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 Prospectus. 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:
<TABLE>
<CAPTION>
FUND BENCHMARK
<S> <C>
The Nova Fund (RYNVX) 150% of the performance of the S&P500 Composite Stock Price
IndexTM
The Ursa Fund (RYURX) Inverse (opposite) of the S&P500 Composite Stock Price IndexTM
Rydex OTC Fund (RYOCX) NASDAQ 100 IndexTM (NDX)
Rydex Precious Metals Fund Philadelphia Stock Exchange Gold/Silver IndexTM (XAU)
(RYPMX)
Rydex U.S. Government 120% of the price movement of the current Long Treasury Bond
Bond Fund
(RYGBX)
The Juno Fund (RYJUX) Inverse (opposite) of the price movement of the current Long Treasury
Bond
</TABLE>
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.
1
<PAGE>
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, 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 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
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 August 1, 1997, as supplemented January 9, 1998, 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 telephone 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 August 1,
1997, as supplemented January 9, 1998.
2
<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...........................................22
INVESTMENT TECHNIQUES AND OTHER
INVESTMENT POLICIES.................................................23
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................30
HOW TO INVEST IN THE FUNDS............................................30
REDEEMING AN INVESTMENT (WITHDRAWALS).................................31
EXCHANGES.............................................................33
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES...........................................................33
DETERMINATION OF NET ASSET VALUE......................................34
TAX-SHELTERED RETIREMENT PLANS........................................35
TRANSACTION CHARGES...................................................36
DIVIDENDS AND DISTRIBUTIONS...........................................36
TAXES.................................................................36
MANAGEMENT OF THE TRUST...............................................38
PERFORMANCE INFORMATION...............................................40
GENERAL INFORMATION ABOUT THE TRUST...................................42
3
<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 including 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 of Ursa Fund shares will increase for each day in direct proportion to any
decreases in the level of the S&P500 Index or decrease for each day in direct
proportion to any increases in the level of the S&P500 Index. 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 Ursa Fund shares may
diverge significantly from the respective cumulative percentage decrease or
increase in the S&P500 Index due to a compounding effect. 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 that 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 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
current 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.
4
<PAGE>
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 for any single trading day, the total return on its shares before
expenses and costs would increase for that day proportionally to any decreases
in the price of the Long Bond or decrease for that day proportionally to any
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 Money 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 instrumentalities, as well as in repurchase
agreements collateralized fully by U.S. Government Securities.
A discussion of each Fund's investment objective(s), policies, and benchmark, if
any, 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.
5
<PAGE>
While the Funds do not expect that the returns over a year will 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. 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, stock indexes, and futures
contracts. 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.
Under certain circumstances, trading on an exchange on which portfolio
instruments of a Fund are traded may be halted or closed early, resulting in a
Fund being unable to execute buy or sell orders that day. If such a trading halt
occurs, and a Fund needs to execute a high volume of trades on that trading day,
a Fund may incur substantial trading losses. See "Special Risk Considerations;
Trading Halts."
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 to compliance with applicable minimum
investment requirements). 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.
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). 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.
6
<PAGE>
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."
7
<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
The Rydex U.S.
The Rydex U.S. Government
The Nova The Ursa The Rydex Precious Government The Juno Money
Fund Fund OTC Fund Metals Fund Bond Fund Fund Market Fund
---- ---- -------- ----------- --------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None None None None None None None
Sales Load Imposed on Reinvested Dividends None None None None None None None
Deferred Sales Load None None None None None None None
Redemption Fees None None None None None None None
Exchange Fees None None None None None None None
Annual Fund Operating Expenses
- ------------------------------
(as a percentage of average net assets)
Management Fees 0.75% 0.90% 0.75% 0.75% 0.50% 0.90% 0.50%
12b-1 Fees None None None None None None None
Other Expenses
Administrative Fees 0.25% 0.25% 0.20% 0.20% 0.20% 0.25% 0.20%
Additional Expenses* 0.16% 0.19% 0.32% 0.50% 0.79% 0.43% 0.16%
-------- ------- -------- -------- -------- ----- --------
Total Other Expenses 0.41% 0.44% 0.52% 0.70% 0.99% 0.68% 0.36%
Total Fund Operating Expenses** 1.16% 1.34% 1.27% 1.45% 1.49% 1.58% 0.86%
</TABLE>
- ---------------------------
* Additional expenses are based on amounts incurred during the most-recent
fiscal year end. The Trustees, on March 12, 1997, changed the Trust's
fiscal year from June 30 to March 31. The information in this row,
therefore, reflects nine months of financial activity (and has been
annualized).
** Retirement plans are charged an annual $15.00 maintenance fee and a $15.00
per account liquidation fee. See "Tax-Sheltered Retirement Plans."
8
<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 $11.81 $36.74 $63.53 $139.53
The Ursa Fund $13.64 $42.45 $73.39 $161.18
Rydex OTC Fund $12.93 $40.23 $69.55 $152.76
Rydex Precious Metals Fund $14.76 $45.93 $79.41 $174.42
Rydex U.S. Government
Bond Fund $15.17 $47.20 $81.60 $179.23
The Juno Fund $16.09 $50.05 $86.53 $190.05
Rydex U.S. Government
Money Market Fund $8.76 $27.24 $47.10 $103.45
</TABLE>
The 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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
Period Ended Year Ended Year Ended Period Ended
March 31, 1997* June 30,1996 June 30,1995 June 30, 1994**
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of Period $ 15.68 $ 11.81 $ 9.77 $ 10.01
----------- ----------- ---------- -----------
Net Investment Income 0.35 0.56 0.28 0.01
Net Realized and Unrealized Gains
(Losses) on Securities 2.19 3.31 2.88 (0.25)
------------- ------------- --------- -----------
Net Increase (Decrease) in Net Asset
Value 2.54 3.87 3.16 (0.24)
Resulting from Operations
Dividends to Shareholders from Net 0.00 0.00 (0.29) 0.00
Investment Income
Distributions to Shareholders from Net (0.33) 0.00 (0.83) 0.00
----------- ----------- --------- -----------
Realized Capital Gain
Net Increase (Decrease) in Net Asset 2.21 3.87 2.04 (0.24)
----------- ---------- --------- ----------
Value
Net Asset Value -- End of Period $ 17.89 $ 15.68 $ 11.81 $ 9.77
========== ========== ========= ==========
Total Investment Return 20.92%*** 32.77% 32.65% (2.47)%
Ratios to Average Net Assets
Net Expenses 1.16%***++ 1.31% 1.43% 1.73%***
Net Investment Income 2.69%*** 3.14% 2.62% 1.05%***
Supplementary Data
Portfolio Turnover Rate**** 0.00% 0.00% 0.00% 0.00%
Net Assets, End of Period (000's $ 181,930 $ 224,541 $ 62,916 $ 77,914
omitted)
</TABLE>
- --------------------
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.19%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: July 12, 1993.
*** Annualized.
**** 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.
</FN>
10
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Ursa Fund
Period Ended Year Ended Year Ended Period Ended
March 31, 1997* June 30, 1996 June 30, 1995 June 30, 1994**
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of Period $ 7.55 $ 8.79 $ 10.54 $ 10.00
------------ ---------- --------- ---------
Net Investment Income 0.17 0.30 0.35 0.01
Net Realized and Unrealized Gains
(Losses) on Securities (0.68) (1.54) (1.78) 0.53
------------ ---------- ---------- -----------
Net Increase (Decrease) in Net Asset
Value (0.51) (1.24) (1.43) 0.54
Resulting from Operations
Dividends to Shareholders from Net (0.02) 0.00 (0.32) 0.00
Investment Income
Net Increase (Decrease) in Net Asset (0.53) (1.24) (1.75) 0.54
---------- ---------- ---------- -----------
Value
Net Asset Value -- End of Period $ 7.02 $ 7.55 $ 8.79 $ 10.54
========== ========== ========== ==========
Total Investment Return (8.98)%*** (14.11)% (14.08)% 10.89%
Ratios to Average Net Assets
Net Expenses 1.34%***++ 1.39% 1.39% 1.67%***
Net Investment Income 3.21%*** 3.38% 3.50% 1.43%***
Supplementary Data
Portfolio Turnover Rate**** 0.00% 0.00% 0.00% 0.00%
Net Assets, End of Period (000's $582,288 $192,553 $127,629 $110,899
omitted)
</TABLE>
- ----------------
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.36%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: January 7, 1994.
*** Annualized.
**** 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 investments in options and futures
contracts which are deemed short-term securities.
</FN>
11
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Rydex OTC Fund
Period Ended Year Ended Year Ended Period Ended
March 31, 1997* June 30, 1996 June 30, 1995 June 30, 1994**
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of
Period $ 15.16 $ 12.22 $ 8.76 $ 10.00
---------- ---------- ---------- ----------
Net Investment Income 0.01 0.06 0.14 0.01
Net Realized and Unrealized Gains
(Losses) on Securities 2.84 3.24 4.17 (1.25)
----------- ----------- ---------- -----------
Net Increase (Decrease) in Net
Asset Value Resulting from 2.85 3.30 4.31 (1.24)
Operations
Dividends to Shareholders from Net
Investment Income (0.07) 0.00 (0.12) 0.00
Distributions to Shareholders from
Net Realized Capital Gain (0.01) (0.36) (0.73) 0.00
----------- ----------- ----------- ----------
Net Increase (Decrease) in Net
Asset Value 2.77 2.94 3.46 (1.24)
----------- ----------- ----------- ----------
Net Asset Value -- End of Period $ 17.93 $ 15.16 $ 12.22 $ 8.76
========== ========== ========== ===========
Total Investment Return 24.77%*** 26.44% 49.00% (30.17)%
Ratios to Average Net Assets
Net Expenses 1.27%***++ 1.33% 1.41% 1.97%***
Net Investment Income 0.08%*** 0.44% 1.34% 1.69%***
Supplementary Data
Portfolio Turnover Rate**** 1,140.35% 2,578.56% 2,241.00% 1,171.00%
Net Assets, End of Period (000's
omitted) $ 52,278 $ 48,716 $ 61,948 $ 30,695
</TABLE>
- -----------------
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.27%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: February 14, 1994.
*** Annualized.
**** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
</FN>
12
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Rydex Precious Metals Fund
Period Ended Year Ended Year Ended Period Ended
March 31,1997* June 30,1996 June 30, 1995 June 30, 1994**
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of
Period $ 9.05 $ 8.73 $ 8.29 $ 10.00
------------ ---------- ---------- ----------
Net Investment Income 0.00 0.00 0.10 0.01
Net Realized and Unrealized Gains
(Losses) on Securities (1.41) 0.32 0.43 (1.72)
------------ ---------- ---------- -----------
Net Increase (Decrease) in Net
Asset Value Resulting from
Operations (1.41) 0.32 0.53 (1.71)
Dividends to Shareholders from Net
Investment Income 0.00 0.00 (0.09) 0.00
------------ ---------- ------------ ----------
Net Increase (Decrease) in Net
Asset Value (1.41) 0.32 0.44 (1.71)
------------ ---------- ---------- ----------
Net Asset Value -- End of Period $ 7.64 $ 9.05 $ 8.73 $ 8.29
=========== ========== ========== ==========
Total Investment Return (20.77)%*** 3.67% 6.21% (29.27)%
Ratios to Average Net Assets
Net Expenses 1.45%***++ 1.33% 1.38% 2.06%***
Net Investment Income 0.00%*** (0.01)% 1.15% 1.23%***
Supplementary Data
Portfolio Turnover Rate**** 743.33% 1,036.37% 1,765.00% 2,728.00%
Average Commission Rate Paid***** 0.0101 0.0151 -- --
Net Assets, End of Period (000's
omitted) $ 23,680 $ 36,574 $ 40,861 $ 1,526
- -------
</TABLE>
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.49%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: December 1, 1993.
*** Annualized.
**** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
***** 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.
</FN>
13
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Rydex U.S. Government Bond Fund
Period Ended Year Ended Year Ended Period Ended
March 31,1997* June 30,1996 June 30, 1995 June 30, 1994**
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of
Period $ 8.97 $ 9.55 $ 8.24 $ 10.00
------------ ----------- ----------- -----------
Net Investment Income 0.34 0.46 0.39 0.02
Net Realized and Unrealized Gains
(Losses) on Securities (0.45) (0.45) 1.17 (1.76)
------------ ----------- ----------- -----------
Net Increase (Decrease) in Net
Asset Value Resulting from
Operations (0.11) 0.01 1.56 (1.74)
Dividends to Shareholders from
Net Investment Income (0.34) (0.46) (0.25) (0.02)
Distributions to Shareholders from
Net Realized Capital Gain 0.00 (0.13) 0.00 0.00
---------- ------------ ----------- -----------
Net Increase (Decrease) in Net
Asset Value (0.45) (0.58) 1.31 (1.76)
------------ ------------ ----------- -----------
Net Asset Value -- End of Period $ 8.52 $ 8.97 $ 9.55 $ 8.24
=========== =========== ========== ==========
Total Investment Return (0.46)%*** (1.48)% 18.97% (32.63)%
Ratios to Average Net Assets
Net Expenses 1.49%***++ 1.26% 2.26% 3.05%***
Net Investment Income 5.06%*** 4.73% 4.64% 3.39%***
Supplementary Data
Portfolio Turnover Rate**** 962.17% 780.30% 3,452.59% 1,290.00%
Net Assets, End of Period (000's
omitted) $ 3,302 $ 18,331 $ 2,592 $ 1,564
</TABLE>
- --------------------
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.51%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: January 3, 1994.
*** Annualized.
**** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
</FN>
14
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Juno Fund
Period Ended Year Ended Period Ended
March 31,1997* June 30,1996 June 30, 1995**
<S> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of Period $ 9.47 $ 9.08 $ 10.00
----------- ----------- -----------
Net Investment Income 0.25 0.34 0.14
Net Realized and Unrealized Gains
(Losses) on Securities 0.00 0.05 (1.06)
----------- ----------- ------------
Net Increase (Decrease) in Net Asset
Value Resulting from Operations 0.25 0.39 (0.92)
Dividends to Shareholders from Net
Investment Income (0.03) 0.00 0.00
------------ ---------- -----------
Net Increase (Decrease) in Net Asset
Value 0.22 0.39 (0.92)
------------ ---------- -----------
Net Asset Value -- End of Period $ 9.69 $ 9.47 $ 9.08
=========== =========== ============
Total Investment Return 3.75%*** 4.30% (9.20)%
Ratios to Average Net Assets
Net Expenses 1.58%***++ 1.64% 1.50%***
Net Investment Income 3.51% 3.63% 1.32%***
Supplementary Data
Portfolio Turnover Rate**** 0.00% 0.00% 0.00%
Net Assets, End of Period (000's
omitted) $ 32,577 $ 18,860 $ 4,301
- ----------------
</TABLE>
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 1.60%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: March 3, 1995.
*** Annualized.
**** 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.
</FN>
15
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUNDS
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Rydex Funds, for the periods
identified, have been audited by Deloitte & Touche LLP, independent certified
public accountants, whose report thereon appears in the Trust's 1997 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. As noted in the financial highlights below, the
Trustees, on March 12, 1997, changed the Trust's fiscal year end from June 30 to
March 31; the information set forth below in these financial highlights under
the columns for the period ended March 31, 1997, therefore, reflects nine months
of financial activity for each of the Rydex Funds. A copy of the Trust's 1997
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 Rydex U.S. Government Money Market Fund
Period Ended Year Ended Year Ended Period Ended
March 31, 1997* June 30, 1996 June 30, 1995 June 30, 1994**
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ----------- ----------- -----------
Net Investment Income 0.03 0.04 0.04 0.01
Net Realized and Unrealized Gains
on Securities 0.00 0.00 0.00 0.00
------------- ----------- ----------- ------------
Net Increase in Net Asset Value
Resulting from Operations 0.03 0.04 0.04 0.01
Dividends to Shareholders from Net
Investment Income (0.03) (0.04) (0.04) (0.01)
------------- ------------ ----------- -----------
Net Increase in Net Asset Value 0.00 0.00 0.00 0.00
------------- ----------- ------------ -----------
Net Asset Value--End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ========== =========== ==========
Total Investment Return 4.39%*** 4.60% 4.43% 2.47%
Ratios to Average Net Assets
Net Expenses 0.86%***++ 0.99% 0.89% 1.16%***
Net Investment Income 4.06%*** 4.18% 4.23% 2.34%***
Supplementary Data
Portfolio Turnover Rate **** 0.00% 0.00% 0.00% 0.00%
Net Assets, End of Period (000's
omitted) $ 283,553 $ 153,925 $ 284,198 $ 88,107
</TABLE>
- -----------------
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the year.
++ The annualized ratio of gross expenses to average net assets is 0.86%.
* The Trustees, on March 12, 1997, changed the Trust's fiscal year end
from June 30 to March 31.
** Commencement of Operations: December 3, 1993.
*** Annualized.
**** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
</FN>
16
<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." A Fund's benchmark may be changed by the Trustees. 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 the Fund 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 the Fund's 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.
None of the Funds (other than the Money Market Fund) will 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; except
that, to the extent the benchmark index selected for a particular Fund is
concentrated in a particular industry, the Fund will be concentrated in that
industry, but will not otherwise be concentrated. This limitation does not apply
to investments or obligations of the U.S. Government or any of its agencies or
instrumentalities.
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. See
"Special Risk Considerations."
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. See "The Benchmarks."
In 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 (i.e., the purchase payment required under the investment technique) 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.
17
<PAGE>
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. See "The Benchmarks." 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 or
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 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, 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
18
<PAGE>
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(TM). See "The Benchmarks."
The OTC Fund does not aim to hold all of the 100 securities included in the
NASDAQ 100 Index(TM). Instead, the OTC Fund intends to hold representative
securities included in the NASDAQ 100 Index(TM) or other instruments which the
Advisor believes will provide returns that correspond to those of the NASDAQ 100
Index(TM). 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.
Companies whose securities are traded on the over-the-counter ("OTC") markets
may include 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 may 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 also 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 and the greater sensitivity 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 may be
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. See "The Benchmarks." To
achieve its objective, the Metals Fund invests in securities included in the XAU
Index. In addition, 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.
Metals-related investments are considered speculative and are influenced by a
host 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 Metals Fund may invest up to 5% of its assets in securities of foreign
issuers other than American Depository Receipts traded in U.S. dollars on United
States exchanges. These securities present certain risks not present in domestic
investments and expose the investor to general market conditions which differ
19
<PAGE>
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 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 current Long Treasury
Bond (the "Long Bond"), without consideration of interest paid. See "The
Benchmarks."
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 three times a year) in an
attempt to track the price movement of the newly-issued Long Bond.
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. See "The Benchmarks."
In attempting to achieve its objective, the Fund intends to devote its assets
primarily to employing certain investment techniques. The investment techniques
that may be employed by the Fund include engaging in short sales and
transactions in futures contracts on U.S. Treasury bonds and options on such
contracts. These techniques are highly specialized and involve 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.
20
<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 or decrease for that day in direct proportion to any increase in
the price of the Long Bond. 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 sold in the open
market, however, does change. The market value of U.S. Treasury bonds rises when
long-term interest rates decrease and falls when long-term interest rates
increase. Accordingly, if the Juno Fund is successful in meeting its investment
objective, the Fund's total return should rise with increases in long-term
interest rates and fall with decreases in long-term interest rates. Investors in
the Juno Fund may experience substantial losses during periods of falling
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 principal 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.
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The Money Market Fund may also invest in securities which are not backed by the
full faith and credit of the United States. In these instances, such obligations
may be supported by the right of the issuer to borrow from the U.S. Treasury,
while still others are supported only by the credit of the instrumentality.
Securities not backed by the full faith and credit of the United States may be
backed, in part, by a line of credit with the U.S. Treasury (such as securities
of the Federal National Mortgage Association), or the Money Market Fund must
look to the agency issuing or guaranteeing the obligation for ultimate repayment
(such as securities of the Federal Farm Credit System), in which case the Money
Market Fund may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
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 pro
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). The S&P500 Index is composed of 500 common stocks, which
are chosen by the Standard & Poor's Corporation ("S&P"), a division of The
McGraw-Hill Companies, Inc., on a statistical basis to be included in the S&P500
Index. The inclusion of a stock in the S&P500 Index in no way implies that the
S&P believes the stock to be an attractive investment. The 500 securities, most
of which traded on the NYSE, represented, as of December 31, 1996, approximately
70% of the market value of all United States common stocks. Each stock included
in the S&P500 Index is weighted by the stock's market value.
Because of the market-value weighting, the 50 largest companies included in the
S&P500 Index currently account for approximately 47% of the S&P500 Index.
