PAGE
<PAGE>
RULE 497(e)
File No. 33-59692
[LOGO]
RYDEX SERIES TRUST
PROSPECTUS
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
Rydex Series Trust (the "Trust") is a no-load mutual fund
complex with nine separate investment portfolios (the "Funds"
or "Rydex Funds"), seven of which Funds are described in this
P r o s pectus. The Funds are principally designed for
professional money managers and investors who intend to invest
in the Funds as part of an asset-allocation or market-timing
investment strategy. Sales are made, without sales charge, at
each Fund s per share net asset value.
Except for the Rydex U.S. Government Money Market Fund, each
Fund is intended to provide investment exposure with respect
to a particular segment of the securities markets. Each of
these Funds seeks investment results that correspond over time
to a specified benchmark. The Funds may be used independently
or in combination with each other as part of an overall
investment strategy. Additional Funds may be created from time
to time.
The following are the Funds and their benchmarks:
FUND BENCHMARK
The Nova Fund 150% of the performance of the S&P 500
Composite Stock Price IndexTM
The Ursa Fund Inverse (opposite) of the S&P 500 Composite
Stock Price IndexTM
Rydex OTC Fund NASDAQ 100 IndexTM (NDX)
Rydex Precious Philadelphia Stock Exchange Gold/Silver
Metals Fund IndexTM (XAU)
PAGE
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Rydex U.S. 120% of the price movement of current Long
Government Bond Treasury Bond
Fund
The Juno Fund Inverse (opposite) of the price movement of
the current Long Treasury Bond
The Trust also offers The Rydex U.S. Government Money Market
Fund. This Fund seeks to provide security of principal, high
current income, and liquidity by investing primarily in money
market instruments which are issued or guaranteed, as to
principal and interest, by the U.S. Government, its agencies
or instrumentalities. The securities of the Rydex U.S.
Government Money Market Fund are not deposits or obligations
of any bank, and are not endorsed or guaranteed by any bank,
and an investment in this Fund is neither insured nor
guaranteed by the United States Government. The Rydex U.S.
Government Money Market Fund seeks to maintain a constant
$1.00 net asset value per share, although this cannot be
assured.
The Funds (other than the Rydex U.S. Government Money Market
Fund) may engage in certain aggressive investment techniques,
which include engaging in short sales and transactions in
options and futures contracts. The Nova Fund and the Rydex
U.S. Government Bond Fund may use the speculative technique
known as leverage to increase funds available for investment
(see "Other Investment Policies"). Investors in the Nova Fund
may experience substantial losses during sustained periods of
falling equity prices. Investors in the Ursa Fund and the Juno
Fund may experience substantial losses during sustained
periods of rising equity prices and rising bond prices,
r e s pectively. Because of the inherent risks in any
investment, there can be no assurance that any Fund s
investment objective will be achieved.
None of the Funds alone constitutes a balanced investment
plan, and certain of the Funds involve special risks not
traditionally associated with investment companies. The
nature of the Funds generally will result in significant
portfolio turnover which would likely cause higher expenses
and additional costs and increase the risk that a Fund will
not qualify as a regulated investment company under the
Federal tax laws. The Trust is not intended for investors
whose principal objective is current income or preservation of
capital and may not be a suitable investment for persons who
intend to follow an "invest and hold" strategy. See "Special
Risk Considerations."
ADDITIONAL INFORMATION
<PAGE> 2<PAGE>
The Trust also offers the Rydex Institutional Money Market
Fund and the Rydex High Yield Fund, each of which series of
the Trust is described in a separate prospectus.
Investors should read this Prospectus and retain it for future
reference. This Prospectus is designed to set forth concisely
the information an investor should know about the Trust before
investing. A Statement of Additional Information, dated
November 1, 1996, as supplemented May 1, 1997, containing
additional information about the Trust has been filed with the
Securities and Exchange Commission and is incorporated herein
by reference. A copy of this Statement of Additional
Information is available, without charge, upon request to the
Trust at the address above or by telephoning the Trust at the
t e lephone numbers above. The Securities and Exchange
Commission also maintains a Web site ( http://www.sec.gov )
that contains this Statement of Additional Information,
material incorporated by reference, and other information
regarding registrants that file electronically with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is November 1, 1996, as
supplemented May 1, 1997.
<PAGE> 3<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY 4
FEES AND EXPENSES OF THE FUNDS 7
FINANCIAL HIGHLIGHTS OF THE FUNDS 9
INVESTMENT OBJECTIVES AND POLICIES 16
SPECIAL RISK CONSIDERATIONS 21
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES 22
PORTFOLIO TRANSACTIONS AND BROKERAGE 29
HOW TO INVEST IN THE FUNDS 29
REDEEMING AN INVESTMENT (WITHDRAWALS) 30
EXCHANGES 31
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES 32
DETERMINATION OF NET ASSET VALUE 33
TAX-SHELTERED RETIREMENT PLANS 34
TRANSACTION CHARGES 35
DIVIDENDS AND DISTRIBUTIONS 35
TAXES 35
MANAGEMENT OF THE TRUST 37
PERFORMANCE INFORMATION 38
GENERAL INFORMATION ABOUT THE TRUST 41
<PAGE> 4<PAGE>
PROSPECTUS SUMMARY
THE RYDEX FUNDS
Each Fund has its own distinct investment objective. There
is, of course, no guarantee that any Fund will achieve its
investment objective. The investment objectives of the Funds
are as follows:
The Nova Fund. The Nova Fund s investment objective is to
provide investment returns that correspond to 150% of the
performance of the Standard & Poor s 500 Composite Stock Price
IndexTM (the "S&P500 Index"). In attempting to achieve its
objective, the Nova Fund expects that a substantial portion of
its assets usually will be devoted to investment techniques
i n c luding certain transactions in stock index futures
contracts, options on stock index futures contracts, and
options on securities and stock indexes. In contrast to
returns on a mutual fund that seeks to approximate the return
of the S&P500 Index, the Nova Fund should increase gains
during periods when the prices of the securities in the S&P500
Index are rising and increase losses to investors during
periods when such prices are declining. Investors in the Nova
Fund could experience substantial losses during sustained
periods of falling equity prices.
The Ursa Fund. The Ursa Fund s investment objective is to
provide investment results that will inversely correlate to
the performance of the S&P500 Index. The Ursa Fund seeks to
achieve this inverse correlation result on each trading day.
If the Ursa Fund is successful in meeting this objective, the
net asset value on Ursa Fund shares will increase for each day
in direct proportion to any decreases in the level of the
S&P500 Index. Conversely, the net asset value on Ursa Fund
shares will decrease for each day in direct proportion to any
increases in the level of the S&P500 Index. In seeking to
achieve its objective, the Ursa Fund primarily engages in
short sales and certain transactions in stock index futures
contracts, options on stock index futures contracts, and
option on securities and stock indexes. The Ursa Fund
involves special risks not traditionally associated with
investment companies. Investors in the Ursa Fund may
experience substantial losses during sustained periods of
rising equity prices.
The Rydex OTC Fund. The investment objective of the Rydex
OTC Fund (the "OTC Fund") is to provide investment results
t h a t correspond to a benchmark for over-the-counter
securities. The OTC Fund s current benchmark is the NASDAQ
100 IndexTM. The OTC Fund does not aim to hold all of the 100
securities included on the NASDAQ 100 IndexTM. Instead, the
OTC Fund intends to hold representative securities included in
<PAGE> 5<PAGE>
the NASDAQ 100 IndexTM or other instruments which are expected
to provide returns that correspond to those of the NASDAQ 100
IndexTM. The OTC Fund may engage in transactions on stock
index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes.
The Rydex Precious Metals Fund. The investment objective of
the Rydex Precious Metals Fund (the "Metals Fund") is to
provide investment results that correspond to a benchmark
primarily for metals-related securities. The Metals Fund s
c u r r ent benchmark is the Philadelphia Stock Exchange
Gold/Silver IndexTM (the "XAU Index"). To achieve its
objective, the Metals Fund invests in securities included in
the XAU Index. In addition, the Metals Fund may invest in
other securities that are expected to perform in a manner that
will assist the Metals Fund s performance to track closely the
XAU Index. The Metals Fund may invest in securities of
foreign issuers. These securities present certain risks not
present in domestic investments and expose the investor to
general market conditions which differ significantly from
those in the United States.
The Rydex U.S. Government Bond Fund. The investment
objective of the Rydex U.S. Government Bond Fund (the "Bond
Fund") is to provide investment results that correspond to a
benchmark for U.S. Government securities. The Bond Fund s
current benchmark is 120% of the price movement of the Current
Long Treasury Bond (the "Long Bond"), without consideration of
interest paid. In attempting to achieve its objective, the
Bond Fund invests primarily in obligations of the U.S.
Treasury or obligations either issued or guaranteed, as to
principal and interest, by agencies or instrumentalities of
the U.S. Government ("U.S. Government Securities"). The Bond
Fund may engage in transactions in futures contracts and
options on futures contracts on U.S. Treasury bonds. The Bond
Fund also may invest in U.S. Treasury zero coupon bonds.
The Juno Fund. The Juno Fund s investment objective is to
provide total return before expenses and costs that will
inversely correlate to the price movements of a benchmark for
U.S. Treasury debt instruments or futures contract on a
specified debt instrument. The Juno Fund seeks to achieve
this inverse correlation result on each trading day. The Long
Bond is the Juno Fund s current benchmark. In seeking its
objective, the Juno Fund will employ certain investment
techniques including engaging in short sales and transactions
in futures contracts and options thereon. If the Juno Fund is
successful in meeting its objective, the total return on its
shares before expenses and costs will increase for each day
proportionally to any decreases in the price of the Long Bond.
Conversely, the total return on its shares before expenses and
cost will decrease for each day proportionally to any
<PAGE> 6<PAGE>
increases in the price of the Long Bond. Investors in the
Juno Fund may experience substantial losses during periods of
falling interest rates/rising bond prices.
The Rydex U.S. Government Money Market Fund. The investment
objective of the Rydex U.S. Government Money Market Fund (the
"Money Market Fund") is to provide security of principal, high
current income, and liquidity. To achieve its objective, the
M o n e y Market Fund invests primarily in money market
instruments which are issued or guaranteed, as to principal
and interest, by the U.S. Government, its agencies or
i n strumentalities, as well as in repurchase agreements
collateralized fully by U.S. Government Securities.
A discussion of each Fund s investment objective(s) and
policies is provided below under "Investment Objectives and
Policies" and "Investment Techniques and Other Investment
Policies." The Trust also offers shares in the Rydex High
Yield Fund and the Rydex Institutional Money Market Fund, each
of which series of the Trust is described in a separate
prospectus.
SPECIAL RISK CONSIDERATIONS
The Trust expects that a substantial portion of the assets of
the Funds will be derived from professional money managers and
investors who intend to invest in the Funds as part of an
asset-allocation or market-timing investment strategy. These
investors are likely to redeem or exchange their Fund shares
frequently to take advantage of anticipated changes in market
conditions. The strategies employed by investors in the Funds
may result in considerable assets moving in and out of the
Funds. Consequently, the Trust expects that the Funds will
generally experience significant portfolio turnover, which
will likely cause higher expenses and additional costs and
increase the risk that the Fund will not qualify as a
"regulated investment company" under the Federal tax laws and
may also adversely affect the ability of the Fund to meet its
investment objective. For further information concerning the
portfolio turnover of the Funds and the Federal tax treatment
of the Funds, see "Investment Objectives and Policies" and
"Taxes" in this Prospectus and "Investment Policies and
Techniques" and "Dividends, Distributions, and Taxes" in the
Statement of Additional Information.
While the Funds do not expect that the returns over a year
w i l l deviate adversely from their respective current
benchmarks by more than ten percent, certain factors may
affect their ability to achieve this correlation. See
"Special Risk Considerations" for a discussion of these
factors.
<PAGE> 7<PAGE>
The Funds (other than the Money Market Fund) may engage in
certain aggressive investment techniques, which may include
engaging in short sales and transactions in futures contracts
a n d options on securities, stock indexes, and futures
c o ntracts. As discussed more fully under "Investment
Objectives and Policies" and "Investment Techniques and Other
Investment Policies," these techniques are specialized and
involve risks that are not traditionally associated with
investment companies.
PURCHASES, REDEMPTIONS, AND
EXCHANGES OF TRUST SHARES
The shares of each Fund may be purchased and redeemed, with no
sales or redemption charge, at the net asset value per share
of the Fund next determined. For shareholders who have
engaged a registered investment adviser with discretionary
authority over the shareholder s account, the minimum initial
investment in the Rydex Funds currently is $15,000; for all
other shareholder accounts, the minimum initial investment in
the Rydex Funds currently is $25,000. These minimums also
apply to retirement plan accounts. Shares of any available
Fund described in this Prospectus may be exchanged at any time
for shares of any other available Fund, with no charge, on the
basis of the relative net asset values next computed (subject
t o c ompliance with applicable minimum investment
requirements). The Trust reserves the right to modify its
m i nimum investment requirements. Shareholders will be
i n f o r med of any increase in the minimum investment
requirements by a letter accompanying a new prospectus or a
prospectus supplement, in which the new minimum is disclosed.
Any time that you request a partial redemption of your Trust
shares, please be aware of the currently-applicable minimum
investment, because, as described below, there are
circumstances under which your entire account may be closed
if, as a result of your request, your account balance falls
below the currently-applicable minimum investment in the
Trust. A redemption from a tax-qualified retirement plan may
have adverse tax consequences and a shareholder contemplating
such a redemption should consult his or her own tax adviser.
Other shareholders should consider the tax consequences of any
redemption.
Because of the administrative expense of handling small
accounts, any request for a redemption (including pursuant to
check writing privileges) by an investor whose account balance
is (a) below the currently-applicable minimum investment, or
(b) would be below that minimum as a result of the redemption,
will be treated as a request by the investor of a complete
redemption of that account. In addition, upon sixty days
notice to a shareholder, the Trust may redeem an account whose
<PAGE> 8<PAGE>
balance (due in whole or in part to redemptions since the time
of last purchase) has fallen below the minimum investment
amount applicable at the time of the shareholder s most recent
purchase of Rydex Fund shares (unless the shareholder brings
his or her account value up to the currently applicable
minimum investment during that notice period). See "How To
Invest In the Funds," "Redeeming An Investment (Withdrawals),"
and "Exchanges."
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of
net realized capital gains from each of the Funds will be
distributed as described under "Dividends and Distributions."
All such distributions of a Fund automatically will be
reinvested without charge in additional shares of the same
Fund unless otherwise specified by a shareholder.
INVESTMENT ADVISER AND SERVICER
The investment adviser of each Fund is PADCO Advisors, Inc.
(the "Advisor"). PADCO Service Company, Inc. (the "Servicer")
provides the Funds with general administrative, shareholder,
and registrar services. Both the Advisor and the Servicer are
located in Rockville, Maryland. See "Management of the
Trust."
TRANSFER AGENT AND CUSTODIAN
The Servicer also serves as the Trust s transfer and dividend
disbursement agent. Star Bank, N.A. serves as the custodian
of each Fund s securities and cash. See "Management of the
Trust."
<PAGE> 9<PAGE>
FEES AND EXPENSES OF THE FUNDS
The following table illustrates all expenses and fees that a
shareholder of each Fund will incur:
<TABLE>
<CAPTION>
The Rydex
Precious
The Nova The Ursa The Rydex Metals
Fund Fund OTC Fund Fund
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Sales Load Imposed on None None None None
Purchases
Sales Load Imposed on None None None None
Reinvested Dividends
Deferred Sales Load None None None None
Redemption Fees None None None None
Exchange Fees None None None None
Annual Fund Operating
Expenses
Management Fees 0.75% 0.90% 0.75% 0.75%
12b-1 Fees None None None None
Other Expenses
Administrative Fees 0.25% 0.25% 0.20% 0.20%
Additional Expenses 0.31% 0.24% 0.38% 0.38%
Total Other Expenses 0.56% 0.49% 0.56% 0.58%
Total Fund Operating 1.31% 1.39% 1.33% 1.33%
Expenses*
The Rydex
The Rydex U.S.
U.S. Government
Government The Juno Money
Bond Fund Fund Market Fund
<PAGE> 10<PAGE>
<S> <C> <C> <C>
Shareholder Transaction
Expenses
Sales Load Imposed on None None None
Purchases
Sales Load Imposed on None None None
Reinvested Dividends
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fees None None None
Annual Fund Operating
Expenses
Management Fees 0.50% 0.90% 0.50%
12b-1 Fees None None None
Other Expenses
Administrative Fees 0.20% 0.25% 0.20%
Additional Expenses 0.56% 0.49% 0.29%
Total Other Expenses 0.76% 0.74% 0.49%
Total Fund Operating 1.26% 1.64% 0.99%
Expenses*
</TABLE>
* Retirement plans are charged an annual $15.00 maintenance
fee. See "Tax-Sheltered Retirement Plans."
<PAGE> 11<PAGE>
EXAMPLE
Assuming hypothetical investments of $1,000 in each of the
Funds, a five-percent annual return, and redemption at the end
of each time period, an investor in each of the Funds would
pay transaction and operating expenses at the end of each year
as follows:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 years
<S> <C> <C> <C> <C>
The Nova Fund $13.34 $41.52 $71.82 $157.90
The Ursa Fund $14.15 $44.00 $76.05 $169.86
Rydex OTC Fund $13.54 $42.14 $72.88 $160.14
Rydex Precious $13.54 $42.14 $72.88 $160.14
Metals Fund
Rydex U.S.
Government $12.84 $39.96 $69.16 $152.56
Bond Fund
The Juno Fund $16.68 $51.73 $89.17 $194.37
Rydex U.S.
Government Money $10.10 $31.53 $54.71 $121.30
Market Fund
</TABLE>
T h e same level of expenses would be incurred if the
investments were held throughout the period indicated.
The preceding table of fees and expenses is provided to assist
investors in understanding the various costs and expenses
which may be borne directly or indirectly by an investor in
each of the Funds. The percentages shown above are based on
actual expenses incurred by the Funds for the fiscal year
ended June 30, 1996. The five-percent assumed annual return is
for comparison purposes only. The actual return for a
particular Fund in future periods may be more or less
depending on market conditions, and the actual expenses an
investor incurs in future periods may be more or less than
those shown above and will depend on the amount invested and
on the actual growth rate of the particular Fund. For a more
complete discussion of the fees connected with an investment
in the Funds and the services provided to the Funds, see
"Management of the Trust" in this Prospectus and in the
Statement of Additional Information.
<PAGE> 12<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Funds, for
the periods identified, have been audited by Deloitte & Touche
LLP, independent certified public accountants, whose report
t h ereon appears in the Trust's 1996 Annual Report to
Shareholders and is incorporated by reference in the Statement
of Additional Information. This information should be read in
conjunction with the financial statements and related notes
thereto included in the Statement of Additional Information.
A copy of the Trust's 1996 Annual Report to Shareholders may
be obtained, without charge, by contacting the Trust at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852, or
by telephoning the Trust at 800-820-0888 or 301-468-8520.
<TABLE>
<CAPTION>
The Nova Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning
of Period $ 11.81 $ 9.77 $ 10.01
Net Investment Income
(Loss) 0.56 0.28 0.01
Net Realized and Unrealized
Gains (Losses) on
Securities 3.31 2.88 (0.25)
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 3.87 3.16 (0.24)
Dividends to Shareholders 0.00 (0.29) 0.00
Distributions to
Shareholders
From Net Realized Capital
Gains 0.00 (0.83) 0.00
Net Increase (Decrease) in
Net Asset Value 3.87 2.04 (0.24)
<PAGE> 13<PAGE>
Net Asset Value -- End of
Period $ 15.68 $ 11.81 $ 9.77
Total Investment Return 32.77% 32.65% (2.47)%
Ratios to Average Net Assets
Expenses 1.31% 1.43% 1.73%**
Net Investment Income 3.14% 2.62% 1.05%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $ 224,541 $ 62,916 $ 77,914
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: July 12, 1993.
** Annualized for the period ending June 30, 1994
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Nova Fund typically holds most of its
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 14<PAGE>
<TABLE>
<CAPTION>
The Ursa Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning of
Period $ 8.79 $ 10.54 $ 10.00
Net Investment Income (Loss) 0.30 0.35 0.01
Net Realized and Unrealized
Gains (Losses) on Securities (1.54) (1.78) 0.53
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations (1.24) (1.43) 0.54
Dividends to Shareholders 0.00 (0.32) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value (1.24) (1.75) 0.54
Net Asset Value -- End of Period $ 7.55 $ 8.79 $ 10.54
Total Investment Return (14.11)% (14.08)% 10.89%
Ratios to Average Net Assets
Expenses 1.39% 1.39% 1.67%**
Net Investment Income 3.38% 3.50% 1.43%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $192,553 $127,629 $110,899
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: January 7, 1994.
** Annualized for the period ending June 30, 1994
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Ursa Fund typically holds most of its
<PAGE> 15<PAGE>
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 16<PAGE>
<TABLE>
<CAPTION>
The Rydex OTC Fund
For the For the
year Year For the
Ended Ended Period Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance: $ 12.22 $ 8.76 $ 10.00
Net Asset Value -- Beginning of
Period
Net Investment Income (Loss) 0.06 0.14 0.01
Net Realized and Unrealized
Gains (Losses) on Securities 3.24 4.17 (1.25)
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 3.30 4.31 (1.24)
Dividends to Shareholders 0.00 (0.12) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains (0.36) (0.73) 0.00
Net Increase (Decrease) in
Net Asset Value 2.94 3.46 (1.24)
Net Asset Value -- End of Period $ 15.16 $ 12.22 $ 8.76
Total Investment Return 26.44% 49.00% (30.17)%
Ratios to Average Net Assets
Expenses 1.33% 1.41% 1.97%**
Net Investment Income 0.44% 1.34% 1.69%**
Supplementary Data:
Portfolio Turnover Rate*** 2,578.56% 2,241.00% 1,171.00%
Net Assets, End of Period $ 48,716 $ 61,948 $ 30,695
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: February 14, 1994.
** Annualized for the period ended June 30, 1994.
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 17<PAGE>
<TABLE>
<CAPTION>
The Rydex Precious Metals Fund
For the For the
Year Period
For the Year Ended Ended
Ended June 30, June 30,
June 30,1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning of
Period $ 8.73 $ 8.29 $ 10.00
Net Investment Income (Loss) 0.00 0.10 0.01
Net Realized and Unrealized
Gains (Losses) on Securities 0.32 0.43 (1.72)
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 0.32 0.53 (1.71)
Dividends to Shareholders 0.00 (0.09) 0.00
Distributions to Shareholders
From Net Realized Capital
Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value 0.32 0.44 (1.71)
Net Asset Value -- End of Period $ 9.05 $ 8.73 $ 8.29
Total Investment Return 3.67% 6.21% (29.27)%
Ratios to Average Net Assets
Expenses 1.33% 1.38% 2.06%**
Net Investment Income (0.01)% 1.15% 1.23%**
Supplementary Data:
Portfolio Turnover Rate*** 1,036.37% 1,765.00% 2,728.00%
Average Commission Rate 1.51% -- --
Paid**** $ 36,574 $ 40,861 $ 1,526
Net Assets, End of Period
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: December 1, 1993.
** Annualized for the period ended June 30, 1994.
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 18<PAGE>
**** For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales on equity
securities.
<PAGE> 19<PAGE>
<TABLE>
<CAPTION>
The Rydex U.S. Government Bond
Fund
For the For the For the
Year Year Period
Ended Ended Ended
June June 30, June 30,
30,1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value -- Beginning of
Period $ 9.55 $ 8.24 $ 10.00
Net Investment Income (Loss) 0.46 0.39 0.02
Net Realized and Unrealized
Gains (Losses) on Securities (0.45) 1.17 (1.76)
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 0.01 1.56 (1.74)
Dividends to Shareholders (0.46) (0.25) (0.02)
Distributions to Shareholders
From Net Realized Capital
Gains (0.13) 0.00 0.00
Net Increase (Decrease) in
Net Asset Value (0.58) 1.31 (1.76)
Net Asset Value -- End of Period $ 8.97 $ 9.55 $ 8.24
Total Investment Return (1.48)% 18.97% (32.63)%
Ratios to Average Net Assets
Expenses 1.26% 2.26% 3.05%**
Net Investment Income 4.73% 4.64% 3.39%**
Supplementary Data:
Portfolio Turnover Rate*** 780.30% 3,452.59% 1,290.00%
Net Assets, End of Period $ 18,331 $ 2,592 $ 1,564
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: January 3, 1994.
