. Under the 1940 Act, shareholders of record
of no less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. Under the Declaration of Trust, the
Trustees are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any such Trustee when requested in
writing to do so by the shareholders of record of not less than 10% of the
Trust's outstanding shares.
The record owner of all of the Trust's shares is Separate Account D of
AGL. Because of current federal securities laws requirements, the Trust expects
its shareholders to offer their Contract owners the opportunity to instruct them
as to how Trust shares allocable to their Contracts will be voted with respect
to certain issues. Therefore, Contract owners could be deemed to have beneficial
ownership of shares allocable to their Contracts. As of March 31, 1995, to the
Trust's knowledge, no Contract Owner had shares allocable to Contracts equal to
more than five percent of any Fund.
Massachusetts law provides that shareholders, under certain
circumstances, could be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from the
Trust's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust would be unable to meet its obligations, a
possibility that the Trust's management believes is remote. Upon payment of any
liability incurred by the Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in such a way so as to avoid, to
the extent possible, ultimate liability of the shareholders for liabilities of
the Trust.
CERTAIN MATTERS RELATING TO J.P. MORGAN INVESTMENT MANAGEMENT INC. AND
ITS AFFILIATES
J.P. Morgan Investment Management Inc. ("J.P. Management"), the
Sub-Advisor to the Global Money, Growth and Income and International Growth
Funds, and Morgan Guaranty Trust Company of New York ("Morgan Guaranty") are
both wholly owned subsidiaries of J.P. Morgan & Co. Incorporated ("J.P.
Morgan"). Through its Corporate Finance Division, Morgan Guaranty has
relationships as a bank of deposit, as a lender, as a financial advisor and in
other capacities, with a significant number of United States corporations. Such
corporate customers of Morgan Guaranty obtain short-term funds to finance the
operation of their business generally through two sources: (i) short-term bank
borrowings from commercial banks such as Morgan Guaranty; and (ii) the issuance
of commercial paper of the type in which certain of the Funds may invest.
Normally the decision of a corporation as to which medium of short-term
financing to utilize will be influenced primarily by interest rate differentials
between the available sources of short-term funds. When interest rate
differentials between short-term bank borrowings and the commercial paper market
narrow, the Corporate Finance Division of Morgan Guaranty may be competing with
the commercial paper market to provide short-term funds to corporate borrowers.
J.P. Morgan Securities Inc. ("J.P. Securities"), a wholly owned
subsidiary of J.P. Morgan, is a broker-dealer registered with the Commission and
a member of the National Association of Securities Dealers, Inc. ("NASD"). J.P.
Securities is active as a dealer in the securities of the United States
Government and an underwriter of and dealer in securities of the United States
Government agencies and money market securities. To a limited extent, J.P.
Securities also underwrites and deals in commercial paper, certain
mortgage-related securities, and consumer receivable securities. J.P. Morgan
Securities Limited ("J.P. Limited"), also a wholly owned subsidiary of J.P.
Morgan, underwrites, distributes and trades international securities, including
Eurobonds, commercial paper and foreign government bonds. To the extent that the
Global Money, Growth and Income or International Growth Funds are permitted to
invest in such securities, the foregoing activities of J.P. Securities and J.P.
Limited may affect the manner in which J.P. Management makes investments for
such Funds and may affect such Funds' portfolios or the markets for the
securities in which such portfolios are invested. Such effects would be
primarily on: (1) the price of securities already held in the Global Money,
Growth and Income or International Growth Funds or securities considered for
purchase, which are the same as or similar to issues underwritten or traded by
J.P. Securities, J.P. Limited, J.P. Morgan or Morgan Guaranty ("Morgan
Affiliates"), and (2) the supply of issues available for purchase by the Global
Money, Growth and Income or International Growth Funds. Particularly, where the
positions of Morgan Affiliates constitute a large percentage of a given issue,
the price at which that issue is traded may influence the price of securities of
that issue or of similar securities in the Global Money, Growth and Income or
International Growth Funds or securities being considered for purchase. Also,
since the Global Money, Growth and Income and International Growth Funds will
not purchase directly from Morgan Affiliates, if the positions of Morgan
Affiliates in given issues is large, it may limit the selection of available
securities in that particular maturity, yield or price range.
In addition, the Global Money, Growth and Income and International
Growth Funds will not purchase securities of U.S. Government agencies during the
existence of any underwriting or selling group of which a Morgan Affiliate is a
member except to the extent permitted by law. Portfolio securities may not be
purchased from or sold to J.P. Management or any affiliated person (as defined
in the 1940 Act) of J.P. Management except as may be permitted by the Commission
and subject to the rules and regulations of the Comptroller of the Currency.
J.P. Morgan issues commercial paper and long-term debt securities, and
Morgan Guaranty and some of its affiliates issue certificates of deposit and
create bankers' acceptances. The Global Money, Growth and Income and
International Growth Funds will not invest in the commercial paper or other debt
securities of J.P. Morgan or in certificates of deposit or bankers' acceptances
of Morgan Guaranty or such affiliates. However, the activities of J.P. Morgan
and Morgan Guaranty and any of such affiliates in the market for such
instruments might affect the portfolios of such Funds or the market for such
instruments.
The limitations discussed in the preceding three paragraphs, in the
opinion of J.P. Management, will not significantly affect the ability of the
Global Money, Growth and Income and International Growth Funds to pursue their
respective investment objectives. However, in the future in other circumstances,
such Funds may be at a disadvantage because of such limitations in comparison to
other funds with similar investment objectives which are not subject to such
limitations. The management of Sierra Advisors believes that the effects of such
limitations are more than offset by the experience and expertise J.P. Management
provides to such Funds.
The Treasurer's Division of Morgan Guaranty manages Morgan Guaranty's
own investment portfolio, composed primarily of securities of the United States
Government and United States Government agencies. Such activities may affect the
portfolios of the Global Money, Growth and Income and International Growth Funds
or the markets for the securities in which such portfolios invest. In acting for
its fiduciary accounts, including such Funds, J.P. Management will not discuss
its investment decisions or positions with the personnel of any Morgan
Affiliates. J.P. Management will not execute any transactions for such Funds
with Morgan Affiliates and will execute such transactions only with unaffiliated
dealers.
The commercial banking divisions of Morgan Guaranty or its affiliates
may have deposit, loan and other commercial banking relationships with issuers
of securities purchased by the Global Money, Growth and Income and International
Growth Funds, including outstanding loans to such issuers that may be repaid in
whole or in part with the proceeds of securities purchased by such Funds in
primary public offerings. Such Funds will not purchase, except as may be
permitted by applicable law, securities in any primary public offering when the
prospectus discloses that the proceeds will be used to repay in whole or in part
the loans to such issuers. J.P. Management will not cause such Funds to make
investments for the direct purpose of benefitting other commercial interests of
Morgan Affiliates at the expense of such Funds. J.P. Management has advised such
Funds that, in making investment decisions, J.P. Management will not obtain or
use material inside information in the possession of any other division or
department of J.P. Management or from Morgan Affiliates. J.P. Management has
also advised such Funds that its investment personnel do not disclose any
material inside information in their possession regarding such Funds to any
other division or department of J.P. Management or Morgan Affiliates.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Prospectus discusses the investment objective or objectives of each
of the Funds and the policies to be employed to achieve such objectives. This
section contains supplemental information concerning the types of securities and
other instruments in which the Funds may invest, the investment policies and
portfolio strategies that the Funds may utilize and certain risks attendant to
such investments, policies and strategies.
MONEY MARKET QUALITY AND MATURITY REQUIREMENTS
The Global Money Fund will purchase only those instruments which meet
the applicable quality requirements described below. The Fund will not purchase
a security (other than a U.S. Government security) unless the security or the
issuer with respect to comparable securities (i) is rated by at least two
nationally recognized statistical rating organizations ("NRSROs") (such as
Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps ("Duff") or Fitch Investors Service, Inc. ("Fitch"))
in one of the two highest rating categories for short-term debt securities, (ii)
is rated by the only NRSRO that has issued a rating in one of such NRSRO's two
highest categories for short-term debt, or (iii) if not so rated, the security
is determined to be of comparable quality. In addition, no more than 5% of the
Fund's total assets will be invested in securities rated in the second highest
rating category by the requisite NRSROs and, no more than 1% of the Fund's total
assets will be invested in the securities of any one such issuer. A description
of the rating systems of S&P, Moody's, Duff and Fitch is contained in the
Appendix to this SAI.