Typically, companies included in the S&P500 Index are the largest and most
dominant firms in their respective industries. As of December 31, 1996, the five
largest companies in the S&P500 Index were: General Electric (2.9%); Coca Cola
(2.3%); Exxon Corporation (2.2%); Intel Corporation (1.9%); and Microsoft
Corporation (1.7%). The largest industry categories for the S&P500 Index were:
banks (7.7%); telephone companies (6.6%); pharmaceutical companies (6.5%);
international oil companies (5.8%); and computer companies (4.6%).
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 National Association of Securities Dealers Automated
Quotations Stock Market (the "Nasdaq"). The Nasdaq, which represents the
fastest-growing stock market in the United States, also is one of the first
fully-electronic stock markets in the world. This modern-day securities market
began operations in 1971, and today lists more companies than any other market
in the United States. The NASDAQ 100 Index(TM), which was created in 1985, is
limited to one issue per company. At the time of inclusion in the NASDAQ 100
Index(TM), index securities must have a minimum market value of at least $500
million. Only domestic issues are included in the NASDAQ 100 Index(TM).
As of January 31, 1997, the NASDAQ 100 Index(TM) was comprised of the following
industry sectors: electronic technology (36.35%); technology services (29.9%);
industrial services (20.83%); telecommunications (8.36%); health technology
(3.79%); and transportation (0.74%). As used herein, electronic technology
describes companies that manufacture computer chips and other computer hardware
(such as Intel Corporation, Cisco Systems, Inc., and Apple Computer, Inc.),
whereas technology services describes publishers of computer software and
operating systems (such as Microsoft Corporation and Oracle Corporation).
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The XAU Index. The Philadelphia Stock Exchange (the "XAU") Gold/Silver Index(TM)
(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 Coeur D'Alene Mines Corp. While 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 current 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 three times a year. In
the future, the U.S. Treasury may change the number of times each year that the
Long Bond is issued.
NEITHER THE NOVA FUND NOR THE URSA FUND IS SPONSORED, ENDORSED, SOLD, OR
PROMOTED BY THE S&P; THE OTC FUND IS NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED
BY THE NASDAQ OR ANY OF THE NASDAQ'S AFFILIATES (THE NASDAQ AND ITS AFFILIATES
HEREINAFTER COLLECTIVELY REFERRED TO AS THE "NASDAQ"); AND THE METALS FUND IS
NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED BY THE XAU. NONE OF THE S&P, THE
NASDAQ, AND THE XAU MAKES ANY REPRESENTATION OR WARRANTY, IMPLIED OR EXPRESS, TO
THE INVESTORS IN THE FUNDS, OR ANY MEMBER OF THE PUBLIC, REGARDING THE
ADVISABILITY OF INVESTING IN INDEX FUNDS OR THE ABILITY OF THE S&P500 INDEX,
NASDAQ 100 INDEX(TM), AND THE XAU INDEX, RESPECTIVELY, TO TRACK GENERAL STOCK
MARKET PERFORMANCE. NONE OF THE S&P500 INDEX, THE NASDAQ, AND THE XAU GUARANTEES
THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P500 INDEX, NASDAQ 100 INDEX(TM),
AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN. IN THE FUTURE,
THE U.S. TREASURY MAY CHANGE THE NUMBER OF TIMES EACH YEAR THAT THE LONG BOND IS
ISSUED.
NONE OF THE S&P, THE NASDAQ, AND THE XAU MAKES ANY WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY ANY OF THE FUNDS, THE INVESTORS IN THE FUNDS, OR
ANY PERSON OR ENTITY FROM THE USE OF THE S&P500 INDEX, THE NASDAQ 100 INDEX(TM),
THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN. NONE OF THE S&P, THE
NASDAQ, AND THE XAU MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE S&P500 INDEX,
THE NASDAQ 100 INDEX(TM), THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED
THEREIN.
For additional information regarding these benchmark indexes, see "The
Benchmarks" in the Statement of Additional Information.
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.
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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 by 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. See "Financial Highlights of the Funds" and "Taxes."
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 of the Funds 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 dealer spreads and 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). 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 cash or liquid securities in a segregated account by these
Funds as "cover" for these investment techniques.
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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."
Trading Halts
All of the Funds (other than the Money Market Fund) typically will hold most of
their investments in short-term options and futures contracts. The major
exchanges on which these contracts are traded, principally the Chicago
Mercantile Exchange (the "CME"), the Chicago Board of Options Exchange (the
"CBOE"), and the Chicago Board of Trade (the "CBOT"), have established limits on
how much an option or futures contract may decline over various time periods
within a day. If an option or futures contract's price declines more than the
established limits, trading on the exchange is halted on that instrument. If
such trading halts are instituted by an options or futures exchange at the close
of a trading day, a Fund will not be able to execute purchase or sales
transactions in the specific options or futures contracts affected. In such an
event, a Fund also may be required to use a fair-value method to price its
outstanding contracts. A trading halt at the end of a business day may
constitute an emergency situation under Commission regulations.
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.
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 CME and 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.
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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."
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 a
futures contract 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 market-to-market on a daily basis) a
segregated account consisting of cash or liquid securities, including U.S.
Government Securities or repurchase agreements collateralized 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. For additional
information regarding the methods by which a Fund covers its position in stock
index futures contracts and options thereon, see "Investment Policies and
Techniques; Futures Contracts and Options Thereupon" in the Statement of
Additional Information.
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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 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&P500
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 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 (i.e., position limits)
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 and
other investment companies advised by the Advisor and its affiliates may buy or
sell; however, the Advisor intends to comply with all limitations. For
additional information regarding the risks to which index options transactions
are subject, see "Investment Policies and Techniques; Options Transactions" in
the Statement of Additional Information.
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.
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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 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 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 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.
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. For additional information regarding options on securities, including
other risks and closing transactions related to options on securities, see
"Investment Policies and Techniques; Options Transactions" in the Statement of
Additional Information.
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 securities at such a level that (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. These Funds may
make a short sale when the Fund wants to sell the security the Fund owns at a
current attractive price, in order to hedge or limit the exposure of the Fund's
position.
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.
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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.
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 Credits, the
Tennessee Valley Authority, the Export-Import Bank of the United States, the
Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, and the National Credit Union Administration.
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. These securities,
when held to maturity or retired, may include an element of 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.
A Fund will not enter into repurchase agreements of more than seven days
duration if more than 15% (10% with respect to the Money Market Fund) of the
market value of the Fund's net assets would be so invested together with any
other investment the Fund may hold which is illiquid. For additional information
regarding repurchase agreements, see "Investment Policies and Techniques;
Repurchase Agreements" in the Statement of Additional Information.
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Illiquid Securities
While none of the Funds anticipates doing so, each Fund may purchase illiquid
securities. 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. For additional information regarding illiquid
securities, see "Investment Policies and Techniques; Illiquid Securities" in the
Statement of Additional Information.
Restricted Securities
While none of the Funds anticipates doing so, each Fund may purchase securities
that are not readily-marketable and securities that are not registered 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
("restricted securities"). 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 otherwise meet selection criteria, a
Fund may make such investments. Whether or not such securities are "illiquid"
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 for a board of trustees to determine, such
determination to be based on a consideration of the 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 and/or a sub-adviser. 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 and the Sub-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 was marketable 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.
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.
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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 may 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
securities 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 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. 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 operational
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.
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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:
Rydex Series Trust
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
Only those third-party checks that are issued by insured financial institutions
will be accepted by the Trust. All purchases of Fund shares must be made in U.S.
Dollars.
By Bank Wire Transfer: First, fill out an application and fax the completed
application, along with a request for a shareholder account number, to the Trust
at (301) 468-8585. Then, request that your bank wire transfer the purchase
amount to our custodian, Star Bank, N.A., along with the following instructions:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Trust Account Number: 48038-9030
Your Name
Your Shareholder Account Number
After instructing your bank to transfer money by wire, you must call the Trust
and inform the Trust as to the amount that you have transferred and the name of
the bank sending the transfer in order to obtain same-day pricing or credit.
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.
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Shares of the Rydex Funds are sold at a price based on the net asset value next
calculated after receipt of a purchase order in good form, as described below.
Initial applications and investments, as well as subsequent investments, in the
Rydex Funds made by mail must be received in good form at the Trust, on any
business day, at or prior to 2:00 P.M., Eastern Time, in order to be processed
for that day's pricing or credit. Wire transfers for both initial investments
(which must be preceded by a faxed application) and subsequent investments in
the Rydex Funds must be received in good form at the Trust, on any business day,
by the cut-off times for redemption and exchange requests indicated below under
"Procedures For Redemptions and Exchanges" in order to be processed for that
day's pricing or credit. An initial application that is faxed to the Trust does
not constitute a purchase order until the application has been processed and
correct payment by check or wire transfer has been received by the Trust.
If no Rydex Fund allocation is indicated either on (i) an application received
by the Trust for an initial purchase order or (ii) on the check or the wire
transfer instructions for subsequent purchase orders, then the purchase amount
for that order automatically will be deposited into the Rydex U.S. Government
Money Market Fund.
In 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 securities exchange, registered securities association, or
clearing agency; or a savings association. A notary public cannot provide a
signature guarantee.
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, and as permitted by the Commission, 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, the CBOE, or the CBOT, as appropriate, is
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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. (See "Special Risk
Considerations; Trading Halts.") On any day that the New York Fed or the NYSE
closes early, the principal government securities and corporate bond markets
close early (such as on days in advance of holidays generally observed by
participants in these markets), or as permitted by the Commission, the right is
reserved to advance the time on that day by which purchase and redemption orders
must be received. (See "Determination of Net Asset Value.")
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 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.
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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 both the Rydex Fund from
which the transfer is to be made and each Rydex Fund into which the transfer is
to be 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 or 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.
PROCEDURES FOR REDEMPTIONS AND
EXCHANGES
Written requests for redemptions and exchanges should be sent to 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.
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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 transactions, 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.
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 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 at 1:00 P.M., Eastern Time. The net asset value
of the shares of the High Yield Fund is determined each day on which both the
NYSE and the New York Fed are open for business as of the time that prices for
the high yield corporate bonds included in the Merrill Lynch High Yield Master
IndexTM, the High Yield Fund's benchmark, are taken (currently approximately
3:00 P.M., Eastern Time). Currently, the NYSE and the New York Fed are closed on
weekends, and the following holiday closings have been scheduled for both 1997
and 1998: (i) New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor 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 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 the
following holiday closings have been scheduled for both 1997 and 1998: (i) New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, 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 (in particular,
the CBOT's future holiday schedule may not always include Columbus Day and/or
Veterans' Day).
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.
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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 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.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at 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.
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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 - Pension Plans
(Money Purchase Plans)
Internal Revenue Code Section 403(b)
Plans
For retirement plan accounts that have engaged a registered investment adviser
with discretionary authority over the retirement plan account with the Trust,
the minimum initial investment in the Rydex Funds is $15,000. For retirement
plan accounts that are Self-Directed Accounts, the minimum initial investment in
the Rydex Funds is $25,000.
Retirement plans are charged an annual $15.00 maintenance fee and a $15.00 per
account liquidation 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 $25.00 for items returned for insufficient or uncollectible
funds.
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 these 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
Trustees, however, may declare a special distribution for the Bond Fund if the
Trustees believe that such a distribution would be in the best interests of
shareholders of the Bond Fund.
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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 these 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, or if the Trustees
otherwise believe that such a revised policy would be in the best interests of
the shareholders of the Money Market Fund.
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 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.
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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 (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.
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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 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 of the Ursa Fund and the OTC Fund is Michael P. Byrum, who
is the Advisor's senior portfolio manager. Prior to joining the Advisor in July
1993, Mr. Byrum worked for one 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, at Oxford, Ohio, in 1992.
The portfolio manager of 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, at Hamilton, New
York, in 1974.
The portfolio manager of the Metals Fund is T. Daniel Gillespie, who joined the
Advisor in January 1997. From July 1994 to January 1997, Mr. Gillespie was a
portfolio manager for GIT Investment Funds, a registered investment company in
Arlington, Virginia, where Mr. Gillespie managed over $160 million in equity,
bond, and money market mutual fund assets. From 1991 to 1994, Mr. Gillespie
worked as a portfolio manager for The Rushmore Funds, Inc., in Bethesda,
Maryland, a registered investment company, where Mr. Gillespie managed over $900
million in mutual fund assets. From 1988 to 1991, Mr. Gillespie worked as an
account executive and stock broker for Wheat First Securities, of Bethesda,
Maryland, where Mr. Gillespie managed portfolios for individual investors. From
1986 to 1988, Mr. Gillespie worked as an account executive and stock broker with
Smith Barney, Inc., of Washington, D. C. Mr. Gillespie received his bachelor of
arts degree in Accounting from the University of Maryland, at College Park,
Maryland, in 1980, and received a masters degree in Business Administration from
Averett College, at Danville, Virginia, in 1997.
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The portfolio manager of the Bond Fund is Anne H. Ruff, who joined the Advisor
in August 1996. From 1989 to 1995, Ms. Ruff worked as a portfolio manager for
United Services Life Insurance Company ("USLICO"), in Arlington, Virginia, where
Ms. Ruff managed $2.5 billion in fixed-income portfolios. From 1985 to 1989, Ms.
Ruff worked as an assistant portfolio manager/securities analyst for USLICO.
From 1979 to 1985, Ms. Ruff worked as a bank investment officer for First Union
Corp. (formerly, First American Bank of Virginia) in McLean, Virginia, where Ms.
Ruff managed the bank's federal funds and investment portfolio operations. Ms.
Ruff received her bachelor of arts degree in French and Economics from Mary
Grove College, at Detroit, Michigan, in 1966.
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 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.
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Costs and Expenses
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
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
nine-month period from July 1, 1996 through March 31, 1997, the total expenses
paid (on an annualized basis) 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 1.16%, 1.34%, 1.27%, 1.45%, 1.49%, 1.58%, and 0.86% 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 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.
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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.
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 Exchange, 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.
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<PAGE>
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 compiled (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.
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.
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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
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.
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.
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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.
47
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Prospectus
of
The Rydex High Yield Fund
<PAGE>
Rule 497(e)
File No. 33-59692
[LOGO]
RYDEX SERIES TRUST
THE RYDEX HIGH YIELD FUND
PROSPECTUS
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
INVESTMENT OBJECTIVE AND POLICIES
The Rydex High Yield Fund (the "Fund") (RYHYX) is a diversified series of the
Rydex Series Trust, an open-end management investment company (the "Trust"). The
investment objective of the Fund is to seek to provide investment returns that
correspond to the performance of a benchmark for high yield fixed income
securities. The Fund's current benchmark is the Merrill Lynch High Yield Master
Index(TM) (the "MLHY Index"). To achieve its objective, the Fund will invest in
securities included in the MLHY Index. In addition, the Fund may invest in debt
obligations and other securities that are expected to perform in a manner that
will assist the Fund's performance to track closely the investment performance
of the MLHY Index. See "Other Investment Policies." The Fund will invest
primarily in below investment grade corporate bonds, commonly known as "junk
bonds." Investments of this type are subject to greater risks, including default
risks, than those found in higher rated securities. Purchasers should carefully
assess the risks associated with an investment in the Fund. See "Special Risk
Factors."
ADDITIONAL INFORMATION
The Fund is part of the Rydex Group of Funds, which is designed for professional
money managers and knowledgeable investors who intend to invest in the Rydex
Group of Funds as part of an asset-allocation or market-timing investment
strategy. The Fund alone does not constitute a balanced investment plan. The
nature of the Fund 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. Sales of the Fund shares are made, without sales charges, at
the Fund's per share net asset value.
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 before investing in the Fund. A Statement of Additional Information, dated
August 1, 1997, as supplemented January 9, 1998, containing additional
information about the Fund and the Trust has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. A copy of that
Statement of Additional Information is available, without charge, upon request
to the Trust at the address above or by telephoning the Trust at the telephone
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is August 1, 1997,
as supplemented January 9, 1998.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.....................................................3
FEES AND EXPENSES OF THE FUND..........................................5
FINANCIAL HIGHLIGHTS OF THE FUND ......................................7
THE RYDEX FUNDS........................................................8
INVESTMENT OBJECTIVE AND POLICIES......................................8
SPECIAL RISK FACTORS..................................................11
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................14
HOW TO INVEST IN THE FUND ............................................14
REDEEMING AN INVESTMENT (WITHDRAWALS).................................15
EXCHANGES ............................................................16
PROCEDURES FOR REDEMPTIONS AND EXCHANGES..............................17
DETERMINATION OF NET ASSET VALUE......................................17
TAX-SHELTERED RETIREMENT PLANS .......................................18
TRANSACTION CHARGES...................................................18
DIVIDENDS AND DISTRIBUTIONS ..........................................18
TAXES.................................................................18
MANAGEMENT OF THE TRUST...............................................20
DISTRIBUTION PLAN.....................................................22
PERFORMANCE INFORMATION...............................................23
GENERAL INFORMATION ABOUT THE TRUST...................................23
APPENDIX A...........................................................A-1
2
<PAGE>
PROSPECTUS SUMMARY
The Fund
The Rydex High Yield Fund (the "Fund") is a diversified series of the Rydex
Series Trust, an open-end management investment company (the "Trust") that
currently is comprised of nine separate series, including the Fund
(collectively, the "Rydex Funds"). The investment objective of the Fund is to
seek to provide investment returns that correspond to the performance of a
benchmark for high yield fixed income securities. The Fund's current benchmark
is the Merrill Lynch High Yield Master Index(TM) (the "MLHY Index"). To achieve
its objective, the Fund will invest in securities included in the MLHY Index. In
addition, the Fund may invest in debt obligations and other securities that are
expected to perform in a manner that will assist the Fund's performance to
correspond to the investment performance of the MLHY Index. See "The Rydex
Funds," "Investment Objective and Policies," and "Other Investment Policies."
While the Fund does not expect that the returns over a year will deviate
adversely from the performance of the Fund's current benchmark by more than ten
percent, certain factors may affect the Fund's ability to achieve this
correlation, and there is no assurance that the Fund will achieve its investment
objective. See "Tracking Error" under "Special Risk Factors" for a discussion of
these factors.
Special Risk Considerations
The Fund will invest primarily in below investment grade corporate bonds,
commonly known as "junk bonds." Investments of this type are subject to greater
risks, including default risks and market risks, than those found in higher
rated securities. Below investment grade securities are of poorer quality, may
have speculative characteristics, and may present elements of danger with
respect to principal or interest. Purchasers should carefully assess the risks
associated with an investment in the Fund. See "Special Risk Factors."
The Fund is part of the Rydex Group of Funds, which is designed for professional
money managers and knowledgeable investors who intend to invest in the Rydex
Group of Funds as part of an asset-allocation or market-timing investment
strategy. The Fund alone does not constitute a balanced investment plan. The
nature of the Fund 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. See "Special Risk Factors."
Investment Adviser, Sub-Adviser, and Servicer
The Fund's investment adviser is PADCO Advisors, Inc., a Maryland corporation
with offices at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(the "Advisor"). The Fund pays the Advisor an investment management fee of 0.75%
of the average daily net assets of the Fund. Pursuant to a sub-advisory
agreement between the Advisor and Loomis, Sayles & Company, L.P. (the
"Sub-Advisor"), the Advisor pays the Sub-Advisor 0.375% of the average daily net
assets of the Fund for providing portfolio management services to the Fund.
PADCO Service Company, Inc. (the "Servicer"), provides the Fund with general
administrative, transfer agent, shareholder, and registrar services for a fee of
0.20% of the average daily net assets of the Fund. See "Management of the
Trust."
Purchases, Redemptions, and Exchanges
The shares of the 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 Fund currently is $15,000; for all other shareholder accounts,
the minimum initial investment in the Fund currently is $25,000. These minimums
also apply to retirement plan accounts. Shares of the Fund may be exchanged at
any time for shares of any other available Rydex Fund, with no charge, on the
basis of the relative net asset values next computed (subject to compliance with
applicable minimum investment requirements). 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.
3
<PAGE>
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 (a) is 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 Trust 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 Fund,"
"Redeeming An Investment (Withdrawals)," and "Exchanges."
4
<PAGE>
FEES AND EXPENSES OF THE FUND
The following table illustrates all expenses and fees that a shareholder of the
Fund will incur:
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested
Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75%
12b-1 Fees 0.25%
Other Expenses:
Administrative Fees 0.20%
Additional Expenses* 0.66%**
Total Other Expenses 0.86%
Total Fund Operating Expenses*** 1.86%
- ---------------------
* Additional expenses are based on amounts incurred for the most-recent
fiscal year end. The Trustees, on March 12, 1997, changed the Trust's
fiscal year end from June 30 to March 31. The Fund commenced operations on
January 3, 1997. This information, therefore, reflects approximately three
months of financial activity (and has been annualized).