** Annualized for the period ended June 30, 1994.
<PAGE> 20<PAGE>
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 21<PAGE>
<TABLE>
<CAPTION>
The Juno Fund
For the
Period
For the Year Ended
Ended June 30,
June 30,1996 1995*
<S> <C> <C>
Per Share Operating Performance:
Net Asset Value -- Beginning of
Period $ 9.08 $ 10.00
Net Investment Income (Loss) 0.34 0.14
Net Realized and Unrealized
Gains (Losses) on Securities 0.05 (1.06)
Net Increase (Decrease) in Net
Asset Value Resulting from
Operations 0.39 (0.92)
Dividends to Shareholders 0.00 0.00
Distributions to Shareholders
From Net Realized Capital Gains 0.00 0.00
Net Increase (Decrease) in Net
Asset Value 0.39 (0.92)
Net Asset Value -- End of Period $ 9.47 $ 9.08
Total Investment Return 4.30% (9.20)%
Ratios to Average Net Assets
Expenses 1.64% 1.50%**
Net Investment Income 3.63% 1.32%**
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00%
Net Assets, End of Period (000's $ 18,860 $ 4,301
omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: March 3, 1995.
** Annualized for the period ended June 30, 1995.
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year. The Juno Fund typically holds most of its
investments in options and futures contracts which are
deemed short-term securities.
<PAGE> 22<PAGE>
<PAGE> 23<PAGE>
<TABLE>
<CAPTION>
The Rydex U.S. Government
Money Market Fund
For the For the For the
Year Year Period
Ended Ended Ended
June 30, June 30, June 30,
1996 1995 1994*
<S> <C> <C> <C>
Per Share Operating
Performance: Net Asset Value
-- Beginning of Period $ 1.00 $ 1.00 $ 1.00
Net Investment Income
(Loss) 0.04 0.04 0.01
Net Realized and Unrealized
Gains(Losses) on
Securities 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value Resulting
from Operations 0.04 0.04 0.01
Dividends to Shareholders (0.04) (0.04) (0.01)
Distributions to
Shareholders From Net
Realized Capital Gains 0.00 0.00 0.00
Net Increase (Decrease) in
Net Asset Value 0.00 0.00 0.00
Net Asset Value End of Period $ 1.00 $ 1.00 $ 1.00
Total Investment Return 4.60% 4.43% 2.47%
Ratios to Average Net Assets 0.99% 0.89% 1.16%**
Expenses 4.18% 4.23% 2.34%**
Net Investment Income
Supplementary Data:
Portfolio Turnover Rate*** 0.00% 0.00% 0.00%
Net Assets, End of Period $ 153,925 $ 284,198 $ 88,107
(000's omitted)
</TABLE>
The per share data of the Financial Highlights table is
calculated using the daily shares outstanding average for
the year.
* Commencement of Operations: December 3, 1993.
** Annualized for the period ended June 30, 1994.
<PAGE> 24<PAGE>
*** Portfolio turnover ratio is calculated without regard to
short-term securities having a maturity of less than one
year.
<PAGE> 25<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
General
The Funds are principally designed for professional money managers and
investors who intend to follow an asset-allocation or market-timing
investment strategy. Except for the Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. These Funds seek investment results
that correspond over time to a specified benchmark. The Funds may be used
independently or in combination with each other as part of an overall
investment strategy. Additional Funds may be created from time to time.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with the respective benchmarks. Rather, the Advisor
primarily uses statistical and quantitative analysis to determine the
investments the Fund makes and techniques it employs. While the Advisor
attempts to minimize any "tracking error" (that statistical measure of the
difference between the investment results of a Fund and the performance of
its benchmark), certain factors will tend to cause the Fund's investment
results to vary from a perfect correlation to its benchmark. The Funds,
however, do not expect that their total returns will vary adversely from
their respective current benchmarks by more than ten percent over a year.
See "Special Risk Considerations." It is the policy of these Funds to
pursue their investment objectives regardless of market conditions, to
remain nearly fully invested and not to take defensive positions.
The investment objectives (including the benchmarks of the Nova and Ursa
Funds) and certain investment restrictions of the Funds are fundamental
policies and may not be changed without the affirmative vote of at least
the majority of the outstanding shares of that Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). All other
investment policies of the Funds not specified as fundamental (including
the benchmarks of the Funds other than Nova and Ursa Funds) may be changed
by the trustees of the Trust (the Trustees ) without the approval of
shareholders.
The Trustees may consider changing a Fund s benchmark (to the extent
permitted) if, for example, the current benchmark becomes unavailable; the
Trustees believe the current benchmark no longer serves the investment
needs of a majority of shareholders or another benchmark better serves
their needs; or the financial or economic environment makes it difficult
for the Fund s investment results to correspond sufficiently to its current
benchmark. If believed appropriate, the Trustees may specify a benchmark
for a Fund that is "leveraged" or proprietary. Of course, there can be no
assurance that a Fund will achieve its objective.
The Nova Fund
The investment objective of the Nova Fund is to provide investment returns
that correspond to 150% of the performance of the S&P500 Index. In
<PAGE> 26<PAGE>
attempting to achieve its objective, the Nova Fund expects that a
substantial portion of its assets usually will be devoted to employing
certain investment techniques. These techniques include engaging in
certain transactions in stock index futures contracts, options on stock
index futures contracts, and options on securities and stock indexes.
Under the techniques in which the Nova Fund engages, the Nova Fund will
generally incur a loss if the price of the underlying security or index
decreases between the date of the employment of the technique and the date
on which the Nova Fund terminates the position. The amount of any gain or
loss on an investment technique may be affected by any premium or amounts
in lieu of dividends or interest income the Nova Fund pays or receives as
the result of the transaction. The Nova Fund may also invest in shares of
individual securities which are expected to track the Nova Fund s
benchmark.
In contrast to returns on a mutual fund that seeks to approximate the
return of the S&P500 Index, the Nova Fund should increase gains to
investors during periods when the prices of the securities in the S&P500
Index are rising and increase losses to investors during periods when they
are declining. Investors in the Nova Fund could experience substantial
losses during sustained periods of falling equity prices.
The Ursa Fund
The Ursa Fund is designed to allow shareholders to hedge an existing
portfolio of securities or mutual fund shares or to speculate on
anticipated decreases in the S&P500 Index. The Ursa Fund's investment
objective is to provide investment results that will inversely correlate to
the performance of the S&P500 Index. The Ursa Fund seeks to achieve this
inverse correlation result on each trading day. While a close correlation
can be achieved on any single trading day, over time the cumulative
percentage increase or decrease in the net asset value of the shares of the
Ursa Fund may diverge significantly from the cumulative percentage decrease
or increase in the S&P500 Index due to a compounding effect.
If the Ursa Fund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the Ursa Fund would
increase for that day in direct proportion to any decrease in the level of
the S&P500 Index. Conversely, the net asset value of the shares of the
Ursa Fund would decrease for that day in direct proportion to any increase
in the level of the S&P500 Index for that day. For example, if the S&P500
Index were to decrease by 1% by the close of business on a particular
trading day, investors in the Ursa Fund would experience a gain in net
asset value of approximately 1% for that day. Conversely, if the S&P500
Index were to increase by 1% by the close of business on a particular
trading day, investors in the Ursa Fund would experience a loss in net
asset value of approximately 1% for that day.
Even if there is a perfect inverse correlation between the Ursa Fund and
the S&P500 Index on a daily basis, however, the symmetry between the
changes in the S&P500 Index and the changes in the value of shares in the
<PAGE> 27<PAGE>
Ursa Fund can be significantly altered over time by a compounding effect.
Thus, if the Ursa Fund achieved a perfect inverse correlation with the
S&P500 Index on every trading day over an extended period, and if there
were a significant decrease in the level of the S&P500 Index during that
period, there would be a compounding effect with the result that the net
asset value of the shares of the Ursa Fund for that period should generally
increase by a percentage that is somewhat greater than the percentage of
decrease in the level of the S&P500 Index. Conversely, if a perfect
inverse correlation were maintained over an extended period and if there
were a significant increase in the level of the S&P500 Index over that
period, then there would be a compounding effect with the result that the
net asset value of the shares of the Ursa Fund for that period should
generally decrease by a percentage that is somewhat less than the
percentage increase in the level of the S&P500 Index for that period.
The Ursa Fund intends to pursue its investment objective regardless of
market conditions and does not intend to take defensive positions in
anticipation of rising equity prices. Consequently, investors in the Ursa
Fund may experience substantial losses during sustained periods of rising
equity prices.
In pursuing its investment objective, the Ursa Fund generally does not
invest in traditional securities, such as common stock of operating
companies. Rather, the Ursa Fund employs certain investment techniques,
including engaging in short sales and in certain transactions in stock
index futures contracts, options on stock index futures contracts, and
options on securities and stock indexes. Under these techniques, the Ursa
Fund will generally incur a loss if the price of the underlying security or
index increases between the date of the employment of the technique and the
date on which the Ursa Fund terminates the position. The Ursa Fund will
generally realize a gain if the underlying security or index declines in
price between those dates. This result is the opposite of what one would
expect from a cash purchase of a long position in a security. The amount
of any gain or loss on an investment technique may be affected by any
premium or amounts in lieu of dividends or interest that the Ursa Fund pays
or receives as the result of the transaction.
The Rydex OTC Fund
The investment objective of the OTC Fund is to provide investment results
that correspond to a benchmark for over-the-counter securities. The OTC
Fund's current benchmark is the NASDAQ 100 Index.
The OTC Fund does not aim to hold all of the 100 securities included in the
NASDAQ 100 Index. Instead, the OTC Fund intends to hold representative
securities included in the NASDAQ 100 Index or other instruments which the
Advisor believes will provide returns that correspond to those of the
NASDAQ 100 IndexTM. The OTC Fund may engage in transactions on stock index
futures contracts, options on stock index futures contracts, and options on
securities and stock indexes.
<PAGE> 28<PAGE>
Companies whose securities are traded on the over-the-counter ("OTC")
markets generally are smaller market-capitalization or newer companies than
those listed on the New York Stock Exchange (the "NYSE") or the American
Stock Exchange (the "AMEX"). OTC companies often have limited product
lines, or relatively new products or services, and may lack established
markets, depth of experienced management, or financial resources and the
ability to generate funds. The securities of these companies may have
limited marketability and may be more volatile in price than securities of
larger-capitalized or more well-known companies. Among the reasons for the
greater price volatility of securities of certain smaller OTC companies are
the less certain growth prospects of comparably smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
s e n s itivity of smaller-capitalized companies to changing economic
conditions than larger-capitalized, exchange-traded securities.
Conversely, because many of these OTC securities may be overlooked by
investors and undervalued in the marketplace, there is potential for
significant capital appreciation.
The Rydex Precious Metals Fund
The investment objective of the Metals Fund is to provide investment
results that correspond to a benchmark primarily for metals-related
securities. The Metals Fund s current benchmark is the XAU Index.
Metals-related investments are considered speculative and are influenced by
a h ost of world-wide economic, financial, and political factors.
Historically, the prices of gold and precious metals have been subject to
wide price movements caused by political as well as economic factors, and,
accordingly, prices of equity securities of companies involved in the
precious metals-related industry have been volatile. Such fluctuation and
volatility may be due to changes in inflation or in expectations regarding
inflation in various countries, the availability of supplies of such
precious metals and minerals, changes in industrial and commercial demand,
metal and mineral sales by governments, central banks, or international
agencies, investment speculation, monetary and other economic policies of
various governments, and governmental restrictions on the private ownership
of certain precious metals and minerals. Such price volatility in precious
metals prices will have a similar effect on the Metals Fund's share prices.
The Fund may invest in other securities that are expected to perform in a
manner that will assist the Metals Fund s performance to closely track the
XAU Index.
The Metals Fund may invest in securities of foreign issuers. These
securities present certain risks not present in domestic investments and
expose the investor to general market conditions which differ significantly
from those in the United States. Securities of foreign issuers may be
affected by the strength of foreign currencies relative to the U.S. dollar
or by political or economic developments in foreign countries. Foreign
companies may not be subject to accounting standards or governmental
regulations comparable to those that affect United States companies, and
there may be less public information about the operations of foreign
<PAGE> 29<PAGE>
companies. Foreign securities also may be subject to foreign government
taxes that could reduce the yield on such securities.
The Rydex U.S. Government Bond Fund
The investment objective of the Bond Fund is to provide investment results
that correspond to a benchmark for U.S. Government Securities. The Bond
Fund s current benchmark is 120% of the price movement of the Long Bond,
without consideration of interest paid.
In attempting to achieve this objective, the Bond Fund invests primarily in
U.S. Government Securities. U.S. Government Securities are obligations of
the U.S. Treasury or obligations either issued or guaranteed, as to
principal and interest, by agencies or instrumentalities of the U.S.
Government. The Bond Fund may engage in transactions in futures contracts
and options on futures contracts on U.S. Treasury bonds. The Bond Fund
also may invest in U.S. Treasury zero coupon bonds. While U.S. Government
Securities provide substantial protection against credit risk, investment
in those securities do not protect investors against price changes due to
changing interest rate levels and, as such, the share price of the Bond
Fund is not guaranteed and will fluctuate over time. Accordingly, the
return of the Bond Fund should move inversely with movements in prevailing
interest rates on the Long Bond. The Fund intends to adjust its portfolio
each time the Long Bond is issued (currently twice yearly) in an attempt to
track the price movement of the newly-issued Long Bond. See "The
Benchmarks."
The Juno Fund
The Juno Fund is designed to allow investors to hedge an existing portfolio
of securities or mutual fund shares against general increases in interest
rates or to speculate on anticipated decreases in the price of the Long
Bond. The Juno Fund s investment objective is to provide total return
before expenses and costs that will inversely correlate to the price
movements of a benchmark debt instrument or futures contract on a specified
debt instrument. The Long Bond has been designated as the Juno Fund s
current benchmark.
In attempting to achieve its objective, the Fund intends to devote its
a s sets primarily to employing certain investment techniques. The
investment techniques that may be employed by the Fund include engaging in
short sales on U.S. Treasury bonds and engaging in transactions in futures
contracts on U.S. Treasury bonds and options on such contracts to produce
synthetic short positions. These techniques are highly specialized and
i n volve certain risks not traditionally associated with investment
companies. Under these techniques, the Fund will generally incur a loss if
the price of the underlying security or futures contract increases between
the date of the employment of the technique and the date on which the Fund
terminates the position. The Fund will generally realize a gain if the
underlying security or futures contract declines in price between those
dates. This result is the opposite of what one would expect from a cash
purchase of a long position in a security.
<PAGE> 30<PAGE>
The Juno Fund seeks to achieve this inverse correlation result on each
trading day. While a close correlation can be achieved on any single
trading day, over time the cumulative percentage increase or decrease in
the Juno Fund's total return before expenses and costs may diverge
significantly from the cumulative percentage decrease or increase in the
price of the Long Bond due to a compounding effect. If the Juno Fund
achieved a perfect inverse correlation for any single trading day, the Juno
Fund's total return before expenses and costs would increase for that day
in direct proportion to any decrease in the price of the Long Bond.
Conversely, the Juno Fund's total return before expenses and costs would
decrease for that day in direct proportion to any increase in the price of
the Long Bond for that day. For example, if the price of the Long Bond
were to decrease by 1% by the close of business on a particular trading
day, investors in the Juno Fund would experience a gain in total return
before expenses and costs of approximately 1% for that day. Conversely, if
the price of the Long Bond were to increase by 1% by the close of business
on a particular trading day, investors in the Juno Fund would experience a
loss in total return before expenses and costs of approximately 1% for that
day.
Even if there is a perfect inverse correlation between the Juno Fund's
total return before expenses and costs and the price of the Long Bond on a
daily basis, however, the symmetry between the changes in the price of the
Long Bond and the changes in the Juno Fund's total return can be
significantly altered over time by a compounding effect. Thus, if the Juno
Fund achieved a perfect inverse correlation with the price of the Long Bond
on every trading day over an extended period, and if there were a
significant decrease in the price of the Long Bond during that period,
there would be a compounding effect with the result that the Juno Fund's
total return before expenses and costs for that period should generally
increase by a percentage that is somewhat greater than the percentage of
decrease in the price of the Long Bond. Conversely, if a perfect inverse
correlation were maintained over an extended period and if there were a
significant increase in the price of the Long Bond over that period, then
there would be a compounding effect with the result that the Juno Fund's
total return before expenses and costs for that period should generally
decrease by a percentage that is somewhat less than the percentage increase
in the price of the Long Bond for that period.
For purposes of determining the Juno Fund's total return before expenses
and costs, costs include the Juno Fund s "carrying cost" in maintaining
short positions. When entering an actual or synthetic short position on
the Long Bond, the Juno Fund must effectively pay interest equal to
interest accrued on the underlying U.S. Treasury bond. The difference, if
any, between the interest effectively paid by the Juno Fund on its short
positions and any interest earned by the Juno Fund on its assets is the
Juno Fund s carrying cost.
The interest rate on a U.S. Treasury bond is set at the time the particular
bond is issued and does not change for the maturity of the bond so that the
interest paid on the bond is constant throughout the life of the bond. The
price at which a previously-issued U.S. Treasury bond can be bought and
<PAGE> 31<PAGE>
sold in the open market, however, does change. The market value of U.S.
Treasury bonds rises when interest rates in general decrease and falls when
interest rates in general increase. Accordingly, if the Juno Fund is
successful in meeting its investment objective, the Fund s total return
should rise with increases in interest rates and fall with decreases in
interest rates.
The Rydex U.S. Government Money
Market Fund
The investment objectives of the Money Market Fund are security of
principal, high current income, and liquidity. The Money Market Fund seeks
to achieve its objectives by investing in U.S. Government Securities,
including money market instruments which are issued or guaranteed, as to
p r i ncipal and interest, by the U.S. Government, its agencies or
instrumentalities, as well as in repurchase agreements collateralized fully
by U.S. Government Securities. An investment in the Money Market Fund is
neither insured nor guaranteed by the U.S. Government. The Money Market
Fund seeks to maintain a constant $1.00 net asset value per share, although
this cannot be assured.
The Money Market Fund may invest in securities that take the form of
participation interests in, and may be evidenced by deposit or safekeeping
receipts for, any of the foregoing securities. Participation interests are
p r o rata interests in U.S. Government Securities; and instruments
evidencing deposit or safekeeping are documentary receipts for such
original securities held in custody by others.
The Benchmarks
The S&P500 Index (SPX). Standard & Poor's Corporation ("S&P") chooses the
500 stocks comprising the S&P500 Index on the basis of market values and
industry diversification. Most of the stocks in the S&P500 Index are
issued by the 500 largest companies, in terms of the aggregate market value
of their outstanding stock, and such companies are generally listed on the
NYSE. Additional stocks that are not among the 500 largest market value
stocks are included in the S&P500 Index for diversification purposes. S&P
will not be a sponsor of, or in any other way affiliated with, the Funds.
The NASDAQ 100 IndexTM (NDX). The NASDAQ 100 IndexTM is a capitalization-
weighted index composed of 100 of the largest non-financial securities
listed on the NASDAQ Stock Market. The index was created in 1985.
The XAU Index. The XAU Index is a capitalization-weighted index featuring
eleven widely-held securities in the gold and silver mining and production
industry or companies investing in such mining and production companies.
The XAU Index was set to an initial value of 100 in January 1979. The
following issuers are currently included in the XAU Index: ASA Limited;
Barrick Gold Corp.; Battle Mountain Gold Co.; Echo Bay Mines Limited; Hecla
Mining Co.; Homestake Mining Co.; Newmont Mining Corp.; Placer Dome Inc.;
Pegasus Gold, Inc.; TVX Gold, Inc.; and Santa Fe Pacific Gold Corp. While
<PAGE> 32<PAGE>
the majority of these companies are based in North America, they generally
have operations in countries based outside North America.
The Long Bond. The Long Bond is the U.S. Treasury bond with the longest
maturity. Currently, the longest maturity of a U.S. Treasury bond is 30
years. At this time, the 30-year U.S. Treasury bond is issued twice
yearly. In the future, the U.S. Treasury may change the number of times
each year that the Long Bond is issued.
<PAGE> 33<PAGE>
SPECIAL RISK CONSIDERATIONS
Shareholders should consider the special factors discussed below that are
associated with the investment policies of the Funds in determining the
appropriateness of investing in the Funds.
Portfolio Turnover
The Trust anticipates that investors in the Funds, as part of an asset-
allocation or market-timing investment strategy, will frequently redeem
shares of a particular Fund, as well as exchange their shares of a
particular Fund for shares in other Funds pursuant to the exchange policy
of the Trust (see "Exchanges"), which would cause that Fund to experience
high portfolio turnover. Because each Fund's portfolio turnover rate to a
great extent will depend on the purchase, redemption, and exchange activity
of the Fund's investors, it is very difficult to estimate what the Fund's
actual turnover rate generally will be. Pursuant to the formula prescribed
b y the Securities and Exchange Commission (the "Commission"), the
portfolio turnover rate for each Fund is calculated without regard to
securities, including options and futures contracts, having a maturity of
less than one year. The Nova Fund, the Ursa Fund, and the Juno Fund
typically hold most of their investments in short-term options and futures
contracts, which, therefore, are excluded for purposes of computing
portfolio turnover.
Significant portfolio turnover will tend to increase the realization by a
Fund of gains (or losses) on securities that have been held by the Fund for
less than three months. Any such realized gains on securities that have
been held by a Fund for less than three months, and other factors related
to large cash flows into and out of the Fund, will increase the risk that,
in any given year, the Fund may fail to qualify as a regulated investment
company under Subchapter M of the U.S. Internal Revenue Code of 1986, as
amended (the "Code") (see "Taxes"). If a Fund should so fail to qualify
under the Code, the Fund's net investment income and net capital gain would
become subject to Federal income tax at corporate rates. The imposition of
such taxes would directly reduce the return to an investor from an
investment in the Fund. In addition, a higher portfolio turnover rate
would likely involve correspondingly greater brokerage commissions and
other expenses which would be borne by the Fund. Furthermore, a Fund's
portfolio turnover level may adversely affect the ability of the Fund to
achieve its investment objective.
Tracking Error
While the Funds do not expect that the returns over a year will deviate
adversely from their respective benchmarks by more than ten percent,
several factors may affect their ability to achieve this correlation.
Among these factors are: (1) Fund expenses, including brokerage (which may
be increased by high portfolio turnover); (2) less than all of the
securities in the benchmark being held by a Fund and securities not
included in the benchmark being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund, such as
futures contracts and options, and the performance of the underlying
<PAGE> - 34 -<PAGE>
securities in the cash market; (4) bid-ask spreads (the effect of which may
be increased by portfolio turnover); (5) a Fund holds instruments traded in
a market that has become illiquid or disrupted; (6) Fund share prices being
rounded to the nearest cent; (7) changes to the benchmark index that are
not disseminated in advance; (8) the need to conform a Fund s portfolio
holdings to comply with investment restrictions or policies or regulatory
or tax law requirements; or (9) market movements that run counter to a
leveraged Fund s investments (which will cause divergence between the Fund
and its benchmark over time due to the mathematical effects of leveraging).
For further information regarding these factors, see Tracking Error in
the Statement of Additional Information.
Aggressive Investment Techniques
Each of the Funds (other than the Money Market Fund) may engage in certain
aggressive investment techniques which may include engaging in short sales
and transactions in futures contracts and options on securities, securities
indexes, and futures contracts. The Trust expects that the Nova Fund, the
Ursa Fund, and the Juno Fund will primarily use these techniques in seeking
to achieve their objectives and that a significant portion (up to 100%) of
the assets of these Funds will be held in high-grade liquid debt in a
segregated account by these Funds as "cover" for these investment
techniques.