At the time of investment, no security purchased by the Fund (except
securities subject to repurchase agreements and variable rate demand notes) can
have a maturity exceeding 397 days, and the Fund's average portfolio maturity
cannot exceed 90 days. The short average maturity of the portfolio enhances the
Fund's ability to maintain share prices at $1.00 which, in turn, provides both
stability of value and liquidity to shareholders. There can be no assurances,
however, that the Fund will be able to maintain net asset values at $1.00 per
share.
STRATEGIES AVAILABLE TO ALL FUNDS
BANK OBLIGATIONS. Domestic commercial banks organized under federal law
are supervised and examined by the Comptroller of the Currency and are required
to be members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to a
Fund, depending upon the principal amount of certificates of deposit ("CDs") of
each state bank held by a Fund) and are subject to federal examination and to a
substantial body of federal law and regulation. As a result of federal and state
laws and regulations, domestic branches of domestic banks are, among other
things, generally required to maintain specific levels of reserves, and are
subject to other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of U.S. banks and of foreign branches
of foreign banks, such as CDs and time deposits ("TDs"), may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and governmental regulation.
Obligations of foreign branches of U.S. banks and foreign banks are subject to
the risks associated with investing in foreign securities generally. Foreign
branches of U.S. banks and foreign branches of foreign banks are not necessarily
subject to the same or similar regulatory requirements that apply to U.S. banks,
such as mandatory reserve requirements, loan limitations, and accounting,
auditing and financial recordkeeping requirements. In addition, less information
may be publicly available about a foreign branch of a U.S. bank or about a
foreign bank than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A U.S branch of a foreign bank may or may not be
subject to reserve requirements imposed by the Federal Reserve System or by the
state in which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the Currency and branches
licensed by certain states ("State Branches") may or may not be required to (1)
pledge to the regulator by depositing assets with a designated bank within the
state an amount of its assets equal to 5% of its total liabilities, or (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of State Branches
may not necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a U.S. branch of a foreign bank than about
a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign banks and foreign branches of U.S. banks, the Funds'
respective Sub-Advisors will carefully evaluate such investments on a
case-by-case basis.
A Fund may purchase a CD, TD or bankers' acceptances issued by a bank,
savings and loan association or other banking institution with less than $1
billion in assets (a "Small Issuer Bank Obligation") only so long as the issuer
is a member of the FDIC or supervised by the Office of Thrift Supervision (the
"OTS"), and so long as the principal amount of the Small Issuer Bank Obligation
is fully insured by the FDIC and is no more than $100,000. Each of the Funds
will at any one time hold only one Small Issuer Bank Obligation from any one
issuer.
Savings and loan associations whose CDs, TDs and bankers' acceptances
may be purchased by the Funds are supervised by the OTS and insured by the
Savings Association Insurance Fund, which is administered by the FDIC and is
backed by the full faith and credit of the United States Government. As a
result, such savings and loan associations are subject to regulation and
examination.
MORTGAGE-BACKED SECURITIES. The mortgage-backed securities in which the
Funds may invest may be classified as governmental or government-related,
depending on the issuer or guarantor. Governmental mortgage-backed securities
are backed by the full faith and credit of the United States. GNMA, the
principal U.S. guarantor of such securities, is a wholly owned U.S. Government
corporation within the Department of Housing and Urban Development.
Government-related mortgage-backed securities which are not backed by the full
faith and credit of the United States include those issued by FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders, which is subject to general regulation by the Secretary of Housing
and Urban Development. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA. FHLMC is a corporate
instrumentality of the United States, the stock of which is owned by the Federal
Home Loan Bank. Participation certificates representing interests in mortgages
from FHLMC's national portfolio are guaranteed as to the timely payment of
interest and ultimate collection of principal by FHLMC.
Governmental or government-related entities may create mortgage loan
pools offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments in which principal or interest
payments may vary or terms to maturity may be shorter than previously customary.
As new types of mortgage-backed securities are developed and offered to
investors, the Funds will, consistent with their respective investment
objectives and policies, consider making investments in such new types of
securities.
The average maturity of pass-through pools of mortgage-backed
securities varies with the maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include the
level of interest rates, general economic and social conditions, the location of
the mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example, is
to assume that prepayments will result in a 7- to 9-year average life for pools
of fixed-rate 30-year mortgages. Pools of mortgages with other maturities of
different characteristics will have varying average life assumptions.
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of NRSROs, such
as Moody's, S&P, Duff and Fitch represent the opinions of these agencies as to
the quality of securities which they rate. It should be emphasized, however,
that such ratings are relative and subjective and are not absolute standards of
quality. These ratings will be used by the Funds as initial criteria for the
selection of portfolio securities, but the Funds will also rely upon the
independent advice of their respective Sub-Advisors to evaluate potential
investments. The Appendix to this SAI contains further information concerning
the ratings of these services and their significance.
To the extent that the rating given by a rating service for securities
may change as a result of changes in such organizations or their rating systems,
the Funds will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
REPURCHASE AGREEMENTS. The Funds may invest in repurchase agreements
without limitation as to amount.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include debt
obligations of varying maturities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. U.S. Government Securities include direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Resolution Trust Corporation, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association. Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance. Because the U.S.
Government is not obligated by law to provide support to an instrumentality it
sponsors, a Fund will invest in obligations issued by such an instrumentality
only if the Fund's Sub-Advisor determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE GLOBAL MONEY FUND
FUTURES ACTIVITIES. The Funds may enter into futures contracts and
options on futures contracts that are traded on a U.S. exchange or board of
trade. These investments may be made by the Fund involved for the purpose of
hedging against changes in the value of its portfolio securities due to
anticipated changes in interest rates and market conditions. The ability of a
Fund to trade in futures contracts and options on futures contracts may be
materially limited by the requirement of the Internal Revenue Code of 1986, as
amended (the "Code"), applicable to a regulated investment company. See "Taxes"
below. In addition to the uses of futures described above, all Funds except the
Global Money Fund may use futures for certain other purposes. See "Strategic
Transactions."
FUTURES CONTRACTS. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. A bond 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. No physical delivery of the underlying securities in the index is made.
The purpose of entering into a futures contract by a Fund is to protect
the Fund from fluctuations in the value of its securities caused by anticipated
changes in interest rates or market conditions without necessarily buying or
selling the securities. Of course, since the value of portfolio securities will
far exceed the value of the futures contracts entered into by a Fund, an
increase in the value of the futures contract would only mitigate -- but not
totally offset -- the decline in the value of the portfolio.
No consideration is paid or received by a Fund upon entering into a
futures contract. Initially, a Fund would be required to deposit with the broker
an amount of cash or cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in its nature the
equivalent of a performance bond or good faith deposit on the contract, which is
returned to a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, a Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
There are several risks in connection with the use of futures contracts
as a hedging device. Successful use of futures contracts by a Fund is subject to
the ability of the Fund's Sub-Advisor to correctly predict movements in the
direction of interest rates or changes in market conditions. These predictions
involve skills and techniques that may be different from those involved in the
management of the portfolio being hedged. In addition, there can be no assurance
that there will be a correlation between movements in the price of the
underlying index or securities and movements in the price of the securities
which are the subject of the hedge. A decision of whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected trends
in interest rates.
Although the Funds intend to enter into futures contracts only if there
is an active market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most U.S. futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on futures contracts is limited to the premium paid
for the option (plus transaction costs). Because the price of the option to the
purchaser is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of the Fund holding the options.
The Funds may purchase and write put and call options on futures
contracts that are traded on a U.S. exchange or board of trade as a hedge
against changes in the value of its portfolio securities, and may enter into
closing transactions with respect to such options to terminate existing
positions. There is no guarantee that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated interest rate and
market trends by the Funds' Sub-Advisors, which could prove to be inaccurate.