** Retirement plans are charged an annual $15.00 maintenance fee and a $15.00
per account liquidation fee. See "Tax-Sheltered Retirement Plans."
5
<PAGE>
*** The Fund's investment adviser, sub-adviser, and administrator voluntarily
waived investment management fees, including sub-advisory fees, and certain
administrative fees for the period from January 3, 1997 (the commencement
of operations) through March 31, 1997, so that total Fund operating
expenses for this period actually were 0.99% of the Fund's average net
assets. Had these fee expenses not been waived, total Fund operating
expenses for this period would have been 1.86% of the Fund's average net
assets.
6
<PAGE>
Example
Assuming a hypothetical investment of $1,000, a five-percent annual return, and
redemption at the end of each time period, an investor in the Fund would pay
transaction and operating expenses at the end of each year as follows:
1 YEAR 3 YEARS
$18.94 $58.92
The same level of expenses would be incurred if the investment were held
throughout the period indicated.
The preceding table is provided to assist the investor in understanding the
various costs and expenses which may be borne directly or indirectly by an
investor in the Fund. The percentages shown above are based on the estimate by
the Fund's investment adviser of the expenses to be incurred by the Fund during
the Fund's current fiscal year. The five-percent assumed annual return is for
comparison purposes only. The actual return for the 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 Fund.
For a more complete discussion of the fees connected with an investment in the
Fund, including any fees that may be charged by securities dealers, banks, and
other financial institutions in connection with wire transfers, and the services
to be provided to the Fund, see "How To Investment In the Fund," "Management of
the Trust," and "Distribution Plan" in this Prospectus.
7
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FUND
(For a Share Outstanding Throughout Each Period)
The following financial highlights relating to the Fund, for the period ended
March 31, 1997, have been audited by Deloitte & Touche LLP, independent
certified public accountants, whose report thereon appears in the Trust's 1997
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. As noted in the financial highlights below, the Fund
commenced operations on January 3, 1997, and the Trustees, on March 12, 1997,
changed the Trust's fiscal year end from June 30 to March 31; the information
set forth below in these financial highlights under the column for the period
ended March 31, 1997, therefore, reflects approximately three months of
financial activity for the Fund. A copy of the Trust's 1997 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. The financial highlights relating to the
Fund for the period from April 1, 1997 to June 30, 1997 are unaudited.
<TABLE>
<CAPTION>
April 1, 1997
Period Ended to June 30, 1997
March 31, 1997* (UNAUDITED)
<S> <C> <C>
Per Share Operating Performance:+
Net Asset Value -- Beginning of Period $ 10.00 $ 9.81
----------- --------------
Net Investment Income 0.19 0.29
Net Realized and Unrealized Gains (Losses)
on Securities (0.36) 0.16
------------ --------------
Net Increase (Decrease) in Net Asset Value
Resulting from Operations (0.17) 0.45
Dividends to Shareholders from Net Investment
Income ( 0.02) (0.29)
Distributions to Shareholders from Net Realized
Capital Gain 0.00 0.00
Net Increase (Decrease) in Net Asset Value (0.19) 0.16
------------- ------------
Net Asset Value -- End of Period $ 9.81 $ 9.97
============ ===========
Total Investment Return** (0.12)% 6.89%
Ratios to Average Net Assets**
Net Expenses ++ 0.99%++ 0.76%
Net Investment Income 8.57% 3.80%
Supplementary Data
Portfolio Turnover Rate*** 763.11% 440.71%
Net Assets, End of Period (000's omitted) $ 10,518 $ 24,923
- ------------------
</TABLE>
[FN]
+ The per share data of the Financial Highlights table is calculated
using the daily shares outstanding average for the period.
++ The annualized ratio of gross expenses to average net assets is 1.88%
and 0.76% for the period ended March 31, 1997 and for the period from
April 1, 1997 to June 1, 1997, respectively.
* Commencement of Operations: January 3, 1997. The Trustees, on March 12,
1997, changed the Trust's fiscal year end from June 30 to March 31.
** Annualized.
*** Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
8
<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including the Fund, 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, and the Institutional Money Market Fund (collectively, the "Rydex Funds");
other separate Rydex Funds may be added in the future. The Rydex 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
Institutional Money Market Fund and the Rydex U.S. Government Money Market Fund,
each Rydex Fund is intended to provide investment exposure with respect to a
particular segment of the securities markets. These Rydex Funds seek investment
results that correspond over time to a specified "benchmark." A Rydex Fund's
benchmark may be changed by the Trustees. The Rydex Funds may be used
independently or in combination with each other as part of an overall investment
strategy.
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; provided, that, in connection with exchanges for shares of the
Institutional Money Market Fund, certain minimum investment levels are
maintained. The Trust reserves the right to modify its minimum investment
requirements (see "Exchanges"). Copies of the separate Prospectuses and
Statements of Additional Information for the Rydex Funds other than the 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. The Trust reserves the right to restrict
exchanges out of the Fund if necessary to preserve the Fund's tax status.
INVESTMENT OBJECTIVE AND POLICIES
General
The investment objective of the Fund is to seek to provide investment returns
that correspond to the performance of a benchmark for high yield fixed income
securities. The Fund's current benchmark is the MLHY Index. See "Merrill Lynch
High Yield Master Index(TM)." Although there is no assurance that the Fund's
objective will be achieved, the Fund will seek to achieve its objective by
investing primarily in a variety of long-term, intermediate-term, and short-term
below investment grade corporate bonds (including convertible issues) commonly
known as "junk bonds" and low-rated preferred securities. The Fund will invest
in securities included in the MLHY Index, and may also invest in United States
dollar-denominated bonds issued by foreign-based companies which may be issued
in the United States or on a global basis.
The investment objective of the Fund is fundamental and may not be changed
without the approval of a majority of the shareholders, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). All other
investment policies of the Fund not specified as fundamental, including the
benchmark index for high yield fixed income securities, may be changed without
the approval of shareholders. The trustees of the Trust (the "Trustees") may
consider changing the 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 the Fund that is "leveraged" or
proprietary. Of course, there can be no assurance that the Fund will achieve its
objective. See "Special Risk Factors."
9
<PAGE>
High Yield Corporate Bonds
The corporate bonds primarily purchased by the Fund will be rated in below
investment grade categories by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's") ("Ba" or lower by Moody's,
"BB" or lower by Standard and Poor's). The Fund does not invest in securities
rated lower than "Caa" by Moody's or "CCC" by Standard & Poor's; these ratings
are applied to issues which are predominantly speculative and may be in default
or as to which there may be present elements of danger with respect to principal
or interest. The Fund does not invest in issues which are in default. The Fund
may invest in unrated securities when the Sub-Advisor believes that the
financial condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Fund rated in below investment grade categories by Moody's or
Standard & Poor's (between "Ba" and "Caa" ratings by Moody's and between "BB"
and "CCC" ratings by Standard & Poor's). If the investment rating of a high
yield corporate security in which the Fund is invested is downgraded to below
"Caa" by Moody's or "CCC" by Standard & Poor's, the Fund will sell the
downgraded security as soon as practicable and when the Sub-Advisor considers it
desirable to do so. See Appendix A to this Prospectus for a specific description
of each corporate bond rating category.
The securities in which the Fund invests offer a wide range of maturities (from
less than one year to thirty years) and yields. These securities include
short-term bonds or notes (maturing in less than three years), intermediate-term
bonds or notes (maturing in three to ten years), and long-term bonds (maturing
in more than ten years). While there are no limitations on the average maturity
of the securities held by the Fund, the Fund's average portfolio maturity will
ordinarily be comparable to that of its benchmark. As of July 30, 1997, the
average years-to-maturity of the MLHY Index was approximately nine years.
Repurchase Agreements
The Fund may also invest in repurchase agreements secured by U.S. Government
Securities. Under a repurchase agreement, the Fund purchases a debt security and
simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price (thereby determining the yield during the purchaser's
holding period) 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. The 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 firm which is a party to a
repurchase agreement with the Fund. 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.
The Fund will not enter into repurchase agreements of more than seven days
duration if more than 15% of the market value of the Fund's net assets would be
so invested together with any other investment the Fund may hold which is
illiquid. For additional information regarding repurchase agreements, see
"Investment Policies and Techniques; Repurchase Agreements" in the Statement of
Additional Information.
10
<PAGE>
When-Issued and Delayed-Delivery Securities
The Fund may purchase securities on a when-issued or delayed-delivery basis
(i.e., delivery and payment can take place a month or more 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 the Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Fund will record the transaction and thereafter reflect the value, each day,
of such security in determining its net asset value. The Fund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more than
10% of the Fund's net assets would be so invested. The Fund will maintain, in a
segregated account, cash or liquid securities having a value equal to or greater
than the Fund's purchase commitments.
Short Sales
The 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 Fund closes its short position or replaces the borrowed security, the
Fund will: (a) maintain a segregated account containing cash or liquid
securities which will be marked to the market daily, and at such a level that
(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 Fund may engage in short sales if, at the time of the short sale, it owns or
has the right to acquire an equal amount of the security being sold at no
additional cost. The Fund may make short sale when it wants to sell the security
it owns at a current attractive price, in order to hedge or limit the exposure
of the its position.
Other Investment Policies
When the Sub-Advisor determines that market conditions warrant, the 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, repurchase agreements secured by U.S. Government
securities, commercial paper, and bank money market instruments, including
certificates of deposit, time deposits, bankers' acceptances, and other
short-term obligations issued by United States banks which are members of the
Federal Reserve System. To meet its objective, the Fund may also: invest in
common stocks, rights, or other equity securities, including preferred and
convertible securities; purchase and sell futures contracts, index futures
contracts, and options thereon; and purchase and sell options on securities and
index options. The Fund also may borrow money and lend portfolio securities to
brokers, dealers, and financial institutions. The Fund, however, does not
presently intend to invest more than 5% of the Fund's net assets in any of these
instruments or practices. A more-detailed explanation of these investment
practices, including the risks associated with each practice, is included in the
Statement of Additional Information.
11
<PAGE>
Merrill Lynch High Yield Master Index(TM)
The MLHY Index is a market capitalization-weighted index comprised of domestic
and foreign high yield corporate bonds, each with at least $50 million par
amount outstanding and more than one year to maturity (foreign corporate bonds
are issued by foreign corporations, denominated in United States dollars, and
underwritten by United States syndicates for delivery in the United States).
Interest and price return for each corporate bond included in the MLHY Index are
calculated daily by Merrill Lynch & Co. and Merrill Lynch Securities Pricing
Services (collectively, "Merrill Lynch") based on accrued schedule and trader
pricing. The investment ratings for the corporate bonds included in the MLHY
Index range from "Baa" by Moody's or "BBB" by Standard and Poor's to "C" by
Moody's or "C" by Standard & Poor's (the Fund, however, does not invest in
securities rated lower than "Caa" by Moody's or "CCC" by Standard & Poor's).
Bonds rated as being in default ("Daa" by Moody's or "DDD" by Standard and
Poor's), as well as deferred interest bonds and pay-in-kind bonds, are not
included in the MLHY Index. Split-rated issues (i.e., bonds rated investment
grade by one rating agency and high yield by another rating agency) are included
in the MLHY Index based on the bond's corresponding composite rating. Prices for
the bonds included in the MLHY Index are taken as of 3:00 P.M., Eastern Time,
and only those bonds for which accurate pricing is available are included in the
index. The index was created in 1984.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED BY MERRILL LYNCH. MERRILL
LYNCH DOES NOT MAKE ANY REPRESENTATION OR WARRANTY, IMPLIED OR EXPRESS, TO THE
INVESTORS IN THE FUND, OR ANY MEMBER OF THE PUBLIC, REGARDING THE ADVISABILITY
OF INVESTING IN INDEX FUNDS OR THE ABILITY OF THE MLHY INDEX TO TRACK GENERAL
STOCK MARKET OR CORPORATE BOND PERFORMANCE. MERRILL LYNCH DOES NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE MLHY INDEX, OR ANY DATA INCLUDED
THEREIN.
MERRILL LYNCH DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS
TO BE OBTAINED BY THE FUND, ANY OF THE INVESTORS IN THE FUND, OR ANY PERSON OR
ENTITY FROM THE USE OF THE MLHY INDEX, OR ANY DATA INCLUDED THEREIN. MERRILL
LYNCH DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE MLHY INDEX, OR ANY
DATA INCLUDED THEREIN.
For additional information regarding the MLHY Index, see "Merrill Lynch High
Yield Master Index(TM)" in the Statement of Additional Information.
SPECIAL RISK FACTORS
Credit and Market Risks
All securities, including those purchased by the Fund, are subject to some
degree of credit risk and market risk. Credit risk refers to the ability of an
issuer of a debt security to pay its principal and interest, and to the earnings
stability and overall financial soundness of an issuer of an equity security.
Market risk refers to the volatility of a security's price in response to
changes in conditions in securities markets in general, and, particularly in the
case of debt securities, to changes in the overall level of interest rates. An
increase in interest rates will tend to reduce the market values of debt
securities, whereas a decline in interest rates will tend to increase their
values.
12
<PAGE>
High Yield Securities
The Fund presently intends to invest at least 80% of its net assets in high
yield corporate bonds. Both credit and market risks are increased by the Fund's
investment in debt securities rated below the top four grades by Standard &
Poor's or Moody's and comparable unrated debt securities. Below investment grade
bonds by Moody's (categories "Ba," "B," "Caa") are of poorer quality and may
have speculative characteristics. Bonds rated "Caa" may be in default or there
may be present elements of danger with respect to principal or interest. Below
investment grade bonds rated by Standard & Poor's (categories "BB," "B," "CCC")
include those which are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with their terms; "BB" indicates the lowest degree of speculation and
"CCC" indicates a high degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
The share price and yield of the Fund may be expected to fluctuate more than in
the case of mutual funds that invest in higher quality, shorter term securities.
Moreover, a significant economic downturn or major increase in interest rates
may result in issuers of below investment grade securities experiencing
increased financial stress, which could adversely affect their ability to
service their principal, interest, and dividend obligations, meet projected
business goals, and obtain additional financing. In this regard, it should be
noted that while the market for high yield corporate bonds has been in existence
for many years and from time to time has experienced economic downturns in
recent years, this market has involved a significant increase in the use of high
yield corporate debt securities to fund highly leveraged corporate acquisitions
and restructurings. Past experience may not, therefore, provide an accurate
indication of future performance of the high yield bond market, particularly
during periods of economic recession. Furthermore, expenses incurred to recover
an investment by the Fund in a defaulted security may adversely affect the
Fund's net asset value. Finally, the secondary market for high yield securities
may be less liquid than the market for higher quality securities. The reduced
liquidity of the secondary market for high yield securities may adversely affect
the market price of, and the ability of the Fund to value, particular securities
at certain times, thereby making it difficult to make specific valuation
determinations.
While the Fund attempts to provide investment returns that correspond to a
benchmark for high yield fixed income securities (currently the MLHY Index),
there is no assurance that it will be able to do so. The Fund will not purchase
all of the securities that comprise its benchmark index. Accordingly, changes in
the value of the Fund's shares may not exactly correspond to changes in the
benchmark index.
Illiquid Securities
While the Fund does not anticipate doing so, the Fund may purchase illiquid
securities. The Fund will not invest more than 15% of the Fund's net assets in
illiquid securities. The 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 maturities in excess of
seven days, and certain securities whose disposition is restricted under the
federal securities laws.
13
<PAGE>
The Fund may not be able to sell illiquid securities when the Sub-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.
Restricted Securities
The Fund may purchase securities that are not readily-marketable and securities
that are not registered 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 ("restricted securities"). 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
otherwise meet selection criteria, the Fund may make such investments. Whether
or not such securities are "illiquid" 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 for a board of
trustees to determine, such determination to be based on a consideration of the
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
and/or a sub-adviser. The Trustees have delegated this responsibility for
determining the liquidity of Rule 144A restricted securities which may be
invested in by the Fund to the Advisor and the Sub-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
was marketable 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
The Trust anticipates that investors in the Fund, as part of an asset-allocation
or market-timing investment strategy, will frequently redeem shares of the Fund,
as well as exchange their shares of the Fund for shares in other Rydex Funds
pursuant to the exchange policy of the Trust (see "Exchanges"), which would
cause the Fund to experience high portfolio turnover. Because the Fund's
portfolio turnover rate to a great extent will depend on the purchase,
redemption, and exchange activity of its investors, it is very difficult to
estimate what the Fund's actual turnover rate generally will be. Pursuant to the
formula prescribed by the Commission, the portfolio turnover rate for the Fund
is calculated without regard to securities, including options and futures
contracts, having a maturity of less than one year. See "Financial Highlights of
the Fund" and "Taxes."
Significant portfolio turnover will tend to increase the realization by the 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 the
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 the 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, the Fund's
portfolio turnover level may adversely affect the ability of the Fund to achieve
its investment objective.
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Tracking Error
While the Fund does not expect that the returns over a year will deviate
adversely from the performance of the Fund's benchmark by more than ten percent,
several factors may affect its ability to achieve this correlation. Among those
factors are: (1) Fund expenses, including dealer spreads and brokerage (which
may be increased by high portfolio turnover); (2) less than all of the
securities in the benchmark being held by the Fund and securities not included
in the benchmark being held by the Fund; (3) bid-ask spreads (the effect of
which may be increased by portfolio turnover); (4) the Fund holds instruments
traded in a market that has become illiquid or disrupted; (5) Fund share prices
being rounded to the nearest cent; (6) changes to the benchmark index that are
not disseminated in advance; or (7) the need to conform the Fund's portfolio
holdings to comply with investment restrictions or policies or regulatory or tax
law requirements.
Aggressive Investment Techniques
While the Fund normally will invest substantially all of its assets in high
yield corporate bonds, it has reserved the right to, and may, from time to time,
engage in certain aggressive investment techniques which may include engaging in
transactions in futures contracts and options on securities, securities indexes,
and futures contracts (which instruments are commonly known as "derivatives").
Participation in the options or futures markets by the 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 Policies and
Techniques" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
AND BROKERAGE
When selecting broker-dealers to execute portfolio transactions, the Sub-Advisor
considers many factors, including the 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 operational capabilities of the broker-dealer,
and the research, statistical, and economic data furnished by the broker-dealer
to the Sub-Advisor. The Sub-Advisor uses these services in connection with all
of the Sub-Advisor's investment activities, including other investment accounts
the Sub-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 Sub-Advisor in providing investment advisory services to
the Fund.
HOW TO INVEST IN THE FUND
For shareholders who have engaged a registered investment adviser with
discretionary authority over the shareholder's account, the minimum initial
investment in the Fund is $15,000. For all other shareholder accounts
("Self-Directed Accounts"), the minimum initial investment in the Fund is
$25,000. These minimums also apply to retirement plan accounts. The Trust, at
its discretion, may accept lesser amounts in certain circumstances.
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<PAGE>
The shares of the 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 the Fund. The Trust reserves the right to
reject or refuse, at the Trust's discretion, any order for the purchase of the
Fund's shares in whole or in part. There is no minimum amount for subsequent
investments in the 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 Fund 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:
Rydex Series Trust
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
Only those third-party checks that are issued by insured financial institutions
will be accepted by the Trust. All purchases of Fund shares must be made in U.S.
Dollars.
By Bank Wire Transfer: First, fill out an application and fax the completed
application, along with a request for a shareholder account number, to the Trust
at (301) 468-8585. Then, request that your bank wire transfer the purchase
amount to our custodian, Star Bank, N.A., along with the following instructions:
Star Bank, N.A.
Routing Number: 0420-00013
For Account of Rydex Series Trust
Trust Account Number: 48038-9030
Your Name
Your Shareholder Account Number
After instructing your bank to transfer money by wire, you must call the Trust
and inform the Trust as to the amount that you have transferred and the name of
the bank sending the transfer in order to obtain same-day pricing or credit.
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.
An initial application that is faxed to the Trust does not constitute a purchase
order until the application has been processed and correct payment by check or
wire transfer has been received by the Trust. If no Rydex Fund allocation is
indicated either on (i) an application received by the Trust for an initial
purchase order or (ii) on the check or the wire transfer instructions for
subsequent purchase orders, then the purchase amount for that order
automatically will be deposited into the Rydex U.S. Government Money Market
Fund.
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<PAGE>
Shares of the Rydex Funds are sold at a price based on the net asset value next
calculated after receipt of a purchase order in good form, as described below.