Participation in the options or futures markets by a Fund involves distinct
investment risks and transaction costs. Risks inherent in the use of
options, futures contracts, and options on futures contracts include: (1)
adverse changes in the value of such instruments; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the price of the underlying securities, index, or futures
contracts; (3) the fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the
possible absence of a liquid secondary market for any particular instrument
at any time; and (5) the possible need to defer closing out certain
positions to avoid adverse tax consequences. For further information
regarding these investment techniques, see "Investment Techniques and Other
Investment Policies."
Early NASDAQ Closings
The normal close of trading of securities listed on the National
Association of Securities Dealers Automated Quotations (the "NASDAQ"),
which is operated by the National Association of Securities Dealers, Inc.
(the "NASD"), is 4:00 P.M. While an infrequent occurrence, the NASD has
closed trading on the NASDAQ as much as 15 minutes prior to the normal
close because of computer systems failures. Early closing of the NASDAQ
may result in a Fund being unable to sell (or buy) OTC securities traded on
the NASDAQ on that day. If the NASDAQ closes prior to the close of
business on a day when one or more of the Funds needs to execute a high
volume of trades late in a trading day, a Fund, in particular the OTC Fund,
might incur substantial trading losses.
<PAGE> - 35 -<PAGE>
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES
Futures Contracts and Options Thereupon
The Nova Fund and the OTC Fund may purchase stock index futures contracts
as a substitute for a comparable market position in the underlying
securities. The Ursa Fund may sell stock index futures contracts. The
Bond Fund may purchase futures contracts on U.S. Government Securities as a
substitute for a comparable market position in the cash market. The Juno
Fund may sell futures contracts on U.S. Government Securities. The
principal trading markets for S&P500 index futures contracts and U.S.
Treasury bond futures contracts are the Chicago Mercantile Exchange (the
"CME") and the Chicago Board of Trade (the "CBOT"), respectively.
A futures contract obligates the seller to deliver (and the purchaser to
take delivery of) the specified commodity on the expiration date of the
contract. A stock index futures contract obligates the seller to deliver
(and the purchaser to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which
the agreement is made. No physical delivery of the underlying stocks in
the index is made.
The Nova Fund and the OTC Fund may purchase call options and write (sell)
put options, and the Ursa Fund may purchase put options and write call
options, on stock index futures contracts. The Bond Fund may purchase call
options and write put options on U.S. Government Securities futures
contracts and the Juno Fund may write call options and purchase put options
on futures contracts on U.S. Government Securities.
When a Fund purchases a put or call option on a futures contract, the Fund
pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
Fund receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the Fund the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a Fund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
Fund s loss from an unhedged short position in futures contracts or from
writing (selling) call options on futures contracts is potentially
unlimited. The Funds may engage in related closing transactions with
respect to options on futures contracts. The Funds will only engage in
transactions in futures contracts and options thereupon that are traded on
a United States exchange or board of trade. In addition to the uses set
forth hereunder, each Fund may also engage in futures and futures options
transactions in order to hedge or limit the exposure of its position, to
create a synthetic money market position, and for certain other tax-related
purposes. See "Taxes."
<PAGE> - 36 -<PAGE>
The Funds may purchase and sell futures contracts, index futures contracts,
and options thereon only to the extent that such activities would be
consistent with the requirements of Section 4.5 of the regulations under
the Commodity Exchange Act promulgated by the Commodity Futures Trading
Commission (the "CFTC Regulations"), under which each of these Funds would
be excluded from the definition of a "commodity pool operator." Under
Section 4.5 of the CFTC Regulations, a Fund may engage in futures
transactions, either for "bona fide hedging" purposes, as this term is
defined in the CFTC Regulations, or for non-hedging purposes to the extent
that the aggregate initial margins and option premiums required to
establish such non-hedging positions do not exceed 5% of the liquidation
value of the Fund s portfolio. In the case of an option on futures
contracts that is "in-the-money" at the time of purchase (i.e., the amount
by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market
value of the underlying security exceeds the exercise price of the call
option), the in-the-money amount may be excluded in calculating this 5%
limitation.
When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a
Fund may maintain with its custodian bank (and mark-to-market on a daily
basis) a segregated account consisting of cash or high-quality liquid debt
instruments, including U.S. Government Securities or repurchase agreements
secured by U.S. Government Securities, that, when added to any amounts
deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities trading practices
and properly segregates assets, the segregated account will function as a
practical limit on the amount of leverage which the Fund may undertake and
on the potential increase in the speculative character of the Fund s
outstanding portfolio securities. Additionally, such segregated accounts
will generally assure the availability of adequate funds to meet the
obligations of the Fund arising from such investment activities.
A Fund may cover its long position in a futures contract by purchasing a
put option on the same futures contract with a strike price (i.e., an
exercise price) as high or higher than the price of the futures contract,
or, if the strike price of the put is less than the price of the futures
contract, the Fund will maintain in a segregated account cash or high-grade
liquid debt securities equal in value to the difference between the strike
price of the put and the price of the future. A Fund may also cover its
long position in a futures contract by taking a short position in the
instruments underlying the futures contract, or by taking positions in
i n s truments the prices of which are expected to move relatively
consistently with the futures contract. A Fund may cover its short
position in a futures contract by taking a long position in the instruments
underlying the futures contract, or by taking positions in instruments the
prices of which are expected to move relatively consistently with the
futures contract.
<PAGE> - 37 -<PAGE>
A Fund may cover its sale of a call option on a futures contract by taking
a long position in the underlying futures contract at a price less than or
equal to the strike price of the call option, or, if the long position in
the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, the Fund will maintain in a
segregated account cash or high-grade liquid debt securities equal in value
to the difference between the strike price of the call and the price of the
future. A Fund may also cover its sale of a call option by taking
positions in instruments the prices of which are expected to move
relatively consistently with the call option. A Fund may cover its sale of
a put option on a futures contract by taking a short position in the
underlying futures contract at a price greater than or equal to the strike
price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of
the written put, the Fund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between
the strike price of the put and the price of the future. A Fund may also
cover its sale of a put option by taking positions in instruments the
prices of which are expected to move relatively consistently with the put
option.
Although the Funds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid
market will exist for any particular contract at any particular time. Many
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 or trading may be suspended for
specified periods during the day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting a Fund to substantial losses. If trading is not possible, or a
Fund determines not to close a futures position in anticipation of adverse
price movements, the Fund will be required to make daily cash payments of
variation margin. The risk that the Fund will be unable to close out a
futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Index Options Transactions
The Nova Fund, the OTC Fund, and the Metals Fund may purchase call options
and write (sell) put options, and the Ursa Fund may purchase put options
and write call options, on stock indexes. All of the Funds may write and
purchase put and call options on stock indexes in order to hedge or limit
the exposure of their positions, to create synthetic money market
positions, and for certain other tax-related purposes. See "Taxes."
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right
to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than (in the case of a call) or
<PAGE> - 38 -<PAGE>
less than (in the case of a put) the exercise price of the option. The
amount of cash received, if any, will be the difference between the closing
price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer (seller) of the option is obligated,
in return for the premiums received from the purchaser of the option, to
make delivery of this amount to the purchaser. Unlike the options on
securities discussed below, all settlements of index options transactions
are in cash.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on
a narrower index such as the Philadelphia Stock Exchange Over-the-Counter
Index. Options currently are traded on the Chicago Board Options Exchange
(the "CBOE"), the AMEX, and other exchanges ("Exchanges"). Purchased over-
the-counter options and the cover for written over-the-counter options will
be subject to the respective Fund s 15% limitation on investment in
illiquid securities. See "Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or
written (sold) by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different Exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of
all investment companies advised by the same investment adviser are
combined for purposes of these limits. Pursuant to these limitations, an
Exchange may order the liquidation of positions and may impose other
sanctions or restrictions. These position limits may restrict the number
of listed options which a Fund may buy or sell; however, the Advisor
intends to comply with all limitations.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the
underlying securities comprising the stock index selected and the risk that
there might not be a liquid secondary market for the option. Because the
value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether a Fund will realize a
gain or loss from the purchase or writing (sale) of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than upon movements in the price of a particular stock.
Whether a Fund will realize a profit or loss by the use of options on stock
indexes will depend on movements in the direction of the stock market
generally or of a particular industry or market segment. This requires
different skills and techniques than are required for predicting changes in
the price of individual stocks. A Fund will not enter into an option
position that exposes the Fund to an obligation to another party, unless
the Fund either (i) owns an offsetting position in securities or other
options and/or (ii) maintains with the Fund s custodian bank (and marks-to-
market on a daily basis) a segregated account consisting of cash, U.S.
Government Securities, or other liquid high-grade debt securities that,
<PAGE> - 39 -<PAGE>
when added to the premiums deposited with respect to the option, are equal
to the market value of the underlying stock index not otherwise covered.
Options on Securities
The Nova Fund, the OTC Fund, and Metals Fund may buy call options and write
(sell) put options on securities, and the Ursa Fund may buy put options and
write call options on securities. By buying a call option, a Fund has the
right, in return for a premium paid during the term of the option, to buy
the securities underlying the option at the exercise price. By writing
(selling) a call option and receiving a premium, a Fund becomes obligated
during the term of the option to deliver the securities underlying the
option at the exercise price if the option is exercised. By buying a put
option, a Fund has the right, in return for a premium paid during the term
of the option, to sell the securities underlying the option at the exercise
price. By writing a put option, a Fund becomes obligated during the term
of the option to purchase the securities underlying the option at the
exercise price. Options on securities written (sold) by the Funds will be
conducted on recognized securities exchanges.
When writing (selling) call options on securities, a Fund may cover its
position by owning the underlying security on which the option is written.
Alternatively, the Fund may cover its position by owning a call option on
the underlying security, on a share for share basis, which is deliverable
under the option contract at a price no higher than the exercise price of
the call option written by the Fund or, if higher, by owning such call
option and depositing and maintaining in a segregated account cash or
liquid high-grade debt securities equal in value to the difference between
the two exercise prices. In addition, a Fund may cover its position by
depositing and maintaining in a segregated account cash or liquid high-
grade debt securities equal in value to the exercise price of the call
option written by the Fund. When a Fund writes (sells) a put option, the
Fund will have and maintain on deposit with its custodian bank cash or
liquid high-grade debt securities having a value equal to the exercise
value of the option. The principal reason for a Fund to write (sell) call
options on stocks held by the Fund is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the
underlying securities alone.
If a Fund that writes (sells) an option wishes to terminate the Fund s
obligation, the Fund may effect a "closing purchase transaction." The Fund
accomplishes this by buying an option of the same series as the option
previously written by the Fund. The effect of the purchase is that the
writer s position will be canceled by the Options Clearing Corporation.
However, a writer (seller) may not effect a closing purchase transaction
after the writer has been notified of the exercise of an option. Likewise,
a Fund which is the holder of an option may liquidate its position by
effecting a "closing sale transaction." The Fund accomplishes this by
selling an option of the same series as the option previously purchased by
the Fund. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected. If any call or put option is not
exercised or sold, the option will become worthless on its expiration date.
<PAGE> - 40 -<PAGE>
A Fund will realize a gain (or a loss) on a closing purchase transaction
with respect to a call or a put option previously written (sold) by the
Fund if the premium, plus commission costs, paid by the Fund to purchase
the call or put option to close the transaction is less (or greater) than
the premium, less commission costs, received by the Fund on the sale of the
call or the put option. The Fund also will realize a gain if a call or put
option which the Fund has written lapses unexercised, because the Fund
would retain the premium.
A Fund will realize a gain (or a loss) on a closing sale transaction with
respect to a call or a put option previously purchased by the Fund if the
premium, less commission costs, received by the Fund on the sale of the
call or the put option to close the transaction is greater (or less) than
the premium, plus commission costs, paid by the Fund to purchase the call
or the put option. If a put or a call option which the Fund has purchased
e x pires out-of-the-money, the option will become worthless on the
expiration date, and the Fund will realize a loss in the amount of the
premium paid, plus commission costs.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance
can be given that a market will exist at all times for all outstanding
options purchased or sold by a Fund. If an options market were to become
unavailable, the Fund would be unable to realize its profits or limit its
losses until the Fund could exercise options it holds, and the Fund would
remain obligated until options it wrote were exercised or expired.
Because option premiums paid or received by a Fund are small in relation to
the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing
directly in common stocks.
Short Sales
The Ursa Fund and the Juno Fund also may engage in short sales transactions
under which the Fund sells a security it does not own. To complete such a
transaction, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest
which accrue during the period of the loan. To borrow the security, the
Fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by
the broker, to the extent necessary to meet the margin requirements, until
the short position is closed out.
Until the Ursa Fund or Juno Fund closes its short position or replaces the
borrowed security, the Fund will: (a) maintain a segregated account
containing cash or liquid high grade debt securities at such a level that
<PAGE> - 41 -<PAGE>
(i) the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold
short and (ii) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will not be less than the
market value of the security at the time the security was sold short; or
(b) otherwise cover the Fund s short position.
The Nova Fund, the OTC Fund, and the Metals Fund each may engage in short
sales if, at the time of the short sale, the Fund owns or has the right to
acquire an equal amount of the security being sold at no additional cost
("selling against the box"). These Funds may make a short sale when the
Fund wants to sell the security the Fund owns at a current attractive
price, but also wishes to defer recognition of a gain or loss for Federal
income tax purposes and for purposes of satisfying certain tests applicable
to regulated investment companies under the Internal Revenue Code.
U.S. Government Securities
The Bond Fund and the Money Market Fund may invest in U.S. Government
Securities in pursuit of their investment objectives. The Funds, except
for the Money Market Fund, may invest in U.S. Government Securities as
"cover" for the investment techniques these Funds employ as part of a cash
reserve or for liquidity purposes.
Yields on short-, intermediate-, and long-term U.S. Government Securities
are dependent on a variety of factors, including the general conditions of
the money and bond markets, the size of a particular offering, and the
maturity of the obligation. Debt securities with longer maturities tend to
produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market value of U.S. Government
Securities generally varies inversely with changes in market interest
rates. An increase in interest rates, therefore, would generally reduce
the market value of a Fund s portfolio investments in U.S. Government
Securities, while a decline in interest rates would generally increase the
market value of a Fund s portfolio investments in these securities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. Such agencies and instrumentalities may borrow funds from the
U.S. Treasury. However, no assurances can be given that the U.S.
Government will provide such financial support to the obligations of the
other U.S. Government agencies or instrumentalities in which a Fund
invests, since the U.S. Government is not obligated to do so. These other
agencies and instrumentalities are supported by either the issuer s right
to borrow, under certain circumstances, an amount limited to a specific
line of credit from the U.S. Treasury, the discretionary authority of the
U . S . Government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality itself.
U.S. Government Securities may be purchased at a discount. Such
securities, when held to maturity or retired, may include an element of
<PAGE> - 42 -<PAGE>
capital gain. Capital losses may be realized when such securities
purchased at a premium are held to maturity or are called or redeemed at a
price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
Repurchase Agreements
U.S. Government Securities include repurchase agreements secured by U.S.
Government Securities. Under a repurchase agreement, a Fund purchases a
debt security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or
a few days later. The resale price is greater than the purchase price,
reflecting an agreed-upon market interest rate during the purchaser s
holding period. While the maturities of the underlying securities in
repurchase transactions may be more than one year, the term of each
repurchase agreement will always be less than one year. A Fund will enter
into repurchase agreements only with member banks of the Federal Reserve
System or primary dealers of U.S. Government Securities. The Advisor will
monitor the creditworthiness of each of the firms which is a party to a
repurchase agreement with any of the Funds. In the event of a default or
bankruptcy by the seller, the Fund will liquidate those securities (whose
market value, including accrued interest, must be at least equal to 100% of
the dollar amount invested by the Fund in each repurchase agreement) held
under the applicable repurchase agreement, which securities constitute
collateral for the seller s obligation to pay. However, liquidation could
involve costs or delays and, to the extent proceeds from the sales of these
securities were less than the agreed-upon repurchase price, the Fund would
suffer a loss. A Fund also may experience difficulties and incur certain
costs in exercising its rights to the collateral and may lose the interest
the Fund expected to receive under the repurchase agreement. Repurchase
agreements usually are for short periods, such as one week or less, but may
be longer. It is the current policy of the Funds to treat repurchase
agreements that do not mature within seven days as illiquid for the
purposes of their investment policies.
Illiquid Securities
While none of the Funds anticipates doing so, each Fund may purchase
illiquid securities, including securities that are not readily marketable
and securities that are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which can be
offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act. A Fund will not invest more than 15% (10% with respect to
the Money Market Fund) of the Fund s net assets in illiquid securities.
Each Fund will adhere to a more restrictive limitation on the Fund s
investment in illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered for sale. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
Under the current guidelines of the Commission staff, illiquid securities
also are considered to include, among other securities, purchased over-the-
<PAGE> - 43 -<PAGE>
counter options, certain cover for over-the-counter options, repurchase
agreements with maturities in excess of seven days, and certain securities
whose disposition is restricted under the Federal securities laws. The
Fund may not be able to sell illiquid securities when the Advisor considers
it desirable to do so or may have to sell such securities at a price that
is lower than the price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses
than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on net asset value.
Cash Reserve
As a cash reserve or for liquidity purposes, each Fund may temporarily
invest all or part of the Fund s assets in cash or cash equivalents, which
include, but are not limited to, short-term money market instruments, U.S.
Government Securities, certificates of deposit, bankers acceptances, or
repurchase agreements secured by U.S. Government Securities.
Other Investment Policies
The Funds also may engage in certain other investment practices described
below, however none of the Funds presently intends to invest more than 5%
of the Fund's net assets in any of these practices. Each of the Funds may
purchase securities on a when-issued or delayed-delivery basis, and also
m a y lend portfolio securities to brokers, dealers, and financial
institutions. Each Fund may borrow money, and the Nova and Bond Funds also
may borrow money for investment purposes. Each Fund (other than the Bond
Fund and the Money Market Fund) may invest in the securities of other
investment companies to the extent permitted by Section 12(d)(1) of the
1940 Act or by the conditions of any exemptive order relating to that
section that may be obtained by the Trust. In addition, each Fund
(including both the Bond Fund and the Money Market Fund) may invest in
s e curities of investment companies acquired as part of a merger,
consolidation, acquisition of assets, or plan of reorganization. In
addition, the Bond and Juno Funds also may invest in U.S. Treasury zero
coupon securities, while each of the Ursa, Juno, and Money Market Funds
also may use reverse repurchase agreements as part of that Fund's
investment strategies. A more-detailed explanation of these investment
practices, including the risks associated with each practice, is included
in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
The Advisor determines which securities to purchase and sell for each Fund,
selects brokers and dealers to effect the transactions, and negotiates
commissions. The Advisor expects that the Funds may execute brokerage or
o t her agency transactions through registered broker-dealers, for a
commission, in conformity with the 1940 Act, the Securities Exchange Act of
<PAGE> - 44 -<PAGE>
1934, as amended, and the rules and regulations thereunder. In placing
orders for portfolio transactions, the Advisor s policy is to obtain the
most favorable price and efficient execution available. Brokerage
commissions are normally paid on exchange-traded securities transactions
and on options and futures transactions, as well as on common stock
transactions. In order to obtain the brokerage and research services
described below, a higher commission may sometimes be paid. The ability to
receive research services, however, may be a factor in the selection of one
dealer acting as a principal over another.
When selecting broker-dealers to execute portfolio transactions, the
Advisor considers many factors including the rate of commission or size of
the broker-dealer s "spread," the size and difficulty of the order, the
nature of the market for the security, the willingness of the broker-dealer
to position, the reliability, financial condition, general execution and
o p e r ational capabilities of the broker-dealer, and the research,
statistical and economic data furnished by the broker-dealer to the
Advisor. The Advisor uses these services in connection with all of the
Advisor s investment activities, including other investment accounts the
Advisor advises. Conversely, brokers or dealers which supply research may
be selected for execution of transactions for such other accounts, while
the data may be used by the Advisor in providing investment advisory
services to the Funds.
HOW TO INVEST IN THE FUNDS
For shareholders who have engaged a registered investment adviser with
discretionary authority over the shareholder s account, the minimum initial
investment in the Rydex Funds is $15,000. For all other shareholder
accounts ("Self-Directed Accounts"), the minimum initial investment in the
Rydex Funds is $25,000. These minimums also apply to retirement plan
accounts. The Trust, at its discretion, may accept lesser amounts in
certain circumstances. The shares of each Fund are offered at the daily
public offering price, which is the net asset value per share (see
"Determination of Net Asset Value") next computed after receipt of the
investor s order. No sales charges are imposed on initial or subsequent
investments in a Fund. The Trust reserves the right to reject or refuse,
at the Trust s discretion, any order for the purchase of a Fund s shares in
whole or in part. There is no minimum amount for subsequent investments in
a Fund. The Trust reserves the right to modify its minimum investment
requirements. Shareholders will be informed of any increase in the minimum
investment requirements by a letter accompanying a new prospectus or a
prospectus supplement, in which the new minimum is disclosed.
Investments in the Funds may be made (i) through securities dealers who
have the responsibility to transmit orders promptly and who may charge a
processing fee or (ii) directly with the Trust by mail or by bank wire
transfer as follows:
By Mail: Fill out an application and make out a check payable to "Rydex
Series Trust." Mail the check along with the application to:
<PAGE> - 45 -<PAGE>
Rydex Series Trust
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
By Bank Wire Transfer: Request a wire transfer to:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Account Number: 48038-9030
Your Name
Your Account Number or, if a new
account, Federal Tax I.D. Number
(e.g., Social Security Number)
After instructing your bank to transfer money by wire, please call the
Trust and inform the Trust as to the amount you have transferred and the
name of the bank sending the transfer. Your bank may charge a fee for such
services. If the purchase is canceled because your wire transfer is not
received, you may be liable for any loss that the Trust may incur.
I n the interest of economy and convenience, physical certificates
representing a Fund s shares are not issued. Shares of each Fund are
recorded on a register by the Trust s transfer agent.
REDEEMING AN INVESTMENT
(WITHDRAWALS)
General
An investor may withdraw all or any portion of his investment by redeeming
Fund shares at the next-determined net asset value per share after receipt
of the order. Redemptions may be made by letter or by telephone subject to
the procedures set forth below. The privilege to initiate redemption
transactions by telephone will be made available to Fund shareholders
automatically. Telephone redemptions will be sent only to the address of
record of the redeeming investor or to bank accounts specified by the
redeeming investor in his account application. The Trust charges $15 for
each wire transfer of redemption proceeds; this charge may be waived at the
discretion of the Trust. If any investor purchases shares of a Fund by
check, the purchaser may not wire out any proceeds of a redemption of such
shares for the 30 calendar days following the purchase.
The proceeds of non-telephone redemptions will be sent directly to the
investor s address of record. If the investor requests payment of
redemptions to a third party or to a location other than the investor s
address of record or a bank account specified in the investor s account
application, this request must be in writing and the investor s signature
must be guaranteed by a commercial bank; a broker, dealer, municipal
securities dealer, municipal securities broker, government securities
dealer, or government securities broker; a credit union; a national
<PAGE> - 46 -<PAGE>
securities exchange, registered securities association, or clearing agency;
or a savings association.
Each Fund will redeem its shares at a redemption price equal to the net
asset value of the shares as next computed following the receipt of a
request for redemption. There is no redemption charge. Payment for the
redemption price will be made within seven days after the Trust s receipt
of the request for redemption. For investments that have been made by
check, payment on withdrawal requests may be delayed until the Trust s
transfer agent is reasonably satisfied that the purchase payment has been
collected by the Trust (which may require up to 10 business days). An
investor may avoid a delay in receiving redemption proceeds by purchasing
shares with a certified check.
With respect to each Fund, the right of redemption may be suspended, or the
date of payment postponed: (i) for any period during which the NYSE, the
Federal Reserve Bank of New York (the New York Fed ), the NASDAQ, the CME,
or the CBOT, as appropriate, is closed (other than customary weekend or
holiday closings) or trading on the NYSE, the NASDAQ, the CME, or the CBOT,
as appropriate, is restricted; (ii) for any period during which an
emergency exists so that disposal of the Fund s investments or the
determination of its net asset value is not reasonably practicable; or
(iii) for such other periods as the Commission, by order, may permit for
protection of the Fund s investors.