Even if the expectations of the Sub-Advisors are correct, there may be an
imperfect correlation between the change in the value of the options and the
portfolio securities hedged. In addition to the uses of options described above,
all Funds except the Global Money Fund may use options for certain other
purposes. See "Strategic Transactions."
OPTIONS ON SECURITIES. The Funds may write covered put options and
covered call options on securities, purchase put and call options on securities
and enter into closing transactions. The Funds may not write put options with
respect to more than 50% of their total assets.
Options written by a Fund will normally have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (1) in-the-money call options when its
Sub-Advisor expects that the price of the underlying security will remain flat
or decline moderately during the option period, (2) at-the-money call options
when its Sub-Advisor expects that the price of the underlying security will
remain flat or advance moderately during the option period and (3)
out-of-the-money call options when its Sub-Advisor expects that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be utilized in the same market
environments as such call options described above.
So long as the obligation of the Fund as the writer of an option
continues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Fund to deliver, in the case of
a call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. The Fund can
no longer effect a closing purchase transaction with respect to an option once
it has been assigned an exercise notice. To secure its obligation to deliver the
underlying security when it writes a call option, or to pay for the underlying
security when it writes a put option, the Fund will be required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the Options Clearing Corporation (the "OCC") and of the securities exchange on
which the option is written.
An option may be closed out only when there exists a secondary market
for an option of the same series on a recognized securities exchange or in the
over-the-counter market (see "Over the Counter Options," below). In light of
this fact and current trading conditions, the Fund expects to purchase or write
call or put options issued by the OCC, as well as the following national
securities exchanges on which options are traded: The Chicago Board Options
Exchange (CBOE), The Board of Trade of the City of Chicago (CBT), American Stock
Exchange (AMEX), Philadelphia Stock Exchange (PHLX), Pacific Stock Exchange
(PSE) and the New York Stock Exchange (NYSE).
The Fund may realize a profit or loss upon entering into closing
transactions. In cases where the Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option, and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages in
a closing sale transaction, the Fund will realize a profit or loss to the extent
that the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs.
To facilitate closing transactions, the Fund will generally purchase or
write only those options for which its Sub-Advisor believes there is an active
secondary market although there is no assurance that sufficient trading interest
to create a liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the OCC and the securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such events, it might not be possible to
effect closing transactions in particular options. If as a covered call option
writer the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the particular
Fund and other clients of Sierra Advisors and its Sub-Advisors and certain of
their affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying security with respect to which the Fund has written
options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, the Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed stock. The Fund may however,
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to mortgage-backed U.S. Government
Securities for which the Fund may write covered call options. If a Fund writes
covered call options on a mortgage-backed security, the security that it holds
as cover may, because of scheduled amortization of unscheduled prepayments,
cease to be sufficient cover. The Fund will compensate by purchasing an
appropriate additional amount of mortgage-backed securities. In addition to the
uses of options described above, all Funds except the Global Money Fund may use
options for certain other purposes. See "Strategic Transactions."
OPTIONS ON SECURITIES INDEXES. In addition to options on securities,
the Funds may also purchase and sell call and put options on securities indexes.
Such options give the holder the right to receive a cash settlement during the
term of the option based upon the difference between the exercise price and the
value of the index.
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
purchase or write such an option only if its Sub-Advisor believes the option can
be closed out.
Use of options on securities indexes also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase or write such options
unless its Sub-Advisor believes the market is sufficiently developed for the
risk of trading in such options to be no greater than the risk of trading in
options on securities.
Price movements in the Fund's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations. In addition to
the uses of options described above, all Funds except the Global Money Fund may
use options for certain other purposes. See "Strategic Transactions."
OVER THE COUNTER OPTIONS. The Funds may write or purchase options in
privately negotiated domestic or foreign transactions ("OTC Options"), as well
as exchanged-traded or "listed" options. OTC Options can be closed out only by
agreement with the primary dealer in the transaction, and thus any OTC Options
and their underlying securities or currencies are considered illiquid. With OTC
Options, terms such as expiration date, exercise price and premium are agreed
upon between the Fund and the transacting dealer, without the intermediation of
a third party such as the OCC. Any OTC Options written by a Fund will be with a
qualified dealer pursuant to an agreement under which the Fund may repurchase
the option at a formula price at which the Fund would have the absolute right to
repurchase an OTC Option it has sold. In addition, certain OTC Options on
foreign currencies are traded through financial institutions acting as
market-makers in such options and the underlying currencies. OTC Options will be
considered illiquid in an amount equal to the formula price, less the amount by
which the option is "in-the-money." A Fund may not invest more than 15% of its
net assets in illiquid securities and repurchase agreements that 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 an exchange such as
the OCC, 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.
REVERSE REPURCHASE AGREEMENTS. Under the 1940 Act, reverse repurchase
agreements may be considered borrowings by the seller; accordingly each of the
Funds will limit its investments in reverse repurchase agreements and other
borrowings to no more than 33 1/3% of its total assets. A Fund will not engage
in reverse repurchase transactions for the purpose of leverage.
STRATEGIC TRANSACTIONS. Each Fund may, but is not required to, utilize
various investment strategies 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 exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices 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. Moreover, no Fund currently intends to enter into
Strategic Transactions, excluding Strategic Transactions that are "covered" or
entered into for bona fide hedging purposes, that are in the aggregate principal
amount in excess of 15% of the Fund's net assets. 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 the 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.
Strategic Transactions have associated risks including possible default
by the other party to the transaction, illiquidity and, to the extent the
Sub-Advisor's view as to certain market movements is incorrect, losses greater
than if they had not been used. Use of put and call options, currency
transactions or options and futures transactions entails certain risks as
described herein and in the Appendix to the Prospectus in sections relating to
such investment or instruments. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.
The Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single strategy when, in the opinion of the Sub-Advisor, it is in the best
interest of the Fund to do so. A combined transaction may contain elements of
risk that are present in each of its component transactions.
The use of Strategic Transactions for portfolio management purposes
involves special considerations and risks. Additional risks pertaining to
particular strategies that make up Strategic Transactions are described in other
sections to this SAI. Successful use of most Strategic Transactions depends upon
the Sub-Advisor's ability to predict movements of the overall securities and
interest rate markets, which requires different skills than predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. There may be imperfect correlation, or
even no correlation, between price movements of Strategic Transactions and price
movements of the related portfolio or currency positions. Such a lack of
correlation might occur due to factors unrelated to the value of the related
portfolio or currency positions, such as speculative or other pressures on the
markets in which Strategic Transactions are traded. Strategic Transactions, if
successful, can reduce risk of loss or enhance income, by wholly or partially
offsetting the negative effect of, or accurately predicting, unfavorable price
movements or currency fluctuations in the related portfolio or currency
position. However, Strategic Transactions can also reduce the opportunity for
gain by offsetting the positive effect of favorable price movements in the
positions. In addition, a Fund might be required to maintain assets as "cover,"
maintain segregated accounts or make margin payments when it takes positions in
Strategic Transactions involving obligations to third parties (i.e., Strategic
Transactions other than purchased options). These requirements might impair the
Fund's ability to sell a portfolio security or currency position or make an
investment at a time when it would otherwise be favorable to do so, or require
that the Fund sell a portfolio security or currency position at a
disadvantageous time.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. A segregated
account in the name of the Funds consisting of cash or liquid debt securities
equal to the amount of when-issued or delayed-delivery commitments will be
established at Boston Safe, the Trust's custodian. For the purpose of
determining the adequacy of the securities in the accounts, the deposited
securities will be valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then-available cash flow, the sale of securities held in the
segregated account, the sale of other securities or, although it would not
normally expect to do so, from the sale of securities purchased on a when-issued
or delayed-delivery basis themselves (which may have a greater or lesser value
than the Fund's payment obligations).
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE U.S. GOVERNMENT FUND
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS. The Funds may
invest in the securities of foreign and domestic issuers in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These
securities may not necessarily be dominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depositary Receipts ("CDRs"), and are receipts issued in
Europe typically by non-U.S. banking and trust companies that evidence ownership
of either foreign or U.S. securities. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and CDRs, in bearer form,
are designed for use in European securities markets.