Initial applications and investments, as well as subsequent investments, in the
Rydex Funds made by mail must be received in good form at the Trust, on any
business day, at or prior to 2:00 P.M., Eastern Time, in order to be processed
for that day's pricing or credit. Wire transfers for both initial investments
(which must be preceded by a faxed application) and subsequent investments in
the Rydex Funds must be received in good form at the Trust, on any business day,
by the cut-off times for redemption and exchange requests indicated below under
"Procedures For Redemptions and Exchanges" in order to be processed for that
day's pricing or credit. An initial application that is faxed to the Trust does
not constitute a purchase order until the application has been processed and
correct payment by check or wire transfer has been received by the Trust.
If no Rydex Fund allocation is indicated either on (i) an application received
by the Trust for an initial purchase order or (ii) on the check or the wire
transfer instructions for subsequent purchase orders, then the purchase amount
for that order automatically will be deposited into the Rydex U.S. Government
Money Market Fund.
In the interest of economy and convenience, physical certificates representing
the Fund's shares are not issued. Shares of the Fund are recorded on a register
by the Trust's transfer agent.
REDEEMING AN INVESTMENT
(WITHDRAWALS)
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 the 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 securities exchange, registered securities association, or
clearing agency; or a savings association. A notary public cannot provide a
signature guarantee.
The 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. When an investor redeems
his or her entire investment in the Trust, then the dividend interest earned on
the Fund shares for the three business days following the receipt of the
redemption request will be included in the payment to the investor of the
redemption price. See "Dividends and Distributions."
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<PAGE>
With respect to the Fund, and as permitted by the Commission, the right of
redemption may be suspended, or the date of payment postponed: (i) for any
period during which the Federal Reserve Bank of New York (the "New York Fed"),
the New York Stock Exchange (the "NYSE"), the Chicago Mercantile Exchange (the
"CME"), or the Chicago Board of Trade (the "CBOT"), as appropriate, is closed
(other than customary weekend or holiday closings) or trading on the NYSE, 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. On any day that the New York Fed or the NYSE closes early, the
principal government securities and corporate bond markets close early (such as
on days in advance of holidays generally observed by participants in these
markets), or as permitted by the Commission, the right is reserved to advance
the time on that day by which purchase and redemption orders must be received.
See "Determination of Net Asset Value."
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 Trust shares (unless the
shareholder brings his or her account value up to the currently applicable
minimum investment during that notice period).
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 next determined
of the shares involved; provided that, in connection with exchanges for shares
of a Rydex Fund, certain minimum investment levels are maintained. The Trust
reserves the right to modify its minimum investment requirements. Exchanges with
respect to Self-Directed Accounts must be for the lesser of $1,000 or 100% of
the account value for both the Rydex Fund from which the transfer is to be made
and each Rydex Fund into which the transfer is to be made. The Trust currently
is composed of nine separate series, 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 "Bond Fund"), The Juno Fund, The Rydex U.S.
Government Money Market Fund (the "Money Market Fund"), The Rydex Institutional
Money Market Fund, and the High Yield Fund (the series described in this
Prospectus); other separate Rydex Funds may be added in the future. Exchanges
may be made by letter or by telephone subject to the procedures set forth below.
An exchange into the Rydex Institutional Money Market Fund is permitted only if
that Rydex Fund's minimum investment of $2 million is satisfied.
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<PAGE>
To implement an exchange, shareholders should provide the following information:
account name, account number or 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. When shares of the Fund are exchanged by a Trust
shareholder for shares of another Rydex Fund, the income dividends that are
payable by the Fund on these shares for the two business days following the
receipt of the exchange request automatically will be paid into the
shareholder's account in the Rydex U.S. Government Money Market Fund (or the
Rydex Institutional Money Market Fund, if the shareholder uses this Rydex Fund
instead of the Rydex U.S. Government Money Market Fund). See "Dividends and
Distributions."
PROCEDURES FOR REDEMPTIONS
AND EXCHANGES
Written requests for redemptions and exchanges should be sent to 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 Rydex
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 periods indicated above. If the primary exchange or market on which
the Rydex Fund transacts business closes early, the above cut-off time will be
approximately fifteen minutes (thirty minutes, in the case of the 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 transactions, 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.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined each day on which
both the NYSE and the New York Fed are open for business as of the time that
prices for the high yield corporate bonds included in the MLHY Index are taken
(currently approximately 3:00 P.M., Eastern Time). Currently, the NYSE and the
New York Fed are closed on weekends, and the following holiday closings have
been scheduled for both 1997 and 1998: (i) New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
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 one of
those holidays falls on a Sunday. To the extent that portfolio securities of the
Fund are traded in other markets on days when the NYSE or the New York Fed 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 schedule to be observed in the future, the NYSE and the New
York Fed each may modify its holiday schedule at any time.
The net asset value of the Fund serves as the basis for the purchase and
redemption price of the Fund's shares. The Fund's net asset value per share is
calculated by dividing the market value of the Fund's securities plus the values
of its other assets (including dividends and interest accrued but not
collected), less all liabilities (including accrued expenses), 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
Sub-Advisor using methods established or ratified by the Board of Trustees. Debt
securities with remaining maturities of 60 days or less at the time of purchase
will be valued at amortized cost, absent unusual circumstances, so long as the
Board of Trustees believes that valuation method results in a fair value for
such securities.
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 - Pension Plans
(Money Purchase Plans)
Internal Revenue Code Section 403(b)
Plans
For retirement plan accounts that have engaged a registered investment adviser
with discretionary authority over the retirement plan account with the Trust,
the minimum initial investment in the Fund is $15,000. For retirement plan
accounts that are Self-Directed Accounts, the minimum initial investment in the
Fund is $25,000.
Retirement plans are charged an annual $15.00 maintenance fee and a $15.00 per
account liquidation 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 $25.00 for items returned for insufficient or uncollectible
funds.
20
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
All income dividends and capital gains distributions of the 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 the 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 Fund intends (i) to declare dividends of ordinary income for shares of the
Fund on a daily basis, and to distribute these dividends to shareholders of the
Fund on a monthly basis, and (ii) to distribute annually any long-term capital
gains to the shareholders of the Fund. The Trustees, however, may declare a
special distribution for the Fund if the Trustees believe that such a
distribution would be in the best interest of the Fund's shareholders. Effective
on or after September 1, 1997, the dividends payable by the Fund for any one day
will be payable to all of the shareholders of record of the Fund on the third
preceding business day and only to these shareholders.
TAXES
The U.S. Internal Revenue Code of 1986, as amended (the "Code"), provides that
each investment portfolio of a series investment company is to be treated as a
separate corporation. Accordingly, the Fund will seek to qualify for treatment
as a regulated investment company (a "RIC") under Subchapter M of the Code. So
long as the Fund qualifies as a RIC and satisfies the distribution requirements
under the Code for any taxable 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, the 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 the 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 short-term
capital gains, if any, are distributed to the shareholders of that Fund. To
avoid an excise tax on its undistributed income, the Fund generally must
distribute at least 98% of its income, including its net long-term capital
gains.
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<PAGE>
Satisfaction of the 90% Test will impose limitations on the investment
strategies that may be pursued by the Fund. In addition, because of the
anticipated frequency of redemptions and exchanges of the shares of the Fund,
the Fund will have greater difficulty than other mutual funds in satisfying the
30% Test. The Trust expects that investors in the Fund, as part of their
market-timing investment strategy, are likely to redeem or exchange their shares
in the Fund frequently to take advantage of anticipated changes in market
conditions. Such redemptions or exchanges are likely to require the 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, the Fund intends to
satisfy obligations in connection with redemptions and exchanges first by using
available cash 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 or by using
borrowing facilities. If the 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 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 Fund and Commission regulations). Notwithstanding
these actions, there can be no assurance that the 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 the Fund will not qualify as a RIC under Subchapter
M of the Internal Revenue Code, the Trust will establish procedures for the Fund
to reflect the anticipated tax liability in the Fund's net asset value. To the
extent that management of the 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 the
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 the Fund or are received in cash.
Under current law, distributions of net long-term gains, if any, realized by the
Fund and designated as capital gains distributions will be taxed to the
shareholders of the Fund as long-term capital gains regardless of the length of
time the shares of the 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 Fund's 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.
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<PAGE>
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 Fund is required to withhold taxes 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. For
further information regarding the taxation of dividends and distributions from
the Fund and the tax treatment of shareholders of the Fund, see "Dividends,
Distributions, and Taxes," in the Statement of Additional Information.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state, or local taxes.
MANAGEMENT OF THE TRUST
The Advisor
The Trust is provided investment management services by PADCO Advisors, Inc.
(the "Advisor"), a Maryland corporation with offices at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852. 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.
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 Fund pays
the Advisor a fee at an annualized rate of 0.75% of the average daily net assets
of the Fund. The Advisor is responsible for the management of the investment and
the reinvestment of the assets of the Fund, in accordance with the investment
objective, policies, and limitations of the Fund, and 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. In
providing these advisory services, the Advisor, at its own expense, has been
authorized by the Trustees to employ a sub-adviser and to enter into such
service agreements as the Advisor deems appropriate in connection with the
management of the Fund. The Advisor, from its own resources, including profits
from advisory fees received from the Fund, 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, which payments, to the extent made by the Advisor, may be in addition to
those payments made pursuant to a plan of distribution for the Fund adopted by
the Trust pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan").
See "Distribution Plan."
The Sub-Advisor
Loomis, Sayles & Company, L.P. (the "Sub-Advisor"), is the sub-adviser of the
Fund. As such, the Sub-Advisor is responsible for daily managing the investment
and reinvestment of assets of the Fund, subject generally to review and
supervision of the Advisor and the Trustees. The Sub-Advisor bears all expenses
in connection with the performance of its services, such as compensating and
furnishing office space for its officers and employees connected with the
investment and economic research, trading, and investment management of the
Fund.
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<PAGE>
The Sub-Advisor is a Delaware limited partnership, registered as an investment
adviser with the Commission, with offices at 2001 Pennsylvania Avenue, N.W.,
Suite 200, Washington, D. C. 20016. The Sub-Advisor's principal business address
is One Financial Center, Boston, Massachusetts 02111. Founded in 1926, the
Sub-Advisor is one of the country's oldest and largest investment firms. The
Sub-Advisor's general partner is indirectly owned by New England Investment
Companies, L.P., a publicly-traded limited partnership whose general partner is
a wholly-owned subsidiary of Metropolitan Life Insurance Company. The portfolio
managers of the Fund are Steven J. Doherty and Stephanie S. Lord. Mr. Doherty is
a Vice President of the Sub-Advisor. From 1986 to 1996, Mr. Doherty was the
portfolio manager of Howard Hughes Medical Institute in Chevy Chase, Maryland.
From 1982 to 1986, Mr. Doherty was an Assistant Vice President and the portfolio
manager of the National Bank of Washington in Washington, D. C. Mr. Doherty
earned his Chartered Financial Analyst designation in 1990, received his Master
of Business Administration in Finance and Investments from The George Washington
University, at Washington, D. C., in 1986, and received his bachelor's degree in
Business Administration from The George Washington University, at Washington, D.
C., in 1982. Ms. Lord has been a Vice President of the Sub-Advisor since 1987.
Ms. Lord earned her Chartered Financial Analyst designation in 1991, and
received her bachelor's degree in Business Administration from The University of
Iowa, at Iowa City, Iowa, in 1987.
Under an investment sub-advisory agreement between the Advisor and the
Sub-Advisor, dated September 25, 1996, which sub-advisory agreement has been
approved by the Trustees, the Advisor pays the Sub-Advisor a fee at an
annualized rate of 0.375% of the average daily net assets of the Fund.
The Servicer
General administrative, shareholder, dividend disbursement, transfer agent, and
registrar services are provided to the Trust and the Fund by PADCO Service
Company, Inc. (the "Servicer"), 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852, 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 Fund pays the Servicer a
fee at an annualized rate of 0.20% of the average daily net assets of the Fund.
The Servicer provides the Trust and the 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 the Fund under federal and state securities laws. The Servicer also
maintains the shareholder account records for the Trust and the Fund,
distributes dividends and distributions payable by the Fund, and produces
statements with respect to account activity for the Fund and the shareholders of
the Fund. The Servicer pays all fees and expenses that are directly related to
the services provided by the Servicer to the Trust; the 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.
The Distributor
Pursuant to the Distribution Plan for the Fund adopted by the Trust pursuant to
Rule 12b-1 under the 1940 Act, the Fund is provided certain distribution
services by PADCO Financial Services, Inc. (the "Distributor"), 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852, subject to the general
supervision and control of the Trustees and the officers of the Trust. Under the
Distribution Plan, dated September 25, 1996, the Fund reimburses the Distributor
for a portion of the Distributor's costs incurred in distributing the shares of
the Fund at an annualized rate not to exceed 0.25% of the average daily net
assets of the Fund. See "Distribution Plan."
24
<PAGE>
Costs and Expenses
The Fund bears all expenses of its operations other than those assumed by the
Advisor, the Servicer, or the Distributor. Fund expenses include: the management
fee; the servicing fee (including administrative, transfer agent, and
shareholder servicing fees); payments to be made by the Fund to the Distributor
under the Distribution Plan; 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) (to
the extent that these expenses are not covered by payments made by the Fund
under the Distribution Plan); all federal, state, and local taxes (including,
without limitation, stamp, excise, income, and franchise taxes); organizational
costs; and non-interested Trustees' fees and expenses.
The Advisor, Sub-Advisor, and Servicer voluntarily waived investment management
fees, including sub-advisory fees, and certain administrative fees for the
period from January 3, 1997 (the commencement of operations) through March 31,
1997, so that total Fund operating expenses for this period actually were 0.99%
of the Fund's average net assets. Had these fee expenses not been waived, total
Fund operating expenses for this period would have been 1.86% of the Fund's
average net assets.
The Advisor has advanced the organizational expenses of the Fund. These costs,
which are approximately $40,000, will be reimbursed by the Fund, and the Fund
will amortize these costs over a five-year period from the date the Fund
commences operations.
DISTRIBUTION PLAN
The Trust finances activities which are primarily intended to result in the sale
of Fund shares and has adopted the Distribution Plan for the Fund pursuant to
Rule 12b-1 under the 1940 Act. The Trust's Distribution Plan for the Fund
provides that the Fund will pay the Distributor up to a maximum of 0.25% per
annum of the Fund's daily net assets for expenses actually incurred by the
Distributor during the same twelve (12) month period, plus unreimbursed expenses
incurred prior to that twelve (12) month period in the distribution and
promotion of the Fund's shares, including the printing of certain reports used
for sales purposes, expenses for preparation and printing of sales literature,
and related expenses, including any maintenance, distribution, or service fees
paid to securities dealers or brokers, administrators, investment advisers,
institutions, including bank trust departments, and other persons ("Recipients")
who have executed a distribution or service agreement with the Distributor. As
of March 31, 1997, the Fund had net assets of approximately $10.5 million and
the Distributor did not have any aggregated "uncovered distribution charges" for
the Fund (i.e., the expenses actually incurred by the Distributor less amounts
received by the Distributor pursuant to the Distribution Plan).
25
<PAGE>
The Glass-Steagall Act generally prohibits federal and state chartered or
supervised banks from engaging in the business of underwriting, selling, or
distributing securities. Although the scope of this prohibition under the
Glass-Steagall Act has not been clearly defined by the courts or appropriate
regulatory agencies, the Distributor believes that the Glass-Steagall Act should
not preclude a bank from performing shareholder support services or servicing
and recordkeeping functions. The Distributor intends to engage banks only to
perform such functions. Changes in federal or state statutes and regulations
pertaining to the permissible activities of banks and their affiliates or
subsidiaries, as well as further judicial or administrative decisions or
interpretations, however, could prevent a bank from continuing to perform all or
a part of the contemplated services. If a bank were prohibited from so acting,
the Trustees would consider what actions, if any, would be necessary to continue
to provide such efficient and effective shareholder services. In such event,
changes in the operation of the Fund might occur, including possible termination
of any automatic investment or redemption or other services then provided by the
bank. It is not expected that shareholders of the Fund would suffer any adverse
financial consequences as a result of any of these occurrences. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein, and banks and other financial institutions may be
required to register as dealers pursuant to state law.
The Fund may execute portfolio transactions with, and purchase securities issued
by, depository institutions that receive payments under the Distribution Plan.
No preference for the instruments of such depository institutions will be shown
in the selection of investments. For further information regarding the
Distribution Plan, see "Distribution Plan" in the Statement of Additional
Information.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its past investment performance. Any
such advertisement would include at least the average annual total return
quotations for one, five, and ten-year periods, or for the life of the Fund.
Other total return quotations (e.g., aggregate or average total returns over
other time periods for the Fund) and the Fund's current yield (as described
below) may also be included. No adjustments to total returns or to current
yields are made to reflect any income taxes payable by shareholders on dividends
and distributions paid by the Fund. Total return and current yield data are
based upon the Fund's past investment performance and are not intended to
indicate its future investment performance. A more-detailed description of the
method by which the Fund's total returns and current yields are calculated is
included in the Fund's Statement of Additional Information under "Calculation of
Return Quotations" and "Information on Computation of Yield."
The Fund's total return 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, assuming all income
dividends or capital gains distributions during the period are reinvested in
shares of the Fund.
The Fund's current yield is determined by analyzing its net income per share for
a thirty-day (or one-month) period (identified 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.
The 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 it owns, its average portfolio maturity, and its
expenses. Yield quotations should be considered relative to changes in the net
asset value of the Fund's shares, its investment policies, and the risks of
investing in its shares. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
26
<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 U.S. Government Money Market Fund, The Rydex
Institutional Money Market Fund, and The Rydex High Yield Fund. Other separate
classes may be added in the future.
All shares of the Rydex Funds are freely transferable. The Rydex 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. Rydex 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.
As of the date of this Prospectus, no officer or Trustee of the Trust owned any
of the Fund's shares.
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 the Fund.
27
<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 Fund. Under the terms of this
custody agreement, the Custodian holds the portfolio securities of the 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.
28
<PAGE>
APPENDIX A
Bond Ratings
Below is a description of Standard & Poor's Ratings Group ("Standard & Poor's")
and Moody's Investors Service, Inc. ("Moody's") bond rating categories. The Fund
normally invests in bonds rated "BB" or lower by Standard & Poor's and/or "Ba"
or lower by Moody's.
Standard & Poor's Ratings
Group Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated "AA" also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from "AAA" issues only in small degree.
A -- Bonds rated "A" have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capability to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated "B" have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC -- Bonds rated "CCC" have a currently identifiable vulnerability to default
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
Moody's Investors Service, Inc.
Corporate Bond Ratings
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
A-1
<PAGE>
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protections may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risk appear somewhat larger than in "Aaa"
securities.
A -- Bonds rated "A" possess many favorable investment attributes, and are to be
considered as upper medium grade obligations. Factors giving security principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any longer period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
A-2
<PAGE>
Combined Statement of Additional Information
of
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,
and
The Rydex U.S. Government Money Market Fund
<PAGE>
Rule 497(e)
File No. 33-59692
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:
<TABLE>
<CAPTION>
FUND BENCHMARK
<S> <C>
The Nova Fund (RYNVX) 150% of the performance of the S&P500 Composite Stock Price
IndexTM
The Ursa Fund (RYURX) Inverse (opposite) of the S&P500 Composite Stock Price IndexTM
Rydex OTC Fund (RYOCX) NASDAQ 100 IndexTM (NDX)
Rydex Precious Metals Fund Philadelphia Stock Exchange Gold/Silver IndexTM (XAU)
(RYPMX)
Rydex U.S. Government Bond 120% of the price movement of the current Long Treasury Bond
Fund (RYGBX)
The Juno Fund (RYJUX) Inverse (opposite) of the price movement of the current Long
Treasury Bond
- ------------------------------------ ------------------------------------------------------------------------------
</TABLE>
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.
1
<PAGE>
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 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 August 1, 1997, as
supplemented January 9, 1998. 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 August 1, 1997, as
supplemented January 9, 1998.
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS........................................................4
INVESTMENT POLICIES AND TECHNIQUES ...................................4
INVESTMENT RESTRICTIONS...............................................16
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................21
MANAGEMENT OF THE TRUST...............................................22
PRINCIPAL HOLDERS OF SECURITIES.......................................28
DETERMINATION OF NET ASSET VALUE......................................30
PERFORMANCE INFORMATION...............................................32
CALCULATION OF RETURN QUOTATIONS......................................33
INFORMATION ON COMPUTATION OF YIELD...................................34
DIVIDENDS, DISTRIBUTIONS, AND TAXES ..................................36
AUDITORS AND CUSTODIAN................................................40
FINANCIAL STATEMENTS..................................................40
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 "OTC Fund"), The Rydex Precious Metals Fund (the "Metals
Fund"), The Rydex U.S. Government Bond Fund (the "Bond Fund"), The Juno Fund,
The Rydex U.S. Government Money Market Fund (the "Money Market Fund"), The Rydex
Institutional Money Market Fund (the "Institutional Fund"), and The Rydex High
Yield Fund (the "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 Money
Market Fund and the Institutional 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 High
Yield Fund and the Institutional 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 the 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.