Any time that you request a partial redemption of your Trust shares, please
be aware of the currently-applicable minimum investment, because, as
described below, there are circumstances under which your entire account
may be closed if, as a result of your request, your account balance falls
below the currently-applicable minimum investment in the Trust. A
redemption from a tax-qualified retirement plan may have adverse tax
consequences and a shareholder contemplating such a redemption should
consult his or her own tax adviser. Other shareholders should consider the
tax consequences of any redemption.
Because of the administrative expense of handling small accounts, any
request for a redemption (including pursuant to check writing privileges)
by an investor whose account balance is (a) below the currently-applicable
minimum investment, or (b) would be below that minimum as a result of the
redemption, will be treated as a request by the investor of a complete
redemption of that account. In addition, upon sixty days notice to a
shareholder, the Trust may redeem an account whose balance (due in whole or
in part to redemptions since the time of last purchase) has fallen below
the minimum investment amount applicable at the time of the shareholder s
most recent purchase of Rydex Fund shares (unless the shareholder brings
his or her account value up to the currently applicable minimum investment
during that notice period).
Draft Checks
With respect to shares of the Money Market Fund, investors may elect to
redeem such shares by draft check (minimum check - $500) made payable to
<PAGE> - 47 -<PAGE>
the order of any person or institution. Upon the Trust s receipt of a
completed signature card, investors will be supplied with draft checks
which are drawn on the Money Market Fund s account and are paid through the
Money Market Fund s custodian, Star Bank, N.A. The Trust reserves the
right to change or suspend this checking service. There is a $25 charge
for each stop payment request on the draft checks. Investors are subject
to the same rules and regulations that the banks apply to checking
accounts. An investor s Money Market Fund account may not be closed by
draft check.
EXCHANGES
Shares of any Rydex Fund may be exchanged, without any charge, for shares
of any other Rydex Fund on the basis of the respective net asset values of
the shares involved. Exchanges with respect to Self-Directed Accounts must
be for at least the lesser of $1,000 or 100% of the account value for the
Fund from which the transfer is made. The Trust currently is composed of
nine separate Rydex Funds, seven of which Funds, The Nova Fund, The Ursa
Fund, The Rydex OTC Fund (the OTC Fund ), The Rydex Precious Metals Fund
(the Metals Fund ), The Rydex U.S. Government Bond Fund, The Juno Fund,
and The Rydex U.S. Government Money Market Fund (the Money Market Fund ),
are described in this Prospectus. The eighth and ninth series of the
Trust, The Rydex High Yield Fund (the High Yield Fund ) and The Rydex
Institutional Money Market Fund (the "Institutional Fund"), are each
described in a separate prospectus; other separate Rydex Funds may be added
in the future. The minimum initial investment in the Institutional Fund
for all shareholder accounts, including retirement plan accounts, is
$2,000,000, and an exchange into the Institutional Fund is permitted only
if the Institutional Fund s minimum investment of $2,000,000 is satisfied.
Exchanges may be made by letter or by telephone subject to the procedures
set forth below.
To implement an exchange, shareholders should provide the following
information: account name, account number, taxpayer identification number,
number of or percentage of shares or dollar value of shares to be
exchanged, and the names of the Rydex Funds involved in the exchange
transaction. Exchanges may be made only if such exchanges are between
identically registered accounts. Shareholders contemplating such an
exchange for shares of a Rydex Fund not described in this Prospectus should
obtain and review the prospectus of the Rydex Fund to which the investment
is to be transferred. The exchange privilege is available only in states
where the exchange legally may be made and may be modified or discontinued
at any time. Shares of the Money Market Fund received in an exchange for
shares of the OTC Fund, the Metals Fund, or the High Yield Fund are issued
on the third business day following the day on which the Rydex Fund
receives the exchange request.
<PAGE> - 48 -<PAGE>
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES
Written requests for redemptions and exchanges should be sent to the Rydex
Series Trust, 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852, and should be signed by the record owner or owners. With proper
authorization, telephone and electronic redemption and transfer requests
are also permitted. Telephone redemption and exchange requests with
respect to the Rydex Funds may be made by calling (800) 820-0888 or (301)
468-8520, on any day the Trust is open for business. Redemption and
exchange requests may be made only between 8:30 A.M., Eastern Time, and the
times indicated below (all times are Eastern Time). For exchanges, the
earlier of the times indicated below for the Funds whose shares are being
exchanged applies.
The Nova, Ursa, and Rydex
OTC Funds . . . . . . 3:45 P.M.
The Rydex Precious Metals
Fund . . . . . . . . . 3:30 P.M.
The Rydex U.S. Government
Bond and Juno Funds . 2:45 P.M.
The Rydex High Yield
Fund . . . . . . . . . 2:15 P.M.
Telephone and electronic redemption and exchange orders will be accepted
only during the period indicated above. If the primary exchange or market
on which a Fund transacts business closes early, the above cut-off time
will be approximately fifteen minutes (thirty minutes, in the case of the
Precious Metals Fund, and forty-five minutes in the case of the High Yield
Fund) prior to the close of such exchange or market. Telephone and
electronic redemption and exchange privileges may be terminated or modified
by the Trust at any time.
When acting on instructions believed to be genuine, the Trust will not be
liable for any loss resulting from a fraudulent telephone or electronic
transaction request and the investor would bear the risk of any such loss.
The Trust will employ reasonable procedures to confirm that telephone and
electronic instructions are genuine; and if the Trust does not employ such
procedures, then the Trust may be liable for any losses due to unauthorized
or fraudulent instructions. The Trust follows specific procedures for
transactions initiated by telephone or electronic medium, including, among
others, requiring some form of personal identification or password prior to
acting upon instructions received by telephone or electronic medium,
providing written confirmation not later than five business days after such
t r a n s actions, and/or tape recording of telephone and electronic
instructions. Investors also should be aware that telephone and electronic
redemptions or exchanges may be difficult to implement in a timely manner
during periods of drastic economic or market changes. If such conditions
occur, redemption or exchange orders can be made by mail.
<PAGE> - 49 -<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Nova Fund, the Ursa Fund, the
Metals Fund, and the OTC Fund is determined each day on which the NYSE is
open for business as of the close of normal trading on the NYSE (currently
4:00 P.M., Eastern Time). The net asset value of the shares of the High
Yield Fund, the Money Market Fund, and the Institutional Fund is determined
each day on which both the NYSE and the New York Fed are open for business.
Currently, the NYSE and the New York Fed are closed on weekends, and the
following holiday closings have been scheduled for 1997: (i) New Year's
Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Good Friday,
Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day, and
Christmas Day; and (ii) the preceding Friday when any of those holidays
falls on a Saturday or the subsequent Monday when any of these holidays
falls on a Sunday. The High Yield Fund determines its net asset value at
3:00 P.M., Eastern Time, and the Money Market Fund and the Institutional
Fund each determines its net asset value at 1:00 P.M., Eastern Time, on
such days. The net asset value of the shares of the Bond Fund and the Juno
Fund is determined each day on which the CBOT is open for trading futures
contracts on U.S. Treasury bonds as of the close of normal trading on the
CBOT (normally 3:00 P.M., Eastern Time). Currently, the CBOT is closed on
weekends and on the following holidays: (i) New Year s Day, Martin Luther
King, Jr. Day, President s Day, Memorial Day, July Fourth, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day; and (ii)
the preceding Friday when any one of those holidays falls on a Saturday or
the subsequent Monday when any one of those holidays falls on a Sunday. To
the extent that portfolio securities of a Fund are traded in other markets
on days when the Fund s principal trading market(s) is closed, the Fund s
net asset value may be affected on days when investors do not have access
to the Fund to purchase or redeem shares. Although the Trust expects the
same holiday schedules to be observed in the future, the NYSE, the CBOT,
and the New York Fed each may modify its holiday schedule at any time.
The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund s shares. The net asset value per share of a
Fund is calculated by dividing the market value of the Fund s securities
plus the values of its other assets, less all liabilities, by the number of
outstanding shares of the Fund. If market quotations are not readily
available, a security will be valued at fair value by the Board of Trustees
or by the Advisor using methods established or ratified by the Board of
Trustees.
The Money Market Fund will utilize the amortized cost method in valuing
that Fund s portfolio securities, which method involves valuing a security
at its cost adjusted by 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. The purpose of this method of calculation
is to facilitate the maintenance of a constant net asset value per share
for the Money Market Fund of $1.00. However, there is no assurance that
the $1.00 net asset value will be maintained. For further information
regarding the amortized cost method for valuing the Money Market Fund s
<PAGE> - 50 -<PAGE>
portfolio securities, see "Determination of Net Asset Value" in the
Statement of Additional Information.
For purposes of determining net asset value per share of a Fund, options
and futures contracts will be valued 15 minutes after the 4:00 P.M.,
Eastern Time, close of trading on the NYSE, except that U.S. Treasury bond
options and futures contracts traded on the CBOT will be valued at 3:00
P.M., Eastern Time, the close of trading of that exchange. Options on
securities and indices purchased by a Fund generally are valued at their
last bid price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the average of the last bid price as
obtained from two or more dealers unless there is only one dealer, in which
case that dealer s price is used. The value of a futures contract equals
the unrealized gain or loss on the contract that 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. The value of
options on futures contracts is determined based upon the current
settlement price for a like option acquired on the day on which the option
is being valued. A settlement price may not be used for the foregoing
purposes if the market makes a limit move with respect to a particular
commodity.
On days when the CBOT is closed during its usual business hours, but the
shares of the Bond Fund or Juno Fund have been purchased, redeemed, and/or
exchanged, the portfolio securities held by the Bond Fund or Juno Fund
which are traded on the CBOT are valued at the earlier of (i) the time of
the execution of the last trade of the day for the Bond Fund or Juno Fund
in those CBOT-traded portfolio securities and (ii) the time of the close of
the CBOT Evening Session. On days when the CBOT is closed during its usual
business hours and there is no need for the Bond Fund or Juno Fund to
execute trades on the CBOT, the value of the CBOT-traded portfolio
securities held by the Bond Fund or Juno Fund will be the mean of the bid
and asked prices for those CBOT-traded portfolio securities at the open of
the CBOT Evening Session.
OTC securities held by a Fund shall be valued at the last sales price or,
if no sales price is reported, the mean of the last bid and asked price is
used. The portfolio securities of a Fund that are listed on national
exchanges or foreign stock exchanges are taken at the last sales price of
such securities on such exchange; if no sales price is reported, the mean
of the last bid and asked price is used. For valuation purposes, all
assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the mean between the bid and the
offered quotations of such currencies against U.S. dollars as last quoted
by any recognized dealer. If such quotations are not available, the rate
of exchange will be determined in good faith by the Trustees. Dividend
income and other distributions are recorded on the ex-dividend date, except
for certain dividends from foreign securities which are recorded as soon as
the Trust is informed after the ex-dividend date.
llliquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at
<PAGE> - 51 -<PAGE>
their respective fair value as determined in good faith by, or under
procedures established by, the Trustees, which procedures may include the
delegation of certain responsibilities regarding valuation to the Advisor
or the officers of the Trust. The officers of the Trust report, as
necessary, to the Trustees regarding portfolio valuation determination.
The Trustees, from time to time, will review these methods of valuation and
will recommend changes which may be necessary to assure that the
investments of the Funds are valued at fair value.
TAX-SHELTERED RETIREMENT PLANS
Tax-sheltered retirement plans of the following types will be available to
investors:
Individual Retirement Accounts (IRAs)
Keogh Accounts - Defined Contribution
Plans (Profit-Sharing Plans)
Keogh Accounts - Money Purchase Plans
Pension Plans)
Internal Revenue Code Section 403(b)
Plans
Retirement plans are charged an annual $15.00 maintenance fee. Additional
information regarding these accounts, including the annual maintenance fee,
may be obtained by contacting the Trust.
TRANSACTION CHARGES
In addition to charges described elsewhere in this Prospectus, the Trust
also may make a charge of $25 for items returned for insufficient or
uncollectible funds.
<PAGE> - 52 -<PAGE>
DIVIDENDS AND DISTRIBUTIONS
General
All income dividends and capital gains distributions of each Fund
automatically will be reinvested in additional shares of the Fund at the
net asset value calculated on the ex-dividend date, unless an investor has
requested otherwise from the Trust in writing. Dividends and distributions
of a Fund are taxable to the shareholders of the Fund, as discussed below
under "Taxes," whether such dividends and distributions are reinvested in
additional shares of the Fund or are received in cash. Statements of
account will be sent to the Fund shareholders at least quarterly.
The Nova Fund; The Ursa Fund; The Rydex OTC Fund; The Rydex Precious Metals
Fund; The Juno Fund
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, and the Juno
Fund each intend to distribute annually any net investment income and net
realized capital gains to shareholders. The Trustees, however, may declare
a special distribution for any of these Funds if the Trustees believe that
such a distribution would be in the best interests of the shareholders of
that Fund.
The Rydex U.S. Government Bond Fund
The Bond Fund intends (i) to declare dividends of ordinary income for
shares of the Bond Fund on a daily basis, and to distribute such dividends
to shareholders of the Bond Fund on a monthly basis, and (ii) to distribute
annually any long-term capital gains to the shareholders of the Bond Fund.
The Rydex U.S. Government Money Market Fund
The Money Market Fund ordinarily (i) declares dividends of net investment
income (and net short-term capital gains, if any) for shares of the Money
Market Fund on a daily basis and (ii) distributes such dividends to
shareholders of the Money Market Fund on a monthly basis. The Trustees,
however, may revise this dividend and distribution policy of the Money
Market Fund, postpone the payment of dividends thereunder, or take any
other action necessary with respect thereto in order to facilitate, to the
extent possible, the maintenance by the Money Market Fund of a constant net
asset value per share of $1.00.
TAXES
The Internal Revenue Code provides that each investment portfolio of a
series investment company is to be treated as a separate corporation.
Accordingly, each of the Funds will seek to qualify for treatment as a
regulated investment company (a "RIC") under Subchapter M of the Code.
Because of the nature of the investment strategies and the expected
turnover of the portfolios of the Funds, there can be no assurance that a
Fund will qualify for such treatment. If a Fund qualifies as a RIC and
satisfies the distribution requirements under the Code for any taxable
<PAGE> - 53 -<PAGE>
year, the Fund itself will not be subject to income tax on the ordinary
income and capital gains it has distributed to its shareholders for that
year.
To qualify as a RIC under the Code, a Fund must satisfy certain
requirements, including the requirements that the Fund receive at least 90%
of the Fund s gross income each year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition
of securities or foreign currencies, or other income derived with respect
to the Fund s investments in stock, securities, and foreign currencies (the
"90% Test"), and that the Fund derive less than 30% of the Fund s gross
income from the sale or other disposition of any of the following
instruments which have been held for less than three months (the "30%
Test"): (i) stock or securities; (ii) certain options, futures, or forward
contracts; or (iii) foreign currencies (or certain options, futures, or
forward contracts on such foreign currencies). Provided that a Fund (i) is
a RIC and (ii) distributes at least 90% of the Fund s net investment income
(including, for this purpose, net realized short-term capital gains), the
Fund itself will not be subject to Federal income taxes to the extent the
Fund s net investment income and the Fund s net realized long- and short-
term capital gains, if any, are distributed to the shareholders of that
Fund. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains.
Satisfaction of the 90% Test will impose limitations on the investment
strategies that may be pursued by any of the Funds, and in particular by
the Metals Fund. Income from investments in precious metals and minerals
will not be qualifying income for purposes of the 90% Test. Therefore, the
Metals Fund will seek to limit its investment transactions in precious
metals and minerals so as to avoid a violation of the 90% Test.
In addition, because of the anticipated frequency of redemptions and
exchanges of the shares of the Funds, each of the Funds, other than the
Money Market Fund, will have greater difficulty than other mutual funds in
satisfying the 30% Test. The Trust expects that investors in the Funds, as
part of their market-timing investment strategy, are likely to redeem or
exchange their shares in the Funds frequently to take advantage of
anticipated changes in market conditions. Such redemptions or exchanges
are likely to require a Fund to sell securities to meet the Fund s payment
obligations. The larger the volume of such redemptions or exchanges, the
more difficult it will be for the Fund to satisfy the 30% Test. To
minimize the risk of failing the 30% Test, each of the Funds intends to
satisfy obligations in connection with redemptions and exchanges first by
using available cash or borrowing facilities and by selling securities that
have been held for at least three months or as to which there will be a
loss or the smallest gain. If a Fund also must sell securities that have
been held for less than three months, then, to the extent possible, the
Fund will seek to conduct such sales in a manner that will allow such sales
to qualify for a special provision in the Code that excludes from the 30%
Test any gains resulting from sales made as a result of "abnormal
redemptions." To the reduce the risk of failing the 30% Test, the Funds
<PAGE> - 54 -<PAGE>
(other than the Money Market Fund) also may engage in other investment
techniques, including engaging in transactions in futures contracts and
options on futures contracts and indexes on an unrestricted basis (subject
to the investment policies of the Funds and Commission regulations).
Notwithstanding these actions, there can be no assurance that a Fund will
be able to satisfy the 30% Test. For additional information concerning
this special Code provision, see "Dividends, Distributions, and Taxes" in
the Statement of Additional Information.
If the Trust determines that a Fund will not qualify as a RIC under
Subchapter M of the Internal Revenue Code, the Trust will establish
procedures for that Fund to reflect the anticipated tax liability in the
Fund s net asset value. To the extent that management of a Fund determines
that Federal income taxes will more likely than not be payable by the Fund
with respect to the Fund s current tax year, the Fund intends to make a
good-faith estimate of the potential tax liability of the Fund and to make
an accrual for tax expenses. Thereafter, the Fund would make a daily
determination whether it is appropriate for the Fund to continue to accrue
for a tax expense and, if so, to make a good-faith estimate of the Fund s
potential tax liability. Any amount by which the accrual is reduced, or
the entire amount of the accrual if the Fund determines that the accrual is
no longer appropriate, will be reclassified as income to the Fund.
Under current law, dividends derived from interest and dividends received
by a Fund, together with distributions of any short-term capital gains, if
any, are taxable to the shareholders of the Fund, as ordinary income at
Federal income tax rates of up to 39.6%, whether or not such dividends and
distributions are reinvested in shares of such Fund or are received in
cash.
Under current law, distributions of net long-term gains, if any, realized
by a Fund and designated as capital gains distributions will be taxed to
the shareholders of that Fund as long-term capital gains regardless of the
length of time the shares of that Fund have been held. Currently, long-
term capital gains of individual investors are taxed at rates of up to 28%.
Statements as to the Federal tax status of shareholders dividends and
distributions will be mailed annually. Shareholders should consult their
tax advisors concerning the tax status of the Funds dividends in their own
states and localities.
Ordinary dividends paid to corporate or individual residents of foreign
countries generally are subject to a 30% withholding tax. The rate of
withholding tax may be reduced if the United States has an income tax
treaty with the foreign country where the recipient resides. Capital gains
distributions received by foreign investors should, in most cases, be
exempt from U.S. tax. A foreign investor will be required to provide the
Fund with supporting documentation in order for the Fund to apply a reduced
rate or exemption from U.S. withholding tax.
Shareholders are required by law to certify that their tax identification
number is correct and that they are not subject to back-up withholding. In
the absence of this certification, the Trust is required to withhold taxes
<PAGE> - 55 -<PAGE>
at the rate of 31% on dividends, capital gains distributions, and
redemptions. Shareholders who are non-resident aliens may be subject to a
withholding tax on dividends earned.
MANAGEMENT OF THE TRUST
Investment Adviser
The Trust is provided investment advice and management services by PADCO
Advisors, Inc., a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The
Advisor was incorporated in the State of Maryland on February 5, 1993.
Albert P. Viragh, Jr., the Chairman of the Board and the President of the
Advisor, owns a controlling interest in the Advisor. From 1985 until the
incorporation of the Advisor, Mr. Viragh was a Vice President of Money
Management Associates ("MMA"), a Maryland-based registered investment
adviser. From 1992 to June 1993, Mr. Viragh was the portfolio manager of
The Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc., an
investment company managed by MMA. From 1989 to 1992, Mr. Viragh was the
Vice President of Sales and Marketing for The Rushmore Fund, Inc. Mr.
Viragh received his bachelor s degree in Business Administration from
Spring Hill College, of Mobile, Alabama, in 1964.
The portfolio manager for the Nova Fund and the Juno Fund is Thomas
Michael, who joined the Advisor in March 1994. From 1992 to February 1994,
Mr. Michael was a financial markets analyst at Cedar Street Investment
Management Co., of Chicago, Illinois, an institutional consulting firm
specializing in developing hedging and speculative strategies in stock
index futures contracts and U.S. Treasury bond futures contracts. From
1989 to 1991, Mr. Michael was the Director of Research for Chronometrics,
Inc., of Chicago, Illinois, a registered commodity trading advisor and was
responsible for managing the firm s proprietary, on-line trading model for
twelve financial futures contracts. Mr. Michael received his bachelor of
arts degree in Geology from Colgate University, of Hamilton, New York, in
1974.
The portfolio manager of the Ursa Fund, the Metals Fund, the OTC Fund, the
Bond Fund, and the Money Market Fund is Michael P. Byrum. Prior to joining
the PADCO Advisors, Inc. organization in July 1993, Mr. Byrum worked for
o n e year as an investor representative with MMA. Mr. Byrum s
responsibilities at MMA included brokerage solicitation and investor
relations. Mr. Byrum received his bachelor s degree in Business
Administration from Miami University, of Oxford, Ohio, in 1992.
Under an investment advisory agreement between the Trust and the Advisor,
dated May 14, 1993, and as most recently amended on September 25, 1996, the
Funds each pay the Advisor a fee at an annualized rate, based on the
average daily net assets for each respective Fund, of 0.75% for the Nova
<PAGE> - 56 -<PAGE>
Fund, the OTC Fund, and the Metals Fund, 0.90% for the Ursa Fund and the
Juno Fund, and 0.50% for the Bond Fund and the Money Market Fund.
The Advisor manages the investment and the reinvestment of the assets of
each of the Funds, in accordance with the investment objectives, policies,
and limitations of the Fund, subject to the general supervision and control
of the Trustees and the officers of the Trust. The Advisor bears all costs
associated with providing these advisory services and the expenses of the
Trustees who are affiliated persons of the Advisor. The Advisor, from its
own resources, including profits from advisory fees received from the
Funds, provided such fees are legitimate and not excessive, also may make
payments to broker-dealers and other financial institutions for their
expenses in connection with the distribution of Fund shares, and otherwise
currently pays all distribution costs for Fund shares, except for expenses
in connection with the distribution of shares of the Institutional Fund and
the High Yield Fund that are paid by these two Rydex Funds in accordance
with distribution plans adopted by these Rydex Funds pursuant to Rule 12b-1
under the 1940 Act.
Servicer
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Funds by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995, and as most recently amended on September 25, 1996. Under this
service agreement, the Funds each pay the Servicer a fee at an annualized
rate, based on the average daily net assets for each respective Fund, of
0.25% for the Nova Fund, Ursa Fund, and the Juno Fund and 0.20% for the
other Funds.
The Servicer provides the Trust and the Funds with all required general
administrative services, including, without limitation, office space,
equipment, and personnel; clerical and general back office services;
bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust and the Funds under Federal
and state securities laws. The Servicer also maintains the shareholder
account records for the Trust and the Funds, distributes dividends and
distributions payable by the Funds, and produces statements with respect to
account activity for the Funds and their shareholders. The Servicer pays
all fees and expenses that are directly related to the services provided by
the Servicer to the Trust; each Fund reimburses the Servicer for all fees
and expenses incurred by the Servicer which are not directly related to the
services the Servicer provides to the Fund under the service agreement.
Costs and Expenses
<PAGE> - 57 -<PAGE>
Each Fund bears all expenses of its operations other than those assumed by
the Advisor or the Servicer. Fund expenses include: the management fee;
t h e servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; securities valuation expenses; fidelity bonds and
other insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-
interested Trustees fees and expenses. For the period from July 1, 1995
through June 30, 1996, the total expenses paid by the Nova Fund, the Ursa
Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the
Money Market Fund were approximately 1.31%, 1.39%, 1.33%, 1.33%, 1.26%,
1.64%, and 0.99% of the respective Fund s average net assets.