LENDING OF PORTFOLIO SECURITIES. Each of the Funds will adhere to the
following conditions whenever its portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities rises above the level of the collateral; (3) the Fund
must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the loaned securities may pass to the borrower, provided that
if a material event adversely affecting the investment occurs, the Trust's Board
of Trustees must terminate the loan and regain the right to vote the securities.
From time to time, the Funds may pay a part of the interest earned from the
investment of the collateral received for securities loaned to the borrower
and/or a third party that is unaffiliated with the Trust and that is acting as a
"finder." A Fund will not lend more than 20% of its total assets.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT GLOBAL MONEY AND U.S. GOVERNMENT FUNDS
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds may engage in
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Funds' dealings in forward currency exchange
contracts will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of forward
foreign currency with respect to specific receivables or payables of the Fund
generally arising in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated or quoted in such foreign
currency. A Fund may not position hedge with respect to a particular currency to
an extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in or
currently convertible into that particular currency. If a Fund enters into a
position hedging transaction, the Trust's custodian or sub-custodian will place
cash or readily marketable securities in a segregated account for the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the amount of the Fund's
commitment with respect to the contract. Hedging transactions may be made from
any foreign currency into U.S. dollars or into other appropriate currencies.
At or before the maturity of a forward contract, a Fund may either sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the amount of the currency that it is obligated to deliver. If the Fund
retains the portfolio security and engages in an offsetting transaction, the
Fund, at the time of execution of the offsetting transaction, will incur a gain
or a loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between the Fund's entering into
a forward contract for the sale of currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Fund will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
prevailing market conditions. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, forward currency contracts may
limit the risk of loss due to a decline in the value of the hedged currency
increase.
If a devaluation of a currency is generally anticipated, a Fund may not
be able to contract to sell the currency at a price above the devaluation level
it anticipates.
The Funds, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in a Fund's underlying currency. For
instance, a Fund could purchase a U.S. dollar-denominated security and at the
same time enter into a forward currency exchange contract to exchange U.S.
dollars for its underlying currency at a future date. By matching the amount of
U.S. dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, the Fund may be able to "lock in" the foreign
currency value of the security and adopt a synthetic investment position whereby
the Fund's overall investment return from the combined position is similar to
the return from purchasing a foreign currency-denominated instrument.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly matched
with a Fund's obligation under a forward currency exchange contract on the date
of maturity, the Fund may be exposed to some risk of loss from fluctuations in
that currency. Although each Fund's Sub-Advisor will attempt to hold such
mismatching to a minimum, there can be no assurance that the Fund's Sub-Advisor
will be able to do so.
Although the foreign currency market is not believed to be necessarily
more volatile than the market in other commodities, there is less protection
against defaults in the forward trading to currencies than there is in trading
such currencies on an exchange because such forward contracts are not guaranteed
by an exchange or clearing house. The Commodity Futures Trading Commission has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Fund, it would
cease trading such contracts. Cessation of trading might adversely affect the
performance of a Fund.
In addition to the uses of foreign currency exchange transactions
described above, all Funds except the Global Money and the U.S. Government Funds
may use foreign currency exchange transactions for certain other purposes. See
"Strategic Transactions."
OPTIONS ON FOREIGN CURRENCIES. The Funds 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.
Such hedging includes cross hedging and proxy hedging where the options to buy
or sell currencies involve other currencies besides the U.S. dollar. As one
example, a decline in the U.S. dollar value of a foreign currency in which
securities are denominated will reduce the U.S. dollar value of the securities,
even if their value in the foreign currency remains constant. To protect against
diminutions in the value of securities held by a Fund in a particular foreign
currency, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right to sell the
currency for a fixed amount in U.S. dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio that otherwise would have resulted.
When an increase in the U.S. dollar value of a currency in which securities to
be acquired are denominated is projected, thereby increasing the cost of the
securities, the Fund conversely may purchase call options on the currency. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction, or
to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
The Fund may also write covered call options on foreign currencies for
the types of hedging purposes described above. As one example, when a Fund
anticipates a decline in the U.S. dollar value of foreign currency-denominated
securities due to adverse fluctuations in exchange rates, it could, instead of
purchasing a put option, write a covered call option on the relevant currency.
If the expected decline occurs, the option will most likely not be exercised,
and the diminution in value of portfolio securities will be offset by the amount
of the premium received. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected direction. If
this does not occur, the option may be exercised and the Fund would be required
to purchase or sell the underlying currency at a loss that may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund may also be required to forego all or a portion of the benefits that
might otherwise have been obtained from favorable movements in exchange rates.
A call option written on a foreign currency by a Fund is "covered" if
the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire the foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by Boston Safe, or by a designated sub-custodian) upon conversion or
exchange of other foreign currency held by the Fund. A call option also is
covered if the Fund has a call on the same foreign currency and in the same
principal amount as the call written when the exercise price of the call held
(1) is equal to or less than the exercise price of the call written or (2) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government Securities and other high-grade
liquid debt securities in a segregated account with Boston Safe or with a
designated sub-custodian.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to those transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterpart default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting the Fund to
liquidate open positions at a profit prior to their exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of exchange-traded foreign
currency options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise. For a discussion of the risks involved in OTC Options
in foreign currency, see "Over the Counter Options" above.
In addition to the uses of options on foreign currencies described
above, all Funds except the Global Money and U.S. Government Funds may use
options on foreign currencies for certain other purposes. See "Strategic
Transactions."
STRATEGY AVAILABLE TO SHORT TERM HIGH QUALITY BOND, SHORT TERM GLOBAL
GOVERNMENT, U.S. GOVERNMENT AND CORPORATE INCOME FUNDS
DOLLAR ROLL TRANSACTIONS. In order to seek a high level of current
income, the Funds may enter into dollar rolls or "covered rolls" in which the
Fund sells securities (usually Mortgage-Backed Securities) and simultaneously
contracts to repurchase, typically in 30 or 60 days, substantially similar, but
not identical, securities on a specified future date. During the roll period,
the Fund forgoes principal and interest paid on such securities. The Fund is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds 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.
STRATEGY AVAILABLE TO SHORT TERM GLOBAL GOVERNMENT, GROWTH AND EMERGING
GROWTH FUNDS
LOWER-RATED SECURITIES. The Short Term Global Government Fund may
invest up to 10% and the Growth and Emerging Growth Funds up to 35% of its net
assets in non-investment grade securities (rated Ba and lower by Moody's or BB
and lower by Standard & Poor's) or unrated securities. Such securities carry a
high degree of risk (including the possibility of default or bankruptcy of the
issuer of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories and are considered speculative. See the Appendix to
this SAI for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
The recent economic downturn disrupted the high yield market and
impaired the ability of issuers to repay principal and interest. Also, an
increase in interest rates could further adversely affect the value of such
obligations held by the Fund. Prices and yields of high yield securities will
fluctuate over time and may affect the Fund's net asset value. In addition,
investments in high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and may be subject
to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to accurately value high yield securities in the Fund's portfolio and
to dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield security. For these reasons,
it is the policy of each of these Fund's Sub-Advisors not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and ongoing review of credit quality. The
achievement of the Fund's investment objectives by investment in such securities
may be more dependent on its Sub-Advisor's credit analysis than is the case for
higher quality bonds. Should the rating of a portfolio security be downgraded,
the Fund's Sub-Advisor will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress from time to time has considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments on
these securities and would regulate corporate restructurings. Such legislation
may significantly depress the prices of outstanding securities of this type.