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 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"), 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 Standard & Poor's 500 Composite Stock Price Index (the "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.
4
<PAGE>
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 "Dividends, Distributions, and Taxes."
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 a
futures contract 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 market-to-market on a daily basis) a
segregated account consisting of cash or liquid securities, including U.S.
Government securities or repurchase agreements collateralized 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 liquid securities equal in value
to the difference between the strike price of the put and the price of the
futures contract. 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 instruments the prices of which are expected to move
relatively consistently with the futures contract.
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A Fund may cover its short position in a futures contract by purchasing a call
option on the same futures contract with a strike price that is less than or
equal to the price of the futures contract, or, if the strike price of the call
is greater than the price of the futures contract, the Fund will maintain in a
segregated account cash or liquid securities equal in value to the difference
between the strike price of the call and the price of the futures contract. A
Fund may also 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.
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 liquid 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 liquid 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.
Options Transactions
Options on Securities. The Nova Fund, the OTC Fund, and 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.
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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.
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 OCC. 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.
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 expires 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.
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.
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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
liquid 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 liquid securities equal in value to the deficiency.
Some stock index options are based on a broad market index such as the S&P500
Index, the New York Stock Exchange (the "NYSE") Composite Index, or the American
Stock Exchange (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 of 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 (i.e., position limits)
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 and
other investment companies advised by the Advisor and its affiliates 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 or liquid securities that, 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.
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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. ADRs 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, 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.
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U.S. Government Securities
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"), and each of the other Funds also may invest in U.S. Government
Securities. The Juno Fund may enter into short transactions 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 Student 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.
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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 only 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 agreed-upon
repurchase price, the Fund could 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. It is also the current policy of each of
the Funds, other than 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 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.
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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 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.
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Lending of Portfolio Securities
Subject to the investment restrictions set forth below, each of the Funds may
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 331/3% 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-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.
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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.
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. 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
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.
Restricted Securities
While none of the Funds anticipates doing so, each Fund may purchase securities
that are not readily-marketable and securities that are not registered 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
("restricted securities"). 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" 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.
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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 these contracts generally have a remaining maturity of less than one year,
as well as government securities with remaining maturities 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 short-term nature of the portfolio securities of the 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. See "Portfolio Transactions and Brokerage."
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 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.
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The Benchmarks
The S&P500 Index. Standard & Poor's Corporation ("S&P"), a division of
The McGraw-Hill Companies, Inc., chooses the 500 stocks comprising the Standard
& Poor's 500 Composite Stock Price Index(TM) (the "S&P500 Index") on the
statistical 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 these companies are
generally listed on the New York Stock Exchange (the "NYSE"). Additional stocks
that are not among the 500 largest companies in terms of the aggregate market
value of their outstanding stock, are included in the S&P500 Index for
diversification purposes. Each stock in the S&P500 Index is weighted by its
market value, and inclusion of a stock in the S&P500 Index in no way implies an
opinion by the S&P as to the stock's attractiveness as an investment. A Fund may
use the S&P500 Index as the standard performance comparison because this index
represents approximately 70% of the total market value of all common stocks and
is well known to investors. "Standard & Poor's(TM)," "S&P(TM)," "S&P500(TM),"
"Standard & Poor's 500(TM)," and "500(TM)" are trademarks, trade names, and
service marks of The McGraw-Hill Companies, Inc.
Neither the Nova Fund nor the Ursa Fund is sponsored, endorsed, sold,
or promoted by the S&P. The S&P's only relationship to the Nova and Ursa Funds
is the use by these Funds of the Standard & Poor's(TM), S&P(TM), S&P500(TM),
Standard & Poor's 500(TM), and 500(TM) trademarks or service marks, and certain
trade names of the S&P, and the use by these Funds of the S&P500 Index, which is
determined, composed, and calculated by the S&P without regard to the Servicer
or these Funds, but which is used by these Funds as the benchmark.
The NASDAQ 100 Index(TM). The NASDAQ 100 Index(TM) (NDX) is a
capitalization-weighted index composed of 100 of the largest non-financial
securities listed on the National Association of Securities Dealers Automated
Quotations Stock Market (the "Nasdaq"). The Nasdaq, which represents the
fastest-growing stock market in the United States, also is one of the first
fully-electronic stock markets in the world. This modern-day securities market
began operations in 1971, and today lists more companies than any other market
in the United States. The NASDAQ 100 Index(TM), which was created in 1985, is
limited to one issue per company. "NASDAQ(TM)," "NASDAQ 100(TM)," "NASDAQ 100
Index(TM)," and "NASD(TM)" are trademarks, trade names, and service marks of the
Nasdaq.
At the time of inclusion in the NASDAQ 100 Index(TM), index securities
must have a minimum market value of at least $500 million. Only domestic issues
are included in the NASDAQ 100 Index(TM). As of January 31, 1997, the NASDAQ 100
Index(TM) was comprised of the following industry sectors: electronic technology
(36.35%); technology services (29.9%); industrial services (20.83%);
telecommunications (8.36%); health technology (3.79%); and transportation
(0.74%). As used herein, electronic technology describes companies that
manufacture computer chips and other computer hardware (such as Intel
Corporation, Cisco Systems, Inc., and Apple Computer, Inc.), whereas technology
services describes publishers of computer software and operating systems (such
as Microsoft Corporation and Oracle Corporation).
In the event that a security is deleted from the NASDAQ 100 Index(TM),
the largest non-financial issue not then included in the NASDAQ 100 Index(TM)
which meets the applicable criteria of the NASDAQ 100 Index(TM) will be
substituted. The Nasdaq and its affiliates (collectively, the "NASDAQ") have
established procedures for and controls over, substitutions of securities, and
may periodically, at the NASDAQ's discretion, make changes in component stocks
so that the NASDAQ 100 Index(TM) will more accurately reflect the overall
composition of the non-financial sector of the Nasdaq. Each security in the
NASDAQ 100 Index(TM) is represented by the security's market capitalization in
relation to the total market value of the NASDAQ 100 Index(TM). Companies are
selected for inclusion in the NASDAQ 100 Index(TM) using criteria that includes
company trading volume, company visibility, continuity of the components in the
NASDAQ 100 Index(TM), and a good mix of industries represented on the Nasdaq.
The CBOE, the largest options exchange in the world, began trading NASDAQ 100
Index(TM) options on February 7, 1994.
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The OTC Fund is not sponsored, endorsed, sold, or promoted by the
Nasdaq or any of the Nasdaq's affiliates (the Nasdaq and its affiliates
hereinafter collectively referred to as the "NASDAQ"). The NASDAQ's only
relationship to the OTC Fund is the use by the OTC Fund of the NASDAQ 100(TM),
NASDAQ 100 Index(TM), NASDAQ(TM), and NASD(TM) trademarks or service marks, and
certain trade names of the NASDAQ, and the use of the NASDAQ 100 Index(TM),
which is determined, composed, and calculated by the NASDAQ without regard to
the Servicer or the Funds, but which is used by the OTC Fund as the OTC Fund's
benchmark.
The XAU Index. The Philadelphia Stock Exchange (the "XAU") Gold/Silver
Index(TM) (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 Coeur D'Alene Mines Corp. While the majority of these companies are based in
North America, these companies generally also have operations in countries based
outside North America. "Philadelphia Stock Exchange Gold/Silver Index(TM),"
"Philadelphia Stock Exchange(TM)," "PHLX(TM)," and "XAU Index" are trademarks,
trade names, and service marks of the XAU.
The Metals Fund is not sponsored, endorsed, sold, or promoted by the
XAU. The XAU's only relationship to the Metals Fund is the use by the Metals
Fund of the Philadelphia Stock Exchange Gold/Silver Index(TM), Philadelphia
Stock Exchange(TM), PHLX(TM), and XAU Index trademarks or service marks, and
certain trade names of the XAU, and the use of the XAU Index, which is
determined, composed, and calculated by the XAU without regard to the Servicer
or the Fund, but which is used by the Metals Fund as the Metals Fund's
benchmark.
The Long Bond. The Long Bond is the current 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 three times a
year. In the future, the U.S. Treasury may change the number of times each year
that the Long Bond is issued.
NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) HAS ANY OBLIGATION TO
TAKE THE NEEDS OF THE FUNDS OR THE INVESTORS IN THE FUNDS INTO CONSIDERATION IN
DETERMINING, COMPOSING, OR CALCULATING THE S&P500 INDEX, THE NASDAQ 100 INDEX,
AND THE XAU INDEX, RESPECTIVELY; (2) IS RESPONSIBLE FOR OR HAS PARTICIPATED IN
THE CALCULATION OF ANY FUND'S NET ASSET VALUE, IN THE DETERMINATION OF THE
TIMING OR PRICES AT, OR QUANTITIES OF THE FUNDS OR THE SHARES TO BE ISSUED, OR
IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH SHARES MAY BE
CONVERTED INTO CASH; (3) IS A DISTRIBUTOR OF THE FUNDS; (4) HAS ANY OBLIGATION
OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE
FUNDS; OR (5) HAS PASSED ON THE LEGALITY OR SUITABILITY OF, OR THE ACCURACY OR
ADEQUACY OF DESCRIPTIONS AND DISCLOSURES RELATING TO, THE FUNDS.
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NONE OF THE S&P, THE NASDAQ, AND THE XAU: (1) GUARANTEES THE ACCURACY,
COMPLETENESS, AND/OR THE UNINTERRUPTED CALCULATIONS OF THE S&P500 INDEX, THE
NASDAQ 100 INDEX(TM), AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED
THEREIN; (2) MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE FUNDS, THE INVESTORS IN THE FUNDS, OR ANY OTHER
PERSON OR ENTITY, FROM THE USE OF THE S&P500 INDEX, THE NASDAQ 100 INDEX(TM),
AND THE XAU INDEX, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN, REGARDING THE
ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE FUNDS PARTICULARLY,
OR THE ABILITY OF THE S&P500 INDEX, THE NASDAQ 100 INDEX(TM), AND THE XAU INDEX,
RESPECTIVELY, TO TRACK GENERAL STOCK MARKET PERFORMANCE; OR (3) MAKES ANY
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS, FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P500 INDEX, THE NASDAQ 100 INDEX(TM), AND THE XAU INDEX, OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL EITHER THE
S&P, THE NASDAQ, OR THE XAU HAVE ANY LIABILITY FOR ANY SPECIAL, INCIDENTAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OR THE POSSIBILITY OF SUCH DAMAGES.
CERTAIN MATERIALS USED BY THE SERVICER AND THE ADVISOR RELATING TO THE
CREATION AND ISSUANCE, MARKETING, AND PROMOTION OF THE FUNDS MAY INDICATE THAT:
(1) THE S&P500 INDEX, NASDAQ 100 INDEX(TM), OR THE XAU INDEX, AS APPLICABLE, AND
IN ACCORDANCE WITH ANY APPLICABLE FEDERAL AND STATE SECURITIES LAW, SERVES AS A
BASIS FOR DETERMINING THE COMPOSITION OF A FUND'S PORTFOLIO; AND (2) THE S&P,
THE NASDAQ, AND THE XAU ARE THE RESPECTIVE SOURCES OF THE S&P500 INDEX, NASDAQ
100 INDEX(TM), AND THE XAU INDEX.
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:
1. Lend any security or make any other loan if, as a result, more
than 331/3% 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.
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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
sell 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
(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. Borrow 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:
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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 331/3% 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)
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.
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The following restrictions are applicable to the Money Market Fund:
The Money Market Fund shall not:
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
Money 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,
consolidation, 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. Borrow 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.
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:
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<PAGE>
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
Fund 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. To 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.
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.
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<PAGE>
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. These 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
through issuers, underwriters or major dealers in U.S. Government Securities
acting as principals. These 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.
Purchases and sales of corporate debt securities are normally transacted through
major dealers acting as principals. These transactions are made on a net basis,
do not involve payment of brokerage commissions, and normally reflect the spread
between bid and asked prices.
Portfolio turnover rate is defined 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, it is anticipated
that a Fund's policy of investing in government securities with remaining
maturities of less than one year will not result in a quantifiable portfolio
turnover rate. However, because of the short-term nature of a Fund's portfolio
securities, it is anticipated that the number of purchases and sales of these
securities will be substantial. Nevertheless, as broker commissions are not
normally charged on purchases and sales of these securities, the large number of
these transactions does not have an adverse effect upon the net yield and the
net asset value of the shares of the Fund.
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 Advisor
believes these 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. These 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 Advisor'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.
23
<PAGE>
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 the respective
commencement of operations 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 the respective
commencement of operations, 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. For the period July 1, 1996 to
March 31, 1997, 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 $259,900, $236,053, $15,491, $276,434, $7,829, $24,387,
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
*Albert P. Viragh, Jr. (56)
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 the present; Chairman of the
Board, President, and Treasurer of PADCO Service Company, Inc., the
shareholder and transfer agent servicer to the Trust, 1993 to the
present; Chairman of the Board of Managers and President of The Rydex
Advisor Variable Annuity Account (the "Separate Account"), a separate
account of Great American Reserve Insurance Company, 1996 to the
present; Chairman of the Board, President, and Treasurer of PADCO
Advisors II, Inc., investment adviser to the Separate Account, 1996 to
the present; Chairman of the Board, President, Treasurer, and Principal
of PADCO Financial Services, Inc., a registered broker-dealer firm and
the distributor of the shares of the Rydex Institutional Money Market
Fund and the Rydex High Yield Fund, each a series of the Trust, 1996 to
the 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 (52)
Trustee of the Trust, 1993 to the present; Manager of the Separate
Account, 1996 to the present; Senior Vice President of Marketing of
Schield Management Company, a registered investment adviser, 1985 to
the present. Address: 1489 West Briarwood Avenue, Littleton, Colorado
80120.
24
<PAGE>
J. Kenneth Dalton (56)
Trustee of the Trust, 1995 to the present; Manager of the Separate
Account, 1996 to the present; Mortgage Banking Consultant and Investor,
The Dalton Group, April 1995 to the present; President, CRAM Mortgage
Group, Inc. 1966 to April 1995. Address: 3613 Lands Ends, Forth Worth,
Texas 76109
John O. Demaret (57)
Trustee of the Trust, December 1997 to the present; Manager of the
Separate Account, December 1997 to the present; Retired, 1996 to the
present; Founder and Chief Executive Officer, Health Cost Controls
America, Chicago, Illinois, 1987 to 1996; Sole practitioner, Chicago,
Illinois, 1984 to 1987; General Counsel, Chicago Transit Authority,
1981 to 1984; Senior Partner, O'Halloran, LaVarre & Demaret,
Northbrook, Illinois, 1978 to 1981. Address: 1415 Redbud Land,
Glenview, Illinois 60025.
Patrick T. McCarville (55)
Trustee of the Trust, December 1997 to the present; Manager of the
Separate Account, December 1997 to the present; Founder and Chief
Executive Officer, Par Industries, Inc., Northbrook, Illinois, 1977 to
the present; President and Chief Executive Officer, American Health
Resources, Northbrook, Illinois, 1984 to 1986. Address: 3069 Plum
Island Drive, Northbrook, Illinois 60062.
Roger Somers (53)
Trustee of the Trust, 1993 to the present; Manager of the Separate
Account, 1996 to the present; President, Arrow Limousine, 1963 to the
present. Address: 72 Sugar Maple Lane, Tinton Falls, New Jersey 07724.
-----------------------
* 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.
Officers
Robert M. Steele (39)
Vice President of Marketing and Secretary of the Trust, 1995 to the
present; Vice President of PADCO Advisors, Inc., 1994 to the present;
Secretary and Vice President of Marketing of the Separate Account, 1996
to the present; Vice President of PADCO Advisors II, Inc., 1995 to the
present; Vice President of PADCO Financial Services, Inc., 1996 to the
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.
Carl G. Verboncoeur (45)
Vice President of Operations and Treasurer of the Trust, since June
1997; Vice President of Operations and Treasurer of the Separate
Account, since June 1997; Senior Vice President, Crestar Bank, 1995 to
1997; Senior Vice President, Crestar Asset Management Company, a
registered investment adviser, 1993 to 1995; Vice President Perpetual
Savings Bank, 1987 to 1993. Address: 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852.
25
<PAGE>
Michael P. Byrum (27)
Vice President of the Trust, since December 1997, and Assistant
Secretary of the Trust, 1993 to the present; Employee and senior
portfolio manager of PADCO Advisors, Inc., 1993 to the present;
portfolio manager of The Rydex OTC Fund (since 1997) and The Rydex U.S.
Government Bond Fund (since 1997), each a series of the Trust;
Assistant Secretary of the Separate Account, 1996 to the present;
Employee and senior portfolio manager of PADCO Advisors II, Inc., 1995
to the present; Secretary and Principal of PADCO Financial Services,
Inc., 1996 to the present; 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.
Thomas H. Reed (37)
Controller of the Trust, November 1997 to the present; Controller of
the Separate Account, November 1997 to the present; Controller of PADCO
Service Company, Inc., November 1997 to the present; Controller of
PADCO Financial Services, Inc., November 1997 to the present; Assistant
Controller, Connie Lee Insurance Company, Washington, D. C., December
1991 until November 1997; Director of Accounting, Perpetual Savings
Bank, F.S.B., Alexandria, Virginia, February 1991 to December 1991;
Assistant Director of Accounting, Perpetual Savings Bank, F.S.B.,
Alexandria, Virginia, March 1989 to February 1991; Certified Public
Accountant, 1985 to the present. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
Scott E. Whaley (32)
Assistant Controller of the Trust, September 1997 to the present;
Assistant Controller of the Separate Account, September 1997 to the
present; Assistant Controller of PADCO Service Company, Inc., September
1997 to the present; Assistant Controller of PADCO Financial Services,
Inc., September 1997 to the present; Senior Accountant, Young, Brophy &
Co., P.C., Certified Public Accountants, November 1992 until September
1997; Student, Liberty University, Lynchburg, Virginia (B.S.,
Accounting, 1992); Certified Public Accountant, 1993 to the present.
Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
Sothara Chin (31)
Compliance Officer of the Trust, 1996 to the present; Compliance
Officer of PADCO Advisors, Inc., 1996 to the present; Compliance
Officer of the Separate Account, 1996 to present; Compliance Officer of
PADCO Advisors II, Inc., 1996 to the present; Compliance Officer of
PADCO Service Company, Inc., 1996 to the present; Compliance Officer
and Principal of PADCO Financial Services, Inc., 1996 to the present;
Compliance Officer, USLICO Securities Corporation, an
insurance-affiliated broker-dealer company, 1990 to 1996. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Messrs. Colehour, Dalton, Demaret, McCarville, and Somers comprise the
Audit Committee of the Trustees. The Audit Committee reviews, and reports to the
Trustees on the scope and results of, the Trust's audits and related matters.
The Trust pays each Trustee who is not an interested person of the
Trust $2,500 per meeting attended and reimbursement for actual out-of-pocket
expenses relating to attendance at meetings.
26
<PAGE>
The Advisory Agreement
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 March 31, 1997, net Trust assets under management
of the Advisor were approximately $1.28 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:
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 the respective
commencement of operations 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 the respective commencement of operations, 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. For the period from July 1, 1996 to March 31, 1997,
total management fees expensed to the Advisor 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 $1,812,740, $2,070,135, $775,607, $185,396, $35,394,
$130,573, and $671,957, respectively.
The Advisor reimbursed the Bond Fund $5,831 and $0 for the fiscal years ended
June 30, 1995 and 1996, respectively, and reimbursed the Bond Fund $0 for the
nine-month period ended March 31, 1997.
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.
27
<PAGE>
The Advisor, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, was incorporated in the State of Maryland on February
5, 1993. Albert P. Viragh, Jr., the Chairman of the Board of Trustees and the
President of the Advisor, owns a controlling interest in the Advisor.
The Service Agreement
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.
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 the respective commencement of operations 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 Servicer amounted
to $37,545, $53,647, $3,973, $4,641, $1,955, and $65,383, respectively. For the
period from July 1, 1994 (or the respective commencement of operations, 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. For the period from July 1, 1996 to March
31, 1997, total service fees expensed 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 Servicer amounted to $606,411, $575,038, $205,328, $49,439, $14,158,
$36,374, and $268,855, 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.