PERFORMANCE INFORMATION
Total Return Calculations
From time to time, each of the Funds (other than the Money Market Fund) may
advertise the total return of the Fund for prior periods. Any such
advertisement would include at least average annual total return quotations
for one, five, and ten-year periods, or for the life of the Fund. Other
total return quotations, aggregate or average, over other time periods for
the Fund also may be included.
The total return of a Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from
the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net
asset value and that all income dividends or capital gains distributions
during the period are reinvested in shares of the Fund at net asset value.
Total return is based on historical earnings and asset value fluctuations
and is not intended to indicate future performance. No adjustments are
made to reflect any income taxes payable by shareholders on dividends and
distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the
period that would equal the initial amount invested to the ending
redeemable value. A more-detailed description of the method by which the
total return of a Fund is calculated is contained in the Statement of
Additional Information under "Calculation of Return Quotations."
Yield Calculations
In addition to total return information, the Bond Fund may also advertise
its current "yield." Yield figures are based on historical earnings and
are not intended to indicate future performance. Yield is determined by
<PAGE> - 58 -<PAGE>
analyzing the Bond Fund s net income per share for a thirty-day (or one-
month) period (which period will be stated in the advertisement), and
dividing by the maximum offering price per share on the last day of the
period. A "bond equivalent" annualization method is used to reflect a
semi-annual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the Commission to facilitate comparison with
yields quoted by other investment companies. Net income computed for this
formula differs from net income reported by the Bond Fund in accordance
with generally accepted accounting principles and from net income computed
for Federal income tax reporting purposes. Thus, the yield computed for a
period may be greater or lesser than the Bond Fund s then-current dividend
rate.
The Bond Fund s yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and
as a function of the type of securities owned by the Bond Fund, portfolio
maturity, and the Bond Fund s expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Bond Fund s shares, the Bond Fund s investment policies, and
the risks of investing in shares of the Bond Fund. The investment return
and principal value of an investment in the Bond Fund will fluctuate so
that an investor s shares, when redeemed, may be worth more or less than
the original cost of such shares.
From time to time, the Money Market Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of the Money
Market Fund refers to the income generated by an investment in the Money
Market Fund over a seven-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 the Money Market 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. A description of the respective methods by which the yield
of the Bond Fund and the current and effective yields of the Money Market
Fund are calculated is contained in the Statement of Additional Information
under "Information on Computation of Yield."
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Bond Fund s or the Money Market Fund s shares with bank
deposits, savings accounts, and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders of the Bond Fund and the Money Market Fund should remember
that yield generally is a function of the kind and quality of the
instrument held in portfolio, portfolio maturity, operating expenses, and
market conditions.
<PAGE> - 59 -<PAGE>
Comparisons of Investment Performance
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a Fund, comparisons of the performance
information of the Fund for a given period to the performance of
recognized, unmanaged indexes for the same period may be made. Such
indexes include, but are not limited to, ones provided by Dow Jones &
Company, Standard & Poor s Corporation, Lipper Analytical Services, Inc.,
Shearson Lehman Brothers, National Association of Securities Dealers, Inc.,
The Frank Russell Company, Value Line Investment Survey, the American Stock
E x c hange, the Philadelphia Stock Exchange, Morgan Stanley Capital
International, Wilshire Associates, the Financial Times-Stock Exchange, and
the Nikkei Stock Average and Deutcher Aktienindex, all of which are
unmanaged market indicators. Such comparisons can be a useful measure of
the quality of a Fund s investment performance. In particular, performance
information for the Nova Fund and the Ursa Fund may be compared to various
unmanaged indexes, including, but not limited to, the S&P500 Index or the
Dow Jones Industrial Average; performance information for the OTC Fund may
be compared to various unmanaged indexes, including, but not limited to its
current benchmark, the NASDAQ 100 IndexTM; performance information for the
Metals Fund may be compared to various unmanaged indexes, including, but
not limited to its current benchmark, the XAU Index; and performance
information for the Bond Fund and the Juno Fund may be compared to various
unmanaged indexes, including, but not limited to, the Shearson Lehman
Government (LT) Index.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appearing in
publications such as Money, Forbes, Kiplinger s Magazine, Personal
Investor, Morningstar, Inc., and similar sources which utilize information
c o mpiled (i) internally, (ii) by Lipper Analytical Services, Inc.
("Lipper"), or (iii) by other recognized analytical services, may be used
in sales literature. The total return of each Fund (other than the Money
Market Fund) also may be compared to the performances of broad groups of
comparable mutual funds with similar investment goals, as such performance
is tracked and published by such independent organizations as Lipper and
CDA Investment Technologies, Inc., among others. The Lipper ranking and
comparison, which may be used by the Trust in performance reports, will be
drawn from the "Capital Appreciation Funds" grouping for each of the Nova
Fund and the Ursa Fund, from the "Small Company Growth Funds" grouping for
the OTC Fund, from the "Precious Metals Funds" grouping for the Metals
Fund, and from the "Bond Funds" grouping for the Bond Fund and the Juno
Fund. In addition, the broad-based Lipper groupings may be used for
comparison to any of the Funds. Additional information concerning the
comparison of the investment performances of the Funds is contained in the
Statement of Additional Information under "Performance Information."
Further information about the performance of the Funds will be contained in
the Trust s annual reports to shareholders, which may be obtained without
charge by writing to the Trust at the address or telephoning the Trust at
telephone number set forth on the cover page of this Prospectus.
<PAGE> - 60 -<PAGE>
GENERAL INFORMATION ABOUT THE
TRUST
Organization and Description of Shares of Beneficial Interest
The Trust is a registered open-end investment company under the 1940 Act.
The Trust was organized as a Delaware business trust on February 10, 1993,
and has present authorized capital of unlimited shares of beneficial
interest of no par value which may be issued in more than one class.
Currently, the Trust has issued shares of nine separate classes: The Nova
Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund,
The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield
Fund, The Rydex U.S. Government Money Market Fund, and The Rydex
Institutional Money Market Fund. Other separate classes may be added in
the future.
All shares of the Funds are freely transferable. The Fund shares do not
have preemptive rights or cumulative voting rights, and none of the shares
have any preference to conversion, exchange, dividends, retirements,
liquidation, redemption, or any other feature. Fund shares have equal
voting rights, except that, in a matter affecting a particular series in
the Trust, only shares of that series may be entitled to vote on the
matter. Shareholder inquiries can be made by telephone (at 800-820-0888 or
301-468-8520) or by mail (to 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852).
Under the Delaware General Corporation Law, a registered investment company
is not required to hold an annual shareholders meeting if the 1940 Act
does not require such a meeting. Generally, there will not be annual
meetings of Trust shareholders. Trust shareholders may remove Trustees of
the Trust from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the
outstanding shares of the Trust, the Trust will call a meeting of Trust
shareholders for the purpose of voting upon the question of removal of a
Trustee or Trustees of the Trust and will assist in communications with
other Trust shareholders.
Unlike the stockholder of a corporation, shareholders of a business trust
such as the Trust could be held personally liable, under certain
circumstances, for the obligations of the business trust. The Trust s
Declaration of Trust, however, disclaims liability of the shareholders of
the Trust, the Trustees, or the officers of the Trust for acts or
obligations of the Trust which are binding only on the assets and property
of the Trust. The Declaration of Trust provides for indemnification out of
Trust property for all loss and expense of any Trust shareholder held
personally liable for the obligations of the Trust. The risk of a Trust
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would not be able to
meet the Trust s obligations and this risk, thus, should be considered
remote.
Classification of the Funds
<PAGE> - 61 -<PAGE>
Each of the Funds (other than the Money Market Fund) is a "non-diversified"
series of the Trust. A Fund is considered "non-diversified" because a
relatively-high percentage of the Fund s assets may be invested in the
securities of a limited number of issuers, primarily within the same
industry or economic sector. That Fund s portfolio securities, therefore,
may be more susceptible to any single economic, political, or regulatory
occurrence than the portfolio securities of a diversified investment
company.
A Fund s classification as a "non-diversified" investment company means
that the proportion of the Fund s assets that may be invested in the
securities of a single issuer is not limited by the 1940 Act. Each Fund,
however, intends to seek to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code, which requires that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of
the Fund s total assets (a diversified investment company would be so
limited with respect to 75% of such market value) be invested in cash, U.S.
Government Securities, the securities of other regulated investment
companies, and other securities, with such securities of any one issuer
limited for the purposes of this calculation to an amount not greater than
5% of the value of Fund s total assets and 10% of the outstanding voting
securities of any one issuer, and (ii) not more than 25% of the value of
the Fund s total assets be invested in the securities of any one issuer
(other than U.S. Government Securities or the securities of other regulated
investment companies).
Trustees and Officers
The Trust has a Board of Trustees which is responsible for the general
supervision of the Trust s business. The day-to-day operations of the
Trust are the responsibility of the Trust s officers.
Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are
the auditors of and the independent public accountants for the Trust and
each of the Funds.
<PAGE> - 62 -<PAGE>
Custodian
Pursuant to a separate custody agreement entered into by the Trust, Star
Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202, serves as custodian for the Trust and the Funds.
Under the terms of this custody agreement, the Custodian holds the
portfolio securities of each Fund and keeps all necessary related accounts
and records.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE TRUST IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY
BE MADE.
<PAGE> - 63 -<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
RYDEX SERIES TRUST
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
(800) 820-0888
(301) 468-8520
The Rydex Series Trust (the "Trust") is a no-load mutual fund with nine
separate investment portfolios (the "Funds" or "Rydex Funds"), seven of
which Funds are described in this Statement of Additional Information. The
Funds are principally designed for professional money managers and
investors who intend to invest in the Funds as part of an asset-allocation
or market-timing investment strategy. Sales are made, without sales
charge, at each Fund s per share net asset value.
Except for the Rydex U.S. Government Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. Each of these Funds seeks investment
results that correspond over time to a specified benchmark. The Funds may
be used independently or in combination with each other as part of an
overall investment strategy. Additional Funds may be created from time to
time.
The following are the Funds and their benchmarks:
FUND BENCHMARK
The Nova Fund 150% of the performance of the S&P 500 Composite
Stock Price IndexTM
The Ursa Fund Inverse (opposite) of the S&P 500 Composite Stock
Price IndexTM
Rydex OTC Fund NASDAQ 100 IndexTM (NDX)
Rydex Precious Metals Philadelphia Stock Exchange Gold/Silver IndexTM
Fund (XAU)
Rydex U.S. Government 120% of the price movement of current Long Treasury
Bond Fund Bond
The Juno Fund Inverse (opposite) of the price movement of the
current Long Treasury Bond
The Trust also offers The Rydex U.S. Government Money Market Fund. This
Fund seeks to provide security of principal, high current income, and
PAGE
<PAGE>
liquidity by investing primarily in money market instruments which are
issued or guaranteed, as to principal and interest, by the U.S. Government,
its agencies or instrumentalities. The securities of the Rydex U.S.
Government Money Market Fund are not deposits or obligations of any bank,
and are not endorsed or guaranteed by any bank, and an investment in this
Fund is neither insured nor guaranteed by the United States Government.
The Rydex U.S. Government Money Market Fund seeks to maintain a constant
$1.00 net asset value per share, although this cannot be assured.
The Funds (other than the Rydex U.S. Government Money Market Fund) may
engage in certain aggressive investment techniques, which include engaging
in short sales and transactions in options and futures contracts. The Nova
Fund and the Rydex U.S. Government Bond Fund also may use the speculative
technique known as leverage to increase funds available for investment.
See "Borrowing." Investors in the Nova Fund may experience substantial
losses during sustained periods of falling equity prices, while investors
in the Ursa Fund and the Juno Fund may experience substantial losses during
sustained periods of rising equity prices and declining interest rates
respectively. Because of the inherent risks in any investment, there can
be no assurance that any Fund s investment objective will be achieved.
None of the Funds alone constitutes a balanced investment plan, and certain
of the Funds involve special risks not traditionally associated with
investment companies. The nature of the Funds generally will result in
significant portfolio turnover which would likely cause higher expenses and
additional costs and increase the risk that the Fund will not qualify as a
regulated investment company under the Federal tax laws. The Trust is not
intended for investors whose principal objective is current income or
preservation of capital and may not be a suitable investment for persons
who intend to follow an "invest and hold" strategy. See "Special Risk
Considerations in the Trust s Prospectus.
The Trust also offers The Rydex Institutional Money Market Fund and,
beginning on or about December 1, 1996 (subject to obtaining all necessary
regulatory approvals), also will offer The Rydex High Yield Fund, each of
which series of the Trust is described in a separate prospectus and a
separate statement of additional information.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Trust's Prospectus, dated November 1, 1996, as
supplemented May 1, 1997. A copy of the Trust s Prospectus is available,
without charge, upon request to the Trust at the address above or by
telephoning the Trust at the telephone numbers above.
The date of this Statement of Additional Information is November 1, 1996,
as supplemented May 1, 1997.
<PAGE> 2<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS 4
INVESTMENT POLICIES AND TECHNIQUES 4
INVESTMENT RESTRICTIONS 11
PORTFOLIO TRANSACTIONS AND BROKERAGE 15
MANAGEMENT OF THE TRUST 16
PRINCIPAL HOLDERS OF SECURITIES 20
DETERMINATION OF NET ASSET VALUE 24
PERFORMANCE INFORMATION 26
CALCULATION OF RETURN QUOTATIONS 27
INFORMATION ON COMPUTATION OF YIELD 28
DIVIDENDS, DISTRIBUTIONS, AND TAXES 29
AUDITORS AND CUSTODIAN 34
FINANCIAL STATEMENTS 34
<PAGE> 3<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including The Nova Fund, The Ursa Fund,
The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S.
Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money Market
Fund, The Rydex Institutional Money Market Fund, and The Rydex High Yield
Fund (collectively, the "Funds"); other separate Funds may be added in the
future. The Funds are principally designed for professional money
managers and investors who intend to follow an asset-allocation or market-
timing investment strategy. Except for the Rydex U.S. Government Money
Market Fund and the Rydex Institutional Money Market Fund, each Fund is
intended to provide investment exposure with respect to a particular
segment of the securities markets. These Funds seek investment results
that correspond over time to a specified benchmark. The Funds may be used
independently or in combination with each other as part of an overall
investment strategy.
Shares of any Fund may be exchanged, without any charge, for shares of any
other Fund on the basis of the respective net asset values of the shares
involved; provided, that, in connection with exchanges for shares of the
Fund, certain minimum investment levels are maintained (see "Exchanges").
Copies of the separate Prospectus and Statement of Additional Information
for each of the Rydex High Yield Fund and the Rydex Institutional Money
Market Fund are available, without charge, upon request to the Trust at
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by
telephoning the Trust at (800) 820-0888 or (301) 468-8520.
INVESTMENT POLICIES AND TECHNIQUES
General
Reference is made to the sections entitled "Investment Objectives and
Policies" and "Investment Techniques and Other Investment Policies" in the
Trust's Prospectus for a discussion of the investment objectives and
policies of the Funds. In addition, set forth below is further information
relating to the Funds. Portfolio management is provided to each Fund by
t h e Trust's investment adviser, PADCO Advisors, Inc., a Maryland
corporation with offices at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Advisor").
The investment strategies of the Funds discussed below, and as discussed in
the Trust's Prospectus, may be used by a Fund if, in the opinion of the
Advisor, these strategies will be advantageous to the Fund. The Fund is
free to reduce or eliminate the Fund's activity in any of those areas
without changing the Fund's fundamental investment policies. There is no
assurance that any of these strategies or any other strategies and methods
of investment available to a Fund will result in the achievement of the
Fund's objectives.
Options Transactions
<PAGE> 4<PAGE>
Options on Securities. The Nova Fund, The Rydex OTC Fund (the "OTC
Fund"), and the Rydex Precious Metals Fund (the "Metals Fund") may buy call
options and write (sell) put options on securities, and the Ursa Fund may
buy put options and write call options on securities for the purpose of
realizing the Fund's investment objective. By writing a call option on
securities, a Fund becomes obligated during the term of the option to sell
the securities underlying the option at the exercise price if the option is
exercised. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised.
During the term of the option, the writer may be assigned an exercise
notice by the broker-dealer through whom the option was sold. The exercise
notice would require the writer 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 upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option covering the same underlying security
and having the same exercise price and expiration date as the one
previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option, the writer of
a call option is required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options Clearing
Corporation (the "OCC"), an institution created to interpose itself between
buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction.
Options on Security Indexes. The Nova Fund, the OTC Fund, and the Metals
Fund may purchase call options and write put options, and the Ursa Fund may
purchase put options and write call options, on stock indexes listed on
national securities exchanges or traded in the over-the-counter market as
an investment vehicle for the purpose of realizing the Fund's investment
objective.
Options on indexes are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash
equal to the difference between the closing price of the securities index
and the exercise price of the option. When a Fund writes a covered option
on an index, the Fund will be required to deposit and maintain with a
custodian cash or high-grade, liquid short-term debt securities equal in
value to the aggregate exercise price of a put or call option pursuant to
the requirements and the rules of the applicable exchange. If, at the
close of business on any day, the market value of the deposited securities
falls below the contract price, the Fund will deposit with the custodian
cash or high-grade, liquid short-term debt securities equal in value to the
deficiency.
<PAGE> 5<PAGE>
Foreign Securities
The Metals Fund may invest in issuers located outside the United States.
These purchases may be made by purchasing American Depository Receipts
("ADRs"), "ordinary shares," or "New York shares" in the United States.
A D Rs are dollar-denominated receipts representing interests in the
securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by United States banks and
trust companies which evidence ownership of underlying securities issued by
a foreign corporation. Generally, ADRs in registered form are designed for
use in domestic securities markets and are traded on exchanges or over-the-
counter in the United States. Ordinary shares are shares of foreign
issuers that are traded abroad and on a United States exchange. New York
shares are shares that a foreign issuer has allocated for trading in the
United States. ADRs, ordinary shares, and New York shares all may be
purchased with and sold for U.S. dollars, which protects the Metals Fund
from the foreign settlement risks described below.
Investing in foreign companies may involve risks not typically associated
with investing in United States companies. The value of securities
denominated in foreign currencies, and of dividends from such securities,
can change significantly when foreign currencies strengthen or weaken
relative to the U.S. dollar. Foreign securities markets generally have
less trading volume and less liquidity than United States markets, and
prices in some foreign markets can be very volatile. Many foreign
countries lack uniform accounting and disclosure standards comparable to
those that apply to United States companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial
condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees,
generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of United States investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on United States investment, or on the ability to
repatriate assets or to convert currency into U.S. dollars. There may be a
greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a
risk of local political, economic, or social instability, military action
or unrest, or adverse diplomatic developments.
At the present time, there are five major producers and processors of gold
bullion and other precious metals and minerals. In order of magnitude,
these producers and processors are: the Republic of South Africa, the
former republics of the former Soviet Union, Canada, the United States, and
Australia. Political and economic conditions in several of these countries
may have a direct effect on the mining, distribution, and price of precious
metals and minerals, and on the sales of central bank gold holdings,
<PAGE> 6<PAGE>
particularly in the case of South Africa and the former republics of the
former Soviet Union. South African mining stocks represent a special risk
in view of the history of political unrest in that country. Besides that
factor, various government bodies such as the South African Ministry of
Mines and the Reserve Bank of South Africa exercise regulatory authority
over mining activity and the sale of gold. The policies of these South
African government bodies in the future could be detrimental to the Metals
Fund's objectives.
U.S. Government Securities
The Rydex U. S. Government Bond Fund (the "Bond Fund") invests primarily in
U.S. Government Securities, and each of the other Funds also may invest in
U . S. Government Securities. The Juno Fund may enter into short
t r ansactions on U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which are backed by the full faith and
credit of the U.S. Treasury and which differ only in their interest rates,
maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities
of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. Government Securities
are issued or guaranteed by agencies or instrumentalities of the U.S.
Government including, but not limited to, obligations of U.S. Government
agencies or instrumentalities such as the Federal National Mortgage
Association, the Government National Mortgage Association, the Small
Business Administration, the Federal Farm Credit Administration, the
Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank
for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit
Banks, the Tennessee Valley Authority, the Export-Import Bank of the United
States, the Commodity Credit Corporation, the Federal Financing Bank, the
S t udent Loan Marketing Association, and the National Credit Union
Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the
U.S. Government to purchase certain obligations of the Federal agency,
while other obligations issued by or guaranteed by Federal agencies, such
as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. Government
provides financial support to such U.S. Government-sponsored Federal
agencies, no assurance can be given that the U.S. Government will always do
so, since the U.S. Government is not so obligated by law. U.S. Treasury
notes and bonds typically pay coupon interest semi-annually and repay the
principal at maturity. The Bond Fund will invest in such U.S. Government
Securities only when the Advisor is satisfied that the credit risk with
respect to the issuer is minimal.
<PAGE> 7<PAGE>
Repurchase Agreements
As discussed in the Trust's Prospectus, each of the Funds may enter into
repurchase agreements with financial institutions. The Funds each follow
certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions
o n l y with large, well-capitalized and well-established financial
institutions whose condition will be continually monitored by the Advisor.
In addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a
default or bankruptcy by a selling financial institution, a Fund will seek
to liquidate such collateral. However, the exercising of each Fund's right
to liquidate such collateral could involve certain costs or delays and, to
the extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a
loss. It is the current policy of each of the Funds, other than The Rydex
U.S. Government Money Market Fund (the "Money Market Fund"), not to invest
in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund,
amounts to more than 15% (10% with respect to the Money Market Fund) of the
Fund's total assets. The investments of each of the Funds in repurchase
agreements, at times, may be substantial when, in the view of the Advisor,
liquidity or other considerations so warrant.
Zero Coupon Bonds
The Bond Fund and the Juno Fund may invest in U.S. Treasury zero-coupon
bonds. These securities are U.S. Treasury bonds which have been stripped
of their unmatured interest coupons, the coupons themselves, and receipts
or certificates representing interests in such stripped debt obligations
and coupons. Interest is not paid in cash during the term of these
securities, but is accrued and paid at maturity. Such obligations have
greater price volatility than coupon obligations and other normal interest-
paying securities, and the value of zero coupon securities reacts more
quickly to changes in interest rates than do coupon bonds. Since dividend
income is accrued throughout the term of the zero coupon obligation, but is
not actually received until maturity, the Fund may have to sell other
securities to pay said accrued dividends prior to maturity of the zero
coupon obligation. Unlike regular U.S. Treasury bonds which pay semi-
annual interest, U.S. Treasury zero coupon bonds do not generate semi-
annual coupon payments. Instead, zero coupon bonds are purchased at a
substantial discount from the maturity value of such securities, the
discount reflecting the current value of the deferred interest; this
discount is amortized as interest income over the life of the security, and
is taxable even though there is no cash return until maturity. Zero coupon
U.S. Treasury issues originally were created by government bond dealers who
bought U.S. Treasury bonds and issued receipts representing an ownership
interest in the interest coupons or in the principal portion of the bonds.
Subsequently, the U.S. Treasury began directly issuing zero coupon bonds
with the introduction of "Separate Trading of Registered Interest and
Principal of Securities" (or "STRIPS"). While zero coupon bonds eliminate
<PAGE> 8<PAGE>
the reinvestment risk of regular coupon issues, that is, the risk of
subsequently investing the periodic interest payments at a lower rate than
that of the security held, zero coupon bonds fluctuate much more sharply
than regular coupon-bearing bonds. Thus, when interest rates rise, the
value of zero coupon bonds will decrease to a greater extent than will the
value of regular bonds having the same interest rate.
Reverse Repurchase Agreements
The Ursa Fund, the Juno Fund, and the Money Market Fund may use reverse
repurchase agreements as part of that Fund's investment strategy. Reverse
repurchase agreements involve sales by a Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at
a later date at a fixed price. Generally, the effect of such a transaction
is that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while the Fund will be able to keep the interest income
associated with those portfolio securities. Such transactions are
advantageous only if the interest cost to the Fund of the reverse
repurchase transaction is less than the cost of obtaining the cash
otherwise. Opportunities to achieve this advantage may not always be
available, and the Funds intend to use the reverse repurchase technique
only when this will be to the Fund's advantage to do so. Each Fund will
establish a segregated account with the Trust's custodian bank in which the
Fund will maintain cash or cash equivalents or other portfolio securities
equal in value to the Fund's obligations in respect of reverse repurchase
agreements.