STRATEGY AVAILABLE TO GROWTH AND INTERNATIONAL GROWTH FUNDS
SECURITIES IN DEVELOPING COUNTRIES. Although most of the Growth and
International Growth Funds' investments are made in securities of companies in
(or governments of) developed countries, up to 5% of the value of the Growth
Fund's investment and 25% of the value of the International Growth Fund's
investment may be made in securities of companies in (or governments of)
developing or emerging countries (sometimes referred to as "emerging markets")
as well. A developing or emerging country is generally considered to be a
country that is in the initial stages of its industrialization cycle. Investing
in the equity and fixed-income markets of developing or emerging countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems that can be expected to have less stability
than those of developed countries. Historical experience indicates that the
markets of developing or emerging countries have been more volatile than the
markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 15 below have been
adopted by the Trust with respect to the Funds as fundamental policies. A
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Trust, as defined in the 1940 Act. Majority
is defined in the 1940 Act as the lesser of (a) 67% or more of the shares
present at a Company meeting, if the holders of more than 50% of the outstanding
shares of the Trust are present or represented by proxy, or (b) more than 50% of
the outstanding shares. A fundamental policy affecting a particular Fund may not
be changed without the vote of a majority of the outstanding shares of the
affected Fund. Investment restrictions 16 through 23 may be changed by vote of a
majority of the Trust's Board of Trustees at any time.
The investment policies adopted by the Trust prohibit a Fund from:
1. Purchasing the securities of any issuer (other than U.S. Government
Securities) if as a result more than 5% of the value of the Fund's
total assets would be invested in the securities of the issuer (the "5%
Limitation"), except that up to 25% of the value of the Fund's total
assets may be invested without regard to the 5% Limitation; provided
that this restriction shall not apply to the Short Term Global
Government Fund; and provided further that the entire investment
portfolio of the Global Money Fund is subject to the 5% Limitation.
However, the Global Money Fund will be able to invest more than 5% of
its total assets in the securities of a single issuer for a period of
up to three Business Days after the purchase thereof; provided that the
Fund may not hold more than one such investment at any time.
2. Purchasing more than 10% of the securities of any class of any one
issuer; provided that this limitation shall not apply to investments in
U.S. Government Securities; provided further that this restriction
shall not apply to the Short Term Global Government and Growth Funds;
and provided further that the Growth Fund shall not own more than 10%
of the outstanding voting securities of a single issuer.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or
related options will not be deemed to be a purchase of securities on
margin.
4. Making short sales of securities or maintaining a short position;
provided that this restriction shall not apply to the Short Term Global
Government, Growth and International Growth Funds.
5. Borrowing money, except that (a) the Fund may (i) enter into reverse
repurchase agreements or (ii) borrow from banks for temporary (not
leveraging) purposes, including the meeting of redemption requests that
might otherwise require the untimely disposition of securities or
pending settlement of securities transactions or for emergency or
extraordinary purposes in an aggregate amount not exceeding 30% of the
value of the Fund's total assets (including the amount borrowed) valued
at market less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) all of the Funds except the Global
Money Fund may enter into (i) futures contracts, and (ii) dollar roll
transactions. Whenever borrowings pursuant to (a) above (except that
with respect to the Short Term High Quality Bond, Short Term Global
Government, U.S. Government, Corporate Income, Growth and Income and
Emerging Growth Funds, pursuant to (a)(ii) above) exceed 5% of the
value of a Fund's total assets, (w) continuous asset coverage of at
least 300% is required; (x) in the event such asset coverage falls
below 300% due to market fluctuations or otherwise, the Fund must
within 3 days reduce the amount of its borrowings so that asset
coverage will again be at least 300%, even if disadvantageous from an
investment standpoint; (y) borrowing pursuant to (a) over 5% must be
repaid before making additional investments; and (z) any interest paid
on such borrowings will reduce income. The Short Term High Quality
Bond, Short Term Global Government, U.S. Government, Corporate Income,
Growth and Income and Emerging Growth Funds may not borrow money or
enter into 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 any such transaction).
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
30% of the value of the Fund's total assets. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the
writing of covered put or call options and the purchase of securities
on a when-issued or delayed-delivery basis and (b) collateral
arrangements with respect to (i) the purchase and sale of options on
securities, options on indexes and options on foreign currencies, and
(ii) initial or variation margin for futures contracts will not be
deemed to be pledges of a Fund's assets.
7. Underwriting the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except
that the Fund may purchase and sell securities that are secured,
directly or indirectly, by real estate and may purchase securities
issued by companies that invest or deal in real estate.
9. Investing in commodities, except that all of the Funds except the
Global Money Fund may invest in futures contracts and options on
futures contracts. The entry into forward foreign currency exchange
contracts is not and shall not be deemed to involve investing in
commodities.
10. Investing in oil, gas or other mineral exploration or development
programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities (except in the case of the
U.S. Government Fund) and the entry into repurchase agreements.
12. Purchasing any securities that would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business
activities in the same industry, except in the case of the Global Money
Fund, which under normal market conditions shall have at least 25% of
its total assets invested in bank obligations; provided that this
limitation shall not apply to the purchase of (a) U.S. Government
Securities, or (b) with respect to the Short Term Global Government
Fund, Bank Obligations.
13. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof; provided that this restriction shall not apply to
any of the Funds except the Global Money Fund; and provided further
that (a) all of the Funds except the Global Money and Short Term Global
Government Funds may purchase, write and sell covered put and call
options on securities, (b) all of the Funds except the Global Money
Fund may purchase, write and sell futures contracts and options on
futures contracts, (c) all of the Funds except the Global Money Fund
may purchase and write put and call options on stock indexes, and (d)
the International Growth Fund may purchase put and call options and
write covered call options on foreign currency contracts.
14. With respect to the Growth Fund, investing more than 35% of the Fund's
assets in non-investment grade debt securities.
15. With respect to the Short Term High Quality Bond Fund, having a
dollar-weighted average portfolio maturity in excess of five years.
16. With respect to the Growth and Emerging Growth Funds, investing more
than 25% of the Fund's assets in foreign securities.
17. Purchasing restricted securities, illiquid securities or other
securities that are not readily marketable if more than 15% (10% for
the Global Money Fund) of the total assets of the Fund would be
invested in such securities, which include: (1) repurchase agreements
with maturities greater than seven calendar days; (2) to the extent a
liquid secondary market does not exist for the instruments, futures
contracts and options thereon; (3) over-the-counter options; (4)
variable rate demand notes with a demand period of more than seven
days; (5) time deposit maturing in more than seven calendar days; (6)
certain Rule 144A restricted securities; and (7) foreign securities not
traded on a recognized domestic or foreign exchange, to the extent a
liquid secondary market does not exist for such instruments.
18. Purchasing any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for
less than three years.
19. Making investments for the purpose of exercising control or management.
20. Purchasing or retaining securities of any company if, to the knowledge
of the Trust, any of the Trust's officers or Trustees or any officer or
director of Sierra Advisors or a Sub-Advisor individually owns more
than 0.5% of the outstanding securities of such company and together
they own beneficially more than 5% of the securities.
21. Investing in warrants, (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if,
as a result, the investments (valued at the lower of cost or market)
would exceed 5% of the value of Fund's net assets or if, as a result,
more than 2% of the Fund's net assets would be invested in warrants not
listed on a recognized United States or foreign stock exchange, to the
extent permitted by applicable state securities laws.
22. Purchasing or selling interests in real estate limited partnerships.
23. Investing in mineral leases.
The percentage limitations contained in the restrictions listed above
apply at the time of purchases of securities.
PORTFOLIO TURNOVER
The Global Money Fund, a money market fund, attempts to increase yields
by trading to take advantage of short-term market variations, which results in
high portfolio turnover. Because purchases and sales of money market instruments
are usually effected as principal transactions, this policy does not result in
high brokerage commissions to the Fund. The Growth and Income, Growth, Emerging
Growth and International Growth Funds (together, the "Equity Funds") and the
Short Term High Quality Bond, the Short Term Global Government, the U.S.
Government and the Corporate Income Funds (collectively, the "Bond Funds") do
not intend to seek profits through short-term trading. Nevertheless, the Funds
will not consider portfolio turnover rate a limiting factor in making investment
decisions.
Under certain market conditions, the Equity Funds and the Bond Funds
may experience increased portfolio turnover as a result of such Fund's options
activities. For instance, the exercise of a substantial number of options
written by the Fund (due to appreciation of the underlying security in the case
of call options or depreciation of the underlying security in the case of put
options) could result in a turnover rate in excess of 100%. A portfolio turnover
rate of 100% would occur if all of the Fund's securities that are included in
the computation of turnover were replaced once during a period of one year. The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the year by the monthly average value of
portfolio securities. Securities with remaining maturities of one year or less
at the date of acquisition are excluded from the calculation.