28
<PAGE>
Costs and Expenses
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
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; 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; dues 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 the respective commencement of operations 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 the respective commencement
of operations, 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. For the nine-month period from July 1,
1996 to March 31, 1997, 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 $2,876,911,
$3,135,640, $1,315,489, $367,139, $108,501, $231,608, and $1,240,180,
respectively.
The aggregate compensation paid by the Trust to each of its Trustees serving
during the nine-month period ended March 31, 1997, is set forth in the table
below:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Annual
Name of Person, Compensation from the Benefits Accrued as Part Benefit upon
Position Trust of the Trust's Expenses Retirement
<S> <C> <C> <C>
Albert P. Viragh, Jr.* $0 $0 $0
Chairman and
President
Corey A. Colehour $4,500 $0 $0
Trustee
J. Kenneth Dalton $4,500 $0 $0
Trustee
Roger Somers $4,500 $0 $0
Trustee
</TABLE>
- ---------------------------
* Denotes an "interested person" of the Trust.
29
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of July 8, 1997, 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.
<TABLE>
<CAPTION>
Fund Name and Address Number of Shares % Ownership
<S> <C> <C> <C>
Nova Fund National Financial Services Corp. 5,718,667.394 18.2%1/
P.O. Box 3908
New York, NY 10008
Schwab & Company 5,496,759.612 17.5%1/
101 Montgomery Street
San Francisco, CA 94104
Donaldson Lufkin Jenrette 2,933,277.105 9.3%1/
P.O. Box 2052
Jersey City, NJ 07303
First Trust Corp. 2,229,953.210 7.1%1/
P.O. Box 173736
Denver, CO 80217
Ursa Fund Schwab & Company 7,477,806.303 18.4%1/
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 4,802,062.240 11.8%1/
P.O. Box 3908
New York, NY 10008
Donaldson Lufkin Jenrette 3,193,496.200 7.9%1/
P.O. Box 2052
Jersey City, NJ 07303
OTC Fund Schwab & Company 2,651,722.302 19.2%1/
101 Montgomery Street
San Francisco, CA 94104
First Trust Corp. 2,442,508.558 17.6%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Zweig/Avatar Advisors 709,923.790 5.1%2/
900 Third Avenue
New York, NY 10022
Donaldson Lufkin Jenrette 1,777,329.655 12.8%1/
P.O. Box 2052
Jersey City, NJ 07303
30
<PAGE>
Fund Name and Address Number of Shares % Ownership
Precious First Trust Corp. 577,047.359 17.8%1/
Metals Fund P.O. Box 173736
Denver, CO 80217
Record Owner for:
Infinet Advisory, Inc. 577,047.359 17.8%2/
3400 Croasdaile Drive
Suite 208
Durham, NC 27205
Donaldson Lufkin Jenrette 169,375.117 5.2%1/
P.O. Box 2052
Jersey City, NJ 07303
U.S. Independent Trust Corporation 547,627.926 39.3%1/
Government 15255 S. 94th Avenue
Bond Fund Suite 303
Orland Park, IL 60462-3897
First Trust Corp. 192,229.567 13.8%1/
P.O. Box 173736
Denver, CO 80217
Record Owner for:
Fairport Asset Management 138,098.827 9.9%2/
830 Post Road East
Westport, CO 06880
Juno Fund Donaldson Lufkin Jenrette 119,855.266 10.0%1/
P.O. Box 2052
Jersey City, NJ 07303
National Financial Services Corp. 117,617.767 9.8%1/
P.O. Box 3908
New York, NY 10008
Schwab & Company 91,008.800 7.6%1/
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
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.
31
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Money Market Fund will utilize the amortized cost method in valuing 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
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, 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 Money 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 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 ninety 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 security result in a
dollar-weighted average portfolio maturity of more than ninety days, the Money
Market Fund would be required to invest its available cash in such a manner as
to reduce such maturity to ninety days or less as soon as reasonably
practicable.
32
<PAGE>
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 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 basis, the net asset value per share,
under ordinary circumstances, is likely to remain constant. Otherwise, realized
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.
33
<PAGE>
PERFORMANCE INFORMATION
From time to time, each of the Funds (other than the Money Market 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 compared 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.
Such 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 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 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. 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 class, 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 mutual 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:
34
<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 the 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 forth 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. Each Fund may show these non-standardized total returns and average
annual total returns; provided, that this alternative total return information
is given no greater prominence in such advertising than the information
prescribed under SEC Rules.
For the one-year period ended June 30, 1997, and for the period from the
respective commencement of operations of the Funds (see "Portfolio Transactions
and Brokerage") to June 30, 1997, 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:
35
<PAGE>
<TABLE>
<CAPTION>
For the Period
For the From The
One-Year Commencement
Period Ended Of Operations to
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
The Nova Fund 44.79% 25.82%
The Ursa Fund (19.89)% (12.71)%
The Rydex OTC Fund 43.57% 29.12%
The Rydex Precious Metals Fund (22.65)% (9.26)%
The Rydex U.S. Government Bond Fund 6.69% 1.36%
The Juno Fund (0.58)% (2.56)%
</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 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.
36
<PAGE>
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 March 31, 1997, based on a thirty-day base period,
was approximately 5.95%.
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 period return, and then multiplying the base period return by
(365/7).
The Money Market Fund's annualized effective yield, as may be quoted 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 March 31, 1997, were approximately 4.84% and
4.74%, 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.
37
<PAGE>
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,
includes accrued interest and accretion of original issue and market discount,
plus or minus any short-term gains or losses realized 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 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.
38
<PAGE>
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 activities 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 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 connection with redemptions and exchanges without the realization
of gains on the sales 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). 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.
39
<PAGE>
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 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 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 contractual 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
date 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.
40
<PAGE>
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 securities
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, foreign 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 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
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.
41
<PAGE>
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.
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
correct 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.
42
<PAGE>
FINANCIAL STATEMENTS
The Trustees, on March 12, 1997, changed the Trust's fiscal year end from June
30 to March 31. The Financial Statements (audited) of the Trust, for the
nine-month period ended March 31, 1997, are included in the Trust's 1997 Annual
Report to Shareholders, which was filed on Form N-30D with the Securities and
Exchange Commission via EDGAR transmission on June 3, 1997. A copy of these
Financial Statements is included immediately below. Copies of the Trust's Annual
Report also 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.
43
<PAGE>
Statement of Additional Information
of
The Rydex High Yield Fund
<PAGE>
Rule 497(e)
File No.: 33-59692
RYDEX SERIES TRUST
THE RYDEX HIGH YIELD FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
(800) 820-0888 (301) 468-8520
STATEMENT OF ADDITIONAL INFORMATION
The Rydex High Yield Fund (the "Fund") (RYHYX) is a diversified series of the
Rydex Series Trust, an open-end management investment company (the "Trust"). The
investment objective of the Fund is to seek to provide investment returns that
correspond to the performance of a benchmark for high yield fixed income
securities. The Fund's current benchmark is the Merrill Lynch High Yield Master
Index(TM) (the "MLHY Index"). Although there is no assurance that the Fund's
objective will be achieved, the Fund will seek to achieve its objective by
investing primarily in a variety of long-term, intermediate-term, and short-term
below investment grade corporate bonds (including convertible issues) commonly
known as "junk bonds" and below investment grade preferred securities. The Fund
is part of the Rydex Group of Funds, which is designed for professional money
managers and knowledgeable investors who intend to invest in the Rydex Group of
Funds as part of an asset-allocation or market-timing investment strategy.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Fund's Prospectus, dated August 1, 1997, as supplemented
January 9, 1998. A copy of the Fund's Prospectus may be obtained without charge
by writing or telephoning the Fund.
The date of this Statement of Additional Information is August 1, 1997, as
supplemented January 9, 1998.
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
THE RYDEX FUNDS...........................................................3
INVESTMENT POLICIES AND TECHNIQUES........................................3
INVESTMENT RESTRICTIONS..................................................13
PORTFOLIO TRANSACTIONS AND BROKERAGE.....................................15
MANAGEMENT OF THE TRUST..................................................16
DISTRIBUTION PLAN........................................................21
PRINCIPAL HOLDERS OF SECURITIES..........................................23
DETERMINATION OF NET ASSET VALUE.........................................23
PERFORMANCE INFORMATION..................................................23
CALCULATION OF RETURN QUOTATIONS.........................................24
INFORMATION ON COMPUTATION OF YIELD......................................25
DIVIDENDS, DISTRIBUTIONS, AND TAXES......................................26
AUDITORS AND CUSTODIAN...................................................29
FINANCIAL STATEMENTS.....................................................29
APPENDIX A...............................................................30
2
<PAGE>
THE RYDEX FUNDS
The Trust is an open-end management investment company, and currently is
composed of nine separate series, including The Rydex High Yield Fund, 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, and The Rydex Institutional Money Market Fund (collectively, the
"Rydex Funds"); other separate Rydex Funds may be added in the future. The Rydex
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 Rydex Fund is intended to provide
investment exposure with respect to a particular segment of the securities
markets. These Rydex Funds seek investment results that correspond over time to
a specified benchmark. The Rydex Funds may be used independently or in
combination with each other as part of an overall investment strategy.
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; provided, that, in connection with exchanges for shares of the Rydex
Institutional Money Market Fund, certain minimum investment levels are
maintained. Copies of the separate Prospectuses and Statements of Additional
Information for the Rydex Funds other than the 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 Objective and Policies"
in the Fund's Prospectus for a discussion of the investment objective and
policies of the Fund. In addition, set forth below is further information
relating to the Fund. Investment management services are provided to the Fund by
the Trust's investment adviser, PADCO Advisors, Inc. (the "Advisor"), a Maryland
corporation with offices at 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852, and portfolio management services are provided to the Fund by
the Fund's sub-adviser, Loomis, Sayles & Company, L. P. (the "Sub-Advisor"), a
Delaware limited partnership with offices at 2001 Pennsylvania Avenue, N.W.,
Suite 200, Washington, D. C. 20016. General administrative, shareholder, and
registrar services are provided to the Fund by PADCO Service Company, Inc. (the
"Servicer").
The investment strategies of the Fund discussed below, and as discussed in the
Fund's Prospectus, may be used by the Fund if, in the opinion of the
Sub-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 the Fund will result in the achievement of the Fund's objective.
Futures Contracts and Options Thereupon
The Fund may purchase securities index futures contracts as a substitute for a
comparable market position in the underlying securities. The principal trading
markets for Standard & Poor's 500 Composite Stock Price Index(TM) 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.
3
<PAGE>
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
securities 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 securities 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 securities in the index is made.
The Fund may purchase put or call options and write (sell) put options on
securities index futures contracts. When the 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, the 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 the 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 Fund
may engage in related closing transactions with respect to options on futures
contracts. The Fund 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, the 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" in the Prospectus.
The Fund 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 the Fund would be excluded from the definition of a
"commodity pool operator." Under Section 4.5 of the CFTC Regulations, the 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 the Fund purchases or sells a securities index futures contract, or sells
an option thereon, the Fund "covers" its position. To cover its position, the
Fund may maintain with its custodian bank (and mark-to-market on a daily basis)
a segregated account consisting of cash or liquid 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.
4
<PAGE>
The 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 liquid securities equal in value
to the difference between the strike price of the put and the price of the
future. The 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 instruments the prices of which are expected to move
relatively consistently with the futures contract. The 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.
The 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 liquid securities equal in value to the difference between the strike
price of the call and the price of the future. The 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. The 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 liquid
securities equal in value to the difference between the strike price of the put
and the price of the future. The 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 Fund intends 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 the Fund to substantial losses. If
trading is not possible, or the 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 Fund may write and purchase put and call options on securities 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"
in the Prospectus.
A securities index fluctuates with changes in the market values of the
securities included in the index. Options on securities 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 securities index upon
which the option is based being greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option. The amount of cash
received, 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.
5
<PAGE>
Some securities index options are based on a broad market index such as the
Standard & Poor's 500 Composite Stock Price Index(TM), the NYSE Composite
Index(TM), or the AMEX Major Market Index(TM), or on a narrower index such as
the Philadelphia Stock Exchange Over-the Counter Index(TM). 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"
in the Prospectus.
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 the Fund and other investment companies advised
by the Advisor and its affiliates may buy or sell; however, the Sub-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 securities 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 security, whether the 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 securities prices in the securities 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 security. Whether the Fund will realize a profit or
loss by the use of options on securities indexes will depend on movements in the
direction of the securities 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 securities. The Fund will not
enter into an option position that exposes it 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 its custodian bank (and marks-to-market on a
daily basis) a segregated account consisting of cash or liquid securities that,
when added to the premiums deposited with respect to the option, are equal to
the market value of the underlying securities index not otherwise covered.
6
<PAGE>
Foreign Securities
The Fund may invest in high yield bonds issued by foreign corporations and
denominated in United States dollars. Investing in foreign companies may involve
risks not typically associated with investing in United States companies. While
not subject to certain risks to which securities denominated in foreign
currencies are subject (for example, the value of foreign-denominated
securities, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the United States dollar;
securities of foreign-based issuers generally have less trading volume and less
liquidity than securities of United States issuers; and prices in some foreign
markets can be very volatile), investments in United States dollar-denominated
foreign securities are subject to unique risks. 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.
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.
U.S. Government Securities
The Fund may invest in obligations of the U.S. Treasury or obligations either
issued or guaranteed, as to principal and interest, by the U.S. Government, its
agencies or instrumentalities, including money market instruments ("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 Student Loan Marketing Association, and the
National Credit Union Administration.
7
<PAGE>
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. These agencies and instrumentalities may borrow
funds from 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,
under certain circumstances, an amount limited to a specific line of credit 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. These other agencies and instrumentalities also are supported by the
discretionary authority of the U.S. Government to purchase certain obligations
of an agency or instrumentality or by the credit of the agency or
instrumentality itself. U.S. Treasury notes and bonds typically pay coupon
interest semi-annually and repay the principal at maturity. The Fund will invest
in U.S. Government Securities only when the Sub-Advisor is satisfied that the
credit risk with respect to the issuer is minimal.
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 the Fund's portfolio investments in
U.S. Government Securities, while a decline in interest rates would generally
increase the market value of the Fund's portfolio investments in these
securities.
U.S. Government Securities may be purchased at a discount. These securities,
when held to maturity or retired, may include an element of 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
As discussed in the Fund's Prospectus, the Fund may enter into repurchase
agreements with financial institutions. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with large, well-capitalized and
well-established financial institutions whose condition will be continually
monitored by the Sub-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, the Fund will seek to liquidate such collateral. However, the
exercising of the 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 agreed-upon
repurchase price, the Fund could suffer a loss. The 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 are usually for short periods, such as one week
or less, but may be longer. It is the current policy of the Fund to treat
repurchase agreements that do not mature within seven days as illiquid for the
purposes of the Fund's investment policies. It is also the current policy of the
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% of the Fund's net assets. The Fund's investments
in repurchase agreements may, at times, be substantial when, in the view of the
Sub-Advisor, liquidity or other considerations so warrant.
8
<PAGE>
When-Issued and Delayed-Delivery Securities
As discussed in the Fund's Prospectus, the 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 the Fund makes the commitment to purchase securities on
a when-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. The Fund will not purchase securities
on a when-issued or delayed-delivery basis if, as a result, more than 10% 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 its 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 Fund does not believe that the 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.
The foregoing strategies, and those discussed in the Fund's Prospectus under the
heading "Investment Objective and Policies," may subject the 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 the Fund if, in
the opinion of the Sub-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 the 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 the Fund will result
in the achievement of its objective.
Borrowing
The 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 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"),
the 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 Fund is 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 Fund is authorized
to pledge portfolio securities as the Sub-Advisor deems appropriate in
connection with any borrowings.
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Lending of Portfolio Securities
The Fund has no present intention of lending portfolio securities, however the
Fund reserves the right, subject to the investment restrictions set forth below,
to 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 of the Fund are on loan, the borrower will pay the Fund any
income accruing thereon, and the Fund may invest the cash collateral in
portfolio securities, thereby earning additional income. The 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 Fund will not lend more than 331/3% of the value of the Fund's total assets.
Loans of the Fund's portfolio securities would be subject to termination by the
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 insures to the Fund and the Fund's shareholders. The Fund may pay
reasonable finders, borrowers, administrative, and custodial fees in connection
with a loan of the Fund's portfolio securities.
Illiquid Securities
The Fund may purchase illiquid securities. The Fund will not invest more than
15% of the Fund's net assets in illiquid securities. The 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 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 Sub-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.
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Restricted Securities
The Fund may purchase securities that are not readily-marketable and securities
that are not registered 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 ("restricted securities"). 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
otherwise meet selection criteria, the Fund may make such investments. Whether
or not such securities are "illiquid" 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 for a board of
trustees to determine, such determination to be based on a consideration of the
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
and/or a sub-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 the Fund to the Advisor and the
Sub-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 was marketable 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.
Other Investment Policies and Risk Considerations
Bank Money Market Instruments. The Fund also may purchase bank money market
instruments, including certificates of deposit, time deposits, bankers'
acceptances, and other short-term obligations issued by U.S. banks which are
members of the Federal Reserve System. Certificates of deposit are short-term,
interest-bearing negotiable certificates evidencing the obligation of a bank to
repay funds deposited with the bank for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time (in no event longer than seven days) at a stated fixed
interest rate for which a negotiable certificate is not received. Time deposits
which may be held by the Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Investments in time deposits and
certificates of deposits are limited to domestic banks that have total assets in
excess of one billion dollars. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to a time draft drawn on the bank by a
customer of the bank; most acceptances have maturities of six months or less and
are traded in secondary markets prior to maturity. These credit instruments
reflect the obligation both of the bank (as a guarantor) and of the drawer (as
the payor) to pay the face amount of the instrument upon maturity. Other
short-term bank obligations in which the Fund may invest include uninsured,
direct obligations of a bank that bear fixed, floating, or variable interest
rates.
Commercial Paper. The Fund also may invest in commercial paper, including
corporate notes. These instruments are short-term obligations issued by banks
and corporations that have maturities ranging from two to 270 days and are
usually sold on a discount basis. Each commercial paper instrument may be backed
only by the credit of the issuer or may be backed by some form of credit
enhancement, typically in the form of a guarantee by a commercial bank.
Investments in commercial paper and other short-term promissory notes issued by
corporations (including variable and floating rate instruments) must be rated at
the time of purchase "A-2" or better by Standard & Poor's Ratings Group ("S&P"),
"Prime-2" or better by Moody's Investors Service, Inc. ("Moody's"), "F-2" or
better by Fitch Investors Service, Inc. ("Fitch"), "Duff 2" or better by Duff &
Phelps Credit Rating Co. ("Duff"), or "A2" or better by IBCA, Inc., or, if not
rated by S&P, Moody's, Fitch, Duff, or IBCA, Inc., must be determined by the
Advisor to be of comparable quality pursuant to guidelines approved by the
trustees of the Trust (the "Trustees"). Please refer to Appendix A to this
Prospectus for more detailed information concerning commercial paper ratings.
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The Fund also may make limited investments in guaranteed investment contracts
("GICs") issued by United States insurance companies. The Fund will purchase a
GIC only when the Advisor has determined, under guidelines established by the
Trustees of the Trust, that the GIC presents minimal credit risks to the Fund
and is of comparable quality to instruments that are rated "high quality" by
certain nationally-recognized statistical rating organizations.
Stocks and Other Equity Securities. Stocks and other equity securities may
include common stocks, fixed-rate preferred stocks, bonds convertible into
equity securities, warrants, and rights. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. Although equity
securities have a history of long-term growth in value, the prices of these
securities fluctuate based on changes in a company's financial condition and on
overall market and economic conditions. Smaller companies are especially
sensitive to these factors. Common stocks have a history of long-term growth in
value; however, stock prices fluctuate in response to general market and
economic conditions, as well as to factors affecting individual companies. The
Fund intends to invest only in the common stock of companies believed by the
Sub-Advisor to have appreciation potential, and each security held will be
monitored to determine whether the security is contributing to the Fund's
investment objective.
Preferred stocks, like debt obligations, are generally fixed-income securities.
Preferred stocks have priority as to income and generally as to assets of the
issuer; however, income usually is limited to a definitive percentage regardless
of the issuer's earnings, and preferred stock usually has limited voting rights.
Shareholder of preferred stocks normally have the right to receive dividends at
a fixed rate when and as declared by the issuer's board of directors, but do not
participate in other amounts available for distribution by the issuing
corporation. Dividends on the preferred stock may be cumulative, and all
cumulative dividends usually must be paid prior to common shareholders receiving
any dividends. Preferred stock dividends must be paid before common stock
dividends and, for that reason, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which generally is the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks, however,
are equity securities in the sense that these securities do not represent a
liability of the issuer and, therefore, do not offer as great a degree of
protection of capital or assurance of continued income as investments in
corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer.