Borrowing
The Nova Fund and the Bond Fund may borrow money, including borrowing for
investment purposes. Borrowing for investment is known as leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique which increases investment risk, but also increases
investment opportunity. Since substantially all of a Fund s assets will
fluctuate in value, whereas the interest obligations on borrowings may be
fixed, the net asset value per share of the Fund will increase more when
the Fund s portfolio assets increase in value and decrease more when the
Fund s portfolio assets decrease in value than would otherwise be the case.
Moreover, interest costs on borrowings may fluctuate with changing market
rates of interest and may partially offset or exceed the returns on the
borrowed funds. Under adverse conditions, the Nova Fund and the Bond Fund
might have to sell portfolio securities to meet interest or principal
payments at a time investment considerations would not favor such sales.
The Nova Fund and the Bond Fund intend to use leverage during periods when
the Advisor believes that the respective Fund s investment objective would
be furthered.
Each Fund may borrow money to facilitate management of the Fund s portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such
<PAGE> 9<PAGE>
borrowing is not for investment purposes and will be repaid by the
borrowing Fund promptly.
As required by the Investment Company Act of 1940, as amended (the 1940
Act ), a Fund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive
of borrowings) of 300% of all amounts borrowed. If, at any time, the value
of the Fund s assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the
amount of the Fund s borrowings to the extent necessary to meet this 300%
coverage. Maintenance of this percentage limitation may result in the sale
of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money from
a bank as a temporary measure for extraordinary or emergency purposes in
amounts not in excess of 5% of the value of the Fund s total assets. This
borrowing is not subject to the foregoing 300% asset coverage requirement.
The Funds are authorized to pledge portfolio securities as the Advisor
deems appropriate in connection with any borrowings.
Lending of Portfolio Securities
Subject to the investment restrictions set forth below, each of the Funds
m a y lend portfolio securities to brokers, dealers, and financial
institutions, provided that cash equal to at least 100% of the market value
of the securities loaned is deposited by the borrower with the Fund and is
maintained each business day in a segregated account pursuant to applicable
regulations. While such securities are on loan, the borrower will pay the
lending Fund any income accruing thereon, and the Fund may invest the cash
collateral in portfolio securities, thereby earning additional income. A
Fund will not lend its portfolio securities if such loans are not permitted
by the laws or regulations of any state in which the Fund's shares are
qualified for sale, and the Funds will not lend more than 33 % of the value
of the Fund's total assets, except that the Money Market Fund will not lend
more than 10% of the value of the Money Market Fund's total assets. Loans
would be subject to termination by the lending Fund on four business days'
notice, or by the borrower on one day's notice. Borrowed securities must
be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan
inures to the lending Fund and that Fund's shareholders. A lending Fund
may pay reasonable finders, borrowers, administrative, and custodial fees
in connection with a loan.
When-Issued and Delayed-Delivery Securities
Each Fund, from time to time, in the ordinary course of business, may
purchase securities on a when-issued or delayed-delivery basis (i.e.,
delivery and payment can take place between a month and 120 days after the
date of the transaction). These securities are subject to market
fluctuation and no interest accrues to the purchaser during this period.
At the time a Fund makes the commitment to purchase securities on a when-
<PAGE> 10<PAGE>
issued or delayed-delivery basis, the Fund will record the transaction and
thereafter reflect the value of the securities, each day, of such security
in determining the Fund's net asset value. A Fund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more
than 15% (10% with respect to the Money Market Fund) of the Fund s net
assets would be so invested. At the time of delivery of the securities,
the value of the securities may be more or less than the purchase price.
The Fund will also establish a segregated account with the Fund's custodian
bank in which the Fund will maintain cash or liquid securities equal to or
greater in value than the Fund s purchase commitments for such when-issued
or delayed-delivery securities. The Trust does not believe that a Fund's
net asset value or income will be adversely affected by the Fund's purchase
of securities on a when-issued or delayed delivery basis.
Investments in Other Investment Companies
The Funds (other than the Bond Fund and the Money Market Fund) presently
may invest in the securities of other investment companies to the extent
that such an investment would be consistent with the requirements of
Section 12(d)(1) of the 1940 Act. A Fund, therefore, may invest in the
securities of another investment company (the "acquired company") provided
that the Fund, immediately after such purchase or acquisition, does not own
in the aggregate: (i) more than 3% of the total outstanding voting stock
of the acquired company; (ii) securities issued by the acquired company
having an aggregate value in excess of 5% of the value of the total assets
of the Fund; or (iii) securities issued by the acquired company and all
other investment companies (other than Treasury stock of the Fund) having
an aggregate value in excess of 10% of the value of the total assets of the
Fund. The Bond Fund and the Money Market Fund may invest in the securities
of other investment companies only as part of a merger, reorganization, or
acquisition, subject to the requirements of the 1940 Act.
If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund s shareholders will indirectly bear the Fund s
proportionate share of the fees and expenses paid by such other investment
company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Fund s own investment adviser and the
other expenses that the Fund bears directly in connection with the Fund s
own operations.
The Trust and the Advisor have applied to the Securities and Exchange
Commission for an exemptive order that would permit other investment
companies to invest in the Funds as part of a fund of funds arrangement
(the FOF Order ). Once the Trust receives the FOF Order, and for as long
as the FOF Order remains effective (and subject to the FOF Order being
modified in the future), none of the Funds (including both the Bond Fund
and the Money Market Fund) will invest in any securities of investment
companies, except as these securities may be acquired as part of a merger,
consolidation, acquisition of assets, or plan of reorganization. There is
no assurance that the FOF Order will be issued.
<PAGE> 11<PAGE>
The foregoing strategies, and those discussed in the Trust s Prospectus
under the heading "Investment Objectives and Policies," may subject a Fund
to the effects of interest rate fluctuations to a greater extent than would
occur if such strategies were not used. While these strategies may be used
by a Fund if, in the opinion of the Advisor, these strategies will be
advantageous to the Fund, the Fund will be free to reduce or eliminate its
activity in any of those areas without changing its fundamental investment
policies. Certain provisions of the Internal Revenue Code, related
regulations, and rulings of the Internal Revenue Service may also have the
effect of reducing the extent to which the previously-cited techniques may
be used by a Fund, either individually or in combination. Furthermore,
there is no assurance that any of these strategies or any other strategies
and methods of investment available to a Fund will result in the
achievement of the Fund s objectives.
Illiquid Securities
While none of the Funds anticipates doing so, each Fund may purchase
illiquid securities, including securities that are not readily marketable
and securities that are not registered ( restricted securities ) under the
Securities Act of 1933, as amended (the 1933 Act ), but which can be
offered and sold to qualified institutional buyers under Rule 144A under
the 1933 Act. A Fund will not invest more than 15% (10% with respect to
the Money Market Fund) of the Fund s net assets in illiquid securities.
Each Fund will adhere to a more restrictive limitation on the Fund s
investment in illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered for sale. The
term illiquid securities for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
Under the current guidelines of the staff of the Securities and Exchange
Commission (the Commission ), illiquid securities also are considered to
include, among other securities, purchased over-the-counter options,
certain cover for over-the-counter options, repurchase agreements with
m a turities in excess of seven days, and certain securities whose
disposition is restricted under the Federal securities laws. The Fund may
not be able to sell illiquid securities when the Advisor considers it
desirable to do so or may have to sell such securities at a price that is
lower than the price that could be obtained if the securities were more
liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses
than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in illiquid
securities may have an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result
of the promulgation of Rule 144A under the 1933 Act, which provides a safe
harbor from 1933 Act registration requirements for qualifying sales to
institutional investors. When Rule 144A restricted securities present an
attractive investment opportunity and other meet selection criteria, a Fund
may make such investments. Whether or not such securities are illiquid
<PAGE> 12<PAGE>
depends on the market that exists for the particular security. The
Commission staff has taken the position that the liquidity of Rule 144A
restricted securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration of the
readily-available trading markets and the review of any contractual
restrictions. The staff also has acknowledged that, while a board of
trustees retains ultimate responsibility, the trustees may delegate this
function to an investment adviser. The trustees of the Trust (the
Trustees ) have delegated this responsibility for determining the
liquidity of Rule 144A restricted securities which may be invested in by a
Fund to the Advisor. It is not possible to predict with assurance exactly
how the market for Rule 144A restricted securities or any other security
will develop. A security which when purchased enjoyed a fair degree of
marketability may subsequently become illiquid and, accordingly, a security
which was deemed to be liquid at the time of acquisition may subsequently
become illiquid. In such event, appropriate remedies will be considered to
minimize the effect on the Fund s liquidity.
Portfolio Turnover
As discussed in the Trust's prospectus, the Trust anticipates that
investors in the Funds, as part of a market-timing or asset allocation
investment strategy, will frequently exchange shares of the Funds for
shares in other Funds pursuant to the exchange policy of the Trust as well
as frequently redeem shares of the Funds (see "Exchanges" in the Trust's
Prospectus). The nature of the Funds has caused the Funds to experience
substantial portfolio turnover. Because each Fund's portfolio turnover
rate to a great extent will depend on the purchase, redemption, and
exchange activity of the Fund's investors, it is very difficult to estimate
what the Fund's actual turnover rate will be in the future. However, the
Trust expects that the portfolio turnover experienced the Funds will
continue to be substantial.
"Portfolio Turnover Rate" is defined under the rules of the Securities and
Exchange Commission as the value of the securities purchased or securities
sold, excluding all securities whose maturities at time of acquisition were
one year or less, divided by the average monthly value of such securities
owned during the year. Based on this definition, instruments with
remaining maturities of less than one year are excluded from the
calculation of portfolio turnover rate. Instruments excluded from the
calculation of portfolio turnover generally would include the futures
contracts and option contracts in which the Funds invest since such
contracts generally have a remaining maturity of less than one year. All
instruments held by a Fund during a specified period may have a remaining
maturity of less than one year in which case the portfolio turnover rate
for that period, under the definition, would be equal to zero. However,
because of the nature of Funds as described above, the actual portfolio
turnover of the Funds has been and it is anticipated that their actual
portfolio turnover in the future will be unusually high.
Tracking Error
<PAGE> 13<PAGE>
While the Funds do not expect that the returns over a year will deviate
adversely from their respective benchmarks by more than ten percent,
several factors may affect their ability to achieve this correlation. Among
these factors are: (1) Fund expenses, including brokerage (which may be
increased by high portfolio turnover); (2) less than all of the securities
in the benchmark being held by a Fund and securities not included in the
benchmark being held by a Fund; (3) an imperfect correlation between the
performance of instruments held by a Fund, such as futures contracts and
options, and the performance of the underlying securities in the cash
market; (4) bid-ask spreads (the effect of which may be increased by
portfolio turnover); (5) a Fund holds instruments traded in a market that
has become illiquid or disrupted; (6) Fund share prices being rounded to
the nearest cent; (7) changes to the benchmark index that are not
disseminated in advance; (8) the need to conform a Fund s portfolio
holdings to comply with investment restrictions or policies or regulatory
or tax law requirements; or (9) market movements that run counter to a
leveraged Fund s investments (which will cause divergence between the Fund
and its benchmark over time due to the mathematical effects of leveraging).
Market movements that run counter to a leveraged Fund s investments will
cause some divergence between the Fund and its benchmark over time due to
the mathematical effects of leveraging. The magnitude of the divergence is
dependent upon the magnitude of the market movement, its duration, and the
degree to which the Fund is leveraged. The tracking error of a leveraged
Fund is generally small during a well-defined uptrend or downtrend in the
market. When measured from price peak to price peak, across a market
decline and subsequent recovery, however, the deviation of the Fund from
its benchmark may be significant.
INVESTMENT RESTRICTIONS
As described in the section of the Trust's Prospectus entitled "Investment
Objectives and Policies," each of the Funds has adopted certain investment
restrictions as fundamental policies which cannot be changed without the
approval of the holders of a "majority" of the outstanding shares of the
Fund, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of
the series present at a meeting of shareholders, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding shares of the series.
(All policies of a Fund not specifically identified in this Statement of
Additional Information or the Trust's Prospectus as fundamental may be
changed without a vote of the shareholders of the Fund.) For purposes of
the following limitations, all percentage limitations apply immediately
after a purchase or initial investment. Any subsequent change in a
particular percentage resulting from fluctuations in value does not require
the elimination of any security from a Fund's portfolio.
The following restrictions are applicable to the Nova Fund, the Ursa Fund,
the OTC Fund, the Metals Fund, the Bond Fund, and the Juno Fund:
A Fund shall not:
<PAGE> 14<PAGE>
1. Lend any security or make any other loan if, as a result, more
than 33 % of the value of the Fund's total assets would be
lent to other parties, except (i) through the purchase of a
portion of an issue of debt securities in accordance with the
Fund's investment objective, policies, and limitations, or
(ii) by engaging in repurchase agreements with respect to
portfolio securities, or (iii) through the loans of portfolio
securities provided the borrower maintains collateral equal to
at least 100% of the value of the borrowed security and
marked-to-market daily.
2. Underwrite securities of any other issuer.
3. Purchase, hold, or deal in real estate or oil and gas
interests, although the Fund may purchase and sell securities
that are secured by real estate or interests therein and may
purchase mortgage-related securities and may hold and sell
real estate acquired for the Fund as a result of the ownership
of securities.
4. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act) (including the amount of senior
securities issued but excluding liabilities and indebtedness
not constituting senior securities), except that the Fund may
issue senior securities in connection with transactions in
options, futures, options on futures, and other similar
investments, and except as otherwise permitted herein and in
Investment Restriction Nos. 5, 7, 8, 9, 10, 11, 13, and 14, as
applicable to the Fund.
5. Pledge, mortgage, or hypothecate the Fund's assets, except to
the extent necessary to secure permitted borrowings and to the
extent related to the deposit of assets in escrow in
connection with (i) the writing of covered put and call
options, (ii) the purchase of securities on a forward-
commitment or delayed-delivery basis, and (iii) collateral and
initial or variation margin arrangements with respect to
currency transactions, options, futures contracts, including
those relating to indexes, and options on futures contracts or
indexes.
The following restrictions are applicable to the Nova Fund, the Ursa Fund,
the OTC Fund, the Bond Fund, and the Juno Fund:
A Fund shall not:
6. Invest in commodities except that the Fund may purchase and
s e l l futures contracts, including those relating to
securities, currencies, indexes, and options on futures
contracts or indexes and currencies underlying or related to
any such futures contracts, and purchase and sell currencies
<PAGE> 15<PAGE>
(and options thereon) or securities on a forward-commitment or
delayed-delivery basis.
7. Invest 25% or more of the value of the Fund's total assets in
the securities of one or more issuers conducting their
principal business activities in the same industry. This
limitation does not apply to investments or obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restriction is applicable to the Ursa Fund, the OTC Fund, the
Metals Fund, and the Money Market Fund:
A Fund shall not:
8. B o r row money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in amounts
not in excess of 5% of the value of the Fund's total assets
from a bank or (ii) in an amount up to one-third of the value
of the Fund's total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling
portfolio instruments. This provision is not for investment
leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous.
The following restriction is applicable to the Nova Fund, the OTC Fund, and
the Metals Fund:
A Fund shall not:
9. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The deposit or payment by the Fund of initial or variation
margin in connection with futures or options transactions is
not considered to be a securities purchase on margin. The
Fund may engage in short sales if, at the time of the short
sale, the Fund owns or has the right to acquire an equal
amount of the security being sold at no additional cost
("selling against the box").
The following restriction is applicable to the Nova Fund and the Bond Fund:
A Fund shall not:
10. Borrow money, except the Fund may borrow money (i) from a bank
in an amount not in excess of 33 % of the total value of the
Fund's assets (including the amount borrowed) less the Fund's
liabilities (not including the Fund's borrowings), and (ii)
<PAGE> 16<PAGE>
for temporary purposes in an amount not in excess of 5% of the
total value of the Fund's assets.
The following restriction is applicable to the Ursa Fund and the Juno Fund:
A Fund shall not:
11. Make short sales of portfolio securities or maintain a short
position unless at all times when a short position is open (i)
the Fund maintains a segregated account with the Fund's
custodian to cover the short position in accordance with the
position of the Securities and Exchange Commission or (ii) the
Fund owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any
further consideration, for securities of the same issue as,
and equal in amount to, the securities sold short.
The following restrictions are applicable to the Metals Fund:
The Metals Fund shall not:
12. Purchase and sell commodities or commodities contracts, but
this shall not prevent the Metals Fund from: (a) trading in
futures contracts and options on futures contracts; or (b)
investing in precious-metals and precious minerals.
13. Invest 25% or more of the value of the Metals Fund's total
assets in the securities of one or more issuers conducting
their principal business activities in the same industry;
except that the Metals Fund will invest 25% or more of the
value of the Metals Fund's total assets in the securities in
the metals-related and minerals-related industries. This
limitation does not apply to investments or obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restriction is applicable to the Bond Fund:
The Bond Fund shall not:
14. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The deposit or payment by the Bond Fund of initial or
variation margin in connection with futures or options
transactions is not considered to be a securities purchase on
margin.
The following restrictions are applicable to the Money Market Fund:
The Money Market Fund shall not:
<PAGE> 17<PAGE>
15. Make loans to others except through the purchase of qualified
debt obligations, loans of portfolio securities and entry into
repurchase agreements.
16. Lend the Money Market Fund's portfolio securities in excess of
15% of the Money Market Fund's total assets. Any loans of the
M o ney Market Fund's portfolio securities will be made
according to guidelines established by the Board of Trustees
of the Trust, including maintenance of cash collateral of the
borrower equal at all times to the current market value of the
securities loaned.
17. Issue senior securities, except as permitted by the Money
Market Fund's investment objectives and policies.
18. Write or purchase put or call options.
19. Invest in securities of other investment companies, except as
these securities may be acquired as part of a merger,
c o nsolidation, acquisition of assets, or plan of
reorganization.
20. Mortgage, pledge, or hypothecate the Money Market Fund's
assets except to secure permitted borrowings. In those cases,
the Money Market Fund may mortgage, pledge, or hypothecate
assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets of
the Money Market Fund at the time of the borrowing.
21. Make short sales of portfolio securities or purchase any
portfolio securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
The following restriction is applicable to the Juno Fund:
The Juno Fund shall not:
22. B o r row money, except (i) as a temporary measure for
extraordinary or emergency purposes and then only in amounts
not in excess of 5% of the value of the Fund's total assets
from a bank or (ii) in an amount up to one-third of the value
of the Fund's total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling
portfolio instruments. This provision is not for investment
leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments would be inconvenient or
disadvantageous. The Juno Fund shall not make purchases while
borrowing in excess of 5% of the value of its total assets.
For purposes of this limitation, Fund assets invested in
reverse repurchase agreements are included in the amounts
borrowed.
<PAGE> 18<PAGE>
Furthermore, the Trustees have adopted additional investment restrictions
for each Fund. These restrictions are not fundamental investment policies,
but rather are operating policies of each Fund, as indicated, and may be
changed by the Trustees without Fund shareholder approval. With respect to
each of the Funds, except as otherwise indicated, these additional
investment restrictions adopted by the Trustees, to date, are as follows:
1. The Fund will not invest in warrants.
2. The Fund will not invest in real estate limited partnerships.
3. The Fund will not invest in mineral leases; except that the
Metals Fund may invest in mineral leases although the Metals
Fund does not presently intend to invest in such leases.
In addition, none of the Funds presently intends:
1. To lend the Fund's assets. If, in the future, a Fund does
lend its assets, the Fund will adhere to all limitations on
the Fund's ability to lend its assets as required by the
securities laws of those jurisdictions where shares of the
Fund are registered for sale.
2. To enter into currency transactions; except that the Metals
Fund may enter into currency transactions although the Metals
F u n d does not presently intend to enter into such
transactions.
3. To purchase illiquid securities. If in the future, a Fund
does purchase illiquid securities, the Fund will not invest
more than 15% of its net assets in illiquid securities; except
that the Money Market Fund will not invest more than 10% of
its net assets in illiquid securities. Each Fund will adhere
to a more restrictive limitation on the Fund's investment in
illiquid securities as required by the securities laws of
those jurisdictions where shares of the Fund are registered
for sale.
4. T o purchase and sell real property (including limited
partnership interests), to purchase and sell securities that
are secured by real estate or interests therein, to purchase
mortgage-related securities, or to hold and sell real estate
acquired for the Fund as a result of the ownership of
securities.
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in the investment's percentage of the value of
the Fund's total assets resulting from a change in such values or assets
will not constitute a violation of the percentage restriction.
<PAGE> 19<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is
responsible for decisions to buy and sell securities for each of the Funds,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Advisor expects that the
Funds may execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder
The Advisor may serve as an investment manager to a number of clients,
including other investment companies. It is the practice of the Advisor to
cause purchase and sale transactions to be allocated among the Funds and
others whose assets the Advisor manages in such manner as the Advisor deems
equitable. The main factors considered by the Advisor in making such
allocations among the Funds and other client accounts of the Advisor are
the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held, and the
opinions of the person(s) responsible, if any, for managing the portfolios
of the Funds and the other client accounts.
The policy of each Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining
the most favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are effected on a
stock exchange, each Fund's policy is to pay commissions which are
considered fair and reasonable without necessarily determining that the
lowest possible commissions are paid in all circumstances. Each Fund
believes that a requirement always to seek the lowest possible commission
cost could impede effective portfolio management and preclude the Fund and
the Advisor from obtaining a high quality of brokerage and research
services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience
and knowledge regarding commissions generally charged by various brokers
and on its judgment in evaluating the brokerage and research services
received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, as in most cases an exact dollar
value for those services is not ascertainable.
Purchases and sales of U.S. Government securities are normally transacted
t h rough issuers, underwriters or major dealers in U.S. Government
Securities acting as principals. Such transactions are made on a net basis
and do not involve payment of brokerage commissions. The cost of
securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriters; transactions with dealers normally
reflect the spread between bid and asked prices.
In seeking to implement a Fund's policies, the Advisor effects transactions
with those brokers and dealers who the Advisor believes provide the most
favorable prices and are capable of providing efficient executions. If the
<PAGE> 20<PAGE>
Advisor believes such prices and executions are obtainable from more than
one broker or dealer, the Advisor may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Advisor. Such services may
include, but are not limited to, any one or more of the following:
information as to the availability of securities for purchase or sale;
statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. If
the broker-dealer providing these additional services is acting as a
principal for its own account, no commissions would be payable. If the
broker-dealer is not a principal, a higher commission may be justified, at
the determination of the Advisor, for the additional services.
The information and services received by the Advisor from brokers and
dealers may be of benefit to the Advisor in the management of accounts of
some of the Advisor's other clients and may not in all cases benefit a Fund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or
services otherwise performed by the Advisor and thereby reduce the
A d v i s or's expenses, this information and these services are of
indeterminable value and the management fee paid to the Advisor is not
reduced by any amount that may be attributable to the value of such
information and services.
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund commenced operations on July 12,
1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3,
1994, March 3, 1995, and December 3, 1993, respectively. For the period
from inception to June 30, 1994, total brokerage commissions paid by the
Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and
the Money Market Fund amounted to $150,696, $197,412, $23,577, $381,380,
$6,324, and $0, respectively. For the period from July 1, 1994 (or
inception, if later) to June 30, 1995, total brokerage commissions paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund amounted to $268,283, $494,223,
$35,421, $550,858, $2,390, $14,999, and $0, respectively. For the period
from July 1, 1995 to June 30, 1996, total brokerage commissions paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
The Juno Fund, and the Money Market Fund amounted to $293,000, $669,000,
$673,000, $35,000, $11,000, $23,000, and $0, respectively.
MANAGEMENT OF THE TRUST
The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities
of the Trust's officers. The names and addresses (and ages) of the
Trustees and the officers of the Trust and the officers of the Advisor,
together with information as to their principal business occupations during
the past five years, are set forth below. Fees and expenses for non-
interested Trustees will be paid by the Trust.