Certain other practices that may be employed by the Funds could result
in high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what a Fund's Sub-Advisor
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of securities.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Decisions to buy and sell securities
for a Fund are made by its Sub-Advisor, which also is responsible for placing
these transactions, subject to the overall review of the Trust's Trustees.
Although investment decisions for each Fund are made independently from those of
the other accounts managed by its Sub-Advisor, investments of the type the Fund
may make may also be made by those other accounts. When a Fund and one or more
other accounts managed by its Sub-Advisor are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the Sub-Advisor to be equitable
to each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.
Transactions on U.S. exchanges involve the payment of negotiated
brokerage commissions. With respect to exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the prices of those securities include undisclosed
commissions or concessions, and the prices at which securities are purchased
from and sold to dealers include a dealer's mark-up or mark-down. U.S.
Government Securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality.
In selecting brokers or dealers to execute portfolio transactions on
behalf of a Fund, the Fund's Sub-Advisor seeks the best overall terms available.
In assessing the best overall terms available for any transaction, each
Sub-Advisor will consider the factors the Sub-Advisor deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, each advisory agreement between the Trust and
Sierra Advisors and each sub-advisory agreement between Sierra Advisors and a
Sub-Advisor authorizes the Advisor or Sub-Advisor, in selecting brokers or
dealers to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended)
provided to the Trust, the other Funds and/or other accounts over which the Sub-
Advisors or its affiliates exercise investment discretion. The fees under the
advisory agreements between the Trust and the Advisor are not reduced by reason
of the receipt by the Advisor or Sub-Advisors of brokerage and research
services. The Trust's Trustees will periodically review the commissions paid by
the Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits received by the Trust.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the Commission thereunder, the Trust's Board
of Trustees has determined that portfolio transactions for a Fund may be
executed through GW Securities or any other affiliated broker, including J.P.
Securities or J.P. Limited (which are affiliates of J.P. Management, the
Sub-Advisor of the Global Money and International Growth Funds), if, in the
judgment of the Fund's Sub-Advisor, the use of GW Securities or an affiliated
broker is likely to result in price and execution at least as favorable as those
of other qualified broker-dealers, and if, in the transaction, GW Securities or
such other affiliated broker charges the Fund a rate consistent with those
charged for comparable transactions in comparable accounts of the broker's most
favored unaffiliated clients. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere. Under rules adopted by
the SEC, an affiliated broker may not execute transactions for a Fund on the
floor of any national securities exchange, but may effect transactions by
transmitting orders for execution, providing for clearance and settlement, and
arranging for the performance of those functions by members of the exchange not
associated with the affiliated broker. GW Securities or an affiliated broker
will be required to pay fees charged by those persons performing the floor
brokerage elements out of the brokerage compensation it receives from the Fund.
The Trust has been advised that on most transactions, the floor brokerage may
constitute 20% or more of the total commissions paid.
For the fiscal years ended December 31, 1993 and 1994, the Funds paid
the following brokerage commissions*:
<TABLE>
<CAPTION>
1994
-------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ----------- ---------- --------
<S> <C> <C> <C>
Global Money Fund $0 $0 $0
Short Term High Quality Bond Fund $0 $0 $0
Short Term Global Government Fund $0 $0 $0
U.S. Government Fund $0 $0 $0
Corporate Income Fund $0 $0 $0
Growth and Income Fund $38,101 $38,101 $29,470,747
Growth Fund $183,469 $183,469 $791,695,782
Emerging Growth Fund $58,799 $58,799 $120,185,937
International Growth Fund $195,231 $195,231 $50,945,896
Total for Trust $475,600
Amount Paid to
Affiliated $126
Broker-Dealers
<CAPTION>
1993
--------------------------------------------------
Amount Paid for Aggregate
Brokerage Brokerage and Transaction
Fund Commissions Research Amount
- ---- ----------- -------- ------
<S> <C> <C> <C>
Global Money Fund $0 $0 $0
Short Term High Quality Bond Fund $0 $0 $0
Short Term Global Government Fund $0 $0 $0
U.S. Government Fund $0 $0 $0
Corporate Income Fund $0 $0 $0
Growth and Income Fund -- -- --
Growth Fund $29,084 $29,084 $95,867,241
Emerging Growth Fund -- -- --
International Growth Fund $30,480 $30,480 $6,917,014
Total for Trust $59,564
Amount Paid to
Affiliated $0
Broker-Dealers
</TABLE>
- ------
*The Global Money Fund, the Short Term High Quality Bond Fund, the Short Term
Global Government Fund, the U.S. Government Fund, the Corporate Income Fund,
the Growth and Income Fund, the Growth Fund, the Emerging Growth Fund and the
International Growth Fund commenced operations on May 10, 1993, January 12,
1994, May 12, 1993, May 6, 1993, May 7, 1993, January 12, 1994, May 7, 1993,
January 12, 1994 and May 7, 1993, respectively.
The Trust is required to identify any securities of its "regular
brokers or dealers" (as such term is defined in the 1940 Act) which the Trust
has acquired during its most recent fiscal year. As of December 31, 1994, the
Growth and Income Fund held common stock of Dean Witter, Discover & Company
valued at $105,013.
PURCHASE AND PRICING OF SHARES
Shares in the Funds are purchased and redeemed and net asset value is
calculated in the manner described in the Prospectus.
<PAGE>
REDEMPTIONS
The right of redemption of shares of a Fund may be suspended or the
date of payment postponed (1) for any periods during which the New York Stock
Exchange is closed (other than for customary weekend and holiday closings), (2)
when trading in the markets the Fund normally utilizes is restricted, or an
emergency, as defined by the rules and regulations of the SEC, exists making
disposal of the Fund's investments or determination of its net asset value not
reasonably practicable or (3) for such other periods as the SEC by order may
permit for protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND. If the Board of Trustees determines that it
would be detrimental to the best interests of the shareholders of a Fund to make
a redemption payment wholly in cash, the Trust may pay any portion of a
redemption by distribution in kind of portfolio securities in lieu of cash.
Securities issued in a distribution in kind will be readily marketable, although
shareholders receiving distributions in kind may incur brokerage commissions
when subsequently redeeming shares of those securities.
NET ASSET VALUE
The Trust will not calculate the net asset value of the Funds on
certain holidays. On those days, securities held by a Fund may nevertheless be
actively traded, and the value of the Fund's shares could be significantly
affected.
The assets of each Fund are valued according to generally accepted
accounting principles and applicable law. Generally, a Fund's investments are
valued at market value or, in the absence of a market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
the Trust's Board of Trustees:
o A security that is primarily traded on a U.S. or foreign
exchange (including securities traded through the National
Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ")) is valued at the last sale price on that
exchange or, if there were no sales during the day, at the
current quoted bid price.
o Portfolio securities that are primarily traded on foreign
exchanges are generally valued at the preceding closing values
of such securities on their respective exchanges, except when an
occurrence subsequent to the time a value was so established is
likely to have changed the value, then the fair value of those
securities will be determined by consideration of other factors
by or under the direction of the Trust's Board of Trustees or
its delegates.
o Over-the-counter securities that are not reported on the NASDAQ
System and securities listed or traded on certain foreign
exchanges whose operations are similar to the U.S.
over-the-counter market are valued on the basis of the bid price
at the close of business on each day.
o An option is generally valued at the last sale price or, in the
absence of a last sale price, the last offer price.
o Investments in U.S. Government Securities (other than
short-term securities) are valued at the average of the quoted
bid and asked prices in the over-the-counter market.
o Short-term investments that mature in 60 days or less
are valued at amortized cost when the Board of Trustees
determines that this constitutes fair value; assets of the
Global Money Fund are also valued at amortized cost.
o The value of a futures contract equals the unrealized gain or
loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract
acquired on the day on which the futures contract is being
valued. A settlement price may not be used if the market makes a
limited move with respect to the security or index underlying
the futures contract. In such event, the futures contract will
be valued at a fair market price to be determined by or under
the direction of the Trust's Board of Trustees.