Warrants and stock rights are almost identical to call options in their nature,
use, and effect, except that warrants and stock rights are issued by the issuer
of the underlying security, rather than an option writer, and generally have
longer expiration dates than call options. A right is a privilege granted by a
corporation to current common shareholders, whereby these shareholders may
purchase a proportionate number of new shares, at a price that is lower than
current market prices, before the public is allowed to purchase the shares.
Because a warrant does not carry with it the right to dividends or voting rights
with respect to the securities that the warrant holder is entitled to purchase,
and because a warrant does not represent any rights to the assets of the issuer,
a warrant may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date. The Fund will invest in
only those warrants or stock rights that are listed on the New York Stock
Exchange or American Stock Exchange.
The Fund also may invest in debt securities and preferred stocks which are
convertible into, or carry the right to purchase, common stock or other equity
securities ("convertible securities") when, in the opinion of the Sub-Advisor,
the convertible securities may be purchased at prices favorable relative to the
common stock itself. Convertible securities have several unique investment
characteristics, such as (1) higher yields than common stocks, but lower yields
than comparable nonconvertible fixed income securities, (2) a lesser degree of
fluctuation in value than the underlying stocks since convertible securities
have fixed income characteristics, and (3) the potential for capital
appreciation if the market price of the underlying common stock increases.
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A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund might be required to permit the issuer to redeem the security, convert
the security into the underlying common stock or sell the security to a third
party.
The Sub-Advisor believes that the characteristics of convertible securities make
these securities suitable investments for an investment company seeking
investment returns, including capital appreciation. These characteristics
include the potential for capital appreciation if the value of the underlying
common stock increases, the relatively high yield received from dividends, and
decreased risks of decline in value, relative to the underlying common stock due
to their fixed income nature. In selecting convertible securities for the Fund,
the Sub-Advisor considers the following factors: (1) the Sub-Advisor's own
evaluation of the basic underlying value of the assets and business of the
issuers of the securities; (2) the interest or dividend income generated by the
securities; (3) the potential for capital appreciation of the securities and the
underlying common stocks; (4) the prices of the securities relative to the
underlying common stocks; (5) whether the securities are entitled to the
benefits of sinking funds or other protective conditions; (6) the existence of
any anti-dilution protections of the security; (7) the diversification of the
Fund's portfolio as to issuers; and (8) an investment rating of "Caa" or higher
by Moody's Investors Service, Inc. ("Moody's") or "CCC" or higher by Standard &
Poor's Ratings Group ("Standard & Poor's"). Lower-rated and some non-rated
convertible securities are predominantly speculative with respect to the
issuer's capacity to repay principal and pay interest. Investment in lower-rated
and non-rated convertible securities normally involves a greater degree of
investment and credit risk than does investment in convertible securities having
higher ratings. In addition, the market for non-rated convertible securities
usually is less broad than the market for rated securities, which could affect
the marketability of the convertible securities. To the extent that the Fund
holds any lower-rated or non-rated convertible securities, the Fund may be
negatively affected by adverse economic developments, increased volatility, or
lack of liquidity.
Portfolio Turnover
As discussed in the Fund's prospectus, the Trust anticipates that investors in
the Fund, as part of a market-timing or asset allocation investment strategy,
will frequently exchange shares of the Fund for shares in other Rydex Funds
pursuant to the exchange policy of the Trust as well as frequently redeem shares
of the Rydex Funds (see "Exchanges" in the Fund's Prospectus). The nature of the
Rydex Funds has caused the Rydex Funds to experience substantial portfolio
turnover. Because each Rydex Fund's portfolio turnover rate to a great extent
will depend on the purchase, redemption, and exchange activity of the Rydex
Fund's investors, it is very difficult to estimate what the Rydex Fund's actual
turnover rate will be in the future. However, the Trust expects that the
portfolio turnover experienced the Rydex 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 Rydex Funds
invest, since these contracts generally have a remaining maturity of less than
one year, as well as government securities with remaining maturities of less
than one year. All instruments held by a Rydex 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 short-term nature of the portfolio securities of the
Rydex Funds, as described above, the actual portfolio turnover of the Rydex
Funds has been and it is anticipated that their actual portfolio turnover in the
future will be unusually high.
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Merrill Lynch High Yield Master Index(TM)
The MLHY Index is a market capitalization weighted index comprised of domestic
and foreign high yield corporate bonds, each with at least $50 million par
amount outstanding and more than one year to maturity (foreign corporate bonds
are issued by foreign corporations, denominated in United States dollars, and
underwritten by United States syndicates for delivery in the United States).
Interest and price return for each corporate bond included in the MLHY Index are
calculated daily by Merrill Lynch & Co. and Merrill Lynch Securities Pricing
Service (collectively, "Merrill Lynch") based on accrued schedule and trader
pricing. The investment ratings for the corporate bonds included in the MLHY
Index range from "Baa" by Moody's or "BBB" by Standard & Poor's to "C" by
Moody's or "C" by Standard & Poor's (the Fund, however, does not invest in
securities rated lower than "Caa" by Moody's or "CCC" by Standard & Poor's).
Bonds rated as being in default ("Daa" by Moody's or "DDD" by Standard and
Poor's), as well as deferred interest bonds and pay-in-kind bonds, are not
included in the MLHY Index. Split-rated issues (i.e., bonds rated investment
grade by one rating agency and high yield by another rating agency) are included
in the MLHY Index based on the bond's corresponding composite rating. Prices for
the bonds included in the MLHY Index are taken as of 3:00 P.M., Eastern Time,
and only those bonds for which accurate pricing is available are included in the
index. The index was created in 1984.
The Fund is not sponsored, endorsed, sold, or promoted by Merrill Lynch. Merrill
Lynch's only relationship to the Fund is the use by the Fund of the Merrill
Lynch High Yield Master Index(TM), MLHY Index, and Merrill Lynch trademarks or
service marks, and certain trade names of Merrill Lynch, and the use of the MLHY
Index, which is determined, composed, and calculated by Merrill Lynch without
regard to the Servicer or the Fund, but which is used by the Fund as the Fund's
benchmark.
MERRILL LYNCH: (1) DOES NOT HAVE ANY OBLIGATION TO TAKE THE NEEDS OF THE FUND OR
THE INVESTORS IN THE FUND INTO CONSIDERATION IN DETERMINING, COMPOSING, OR
CALCULATING THE MLHY INDEX; (2) IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED
IN THE CALCULATION OF THE FUND'S NET ASSET VALUE, IN THE DETERMINATION OF THE
TIMING OR PRICES AT, OR QUANTITIES OF THE FUND OR THE SHARES TO BE ISSUED, OR IN
THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH SHARES MAY BE
CONVERTED INTO CASH; (3) IS NOT A DISTRIBUTOR OF THE FUND; (4) DOES NOT HAVE ANY
OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR
TRADING OF THE FUND; AND (5) HAS NOT PASSED ON THE LEGALITY OR SUITABILITY OF,
OR THE ACCURACY OR ADEQUACY OF DESCRIPTIONS AND DISCLOSURES RELATING TO, THE
FUND.
MERRILL LYNCH DOES NOT: (1) GUARANTEE THE ACCURACY, COMPLETENESS, AND/OR THE
UNINTERRUPTED CALCULATIONS OF THE MLHY INDEX, OR ANY DATA INCLUDED THEREIN; (2)
MAKE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE FUND, THE INVESTORS IN THE FUND, OR ANY OTHER PERSON OR ENTITY,
FROM THE USE OF THE MLHY INDEX, OR ANY DATA INCLUDED THEREIN, REGARDING THE
ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE FUND PARTICULARLY,
OR THE ABILITY OF THE MLHY INDEX TO TRACK GENERAL STOCK MARKET OR CORPORATE BOND
PERFORMANCE; OR (3) MAKE ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS, FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE MLHY INDEX, OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MERRILL LYNCH HAVE ANY
LIABILITY FOR ANY SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
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CERTAIN MATERIALS USED BY THE SERVICER AND THE ADVISOR RELATING TO THE CREATION
AND ISSUANCE, MARKETING, AND PROMOTION OF THE FUND MAY INDICATE THAT: (1) THE
MLHY INDEX, IN ACCORDANCE WITH ANY APPLICABLE FEDERAL AND STATE SECURITIES LAW,
SERVES AS A BASIS FOR DETERMINING THE COMPOSITION OF THE FUND'S PORTFOLIO; AND
(2) MERRILL LYNCH IS THE SOURCE OF THE MLHY INDEX.
INVESTMENT RESTRICTIONS
As described in the section of the Fund's Prospectus entitled "Investment
Objective and Policies," the Fund 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 the Fund not specifically
identified in this Statement of Additional Information or the Fund'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 the Fund's portfolio.
These restrictions provide that the Fund may not:
1. Lend any security or make any other loan if, as a result, more
than 331/3% 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, and 9, 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.
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<PAGE>
6. Invest in commodities except that the Fund may purchase and
sell 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
(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.
8. Borrow money, except the Fund may borrow money (i) from a bank
in an amount not in excess of 331/3% 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)
for temporary purposes in an amount not in excess of 5% of the
total value of the Fund's assets.
9. 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.
Furthermore, the Trustees have adopted additional investment restrictions for
the Fund. These restrictions are not fundamental investment policies, but rather
are operating policies of the Fund, and may be changed by the Trustees without
Fund shareholder approval. 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.
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 Rydex 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 Rydex Funds, including the High Yield 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.
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.
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<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, and in conformity with the
1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, the Sub-Advisor is responsible for decisions to buy and
sell securities for the Fund, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. In seeking
to implement the Fund's policies, the Sub-Advisor effects transactions with
those brokers and dealers who the Sub-Advisor believes provide the most
favorable prices and are capable of providing efficient executions. If these
prices and executions are obtainable from more than one dealer, the Sub-Advisor
may give consideration to placing portfolio transactions with dealers who also
furnish research and other services to the Fund or the Sub-Advisor. These
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.
The Sub-Advisor may serve as an investment manager to a number of clients,
including other investment companies. It is the practice of the Sub-Advisor to
cause purchase and sale transactions to be allocated among the Fund and others
whose assets the Sub-Advisor manages in such manner as the Sub-Advisor deems
equitable. The main factors considered by the Sub-Advisor in making such
allocations among the Fund and other client accounts of the Sub-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 Fund and the other
client accounts. Purchases and sales of corporate debt securities are normally
transacted through major dealers acting as principals. These transactions are
made on a net basis, do not involve payment of brokerage commissions, and
normally reflect the spread between bid and asked prices.
The information and services received by the Sub-Advisor from dealers may be of
benefit to the Sub-Advisor in the management of accounts of some of the
Sub-Advisor's other clients and may not in all cases benefit the 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 Sub-Advisor and thereby reduce the Sub-Advisor's expenses, this
information and these services are of indeterminable value and the management
fee paid to the Sub-Advisor is not reduced by any amount that may be
attributable to the value of such information and services.
The Fund commenced operations on January 3, 1997. For the period from January 3,
1997 to March 31, 1997, total brokerage commissions paid by the Fund amounted to
$0.
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.
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Trustees
*Albert P. Viragh, Jr. (56)
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 the present; Chairman of the
Board, President, and Treasurer of PADCO Service Company, Inc., the
shareholder and transfer agent servicer to the Trust, 1993 to the
present; Chairman of the Board of Managers and President of The Rydex
Advisor Variable Annuity Account (the "Separate Account"), a separate
account of Great American Reserve Insurance Company, 1996 to the
present; Chairman of the Board, President, and Treasurer of PADCO
Advisors II, Inc., investment adviser to the Separate Account, 1996 to
the present; Chairman of the Board, President, Treasurer, and Principal
of PADCO Financial Services, Inc., a registered broker-dealer firm and
the distributor of the shares of the Rydex Institutional Money Market
Fund and the Rydex High Yield Fund, each a series of the Trust, 1996 to
the 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 (52)
Trustee of the Trust, 1993 to the present; Manager of the Separate
Account, 1996 to the present; Senior Vice President of Marketing of
Schield Management Company, a registered investment adviser, 1985 to
the present. Address: 1489 West Briarwood Avenue, Littleton, Colorado
80120.
J. Kenneth Dalton (56)
Trustee of the Trust, 1995 to the present; Manager of the Separate
Account, 1996 to the present; Mortgage Banking Consultant and Investor,
The Dalton Group, April 1995 to the present; President, CRAM Mortgage
Group, Inc. 1966 to April 1995. Address: 3613 Lands Ends, Forth Worth,
Texas 76109
John O. Demaret (57)
Trustee of the Trust, December 1997 to the present; Manager of the
Separate Account, December 1997 to the present; Retired, 1996 to the
present; Founder and Chief Executive Officer, Health Cost Controls
America, Chicago, Illinois, 1987 to 1996; Sole practitioner, Chicago,
Illinois, 1984 to 1987; General Counsel, Chicago Transit Authority,
1981 to 1984; Senior Partner, O'Halloran, LaVarre & Demaret,
Northbrook, Illinois, 1978 to 1981. Address: 1415 Redbud Land,
Glenview, Illinois 60025.
Patrick T. McCarville (55)
Trustee of the Trust, December 1997 to the present; Manager of the
Separate Account, December 1997 to the present; Founder and Chief
Executive Officer, Par Industries, Inc., Northbrook, Illinois, 1977 to
the present; President and Chief Executive Officer, American Health
Resources, Northbrook, Illinois, 1984 to 1986. Address: 3069 Plum
Island Drive, Northbrook, Illinois 60062.
Roger Somers (53)
Trustee of the Trust, 1993 to the present; Manager of the Separate
Account, 1996 to the present; President, Arrow Limousine, 1963 to the
present. Address: 72 Sugar Maple Lane, Tinton Falls, New Jersey 07724.
- -----------------------
* 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.
18
<PAGE>
Officers
Robert M. Steele (39)
Vice President of Marketing and Secretary of the Trust, 1995 to the
present; Vice President of PADCO Advisors, Inc., 1994 to the present;
Secretary and Vice President of Marketing of the Separate Account, 1996
to the present; Vice President of PADCO Advisors II, Inc., 1995 to the
present; Vice President of PADCO Financial Services, Inc., 1996 to the
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.
Carl G. Verboncoeur (45)
Vice President of Operations and Treasurer of the Trust, since June
1997; Vice President of Operations and Treasurer of the Separate
Account, since June 1997; Senior Vice President, Crestar Bank, 1995 to
1997; Senior Vice President, Crestar Asset Management Company, a
registered investment adviser, 1993 to 1995; Vice President Perpetual
Savings Bank, 1987 to 1993. Address: 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852.
Michael P. Byrum (27)
Vice President of the Trust, since December 1997, and Assistant
Secretary of the Trust, 1993 to the present; Employee and senior
portfolio manager of PADCO Advisors, Inc., 1993 to the present;
portfolio manager of The Rydex OTC Fund (since 1997) and The Rydex U.S.
Government Bond Fund (since 1997), each a series of the Trust;
Assistant Secretary of the Separate Account, 1996 to the present;
Employee and senior portfolio manager of PADCO Advisors II, Inc., 1995
to the present; Secretary and Principal of PADCO Financial Services,
Inc., 1996 to the present; 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.
Thomas H. Reed (37)
Controller of the Trust, November 1997 to the present; Controller of
the Separate Account, November 1997 to the present; Controller of PADCO
Service Company, Inc., November 1997 to the present; Controller of
PADCO Financial Services, Inc., November 1997 to the present; Assistant
Controller, Connie Lee Insurance Company, Washington, D. C., December
1991 until November 1997; Director of Accounting, Perpetual Savings
Bank, F.S.B., Alexandria, Virginia, February 1991 to December 1991;
Assistant Director of Accounting, Perpetual Savings Bank, F.S.B.,
Alexandria, Virginia, March 1989 to February 1991; Certified Public
Accountant, 1985 to the present. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
Scott E. Whaley (32)
Assistant Controller of the Trust, September 1997 to the present;
Assistant Controller of the Separate Account, September 1997 to the
present; Assistant Controller of PADCO Service Company, Inc., September
1997 to the present; Assistant Controller of PADCO Financial Services,
Inc., September 1997 to the present; Senior Accountant, Young, Brophy &
Co., P.C., Certified Public Accountants, November 1992 until September
1997; Student, Liberty University, Lynchburg, Virginia (B.S.,
Accounting, 1992); Certified Public Accountant, 1993 to the present.
Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
19
<PAGE>
Sothara Chin (31)
Compliance Officer of the Trust, 1996 to the present; Compliance
Officer of PADCO Advisors, Inc., 1996 to the present; Compliance
Officer of the Separate Account, 1996 to present; Compliance Officer of
PADCO Advisors II, Inc., 1996 to the present; Compliance Officer of
PADCO Service Company, Inc., 1996 to the present; Compliance Officer
and Principal of PADCO Financial Services, Inc., 1996 to the present;
Compliance Officer, USLICO Securities Corporation, an
insurance-affiliated broker-dealer company, 1990 to 1996. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Messrs. Colehour, Dalton, Demaret, McCarville, and Somers comprise the
Audit Committee of the Trustees. The Audit Committee reviews, and reports to the
Trustees on the scope and results of, the Trust's audits and related matters.
The Trust pays each Trustee who is not an interested person of the
Trust $2,500 per meeting attended and reimbursement for actual out-of-pocket
expenses relating to attendance at meetings.
The Advisory Agreement
Under an investment advisory agreement with the Advisor, dated May 14, 1993, and
amended on November 2, 1993, December 13, 1994, March 8, 1996, and September 25,
1996, the Advisor serves as the investment adviser for each series of the Trust
and oversees the day-to-day operations of the Fund (including monitoring the
performance of the Sub-Advisor, as discussed below), 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 Institutional
Money Market Fund, and The Rydex High Yield Fund; other separate series may be
added in the future. As of March 31, 1997, net Trust assets under management of
the Advisor were approximately $1.28 billion. Pursuant to the advisory
agreement, the Fund pays the Advisor a fee at an annual rate based on 0.75% of
the net assets of the Fund. The Fund commenced operations on January 3, 1997.
For the period from January 3, 1997 to March 31, 1997, total management fees
expensed by the Fund to the Advisor amounted to $8,131.
The Advisor is responsible for the management of the investment and the
reinvestment of the assets of the Fund, in accordance with the investment
objective, policies, and limitations of the Fund, and subject to the general
supervision and control of the officers of the Trust and the Trustees. The
Advisor bears all costs associated with providing these advisory services. In
providing these advisory services, the Advisor, at its own expense, has been
authorized by the Trustees to employ a sub-adviser and to enter into such
service agreements as the Advisor deems appropriate in connection with the
management of the Fund. The Advisor, from its own resources, including profits
from advisory fees received from the Fund, 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, which payments, to the extent made by the Advisor, may be in addition to
those payments made pursuant to a plan of distribution for the Fund adopted by
the Trust pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan").
See "Distribution Plan."
The Advisor, which has its office at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852, was incorporated in the State of Maryland on February
5, 1993. Albert P. Viragh, Jr., the Chairman of the Board of Trustees and the
President of the Advisor, owns a controlling interest in the Advisor.
20
<PAGE>
The Sub-Advisory Agreement
Loomis, Sayles & Company, L.P. (the "Sub-Advisor"), is the sub-adviser of the
Fund. As such, the Sub-Advisor is responsible for daily managing the investment
and reinvestment of assets of the Fund, subject generally to review and
supervision of the Advisor and the Trustees. The Sub-Advisor bears all expenses
in connection with the performance of its services, such as compensating and
furnishing office space for its officers and employees connected with the
investment and economic research, trading, and investment management of the
Fund.
The Sub-Advisor is a Delaware limited partnership, registered as an investment
adviser with the Commission. The Sub-Advisor's principal business address is One
Financial Center, Boston, Massachusetts 02111. Founded in 1926, the Sub-Advisor
is one of the country's oldest and largest investment firms. The Sub-Advisor's
general partner is indirectly owned by New England Investment Companies, L.P., a
publicly-traded limited partnership whose general partner is a wholly-owned
subsidiary of Metropolitan Life Insurance Company. The portfolio managers of the
Fund are Steven J. Doherty and Stephanie S. Lord. Mr. Doherty is a Vice
President of the Sub-Advisor. From 1986 to 1996, Mr. Doherty was the portfolio
manager of Howard Hughes Medical Institute in Chevy Chase, Maryland. From 1982
to 1986, Mr. Doherty was an Assistant Vice President and the portfolio manager
of the National Bank of Washington in Washington, D. C. Mr. Doherty earned his
Chartered Financial Analyst designation in 1990, received his Master of Business
Administration in Finance and Investments from The George Washington University,
at Washington, D. C., in 1986, and received his bachelor's degree in Business
Administration from The George Washington University, at Washington, D. C., in
1982. Ms. Lord has been a Vice President of the Sub-Advisor since 1987. Ms. Lord
earned her Chartered Financial Analyst designation in 1991, and received her
bachelor's degree in Business Administration from The University of Iowa, at
Iowa City, Iowa, in 1987.