Trustees
<PAGE> 21<PAGE>
*Albert P. Viragh, Jr. (55)
Chairman of the Board of Trustees and President of the Trust;
Chairman of the Board, President, and Treasurer of PADCO Advisors,
Inc., investment adviser to the Trust, 1993 to present; Chairman of
the Board, President, and Treasurer of PADCO Service Company, Inc.,
shareholder and transfer agent servicer to the Trust, 1993 to
present; Chairman of the Board of Managers of the Rydex Advisor
Variable Annuity Account (the Separate Account ), a separate
account of Great American Reserve Insurance Company, 1996 to
present; Chairman of the Board, President, and Treasurer of PADCO
Advisors II, Inc., investment adviser to the Separate Account, 1996
to present; Chairman of the Board, President, and Treasurer of PADCO
Financial Services, Inc., a registered broker-dealer firm, and the
Rydex Institutional Money Market Fund s principal underwriter, 1996
to present; Vice President of Rushmore Investment Advisors Ltd., a
registered investment adviser, 1985 to 1993. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Corey A. Colehour (51)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
J. Kenneth Dalton (56)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; Mortgage Banking Consultant and Investor, The Dalton Group,
April 1995 to present; President, CRAM Mortgage Group, Inc. 1966 to
April 1995. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Roger Somers (52)
Trustee of the Trust; Manager of the Separate Account, 1996 to
present; President, Arrow Limousine, 1963 to present. Address:
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Officers
<PAGE> 22<PAGE>
Robert M. Steele (38)
Secretary and Vice President of the Trust; Vice President of PADCO
Advisors, Inc., investment adviser to the Trust, 1994 to present;
Secretary and Vice President of the Separate Account, 1996 to
present; Vice President of PADCO Advisors II, Inc., investment
adviser to the Separate Account, 1996 to present; Vice President of
The Boston Company, Inc., an institutional money management firm,
1987 to 1994. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
Michael P. Byrum (26)
Assistant Secretary of the Trust; Employee of PADCO Advisors, Inc.,
1993 to present; portfolio manager of The Ursa Fund (since 1996),
The Rydex Precious Metals Fund (since 1993), The Rydex OTC Fund
(since 1997), The Rydex U.S. Government Bond Fund (since 1997),The
Rydex U.S. Government Money Market Fund (since 1993), and The Rydex
Institutional Money Market Fund (since 1996), each a series of the
Trust; Assistant Secretary of the Separate Account, 1996 to present;
Employee of PADCO Advisors II, Inc., investment adviser to the
S e parate Account; Investment Representative, Money Management
Associates, a registered investment adviser, 1992 to 1993; Student,
Miami University, of Oxford, Ohio (B.A., Business Administration,
1992). Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
__________________________
* This Trustee is deemed to be an "interested person" of the Trust,
within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as
this person is affiliated with the Advisor, as described herein.
Under an investment advisory agreement with the Advisor, dated May 14,
1993, and amended on November 2, 1993, and also amended on December 13,
1994, March 8, 1996, and September 25, 1996, the Advisor serves as the
investment adviser for each series of the Trust and provides investment
advice to the Funds and oversees the day-to-day operations of the Funds,
subject to direction and control by the Trustees and the officers of the
Trust. The Trust currently is composed of nine separate series, the Nova
Fund, the Ursa Fund, the Rydex OTC Fund, the Rydex Precious Metals Fund,
the Rydex U.S. Government Bond Fund, the Juno Fund, the Rydex U.S.
Government Money Market Fund, the Rydex High Yield Fund, and the Rydex
Institutional Money Market Fund; other separate series may be added in the
future. As of October 24, 1996, net Trust assets under management of the
Advisor were approximately $1 billion. Pursuant to the advisory agreement
with the Advisor, the Funds pay the Advisor the following fees at an annual
rate based on the average daily net assets for each respective Fund, as set
forth below:
<PAGE> 23<PAGE>
The Nova Fund 0.75%
The Ursa Fund 0.90%
The Rydex OTC Fund 0.75%
The Rydex Precious Metals Fund 0.75%
The Rydex U.S. Government Bond Fund 0.50%
The Juno Fund 0.90%
The Rydex U.S. Government Money Market Fund 0.50%
The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
the Juno Fund, and the Money Market Fund commenced operations on July 12,
1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3,
1994, March 3, 1995, and December 3, 1993, respectively. For the period
from inception to June 30, 1994, total management fees paid by the Nova
Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the
Money Market Fund to the Advisor amounted to $158,834, $193,185, $14,901,
$16,816, $4,888, and $163,459, respectively. For the period from July 1,
1994 (or inception, if later) to June 30, 1995, total management fees paid
by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond
Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to
$411,286, $1,587,040, $361,659, $221,309, $7,704, $29,837, and $727,027,
respectively. For the period from July 1, 1995 to June 30, 1996, total
management fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the
Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $1,022,794, $1,607,706, $541,443, $406,902, $97,820,
$174,866, and $891,864, respectively.
The Advisor reimbursed the Bond Fund $0, $5,831, and $0 for the fiscal
years ended June 30, 1994, 1995, and 1996, respectively.
The Advisor manages the investment and the reinvestment of the assets of
each of the Funds, in accordance with the investment objectives, policies,
and limitations of the Fund, subject to the general supervision and control
of the Trustees and the officers of the Trust. The Advisor bears all costs
associated with providing these advisory services and the expenses of the
Trustees of the Trust who are affiliated with or interested persons of the
Advisor. The Advisor, from its own resources, including profits from
advisory fees received from the Funds, provided such fees are legitimate
and not excessive, may make payments to broker-dealers and other financial
institutions for their expenses in connection with the distribution of Fund
shares, and otherwise currently pay all distribution costs for Fund shares.
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust and the Funds by PADCO
Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852 (the "Servicer"), subject to the general supervision and
control of the Trustees and the officers of the Trust, pursuant to a
service agreement between the Trust and the Servicer, dated September 19,
1995, and amended on March 8, 1996 and also amended on September 25, 1996.
The Servicer is wholly-owned by Albert P. Viragh, Jr., who is the Chairman
of the Board and the President of the Trust and the sole controlling person
and majority owner of the Advisor.
<PAGE> 24<PAGE>
Under this service agreement, the Funds pay the Servicer the following fees
at an annual rate based on the average daily net assets for each respective
Fund, as set forth below:
The Nova Fund 0.25%
The Ursa Fund 0.25%
The Rydex OTC Fund 0.20%
The Rydex Precious Metals Fund 0.20%
The Rydex U.S. Government Bond Fund 0.20%
The Juno Fund 0.25%
The Rydex U.S. Government Money Market Fund 0.20%
For the period from inception to June 30, 1994, total service fees paid by
the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund,
and the Money Market Fund to the Advisor amounted to $37,545, $53,647,
$3,973, $4,641, $1,955, and $65,383, respectively. For the period from
July 1, 1994 (or inception, if later) to June 30, 1995, total service fees
paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the
Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted
to $137,082, $440,721, $96,637, $59,001, $3,333, $8,232, and $290,811,
respectively. For the period from July 1, 1995 to June 30, 1996, total
service fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $327,476, $451,107, $123,358, $114,476, $37,793,
$47,333, and $403,167, respectively.
Under the service agreement, the Servicer provides the Trust and each Fund
with all required general administrative services, including, without
limitation, office space, equipment, and personnel; clerical and general
back office services; bookkeeping, internal accounting, and secretarial
services; the determination of net asset values; and the preparation and
filing of all reports, registration statements, proxy statements, and all
other materials required to be filed or furnished by the Trust and each
Fund under Federal and state securities laws. The Servicer also maintains
the shareholder account records for each Fund, distributes dividends and
distributions payable by each Fund, and produces statements with respect to
account activity for each Fund and each Fund's shareholders. The Servicer
pays all fees and expenses that are directly related to the services
provided by the Servicer to each Fund; each Fund reimburses the Servicer
for all fees and expenses incurred by the Servicer which are not directly
related to the services the Servicer provides to the Fund under the service
agreement.
Each Fund bears all expenses of its operations other than those assumed by
the Advisor or the Servicer. Fund expenses include: the management fee;
t h e servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses;
legal and auditing fees; securities valuation expenses; fidelity bonds and
other insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
<PAGE> 25<PAGE>
excise, income, and franchise taxes); organizational costs; non-interested
Trustees' fees and expenses; the costs and expenses of redeeming shares of
the Fund; fees and expenses paid to any securities pricing organization;
d u e s and expenses associated with membership in any mutual fund
organization; and costs for incoming telephone WATTS lines. In addition,
each of the Funds pays an equal portion of the Trustee fees and expenses
for attendance at Trustee meetings for the Trustees of the Trust who are
not affiliated with or interested persons of the Advisor.
For the period from inception to June 30, 1994, the total expenses of Fund
operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, and the Money Market Fund to the Advisor amounted to
$376,156, $367,676, $44,250, $45,787, $30,901, and $384,373, respectively.
For the period from July 1, 1994 (or inception, if later) to June 30, 1995,
the total expenses of Fund operations borne by the Nova Fund, the Ursa
Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the
Money Market Fund to the Advisor amounted to $785,175, $2,441,508,
$680,241, $405,626, $40,599, $51,932, and $1,290,628, respectively. For
the period from July 1, 1995 to June 30, 1996, the total expenses of Fund
operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals
Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the
Advisor amounted to $1,747,874, $2,469,816, $916,004, $704,167, $236,172,
$320,232, and $1,758,657, respectively.
The aggregate compensation paid by the Trust to each of its trustees
serving during the fiscal year ended June 30, 1996, is set forth in the
table below:
<PAGE> 26<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Benefits Estimated Annual
Aggregate Accrued as Part of Benefit upon
Name of Person, Compensation from the Trust s Expenses Retirement
Position the Trust** <C> <C>
<S> <C>
Albert P. Viragh, Jr.* $0 $0 $0
Chairman and President
Corey A. Colehour $7,500 $0 $0
Trustee
J. Kenneth Dalton $4,500 $0 $0
Trustee
Roger Somers $7,500 $0 $0
Trustee
</TABLE>
__________________
* Denotes an interested person of the Trust.
** Mr. David R. Petersen, who resigned as a Trustee, effective October 13,
1995, was paid $2,000 in aggregate compensation by the Trust during the
fiscal year ended June 30, 1996.
PRINCIPAL HOLDERS OF SECURITIES
As of October 17, 1996, the following persons were the only
persons who were record owners or, to the knowledge of the
Trust, beneficial owners of 5% or more of the shares of the
Funds.
<PAGE> 27<PAGE>
<TABLE>
<CAPTION>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
Nova National Financial 4,638,399.963 26.6%1/
Fund Services Corp.
P.O. Box 3908
New York, NY 10008
Schwab & Company 2,846,108.327 16.3%1/
101 Montgomery Street
San Francisco, CA 94104
First Trust Corp. 1,085,284.837 6.2%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Portfolio Advisory 1,085,284.837 6.2% 2/
Services
725 South Figueroa
Suite 2328
Los Angeles, CA
90017
Nova Donaldson Lufkin 1,077,196.868 6.2%1/
Fund Jenrette
(conti- P.O. Box 2052
nued) Jersey City, NJ 07303
First Trust Corp. 886,137.511 5.1%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Keystone Capital 886,137.511 5.1%2/
Management
The Hatten Building
Suite 313
Gulfport, MS 39502
Ursa Schwab & Company 7,394,264.720 17.1%1/
Fund 101 Montgomery Street
San Francisco, CA 94104
<PAGE> 28<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
National Financial 4,025,622.414 9.3%1/
Services Corp.
P.O. Box 3908
New York, NY 10008
Donaldson Lufkin 3,290,932.667 7.6%1/
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
Schwab & Company 2,681,825.883 6.2%1/
101 Montgomery Street
San Francisco, CA 94104
OTC Fund First Trust Corp. 1,742,714.527 25.3%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Keystone Capital 1,742,714.527 25.3%2/
Management
The Hatten Building
Suite 313
Gulfport, MS 39502
Donaldson Lufkin 650,141.713 9.4%1/
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
Stocktontrust Nominee 575,744.824 8.4%1/
Partnership
c/o Stockton Trust,
Inc.
3001 East Camelback
Phoenix, AZ 85016
OTC Fund First Trust Corp. 502,513.450 7.3%1/
(conti- P.O. Box 173736
nued) Denver, CO 80217
Record Owner for:
Potomac Fund 502,513.450 7.3%2/
Management
19522 Clubhouse Road
Gaithersburg, MD
20879
<PAGE> 29<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
First Trust Corp. 483,725.149 7.0%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Trendline Research & 483,725.149 7.0%2/
Mgmt.
1100 Boulders
Parkway
Suite 702
Richmond, VA 23225
Precious First Trust Corp. 544,187.863 16.1%1/
Metals P.O. Box 173736
Fund Denver, CO 80217
Record Owner for:
Clark Capital 544,187.863 16.1%2/
1735 Market Street
Philadelphia, PA
19103
Donaldson Lufkin 226,588.181 6.7%1/
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
U.S. Independent Trust 265,817.521 21.3%1/
Govern- Corporation
ment 15255 S. 94th Avenue
Bond Suite 303
Fund Orland Park, IL 60462-
3897
Record Owner for:
Brookstreet 265,817.521 21.3%2/
Securities
2361 Campus Drive
Suite 210
Irvine, CA 92715
<PAGE> 30<PAGE>
Fund Name and Address Number of %Ownership
Shares
<S> <C> <C> <C>
U.S.
Govern- National Financial 214,773.435 17.2%1/
ment Services Corp.
Bond P.O. Box 3908
Fund New York, NY 10008
(conti-
nued)
Independent Trust 129,575.912 10.4%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL 60462-
3897
Record Owner for:
Brookstreet 129,575.912 10.4%2/
Securities
2361 Campus Drive
Suite 210
Irvine, CA 92715
Independent Trust 92,026.093 7.4%1/
Corporation
15255 S. 94th Avenue
Suite 303
Orland Park, IL 60462-
3897
Record Owner for:
Trendstat Capital 92,026.093 7.4%2/
Management, Inc.
6991 East Camelback
Suite D210
Scottsdale, AZ 85251
Juno National Financial 168,993.240 11.7%1/
Fund Services Corp.
P.O. Box 3908
New York, NY 10008
Donaldson Lufkin 135,642.359 9.4%1/
Jenrette
P.O. Box 2052
Jersey City, NJ 07303
</TABLE>
<PAGE> 31<PAGE>
1/ Record owner only.
2/ Beneficial owner only.
As of the date of this Statement of Additional Information,
the Trustees and the officers of the Trust, as a group, owned,
of record and beneficially, less than 1.0% of the outstanding
shares of each Fund.
DETERMINATION OF NET ASSET VALUE
The Money Market Fund will utilize the amortized cost method
i n v aluing its portfolio securities for purposes of
determining the net asset value of the shares of the Money
Market Fund. The Money Market Fund will utilize the amortized
cost method in valuing its portfolio securities even though
the portfolio securities may increase or decrease in market
value, generally, in connection with changes in interest
rates. The amortized cost method of valuation involves
valuing a security at its cost adjusted by a constant
a m o rtization 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, this method may result in periods
during which value, as determined by amortized cost, is higher
or lower than the price the Money Market Fund would receive if
this Fund sold the instrument. During such periods, the yield
to investors in the Money Market Fund may differ somewhat from
that obtained in a similar company which uses mark-to-market
values for all its portfolio securities. For example, if the
use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in
the Money Market Fund would be able to obtain a somewhat
higher (lower) yield than would result from investment in such
a similar company and existing investors would receive less
(more) investment income. The purpose of this method of
calculation is to facilitate the maintenance of a constant net
asset value per share of $1.00.
The Money Market Fund's use of the amortized cost method to
value its portfolio securities and the maintenance of the per
share net asset value of $1.00 is permitted pursuant to Rule
2a-7 under the 1940 Act (the "Rule"), and is conditioned on
the Money Market Fund's compliance with various conditions
including: (a) the Board is obligated, as a particular
responsibility within the overall duty of care owed to the
M o ney Market Fund's shareholders, to establish written
procedures reasonably designed, taking into account current
market conditions and the Money Market Fund's investment
objectives, to stabilize the net asset value per share as
computed for the purpose of distribution and redemption at
$1.00 per share; (b) the procedures should provide for (i) the
calculation, at such intervals as the Trustees determine are
<PAGE> 32<PAGE>
appropriate and as are reasonable in light of current market
conditions, of the deviation, if any, between net asset value
per share using amortized cost to value portfolio securities
and net asset value per share based upon available market
quotations with respect to such portfolio securities; (ii) the
periodic review by the Trustees of the amount of deviation as
well as methods used to calculate the amount of deviation; and
(iii) the maintenance of written records of the procedures,
the Trustees considerations made pursuant to the procedures
and any actions taken upon such considerations; (c) the
Trustees should consider what steps should be taken, if any,
in the event of a difference of more than 1/2 of 1% between
the two methods of valuation; and (d) the Trustees should take
such action as the Trustees deem appropriate (such as
shortening the average portfolio maturity, realizing gains or
losses, or, as provided by the Trust's Declaration of Trust,
reducing the number of the outstanding shares of the Money
Market Fund) to eliminate or reduce to the extent reasonably
practicable material dilution or other unfair results to
investors or existing shareholders. Any reduction of the
outstanding shares of the Money Market Fund will be effected
by having each shareholder proportionately contribute to the
Money Market Fund's capital the shares necessary to eliminate
or reduce the material dilution or other unfair results to
investors or existing shareholders. Each Money Market Fund
shareholder will be deemed to have agreed to such contribution
in these circumstances by investment in the Money Market Fund.
The Rule further requires that the Money Market Fund limit its
investments to U.S. dollar-denominated instruments which the
Trustees determine present minimal credit risks and which are
Eligible Securities (as defined below). The Rule also
requires the Money Market Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate
to the Money Market Fund's objective of maintaining a stable
net asset value of $1.00 per share and precludes the purchase
of any instrument with a remaining maturity of more than
thirteen months. Should the disposition of a portfolio
s e curity result in a dollar-weighted average portfolio
maturity of more than 90 days, the Money Market Fund would be
required to invest its available cash in such a manner as to
reduce such maturity to 90 days or less as soon as reasonably
practicable.
Generally, for purposes of the procedures adopted under the
Rule, the maturity of a portfolio instrument is deemed to be
the period remaining (calculated from the trade date or such
other date on which the Money Market Fund's interest in the
instrument is subject to market action) until the date noted
on the face of the instrument as the date on which the
principal amount must be paid, or, in the case of an
<PAGE> 33<PAGE>
instrument called for redemption, the date on which the
redemption payment must be made.
A variable rate obligation that is subject to a demand feature
is deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or
the period remaining until the principal amount can be
recovered through demand. A floating rate instrument that is
subject to a demand feature is deemed to have a maturity equal
to the period remaining until the principal amount can be
recovered through demand.
An Eligible Security is defined in the Rule to mean a security
which: (a) has a remaining maturity of thirteen months or
less; (b) either (i) is rated in the two highest short-term
rating categories by any two nationally-recognized statistical
rating organizations ("NSROs") that have issued a short-term
rating with respect to the security or class of debt
obligations of the issuer, or (ii) if only one NSRO has issued
a short-term rating with respect to the security, then by that
NSRO; (c) was a long-term security at the time of issuance
whose issuer has outstanding a short-term debt obligation
which is comparable in priority and security and has a rating
as specified in clause (b) above; or (d) if no rating is
assigned by any NSRO as provided in clauses (b) and (c) above,
the unrated security is determined by the Trustees to be of
comparable quality to any such rated security.
As permitted by the Rule, the Trustees have delegated to the
Advisor, subject to the Trustees' oversight pursuant to
guidelines and procedures adopted by the Trustees, the
authority to determine which securities present minimal credit
risks and which unrated securities are comparable in quality
to rated securities.
If the Trustees determine that it is no longer in the best
interests of the Money Market Fund and its shareholders to
maintain a stable price of $1.00 per share, or if the Trustees
believe that maintaining such price no longer reflects a
market-based net asset value per share, the Trustees have the
right to change from an amortized cost basis of valuation to
valuation based on market quotations. The Money Market Fund
will notify shareholders of any such change.
The Money Market Fund will manage its portfolio in an effort
to maintain a constant $1.00 per share price, but the Money
Market Fund cannot assure that the value of the shares of the
Money Market Fund will never deviate from this price. Since
dividends from net investment income (and net short-term
capital gains, if any) are declared and accrued on a daily
b a sis, the net asset value per share, under ordinary
circumstances, is likely to remain constant. Otherwise,
<PAGE> 34<PAGE>
r e alized and unrealized gains and losses will not be
distributed on a daily basis but will be reflected in the
Money Market Fund's net asset value. The amounts of such
gains and losses will be considered by the Trustees in
determining the action to be taken to maintain the Money
Market Fund's $1.00 per share net asset value. Such action
may include distribution at any time of part or all of the
then-accumulated undistributed net realized capital gains, or
reduction or elimination of daily dividends by an amount equal
to part or all of the then-accumulated net realized capital
losses. However, if realized losses should exceed the sum of
net investment income plus realized gains on any day, the net
asset value per share on that day might decline below $1.00
per share. In such circumstances, the Money Market Fund may
reduce or eliminate the payment of daily dividends for a
period of time in an effort to restore the Money Market Fund's
$1.00 per share net asset value. A decline in prices of
securities could result in significant unrealized depreciation
on a mark-to-market basis. Under these circumstances the
Money Market Fund may reduce or eliminate the payment of
dividends, and utilize a net asset value per share as
determined by using available market quotations, or reduce the
number of Money Market Fund shares outstanding.
<PAGE> 35<PAGE>
PERFORMANCE INFORMATION
From time to time, each of the Funds (other than the Money
M a r ket Fund) may include the Fund's total return in
advertisements or reports to shareholders or prospective
shareholders. Quotations of average annual total return for a
Fund will be expressed in terms of the average annual
compounded rate of return on a hypothetical investment in the
Fund over a period of at least one, five, and ten years (up to
the life of the Fund) (the ending date of the period will be
stated). Total return of a Fund is calculated from two
factors: the amount of dividends earned by each Fund share
and by the increase or decrease in value of the Fund's share
price. See "Calculation of Return Quotations."
Performance information for each of the Funds contained in
reports to shareholders or prospective shareholders,
advertisements, and other promotional literature may be
c o m pared to the record of various unmanaged indexes.
Performance information for the Nova Fund, the Ursa Fund, and
the Metals Fund may be compared to various unmanaged indexes,
including, but not limited to, the S&P500 Index or the Dow
Jones Industrial Average. Performance information for the
Metals Fund also may be compared to its current benchmark, the
XAU Index. Performance information for the OTC Fund may be
compared to various unmanaged indexes, including, but not
limited to, its current benchmark, the NASDAQ 100 IndexTM, and
the NASDAQ Composite IndexTM. The NASDAQ Composite IndexTM
comparison may be provided to show how the OTC Fund's total
return compares to the record of a broad average of over-the-
counter stock prices over the same period. The OTC Fund has
the ability to invest in securities not included in the NASDAQ
100 IndexTM or the NASDAQ Composite IndexTM, and the OTC
Fund's investment portfolio may or may not be similar in
composition to NASDAQ 100 IndexTM or the NASDAQ Composite
IndexTM. The NASDAQ Composite IndexTM is based on the prices
of an unmanaged group of stocks and, unlike the OTC Fund's
returns, the returns of the NASDAQ Composite IndexTM, and such
other unmanaged indexes, may assume the reinvestment of
dividends, but generally do not reflect payments of brokerage
commissions or deductions for operating costs and other
expenses of investing. Performance information for the Bond
Fund and the Juno Fund may be compared to various unmanaged
indexes, including, but not limited to, the Shearson Lehman
Government (LT) Index.
S u ch unmanaged indexes may assume the reinvestment of
dividends, but generally do not reflect deductions for
operating costs and expenses. In addition, a Fund's total
return may be compared to the performance of broad groups of
comparable mutual funds with similar investment goals, as such
performance is tracked and published by such independent
<PAGE> 36<PAGE>
organizations as Lipper Analytical Services, Inc. ("Lipper"),
and CDA Investment Technologies, Inc., among others. When
Lipper's tracking results are used, the Fund will be compared
to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. Accordingly, the Lipper
ranking and comparison, which may be used by the Trust in
p e r formance reports, will be drawn from the "Capital
Appreciation Funds" grouping for each of the Nova Fund and the
Ursa Fund, from the "Small Company Growth Funds" grouping for
the OTC Fund, from the "Precious Metals Funds" grouping for
the Metals Fund, and from the "Bond Funds" grouping for the
Bond Fund and the Juno Fund. Rankings may be listed among one
or more of the asset-size classes as determined by Lipper.