In carrying out the Board's valuation policies, The Shareholder
Services Group, Inc. ("TSSG"), a subsidiary of First Data Corp., as
sub-administrator, may consult with one or more independent pricing services
("Pricing Service") retained by the Trust. Debt securities of U.S. issuers
(other than U.S. Government Securities and short-term investments) are valued by
TSSG, as sub-administrator, after consultation with the Pricing Service. The
procedures of the Pricing Service are reviewed periodically by the officers of
the Trust under the general supervision and responsibility of the Board of
Trustees.
VALUATION OF THE GLOBAL MONEY FUND. The valuation of the portfolio
securities of the Global Money Fund is based upon its amortized costs, which
does not take into account unrealized capital gains or losses. Amortized cost
valuation involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Fund would receive if it sold the instrument.
The use by the Global Money Fund of the amortized cost method of
valuing its respective portfolio securities is permitted by a rule adopted by
the SEC. Under this rule, the Global Money Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by the Board of Trustees of the Trust to present minimal credit risks
and meet certain rating criteria described under "Investment Objectives and
Policies of the Funds -- Money Market Quality and Maturity Requirements" above.
Pursuant to the rule, the Board of Trustees also has established procedures
designed to stabilize, to the extent reasonably possible, the Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures include review of the Fund's portfolio holdings by the Board of
Trustees, at such intervals as it may deem appropriate, to determine whether the
Fund's net asset values calculated by using available market quotations or
market equivalents deviates from $1.00 per share based on amortized cost.
The rule also provides that the extent of any deviation between the
Fund's net asset values based upon available market quotations or market
equivalents and the $1.00 per share net asset values based on amortized cost
must be examined by the Board of Trustees. In the event the Board of Trustees
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, pursuant to the rule
the Board of Trustees must cause the Trust to take such corrective action as the
Board deems necessary and appropriate including: selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends or paying distributions from capital
or capital gains; redeeming shares in kind; or establishing a net asset value
per share by using available market quotations.
PERFORMANCE
From time to time, the Trust may quote the performance of a Fund in
terms of yield, effective yield, actual distributions, total return or capital
appreciation in reports or other communications to shareholders or in
advertising material. Fund performance will be advertised only if accompanied by
the comparable performance for the corresponding separate account.
THE FUNDS OF THE TRUST MAY NOT BE PURCHASED DIRECTLY BUT ARE CURRENTLY
AVAILABLE ONLY THROUGH PURCHASE OF SIERRA ADVANTAGE, A TAX-DEFERRED VARIABLE
ANNUITY ISSUED BY AGL. ANNUITY CONTRACT OWNER VALUES WILL DEPEND NOT ONLY ON THE
PERFORMANCE OF THE FUNDS, BUT ALSO ON THE MORTALITY AND EXPENSE RISK CHARGES,
THE ADMINISTRATIVE CHARGES, AND ANY APPLICABLE SALES CHARGES UNDER THE SIERRA
ADVANTAGE CONTRACT. THE TOTAL RETURNS OF THE FUNDS REFLECT THE AGREEMENT OF
SIERRA ADVISORS TO VOLUNTARILY WAIVE FEES AND BEAR CERTAIN EXPENSES. TOTAL
RETURNS WOULD HAVE BEEN LOWER IF THESE FEES AND EXPENSES HAD NOT BEEN WAIVED.
GLOBAL MONEY FUND YIELD INFORMATION
The "yield" of the Global Money Fund refers to the income generated by
an investment in the Fund over a 7-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in a Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment.
The yield for the Global Money Fund is computed by: (1) determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in the Fund having a balance of one share at the beginning
of a seven calendar day period for which yield is to be quoted, (2) subtracting
a hypothetical charge reflecting deductions from shareholder accounts, (3)
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and (4) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares and income
received or accrued but not declared as a dividend, but does not include
realized gains and losses or unrealized appreciation or depreciation. In
addition, the Global Money Fund may calculate a compounded effective annualized
yield by adding 1 to the base period return (calculated as described above),
raising the sum to a power equal to 365/7 and subtracting 1.
Based upon the foregoing calculation, for the 7-day period ended
December 31, 1994, the yield for the Global Money Fund was 5.37%, and the
effective yield for the Global Money Fund for the same period was 5.51%.
The Global Money Fund yield may be compared with the yields of other
investments. It should not, however, be compared to the return on fixed rate
investments which guarantee rates of interest for specified periods, such as the
interest guarantees in an annuity contract or bank deposits.
BOND FUND YIELD INFORMATION
From time to time, the Bond Funds may advertise the 30-day "yield."
Yield refers to the income generated by an investment in such Fund over the
30-day period identified in the advertisement, and is computed by dividing the
net investment income per share earned by the Fund during the period by the net
asset value per share on the last day of the previous period. This income is
"annualized" by assuming that the amount of income is generated each month over
a one-year period and is compounded semiannually. The annualized income is then
shown as a percentage of the net asset value. The yield formula prescribed by
the SEC can be expressed as follows:
YIELD = 2[((a-b) + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by one of the Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Based on the foregoing calculation, for the 30-day period ended
December 31, 1994, the yields for the Short Term High Quality Bond, the Short
Term Global Government, the U.S. Government and the Corporate Income Funds were
7.86%, 6.58%, 8.13% and 6.17%, respectively.
THE BOND FUNDS AND THE EQUITY FUNDS TOTAL RETURN INFORMATION
From time to time, a Bond Fund or an Equity Fund may advertise its
"average annual total return" or "aggregate total return" over various periods
of time. Such average annual total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period to the end of the measuring period. These figures reflect
changes in the price of the Fund's shares and assume that any income dividends
and/or capital gains distributions made by the Fund during the period were
reinvested in shares of the Fund. Figures will be given for recent one-, five-
and ten-year periods (if applicable), and may be given for other periods as well
(such as from commencement of the Fund's operations, or on a year-by-year
basis).
When considering "average" total return figures for periods longer than
one year, it is important to note that the relevant Fund's annual total return
for any one year in the period might have been greater or less than the average
for the entire period. A Bond Fund or an Equity Fund may also use "aggregate"
total return figures for various periods representing the cumulative change in
value of an investment in the Fund for a specific period (again reflecting
changes in the Fund's share prices and assuming reinvestment of dividends and
distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs and may indicate subtotals of the various components of total
return (i.e., change in value of initial investment, income dividends and
capital gains distributions).
Average annual total return is computed according to a formula
prescribed by the SEC. The formula can be expressed as follows: P(1 + T)n = ERV,
where P = a hypothetical initial payment of $1,000; T = average annual total
return; n = number of years; and ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the designated time period as of the end
of such period or the life of the fund. The formula for calculating aggregate
total return can be expressed as (ERV/P)-1.
Based on the foregoing, the average annual total returns for the fiscal
year ended December 31, 1994 and from inception through December 31, 1994 and
the aggregate total returns for the Funds from inception through December 31,
1994, were as follows*:
Average Annual
Total Return Average Aggregate
for Fiscal Annual Total Total Return
Year Ended Return Since Since
Fund 12/31/94 Inception Inception*
- ---- -------- --------- ----------
Global Money Fund 3.69% 3.20% 5.34%
Short Term High Quality Bond Fund -1.62% NA -1.62%
Short Term Global Government Fund -2.03% -1.17% -1.91%
U.S. Government Fund -4.04% -1.14% -1.87%
Corporate Income Fund -8.13% -1.81% -2.97%
Growth and Income Fund -1.70% NA -1.70%
Growth Fund 2.69% 8.80% 14.91%
Emerging Growth Fund 5.30% NA 5.30%
International Growth Fund 1.88% 8.98% 15.23%
- -----
* The Global Money Fund, the Short Term High Quality Bond Fund, the Short
Term Global Government Fund, the U.S. Government Fund, the Corporate
Income Fund, the Growth and Income Fund, the Growth Fund, the Emerging
Growth Fund and the International Growth Fund commenced operations on
May 10, 1993, January 12, 1994, May 12, 1993, May 6, 1993, May 7, 1993,
January 12, 1994, May 7, 1993, January 12, 1994 and May 7, 1993,
respectively.