Under an investment sub-advisory agreement between the Advisor and the
Sub-Advisor, dated September 25, 1996, which sub-advisory agreement has been
approved by the Trustees, the Advisor pays the Sub-Advisor a fee at an
annualized rate of 0.375% of the average daily net assets of the Fund. The Fund
commenced operations on January 3, 1997. For the period from January 3, 1997 to
March 31, 1997, total sub-advisory fees expensed by the Advisor to the
Sub-Advisor amounted to $4,066.
The Service Agreement
General administrative, shareholder, dividend disbursement, transfer agent, and
registrar services are provided to the Trust and the Fund 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 amended on March 8, 1996, and
as further 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.
Under the service agreement with the Servicer, the Fund pays the Servicer an
annual fee based on 0.20% of the net assets of the Fund. The Fund commenced
operations on January 3, 1997. For the period from January 3, 1997 to March 31,
1997, total service fees expensed by the Fund to the Servicer amounted to
$2,168. Under the service agreement, the Servicer provides the 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 Fund under federal and state securities laws. The Servicer also
maintains the shareholder account records for the Fund, distributes dividends
and distributions payable by the Fund, and produces statements with respect to
account activity for the Fund and its shareholders. The Servicer pays all fees
and expenses that are directly related to the services provided by the Servicer
to the Fund; the 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.
21
<PAGE>
The Distribution Plan
Pursuant to the Distribution Plan for the Fund adopted by the Trust pursuant to
Rule 12b-1 under the 1940 Act, (the "Distribution Plan") the Fund is provided
certain distribution services by PADCO Financial Services, Inc. (the
"Distributor"), 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852,
subject to the general supervision and control of the Trustees and the officers
of the Trust. Under the Distribution Plan, dated September 25, 1996, the Fund
reimburses the Distributor for a portion of the Distributor's costs incurred in
distributing the shares of the Fund at an annualized rate not to exceed 0.25% of
the average daily net assets of the Fund. For further information concerning the
Distribution Plan for the Fund, see "Distribution Plan," below.
Costs and Expenses
The Fund bears all expenses of its operations other than those assumed by the
Advisor, the Sub-Advisor, and the Servicer. Fund expenses include: the
management fee; the servicing fee (including administrative, transfer agent, and
shareholder servicing fees); payments to be made by the Fund to the Distributor
under the Distribution Plan; custodian and accounting fees and expenses; legal
and auditing fees; 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; 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; dues and expenses associated with membership in any mutual fund
organization; and costs for incoming telephone WATTS lines. In addition, each of
the nine Rydex Funds, including the Fund, 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.
The Fund commenced operations on January 3, 1997. For the period from January 3,
1997 to March 31, 1997, the total expenses of Fund operations borne by the Fund,
other than those expenses assumed or reimbursed by the Advisor of the Servicer,
amounted to $31,160.
The aggregate compensation paid by the Trust to each of its Trustees serving
during the nine-month period ended March 31, 1997 is set forth in the table
below:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Annual
Name of Person, Compensation from the Benefits Accrued as Part Benefit upon
Position Trust of the Trust's Expenses Retirement
<S> <C> <C> <C>
Albert P. Viragh, Jr.* $0 $0 $0
Chairman and
President
Corey A. Colehour $4,500 $0 $0
Trustee
J. Kenneth Dalton $4,500 $0 $0
Trustee
Roger Somers $4,500 $0 $0
Trustee
</TABLE>
- --------------------------
* Denotes an "interested person" of the Trust.
22
<PAGE>
DISTRIBUTION PLAN
Pursuant to the Trust's Distribution Plan for the Fund adopted by the Trust
pursuant to Rule 12b-1 under the 1940 Act, the Fund will pay the Distributor,
monthly at a rate not to exceed 0.25% of the average daily net assets of the
Fund during that month for expenses actually incurred in the distribution and
promotion of the Fund's shares, and the Distributor, in turn, on a quarterly
basis will pay certain securities dealers or brokers, administrators, investment
advisers, institutions, including bank trust departments, and other persons
("Recipients") amounts based on the average daily net asset value of shares of
the Fund owned by that Recipient or its customers during that month. No such
payments, however, will be made to any Recipient in any month if the aggregate
net asset value of all Fund shares held by the Recipient or its customers at the
end of such month, taken without regard to the minimum holding period, does not
exceed a minimum amount. The minimum holding period and minimum level of
holdings, if any, will be determined from time to time by a majority of the
Trustees of the Trust who are not "interested persons" of the Trust, as defined
in the 1940 Act, and who have no direct or indirect financial interest in the
operation of the Distribution Plan or any agreements related to the Distribution
Plan (the "Rule 12b-1 Trustees"). The services to be provided by the Recipients
may include, but are not limited to, distributing sales literature, answering
routine customer inquiries regarding the Trust and the Fund, assisting in
establishing and maintaining shareholder accounts and processing purchase and
redemption transactions, making the Trust's investment plans and shareholder
services options available and providing such other information and services as
the Distributor or the Trust may reasonably request from time to time.
Pursuant to the Distribution Plan, the Distributor, in addition to being
reimbursed by the Fund for any payments to Recipients, also will be entitled to
reimbursement monthly (up to the maximum of 0.25% per annum of the average net
assets of the Fund) for the Distributor's other expenses incurred in the
distribution and promotion of the Fund's shares, including, but not limited to,
the printing of certain reports used for sales purposes, advertisements,
expenses of preparation and printing of sales literature, and other distribution
related expenses, including any distribution or service fees paid to Recipients
who have executed a distribution or service agreement with the Distributor. The
maximum amount which may be paid to these Recipients by the Distributor (which
will be determined according to the services provided in assisting investors
with their accounts and/or shares sold) is 0.25% (on an annual basis) of the
Fund's average net assets owned by those Recipients or by clients of those
Recipients.
For the period from January 3, 1997 to March 31, 1997, and pursuant to the
Distribution Plan, the total reimbursement payments paid or payable by the Fund
to the Distributor amounted to $4,432, which constituted 0.25 of 1% of the
Fund's average daily net assets during this period. Of these payments by the
Fund to the Distributor under the Distribution Plan, $0 was paid as compensation
by the Distributor to Recipients pursuant to agreements related to the
Distribution Plan, and $4,432 was spent on the printing of sales literature,
travel, entertainment, due diligence, and other promotional expenses; none of
these payments was spent on advertising and marketing, the printing and mailing
of prospectuses for persons other than current shareholders of the Fund, or as
compensation to wholesalers of the Distributor in respect of sales of shares of
the Fund. In addition, for the period from January 3, 1997 to March 31, 1997,
the Advisor, pursuant to agreements related to the Distribution Plan, also made
payments from its own resources to Recipients aggregating $0. In the event that
the Distributor is not fully reimbursed for payments or expenses incurred by the
Distributor, these unreimbursed expenses under the Distribution Plan will not be
carried forward beyond December 31 of the year in which these expenses were
incurred. As of March 31, 1997, an aggregate of $1,582 of distribution expenses,
or 0.02% of the average daily net assets of the Fund's shares (annualized), was
not reimbursed or recovered by the Distributor through the receipt of
reimbursement payments under the Distribution Plan.
23
<PAGE>
On June 23, 1997, the Trustees, including a majority of the Rule 12b-1 Trustees,
approved certain non-material revisions to the Distribution Plan. These
revisions clarify that the sum of the payments made by the Trust to the
Distributor pursuant to the Distribution Plan during any twelve (12) month
period ended December 31 cannot exceed the Distributor's actual distribution
expenses incurred during that same twelve (12) month period.
The Distributor is required to report in writing to the Trustees of the Trust at
least quarterly on the monies reimbursed to the Distributor under the
Distribution Plan, as well as to furnish the Trustees with such other
information as may reasonably be requested in connection with the payments made
under the Distribution Plan in order to enable the Trustees to make an informed
determination as to whether the Distribution Plan should be continued.
The Trustees of the Trust have determined that a consistent cash flow resulting
from the sale of new shares of the Fund is necessary and appropriate to meet
redemptions and to take advantage of buying opportunities without having to make
unwarranted liquidations of portfolio securities of the Fund. The Trustees,
therefore, felt that it will likely benefit the Fund to have monies available
for the direct distribution activities of the Distributor in promoting the sale
of the Fund's shares. The Trustees, including the Rule 12b-1 Trustees,
concluded, in the exercise of their reasonable business judgment and in light of
their fiduciary duties, that there is a reasonable likelihood that the
Distribution Plan will benefit the Fund and its shareholders.
The Distribution Plan has been approved by the Trustees of the Trust, including
all of the Rule 12b-1 Trustees, and by the Fund's initial shareholder. The
Distribution Plan must be renewed annually by the Trustees of the Trust,
including by a majority of the Rule 12b-1 Trustees, cast in person at a meeting
called for that purpose. The Distribution Plan and any distribution or service
agreement may be terminated at any time, without any penalty, by the Trustees or
by a vote of a majority of the Fund's outstanding shares on sixty (60) days'
written notice. The Distributor or any Recipient also may terminate their
respective distribution or service agreement at any time upon written notice.
The Distribution Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses or in
any other material way without approval by a majority of the Fund's outstanding
shares, and all material amendments to the Distribution Plan or any distribution
or service agreement shall be approved by the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on any such amendment.
PRINCIPAL HOLDERS OF SECURITIES
As of July 8, 1997, 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 Fund:
<TABLE>
<CAPTION>
Name and Address Number of Shares % Ownership
<S> <C> <C>
Stocktontrust Nominee Partnership 660,489.602 26.2%1/
c/o Stockton Trust, Inc.
3001 E. Camelback
Phoenix, AZ 85016
First Trust Corp. 159,090.149 6.3%1/
P.O. Box 173736
Denver, CO 80217
24
<PAGE>
Name and Address Number of Shares % Ownership
RSBCO 129,349.501 5.1%1/
Trust Company of Louisiana
P.O. Drawer 1410
Ruston, LA 71273
- -------------------
1/ Record owner only.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined each day on which
both the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of
New York (the "New York Fed") are open for business as of the time that prices
for the high yield corporate bonds included in the MLHY Index are taken
(currently approximately 3:00 P.M., Eastern Time). Currently, the NYSE and the
New York Fed are closed on weekends, and the ofllowing holiday closings have
been scheduled for both 1997 and 1998: (i) New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
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 one of
those holidays falls on a Sunday. To the extent that portfolio securities of the
Fund are traded in other markets on days when the NYSE or the New York Fed 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 schedule to be observed in the future, the NYSE and the New
York Fed each may modify its holiday schedule at any time. The net asset value
of the Fund serves as the basis for the purchase and redemption price of the
Fund's shares.
PERFORMANCE INFORMATION
From time to time, the Fund may include its total return in advertisements or
reports to shareholders or prospective shareholders. Quotations of average
annual total return for the 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 the Fund is
calculated from two factors: the amount of dividends earned by the Fund share
and by the increase or decrease in value of the Fund's share price. See
"Calculation of Return Quotations."
25
<PAGE>
Performance information for the Fund contained in reports to shareholders or
prospective shareholders, advertisements, and other promotional literature may
be compared to the record of various unmanaged indexes. Performance information
for the Fund may be compared to its current benchmark, the MLHY Index and to
various other unmanaged indexes, including, but not limited to, the Shearson
Lehman Government (LT) Index. Unmanaged indexes may assume reinvestment of
dividends, but generally do not reflect payments of brokerage commissions or
deductions for operating costs and other expenses of investing, as do the total
return calculations for the Fund. In addition, the 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 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 performance reports for the
Fund will include those for high yield funds. Since the assets in all mutual
funds are always changing, the 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 class, 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 the Fund to that of
other mutual 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:
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 the 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 respective commencement of
operations of the Fund. In calculating the ending redeemable value, all
dividends and distributions by the 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.
26
<PAGE>
From time to time, the Fund also may include in such advertising a total return
figure that is not calculated according to the formula set forth 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 the Fund with
data published by Lipper Analytical Services, Inc., with the performance of the
MLHY Index or the Shearson Lehman Government (LT) Index, or with the performance
of another unmanaged index, the 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. The Fund may show these
nonstandardized total returns and average annual total returns; provided, that
this alternative total return information is given no greater prominence in such
advertising than the information prescribed under SEC Rules.
For the period from January 3, 1997, when the Fund commenced operations (see
"Portfolio Transactions and Brokerage"), to June 30, 1997, the average annual
compounded rate of return, on an annualized basis of the Fund, assuming the
reinvestment of all dividends and distributions, was approximately 7.19%.
INFORMATION ON COMPUTATION OF YIELD
In addition to the total return quotations discussed above, the Fund also may
advertise its 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 Fund
earned during the period by the maximum offering price per 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 Fund 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 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 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.
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The 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 Fund's yield, as of March 31, 1997, based on a thirty-day base period, was
approximately 8.18%.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends and Distributions. As discussed in the Fund's Prospectus, the Fund
intends (i) to declare dividends of ordinary income for shares of the Fund on a
daily basis, and to distribute such dividends to shareholders of the Fund on a
monthly basis, and (ii) to distribute annually any long-term capital gains to
the shareholders of the Fund. The Trustees, however, may declare a special
distribution for the Fund if the Trustees believe that such a distribution would
be in the best interest of the Fund's shareholders. All such distributions of
the Fund normally automatically will be invested without charge in additional
shares of the Fund.
Regulated Investment Company Status. The Fund intends to qualify as a regulated
investment company (a "RIC") under Subchapter M of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"). As a RIC, the 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 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.
The Fund will seek to qualify for treatment as a RIC under the Code. Provided
that the 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 short-term
capital gains, if any, are distributed to the Fund's shareholders. To avoid an
excise tax on its undistributed income, the Fund generally must distribute at
least 98% of its income. 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").
In addition, under the Code, the 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 the Fund's activities in
option and other portfolio transactions. Specifically, the 30% Test will limit
the extent to which the 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 the preceding three months. Finally, as discussed
below, this 30% Test requirement also may limit investments by the Fund in
futures contracts and options on securities indexes, securities, and futures
contracts.
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The 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, the Fund will
seek to meet its obligations in connection with redemptions and exchanges
without the realization of gains on the sales of securities, options, futures or
forward contracts, options on futures contracts, 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 the 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 the Fund's objective
to satisfy the requirements of Section 851 of the Code, there can be no
assurance that the Fund's efforts to achieve that objective will be successful.
If the 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 the Fund fails to 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 the 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 the 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 the 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.
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When the 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 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
contractual 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
date 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 the 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 the 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. The Fund generally intends to
sell pro rata the securities being hedged, but it is unclear whether the
securities and the futures contracts would constitute "substantially identical"
property.
Transactions By the Fund. If a call option written by the 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 the 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
depending on the Fund's holding period for the underlying security or underlying
futures contract.
With respect to call options purchased by the 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 securities or futures contract so acquired.
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The Fund in its operations also may utilize options on securities indexes.
Options on "broad based" securities 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 the 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 the Fund involving nonequity options on securities
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. The Fund will also have
available to it a number of elections under the Code concerning the treatment of
option transactions for tax purposes. The 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.
The 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 the 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. The 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
correct 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. The 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 the 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 the
Fund. Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, acts as the
Custodian bank for the Trust and the Fund.
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FINANCIAL STATEMENTS
The Trustees, on March 12, 1997, changed the Trust's fiscal year end from June
30 to March 31. The Financial Statements (audited) of the Fund, for the period
from January 3, 1997 (the date the Fund commenced operations) to March 31, 1997,
are included in the Trust's 1997 Annual Report to Shareholders, which was filed
on Form N-30D with the Securities and Exchange Commission via EDGAR transmission
on June 3, 1997. A copy of these Financial Statements is included immediately
below after Appendix A to this Statement of Additional Information. Copies of
the Trust's Annual Report also may be obtained without charge by contacting the
Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or
telephoning the Trust at 800-820-0888 or 301-468-8520. Unaudited financial
statements for the Fund, for the period from April 1, 1997 to June 30, 1997,
also are included herein.
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APPENDIX A
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Commercial paper rated "Prime" by Moody's Investors Service, Inc. ("Moody's"),
is based upon Moody's evaluation of many factors including: (1) the management
of the issuer; (2) the issuer's industry or industries and the speculative-type
risks which may be inherent in certain areas; (3) the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issue; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations. Relative differences in these factors determine
whether the issuer's commercial paper is rated "Prime-1," "Prime-2," or
"Prime-3" by Moody's.
"Prime-1" indicates a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: (1) leading market positions in well-established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well-established access to a range of
financial markets and assured sources of alternative liquidity.
"Prime-2" indicates a strong capacity for repayment of short-term promissory
obligations. This repayment capacity normally will be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Standard & Poor's Rating Group
Commercial paper rated by Standard & Poor's Rating Group ("S&P") has the
following characteristics: (1) liquidity ratios adequate to meet cash
requirements; (2) long-term senior debt is rated "A" or better; (3) the issuer
has access to at least two additional channels of borrowing; (4) basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; (5) typically, the issuer's industry is well-established and the
issuer has a strong position within the industry; and (6) the reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated "A-1,"
"A-2," or "A-3."
A-1 -- This designation rating indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- The capacity for timely payment on issues with this designation rating is
strong; however, the relative degree of safety is not as high as for issues
designated "A-1."
Fitch Investors Service, Inc.
Commercial paper rated by Fitch Investors Service, Inc. ("Fitch"), reflects
Fitch's current appraisal of the degree of assurance of timely payment of such
debt. An appraisal results in the rating of an issuer's paper as "F-1," "F-2,"
"F-3," or "F-4."
F-1 -- This designation rating indicates that the commercial paper is regarded
as having the strongest degree of assurance for timely payment.
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F-2 -- Commercial paper issues assigned this designation rating reflect an
assurance of timely payment only slightly less in degree than those issues rated
"F-1."
Duff and Phelps Credit Rating Co.
Short-term ratings by Duff & Phelps Credit Rating Co. ("Duff") are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
An emphasis of Duff's short-term ratings is placed on "liquidity," which is
defined as not only cash from operations, but also access to alternative sources
of funds including trade credit, bank lines, and the capital markets. An
important consideration is the level of an obligor's reliance on short-term
funds on an ongoing basis.
The distinguishing feature of Duff's short-term ratings is the refinement of the
traditional "1" category. The majority of short-term debt issuers carry the
highest rating, yet quality differences exist within that tier. As a
consequence, Duff has incorporated gradations of "1+" (one plus) and "1-" (one
minus) to assist investors in recognizing those differences.
Duff 1+ -- This designation rating indicates the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 -- This designation rating indicates a very high certainty of timely
payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
Duff 1- -- This designation rating indicates a high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Good Grade
Duff 2 -- This designation rating indicates a good certainty of timely payment.
Liquidity factors and company fundamental are sound. Although ongoing funding
needs may enlarge total financing requirements, access capital markets is good.
Risk factors are small.
IBCA, Inc.
In addition to conducting a careful review of an institution's reports and
published figures, IBCA's analysts regularly visit the companies for discussions
with senior management. These meetings are fundamental to the preparation of
individual reports and ratings. To keep abreast of any changes that may affect
assessments, analysts maintain contact throughout the year with the management
of the companies that the analysts cover.
IBCA's analysts speak the languages of the countries that the analysts cover,
which is essential to maximize the value of their meetings with management and
to analyze properly a company's written materials. IBCA's analysts also have a
thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, these data are taken into account by IBCA when assigning IBCA's
ratings. Before dispatch to subscribers, a draft of the report is submitted to
each company to permit the correction of any factual errors and to enable the
clarification of issues raised.
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IBCA's Rating Committees meet at regular intervals to review all ratings and to
ensure that individual ratings are assigned consistently for institutions in all
the countries covered. Following these committee meetings, IBCA ratings are
issued directly to subscribers. At the same time, the company is informed of the
ratings as a matter of courtesy, but not for discussion.
A1+ -- This designation rating indicates obligations supported by the highest
capacity for timely repayment.
A1 -- This designation rating indicates obligations supported by a very strong
capacity for timely repayment.
A2 -- This designation rating indicates obligations supported by a strong
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic, or financial conditions.
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</TABLE>