Since the assets in all mutual funds are always changing, a
Fund may be ranked within one Lipper asset-size class at one
time and in another Lipper asset-size class at some other
time. Footnotes in advertisements and other marketing
literature will include the time period and Lipper asset-size
c l a s s , as applicable, for the ranking in question.
Performance figures are based on historical results and are
not intended to indicate future performance.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of a
Fund (other than the Money Market Fund) to that of other
m u tual funds and to other relevant market indexes in
advertisements or in reports to shareholders, performance for
the Fund may be stated in terms of total return. Under the
rules of the Securities and Exchange Commission ("SEC Rules"),
Funds advertising performance must include total return quotes
calculated according to the following formula:
<PAGE> 37<PAGE>
P(1+T)n=ERV
Where: P = a hypothetical initial payment of
$1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the 1, 5, or 10 year periods at the end of
t h e 1, 5, or 10 year periods (or
fractional portion thereof).
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Trust. In
calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at
net asset value as described in the Trust's Prospectus on the
reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual
compounded rates of return over the 1, 5, and 10 year periods
(or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
From time to time, each Fund, other than the Money Market
Fund, also may include in such advertising a total return
figure that is not calculated according to the formula set
f o r th above in order to compare more accurately the
performance of the Fund with other measures of investment
return. For example, in comparing the total return of a Fund
with data published by Lipper Analytical Services, Inc., or
with the performance of the S&P500 Index or the Dow Jones
Industrial Average for each of the Nova Fund and the Ursa
Fund, the NASDAQ 100 IndexTM for the OTC Fund, the XAU Index
for the Metals Fund, and the Lehman Government (LT) Index for
the Bond Fund and the Juno Fund, each respective Fund
calculates its aggregate total return for the specified
periods of time by assuming the investment of $10,000 in Fund
shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial
value of the investment from the ending value and by dividing
the remainder by the beginning value. Such alternative total
return information will be given no greater prominence in such
advertising than the information prescribed under SEC Rules.
<PAGE> 38<PAGE>
For the one year period ended June 30, 1996, and for the
p e r i o d from inception of the Funds (see "Portfolio
Transactions and Brokerage") to June 30, 1996, the average
annual compounded rate of return of the respective Funds
(other than the Money Market Fund), assuming the reinvestment
of all dividends and distributions, was as follows:
<TABLE>
<CAPTION>
One Year From Inception
<S> <C> <C>
The Nova Fund 32.77% 71.89%
The Ursa Fund -14.11% -22.21%
The Rydex OTC Fund 26.44% 65.03%
The Rydex Precious Metals 3.67% -8.72%
Fund -1.48% -1.75%
The Rydex U.S. Government 4.30% -5.30%
Bond Fund
The Juno Fund
</TABLE>
INFORMATION ON COMPUTATION OF YIELD
The Bond Fund. In addition to the total return quotations
discussed above, the Bond Fund also may advertise the Bond
Fund's yield based on a thirty-day (or one month) period ended
on the date of the most recent balance sheet included in the
Trust's Registration Statement, computed by dividing the net
investment income per share of the Bond Fund earned during the
period by the maximum offering price per Bond Fund share on
the last day of the period, according to the following
formula:
YIELD = 2[( a-b +1)6-1]
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on
the last day of the period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (i) computing the
yield to maturity of each obligation held by the Bond Fund
<PAGE> 39<PAGE>
based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during
the month, the purchase price (plus actual accrued interest),
(ii) dividing that figure by 360 and multiplying the quotient
by the market value of the obligation (including actual
accrued interest as referred to above) to determine the
interest income on the obligation that is in the Bond Fund's
portfolio (assuming a month of thirty days), and (iii)
computing the total of the interest earned on all debt
obligations and all dividends accrued on all equity securities
during the thirty-day or one month period. In computing
dividends accrued, dividend income is recognized by accruing
1/360 of the stated dividend rate of a security each day that
the security is in the Bond Fund's portfolio. Undeclared
earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
The Bond Fund from time to time may also advertise its yield
based on a thirty-day period ending on a date other than the
most recent balance sheet included in the Trust's Registration
Statement, computed in accordance with the yield formula
described above, as adjusted to conform with the differing
period for which the yield computation is based.
Any quotation of performance stated in terms of yield (whether
based on a thirty-day or one month period) will be given no
greater prominence than the information prescribed under SEC
Rules. In addition, all advertisements containing performance
data of any kind will include a legend disclosing that such
performance data represents past performance and that the
investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be
worth more or less than the original cost of such shares.
The Bond Fund's yield as of June 30, 1996, based on a thirty-
day base period, was approximately 1.37%.
The Money Market Fund. The Money Market Fund's annualized
current yield, as may be quoted from time to time in
advertisements and other communications to shareholders and
potential investors, is computed by determining, for a stated
seven-day period, the net change, exclusive of capital changes
and including the value of additional shares purchased with
dividends and any dividends declared therefrom (which reflect
deductions of all expenses of the Money Market Fund such as
management fees), in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the
period, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base
<PAGE> 40<PAGE>
period return, and then multiplying the base period return by
(365/7).
The Money Market Fund's annualized effective yield, as may be
q u oted from time to time in advertisements and other
communications to shareholders and potential investors, is
computed by determining (for the same stated seven-day period
as the current yield) the net change, exclusive of capital
changes and including the value of additional shares purchased
with dividends and any dividends declared therefrom (which
reflect deductions of all expenses of the Money Market Fund
such as management fees), in the value of a hypothetical pre-
existing account having a balance of one share at the
beginning of the period, and dividing the difference by the
value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base
period return by adding 1, raising the sum to a power equal to
365 divided by 7, and subtracting 1 from the result.
The Money Market Fund's annualized effective yield and
annualized current yield, for the seven-day period ended June
30, 1996, were 4.15% and 4.07%, respectively.
The yields quoted in any advertisement or other communication
should not be considered a representation of the yields of the
Money Market Fund in the future since the yield is not fixed.
Actual yields will depend not only on the type, quality, and
maturities of the investments held by the Money Market Fund
and changes in interest rates on such investments, but also on
changes in the Money Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance
of the Money Market Fund and for providing a basis for
comparison with other investment alternatives. However,
unlike bank deposits or other investments which typically pay
a fixed yield for a stated period of time, the Money Market
Fund's yield fluctuates.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends and Distributions. Dividends from net investment
income and any distributions of net realized capital gains
from each of the Funds will be distributed as described in the
Trust's Prospectus under "Dividends and Distributions." All
such distributions of a Fund normally automatically will be
reinvested without charge in additional shares of the same
Fund.
As discussed in the Trust's Prospectus, the Money Market Fund
intends to declare dividends daily from net investment income
(and net short-term capital gains, if any) and distribute such
dividends monthly. Net income, for dividend purposes,
<PAGE> 41<PAGE>
includes accrued interest and accretion of original issue and
market discount, plus or minus any short-term gains or losses
r e a l ized on sales of portfolio securities, less the
amortization of market premium and the estimated expenses of
the Money Market Fund. Net income will be calculated
immediately prior to the determination of net asset value per
share of the Money Market Fund.
The Trustees may revise the dividend policy, or postpone the
payment of dividends, if the Money Market Fund should have or
anticipate any large unexpected expense, loss, or fluctuation
in net assets which, in the opinion of the Trustees, might
have a significant adverse effect on shareholders of the Money
Market Fund. On occasion, in order to maintain a constant
$1.00 per share net asset value for the Money Market Fund, the
Trustees may direct that the number of outstanding shares of
the Money Market Fund be reduced in each shareholder's
account. Such reduction may result in taxable income to a
shareholder of the Money Market Fund in excess of the net
increase (i.e., dividends, less such reduction), if any, in
the shareholder's account for a period of time. Furthermore,
such reduction may be realized as a capital loss when the
shares are liquidated.
With respect to the investment by the Bond Fund in U.S.
Treasury zero coupon bonds, a portion of the difference
between the issue price of zero coupon securities and the face
value of such securities (the "original issue discount") is
considered to be income to the Bond Fund each year, even
though the Bond Fund will not receive cash interest payments
from these securities. This original issue discount (imputed
income) will comprise a part of the investment company taxable
income of the Bond Fund which must be distributed to
shareholders of the Bond Fund in order to maintain the
qualification of the Bond Fund as a regulated investment
company (a "RIC") under Subchapter M of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), as described
immediately below under "Regulated Investment Company Status,"
and to avoid Federal income tax at the level of the Bond Fund.
Shareholders of the Bond Fund will be subject to income tax on
such original issue discount, whether or not such shareholders
elect to receive their distributions in cash.
Regulated Investment Company Status. As a RIC, a Fund would
not be subject to Federal income taxes on the net investment
income and capital gains that the Fund distributes to the
Fund's shareholders. The distribution of net investment
income and capital gains will be taxable to Fund shareholders
regardless of whether the shareholder elects to receive these
distributions in cash or in additional shares. Distributions
reported to Fund shareholders as long-term capital gains shall
be taxable as such, regardless of how long the shareholder has
<PAGE> 42<PAGE>
owned the shares. Fund shareholders will be notified annually
by the Fund as to the Federal tax status of all distributions
made by the Fund. Distributions may be subject to state and
local taxes.
Shareholders of the Money Market Fund will be subject to
Federal income tax on dividends paid from interest income
derived from taxable securities and on distributions of
realized net short-term capital gains. Interest and realized
net short-term capital gains distributions are taxable to a
shareholder of the Money Market Fund as ordinary dividend
income regardless of whether the shareholder receives such
distributions in additional shares of the Money Market Fund or
in cash. Since the Money Market Fund's income is expected to
be derived entirely from interest rather than dividends, none
of such distributions will be eligible for the Federal
dividends received deduction available to corporations.
Each of the Funds will seek to qualify for treatment as a RIC
under the Code. Provided that a Fund (i) is a RIC and (ii)
distributes at least 90% of the Fund's net investment income
(including, for this purpose, net realized short-term capital
gains), the Fund itself will not be subject to Federal income
taxes to the extent the Fund's net investment income and the
Fund's net realized long- and short-term capital gains, if
any, are distributed to the Fund's shareholders. To avoid an
excise tax on its undistributed income, each Fund generally
must distribute at least 98% of its income, including its net
long-term capital gains. One of several requirements for RIC
qualification is that the Fund must receive at least 90% of
the Fund's gross income each year from dividends, interest,
payments with respect to securities loans, gains from the sale
or other disposition of securities or foreign currencies, or
other income derived with respect to the Fund's investments in
stock, securities, and foreign currencies (the "90% Test").
Income from investments in precious metals and in precious
minerals will not qualify as gross income from "securities"
for purposes of the 90% Test. The Metals Fund, therefore,
intends to restrict its investment in precious metals and in
precious minerals to avoid a violation of the 90% Test.
In addition, under the Code, a Fund will not qualify as a RIC
for any taxable year if more than 30% of the Fund's gross
income for that year is derived from gains on the sale of
securities held less than three months (the "30% Test").
These requirements may also restrict the extent of a Fund's
a c tivities in option and other portfolio transactions.
Specifically, the 30% Test will limit the extent to which a
Fund may: (i) sell securities held for less than three
months; (ii) write options which expire in less than three
months; and (iii) effect closing transactions with respect to
call or put options that have been written or purchased within
<PAGE> 43<PAGE>
the preceding three months. Finally, as discussed below, this
30% Test requirement also may limit investments by a Fund in
futures contracts and options on stock indexes, securities,
and futures contracts.
Each of the Funds, other than the Money Market Fund, expects
to have greater difficulty than other mutual funds in
satisfying the 30% Test because of frequent redemptions and
exchanges of shares that are expected to occur as investors in
the Fund seek to take advantage of anticipated changes in
market conditions as a part of their market-timing investment
strategies. To minimize the risk that it will not satisfy the
30% Test because of such frequent redemptions and exchanges of
shares, each Fund will seek to meet that Fund's obligations in
c o n nection with redemptions and exchanges without the
realization of gains on the sales of stock or securities,
options, futures or forward contracts, options on futures
c o n tracts, or foreign currencies (or options, futures
contracts, or forward contracts on such foreign currencies).
In this regard, the Fund will seek (consistent with the Fund's
investment strategies) to use available cash, proceeds of
borrowing facilities, proceeds of the sale of stock or
securities, options, futures or forward contracts, options on
futures contracts, or foreign currencies (or options, futures
contracts, or forward contracts on such foreign currencies)
that have been held for three months or more, and the proceeds
of the sale of such assets that produce either no gain or the
smallest amount of such gain.
Section 851(h)(3) of the Code provides a special rule for
series mutual funds with respect to the 30% Test. Pursuant to
Section 851(h)(3), a RIC that is part of a series fund will
not fail the 30% Test as a result of sales made within five
days of "abnormal redemptions" if: (i) the sum of the
percentages for abnormal redemptions exceeds 30%; and (ii) the
RIC of which such fund is a part would meet the 30% Test if
all the funds of the investment company were treated as a
single corporation. Abnormal redemptions are defined as
redemptions which occur on any day when net redemptions exceed
one percent of net asset value. If abnormal redemptions
require a Fund to sell securities with a holding period of
less than three months, the Fund intends to make those sales
within five days of such redemptions so as to qualify for the
exclusion afforded by Section 851(h)(3) of the Code if it is
possible to do so. Despite each Fund's objective to satisfy
the requirements of Section 851 of the Code, there can be no
assurance that a Fund's efforts to achieve that objective will
be successful.
If a Fund does not satisfy the 30% Test for the Fund's first
taxable year, or for any subsequent taxable year, the Fund
will not qualify as a RIC for that year. If a Fund fails to
<PAGE> 44<PAGE>
qualify as a RIC for any taxable year, the Fund would be taxed
in the same manner as an ordinary corporation. In that event,
the Fund would not be entitled to deduct the distributions
which the Fund had paid to shareholders and, thus, would incur
a corporate income tax liability on all of the Fund's taxable
income whether or not distributed. The imposition of
corporate income taxes on the Fund would directly reduce the
return to an investor from an investment in the Fund.
In the event of a failure by a Fund to qualify as a RIC, the
Fund's distributions, to the extent such distributions are
derived from the Fund's current or accumulated earnings and
profits, would constitute dividends that would be taxable to
the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate
shareholders. This treatment would also apply to any portion
of the distributions that might have been treated in the
shareholder's hands as long-term capital gains, as discussed
below, had the Fund qualified as a RIC.
If a Fund were to fail to qualify as a RIC for one or more
taxable years, the Fund could then qualify (or requalify) as a
RIC for a subsequent taxable year only if the Fund had
distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the
interest charge mentioned below, if applicable) attributable
to such period. The Fund might also be required to pay to the
U.S. Internal Revenue Service (the "IRS") interest on 50% of
such accumulated earnings and profits. In addition, pursuant
to the Code and an interpretative notice issued by the IRS, if
the Fund should fail to qualify as a RIC and should thereafter
seek to requalify as a RIC, the Fund may be subject to tax on
the excess (if any) of the fair market of the Fund's assets
over the Fund's basis in such assets, as of the day
immediately before the first taxable year for which the Fund
seeks to requalify as a RIC.
If a Fund determines that the Fund will not qualify as a RIC
under Subchapter M of the Code, the Fund will establish
procedures to reflect the anticipated tax liability in the
Fund's net asset value.
When a Fund, other than the Money Market Fund, is required to
sell securities to meet significant redemptions or exchanges,
the Fund may enter into futures contracts as a hedge against
price changes in the securities to be sold. Gains realized by
the Fund upon closing out the Fund's position in these
contracts are subject to the 30% Test. Ordinarily, these
gains could not be offset by declines in the value of the
hedged securities for purposes of the 30% Test. Section
851(g)(1) of the Code, however, provides that, in the case of
a "designated hedge," for purposes of the 30% Test, increases
<PAGE> 45<PAGE>
and decreases in value (during the period of the hedge) of
positions which are part of the hedge are to be netted.
Section 851(g)(2) of the Code provides that a "designated
hedge" exists when: (i) the taxpayer's risk of loss with
respect to any position in property is reduced by reason of a
c o n tractual obligation to sell substantially identical
property; and (ii) the taxpayer clearly identifies the
positions which are part of the hedge in the manner prescribed
in the IRS regulations.
IRS regulations have not yet been issued specifying how this
identification requirement can be satisfied. The legislative
history with respect to Section 851(g) states that, prior to
issuance of regulations, the identification requirement is
satisfied either by: (i) placing the positions that are part
of the hedge in a separate account that is maintained by a
broker, futures commission merchant ("FCM"), custodian, or
similar person, and that is designated as a hedging account,
provided that such person maintaining such account makes
notations identifying the hedged and hedging positions and the
d a te on which the hedge is established; or (ii) the
designation by such a broker, FCM, custodian, or similar
person of such positions as a hedge for purposes of these
provisions, provided that the RIC is provided with a written
confirmation stating the date that the hedge is established
and identifying the hedged and hedging positions.
When a Fund, other than the Money Market Fund, enters into
futures contracts to hedge against price changes of securities
to be sold, the Fund may identify such securities and
contracts as a hedge so as to qualify under Section 851(g)(1)
of the Code. There can be no assurances, however, that a Fund
(or the Fund's agents) will be able to comply with the
identification requirements that may be contained in future
IRS regulations. Moreover, the netting rule of Section
851(g)(1) is available only if the securities to be sold and
the property subject to the futures contracts constitute
"substantially identical" property. Each of the Funds, other
than the Money Market Fund, generally intends to sell pro rata
the securities being hedged, but it is unclear whether the
s e c urities and the futures contracts would constitute
"substantially identical" property.
Special Considerations Applicable to The Rydex Precious Metals
Fund. In general, with respect to the Metals Fund, gains from
"foreign currencies" and from foreign currency options,
f o reign currency futures, and forward foreign exchange
contracts ("forward contracts") relating to investments in
stock, securities, or foreign currencies will be qualifying
income for purposes of determining whether the Metals Fund
qualifies as a RIC. It is currently unclear, however, who
will be treated as the issuer of a foreign currency instrument
<PAGE> 46<PAGE>
or how foreign currency options, futures, or forward contracts
will be valued for purposes of the RIC diversification
requirements applicable to the Metals Fund.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's
functional currency (i.e., unless certain special rules apply,
currencies other than the U.S. dollar). In general, foreign
currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts," and from
unlisted options will be treated as ordinary income or loss
under Code Section 988. Also, certain foreign exchange gains
derived with respect to foreign fixed-income securities are
also subject to Section 988 treatment. In general, Code
Section 988 gains or losses will increase or decrease the
amount of the Metals Fund's investment company taxable income
available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the
Metals Fund's net capital gain. Additionally, if Code Section
988 losses exceed other investment company taxable income
during a taxable year, the Metals Fund would not be able to
make any ordinary dividend distributions.
The Metals Fund may incur a liability for dividend withholding
tax as a result of the Metals Fund's investment in stock or
securities of foreign corporations. If, at any year end, more
than 50% of the assets of the Metals Fund are comprised of
stock or securities of foreign corporations, the Metals Fund
may elect to "pass through" to shareholders the amount of
foreign taxes paid by the Metals Fund. The Metals Fund will
make such an election only if the Metals Fund deems this to be
in the best interests of its shareholders. If the Metals Fund
does not qualify to make this election or does qualify, but
does not choose to do so, the imposition of such taxes would
directly reduce the return to an investor from an investment
in the Metals Fund.
Transactions By the Funds. If a call option written by a Fund
expires, the amount of the premium received by the Fund for
the option will be short-term or long-term capital gain to the
Fund depending on the Fund's holding period for the underlying
security or underlying futures contract. If such an option is
closed by a Fund, any gain or loss realized by the Fund as a
result of the closing purchase transaction will be short-term
or long-term capital gain or loss depending on the Fund's
holding period for the underlying security or underlying
futures contract. If the holder of a call option exercises
the holder's right under the option, any gain or loss realized
by the Fund upon the sale of the underlying security or
underlying futures contract pursuant to such exercise will be
short-term or long-term capital gain or loss to the Fund
<PAGE> 47<PAGE>
depending on the Fund's holding period for the underlying
security or underlying futures contract.
With respect to call options purchased by a Fund, the Fund
will realize short-term or long-term capital gain or loss if
such option is sold and will realize short-term or long-term
capital loss if the option is allowed to expire depending on
the Fund's holding period for the call option. If such a call
option is exercised, the amount paid by the Fund for the
option will be added to the basis of the stock or futures
contract so acquired.
A Fund has available to it a number of elections under the
Code concerning the treatment of option transactions for tax
purposes. A Fund will utilize the tax treatment that, in the
Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will
vary according to the elections made by the Fund. These tax
considerations may have an impact on investment decisions made
by the Fund.
Each of the Nova Fund, the Ursa Fund, the OTC Fund, and the
Metals Fund in its operations also will utilize options on
stock indexes. Options on "broad based" stock indexes are
classified as "nonequity options" under the Code. Gains and
losses resulting from the expiration, exercise, or closing of
such nonequity options, as well as gains and losses resulting
from futures contract transactions, will be treated as long-
term capital gain or loss to the extent of 60% thereof and
short-term capital gain or loss to the extent of 40% thereof
(hereinafter, "blended gain or loss"). In addition, any
nonequity option and futures contract held by a Fund on the
last day of a fiscal year will be treated as sold for market
value on that date, and gain or loss recognized as a result of
such deemed sale will be blended gain or loss.
The trading strategies of each of the Nova Fund, the Ursa
Fund, the OTC Fund, and the Metals Fund involving nonequity
options on stock indexes may constitute "straddle"
transactions. "Straddles" may affect the taxation of such
instruments and may cause the postponement of recognition of
losses incurred in certain closing transactions. Each of
these four Funds will also have available to the Fund a number
of elections under the Code concerning the treatment of option
transactions for tax purposes. Each such Fund will utilize
the tax treatment that, in the Fund's judgment, will be most
favorable to a majority of investors in the Fund. Taxation of
these transactions will vary according to the elections made
by the Fund. These tax considerations may have an impact on
investment decisions made by the Fund.
<PAGE> 48<PAGE>
A Fund's transactions in options, under some circumstances,
could preclude the Fund's qualifying for the special tax
treatment available to investment companies meeting the
requirements of Subchapter M of the Code. However, it is the
intention of each Fund's portfolio management to limit gains
from such investments to less than 10% of the gross income of
the Fund during any fiscal year in order to maintain this
qualification.
Back-Up Withholding. Each Fund is required to withhold and
remit to the U.S. Treasury 31% of (i) reportable taxable
dividends and distributions and (ii) the proceeds of any
redemptions of Fund shares with respect to any shareholder who
is not exempt from withholding and who fails to furnish the
Trust with a correct taxpayer identification number, who fails
to report fully dividend or interest income, or who fails to
certify to the Trust that the shareholder has provided a
c o r r e ct taxpayer identification number and that the
shareholder is not subject to withholding. (An individual's
taxpayer identification number is the individual's social
security number.) The 31% "back-up withholding tax" is not an
additional tax and may be credited against a taxpayer's
regular Federal income tax liability.
Other Issues. Each Fund may be subject to tax or taxes in
certain states where the Fund does business. Furthermore, in
those states which have income tax laws, the tax treatment of
a Fund and of Fund shareholders with respect to distributions
by the Fund may differ from Federal tax treatment.
Shareholders are urged to consult their own tax advisors
regarding the application of the provisions of tax law
described in this Statement of Additional Information in light
of the particular tax situations of the shareholders and
regarding specific questions as to Federal, state, or local
taxes.
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey
08540, are the auditors and the independent certified public
accountants of the Trust and each of the Funds. Star Bank,
N.A., 425 Walnut Street, Cincinnati, Ohio 45202, acts as the
Custodian bank for the Trust and each of the Funds.
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FINANCIAL STATEMENTS
The Financial Statements (audited) of the Trust for the fiscal
year ended June 30, 1996, are incorporated by reference from
the Trust's 1996 Annual Report to Shareholders. Copies of the
Trust's Annual Report may be obtained without charge by
contacting the Trust at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, or by telephoning the Trust at 800-
820-0888 or 301-468-8520.
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