The total returns shown for the Funds are not an estimate or guarantee
of future performance and do not take into account charges at the annuity and
separate account level.
The performance of any or all of the Funds may be compared in
advertisements and sales literature to the performance of other variable annuity
issuers in general and to the performance of particular types of variable
annuities investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the Funds. Lipper Analytical Services, Inc.
("Lipper") and the Variable Annuity Research and Data Service ("VARDSR") are
independent services which monitor and rank the performance of variable annuity
issuers in each of the major categories of investment objectives on an
industry-wide basis. Lipper's rankings include variable life issuers as well as
variable annuity issuers. VARDSR rankings compare only variable annuity issuers.
The performance analyses prepared by Lipper and VARDSR rank such issuers on the
basis of total return, assuming reinvestment of dividends and distributions, but
do not take sales charges, redemption fees or certain expense deductions at the
separate account level into consideration. In addition, VARDSR prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance.
In addition, each Fund's performance may be compared in advertisements
and sales literature to the following benchmarks: (1) the Standard & Poor's 500
Index, which represents an unmanaged weighted index of 500 industrial,
transportation, utility and financial companies that represent approximately 80%
of the market capitalization of the United States equity markets, widely
regarded by investors as representative of the stock market; (2) the Consumer
Price Index, published by the U.S. Bureau of Labor Statistics, a statistical
measure of change, over time, in the prices of goods and services in major
expenditure groups and generally considered to be a measure of inflation; (3)
the Lehman Brothers Mutual Fund Short World Multi-Market Index, which includes
all debt instruments of the United States and 12 Lehman Major Countries
denominated in dollars with maturities of one to five years; (4) the Lehman
Brothers Mutual Fund U.S. Mortgage Index, which includes all agency
mortgage-backed securities; (5) the Lehman Brothers Mutual Fund Debt BBB-Rated
Index, which represents all investment-grade corporate debt securities; (6) the
Morgan Stanley Capital International EAFE (Europe, Australia, Far East) Index,
which includes 1050 companies representing the stock markets of Europe,
Australia, New Zealand and the Far East; and (7) the U.S. Government 90 Day
Treasury Bill rate. Generally, an index represents the market value of an
unmanaged group of securities, regarded by investors as representative of a
particular market. An index does not reflect any asset-based charges for
investment management or other expenses. The performance information may also
include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Institutional Investor, Money and The Wall Street
Journal.
TAXES
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this SAI. New legislation, as well
as administrative changes or court decisions, may significantly change the
conclusions expressed herein and may have a retroactive effect with respect to
the transactions contemplated herein.
Each of the Funds intends to qualify as a "regulated investment
company" ("RIC") under Subchapter M of the Code. A Fund that is a RIC and
distributes to its shareholders at least 90% of its taxable net investment
income (including, for this purpose, its net realized short-term capital gains)
and 90% of its tax-exempt interest income (reduced by certain expenses), will
not be liable for federal income taxes to the extent its taxable net investment
income and its net realized long-term and short-term capital gains, if any, are
distributed to its shareholders.
A number of technical rules are prescribed for computing net investment
income and net capital gains. For example, the Fund is generally treated as
receiving dividends on the ex-dividend date. Also, certain foreign currency
losses and capital losses arising after October 31 of a given year may be
treated as if they arise on the first day of the next taxable year.
In order to qualify as a RIC under the Code, in addition to satisfying
the distribution requirement described above, each Fund must (a) derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities, or foreign currencies, and certain other related income,
including, generally, certain gains from options, futures, and forward
contracts; (b) derive less than 30% of its gross income each taxable year from
the sale or other disposition of the following items if held for less than three
months: (i) stock or securities, (ii) options, futures or forward contracts
(other than options futures, or forward contracts on foreign currencies), and
(iii) foreign currencies (or options, futures, or forward contracts on foreign
currencies) that are not directly related to the company's business of investing
in stock or securities; and (c) diversify its holdings so that, at the end of
each fiscal quarter of the Fund's taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash and cash items, U.S.
Government Securities, securities of other RICs, and other securities, with such
other securities limited, in respect of any one issuer, to an amount that does
not exceed 10% of the voting securities of such issuer or 5% of the value of the
Fund's total assets; and (ii) not more than 25% of the value of its assets is
invested in the securities (other than U.S. Government Securities and securities
of other RICs) of any one issuer or two or more issuers which the Fund controls
and which are engaged in the same, similar or related trades or businesses.
In addition to qualifying under subchapter M by meeting the
requirements described above, each Fund intends to qualify as diversified under
Subchapter L so that non-qualified variable annuity contracts funded by the
Trust will not fail to qualify as annuities for tax purposes. In general, for a
Fund to meet the investment diversification requirements of Subchapter L of the
Code, Treasury regulations require that no more than 55% of the total value of
the assets of the Fund be represented by any one investment, no more than 70% by
any two investments, no more than 80% by three investments and no more than 90%
by four investments. Generally, for purposes of the regulations, all securities
of the same issuer are treated as one investment. In the context of U.S.
Government Securities (including any security that is issued, guaranteed or
insured by the United States or an instrumentality of the United States), each
U.S. Government agency or instrumentality is treated as a separate issuer.
Compliance with the Subchapter L regulations is tested on the last day of each
calendar year quarter.
Notwithstanding the distribution requirement described above, which
only requires a Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gain, a regulated investment company is generally subject to a nondeductible 4%
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
The excise tax is inapplicable to any RIC all of the shareholders of
which are either tax-exempt pension trusts or separate accounts of life
insurance companies funding variable contracts. Although each Fund believes that
it is not subject to the excise tax, each Fund intends to make the distributions
required to avoid the imposition of the tax, provided such payments and
distributions are determined to be in the best interest of such Fund's
shareholders.
Dividends declared by a Fund in October, November, or December of any
year and payable to shareholders of record on a date in such month will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if paid by the Fund at any time during the following
January.
<PAGE>
APPENDIX
DESCRIPTION OF S&P, MOODY'S, DUFF AND FITCH RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA-Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC or C-Debt rated BB, B, CCC, CC or C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to inadequate capacity to meet timely
interest and principal payments. The 'BB' rating category is also
used for debt subordinated to senior debt that is assigned an actual
or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
The 'B' rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The 'CCC' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'B'
or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC' rating.
C The rating 'C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The
'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
C1-Debt rated C1 is reserved for income bonds on which no interest is
being paid.
D-Debt is rated D when the issue is in payment default, or the
obligor has filed for bankruptcy. The D rating is used when interest or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa-Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca-Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C-Bonds which are rated C are the lowest class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the security ranks in the lower end of its generic rating
category.
DESCRIPTION OF DUFF CORPORATE BOND RATINGS
AAA-Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet obligations
BB when due. Present or prospective financial protection
BB- factors fluctuate according to industry conditions or company
fortunes. Overall quality may move up or down frequently within
this category.
B+ Below investment grade and possessing risk that obligations will
B not be met when due. Financial protection factors will fluctuate
B- widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating
within this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF FITCH CORPORATE BOND RATINGS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA-Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A-Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB-Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D
Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the lowest potential for recovery on these
bonds, and 'D' represents the lowest potential for recovery.
PLUS (+) MINUS (-)
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA, DDD, DD, or D
categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Debt determined to possess extremely strong
safety characteristics is denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated 'A-1'.
A-3 Debt carrying this designation has an adequate capacity for timely
payment. It is, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Debt rated 'B' is regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D This rating indicates that the obligation is in payment default.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- --Leading market positions in well-established industries.
- --High rates of return on funds employed.
- --Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
SATISFACTORY GRADE
Duff 3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DEFAULT
Duff 5 Issuer failed to meet scheduled principal and/or interest
payments.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated 'F-1+'
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned 'F-1+' and 'F-1' ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
FINANCIAL STATEMENTS
Following are the Audited Financial Statements for the periods ended
December 31, 1994, and the Report of Independent Accountants of Price Waterhouse
LLP dated February 16, 1995 relating to the financial statements and selected
per share data and ratios of each of the fund series constituting The Sierra
Variable Trust.
