File Nos. 33-61810, 811-7674
As filed with the Securities and Exchange Commission on February 28, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO.___ / /
POST-EFFECTIVE AMENDMENT NO. 7 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 8 /X/
THE DIVERSIFIED INVESTORS
FUNDS GROUP
(Exact Name of Registrant as Specified in Charter)
Four Manhattanville Road, Purchase, New York 10577
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 914-697-8000
Robert F. Colby
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)
Copy to:
Roger P. Joseph
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b).
[ ] on (date) pursuant to paragraph (b).
[X] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has previously registered an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 Notice with respect to each series of the Registrant for the
Registrant's most recently completed fiscal year ended December 31, 1996 was
filed on February 25, 1997.
Diversified Investors Portfolios has also executed this registration
statement.
<PAGE>
<TABLE>
<CAPTION>
THE DIVERSIFIED INVESTORS FUNDS GROUP
FORM N-1A
CROSS REFERENCE SHEET
Part A
Item No. Prospectus Headings
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial Information Condensed Financial
Information
4. General Description of Registrant Cover Page; Management of the Trust
and Portfolio Series
5. Management of the Fund Management of the Trust and Portfolio
Series; Other Information
5A. Management's Discussion of Fund Performance Not applicable
6. Capital Stock and other Securities Cover Page; Purchases and Redemptions
of Shares; Management of the Trust
and Portfolio Series; Other
Information
7. Purchase of Securities Being Offered Purchases and Redemptions of
Shares; Other Information
8. Redemption or Repurchase Purchases and Redemptions
of Shares
9. Pending Legal Proceedings Not applicable
Part B Statement of Additional
Item No. Information Headings
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objectives,
Policies and Restrictions
14. Management of the Fund Management of the Trust and
Portfolio Series
15. Control Persons and Principal Holders of
Securities See Prospectus--"Management of the Trust
and Portfolio Series"
16. Investment Advisory and Other Services Management of the Trust and Portfolio
Series; see Prospectus--"Management of
the Trust and Portfolio Series"
<PAGE>
17. Brokerage Allocation and Other Practices Investment Objectives,
Policies and Restrictions
18. Capital Stock and Other Securities Taxation; Description of the Trust; Fund
Shares; see Prospectus--"Management of
the Trust and Portfolio Series" and
"Other Information"
19. Purchase, Redemption and Pricing of
Securities Being Offered Determination of Net Asset Value;
Valuation of Securities; see Prospectus-
-"Purchases and Redemptions of Shares"
20. Tax Status Taxation; see Prospectus--
"Other Information"
21. Underwriters See Prospectus--"Management of the Trust
and Portfolio Series" and "Purchases and
Redemptions of Shares"
22. Calculations of Yield Quotations of Money
Market Funds Performance Information
23. Financial Statements Experts; Statements of Assets and
Liabilities; Reports of Independent
Accountants
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this registration statement.
<PAGE>
PROSPECTUS Dated , 1997
THE DIVERSIFIED INVESTORS FUNDS GROUP
The Diversified Investors Funds Group (the "Trust") is an open-end
management investment company that seeks to provide investors with a broad
range of investment alternatives through its thirteen separate funds (the
"Funds"). Each Fund is a separate mutual fund issuing its own shares.
Diversified Investment Advisors, Inc. ("Diversified") is the investment adviser
(the "Adviser") to each Fund and selects, subject to shareholder approval,
separate investment subadvisers (the "Subadvisers") that provide investment
advice for the Funds. The Trust seeks to achieve each Fund's investment
objective by investing all of the investable assets ("Assets") of that Fund in
a corresponding series of Diversified Investors Portfolios (the "Portfolio
Series"). The Portfolio Series (like the Trust) is a diversified, open-end
management investment company with separate series (the "Portfolios") which
have the same investment objectives as the Funds. The thirteen Funds offered
for sale by this Prospectus are as follows:
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE TRUST SEEKS TO ACHIEVE EACH FUND'S INVESTMENT
OBJECTIVES BY INVESTING ALL OF THAT FUND'S ASSETS IN A CORRESPONDING PORTFOLIO.
SEE "MASTER FEEDER STRUCTURE" ON PAGE [___].
This Prospectus sets forth information about the Trust and the Funds that
a prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. Additional information
about the Funds, contained in a "Statement of Additional Information," has been
filed with the Securities and Exchange Commission and is available without
charge upon request by calling the Trust at (914) 697-8000. The Statement of
Additional Information, which has the same date as this Prospectus, is
incorporated by reference into this Prospectus.
<PAGE>
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 Money Market Fund's net asset value per share will fluctuate. Many
money market funds declare a dividend of all investment income each day in
order to maintain a stable net asset value of $1.00 per share. The Money Market
Fund intends to declare dividends of all investment income and to distribute
all net realized capital gains only once a year in December. Undeclared
investment income may cause the Money Market Fund's net asset value per share
to fluctuate. INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT.
In pursuing its investment objective, the High-Yield Bond Fund may invest
significantly in lower rated bonds, commonly referred to as "junk bonds". Bonds
of this type are considered to be speculative with regard to the payment of
interest and return of principal. Investments in these types of securities have
special risks and therefore may not be suitable for all investors. Investors
should carefully assess the risks associated with an investment in this Fund.
<PAGE>
EXPENSE SUMMARY
The following tables provide (i) a summary of estimated expenses relating
to purchases and sales of shares of each Fund, and the aggregate annual
operating expenses for each Fund and its corresponding Portfolio, as a
percentage of average net assets of the Fund and as adjusted to give effect to
anticipated fee waivers, and (ii) an example illustrating the dollar cost of
such estimated expenses on a $1,000 investment in each Fund. Except as
otherwise noted, the information concerning annual operating expenses and in
the example is based on the fiscal year ended December 31, 1996.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases...........None
Sales Load Imposed on Reinvested Dividends........None
Deferred Sales Load...............................None
Redemption Fee....................................None
Exchange Fee......................................None
<PAGE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
HIGH INTERMEDIATE GOVERNMENT/
MONEY QUALITY GOVERNMENT CORPORATE
MARKET BOND BOND BOND HIGH YIELD BALANCED
FUND FUND FUND FUND BOND FUND FUND
_______ _______ ____________ ___________ __________ ________
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waiver) .230% .350% .280% .350% .542% .430%
Distribution (Rule 12b-1) Fees .250% .250% .250% .250% .250% .250%
Other Expenses:
Administrative
Services Fees
(After Waiver) .280% .290% .278% .270% .126% .290%
Miscellaneous
Expenses(1) .040% .110% .192% .120% .182% .130%
Total Operating Expenses (After
Reimbursements and Waivers)(2) 0.800% 1.000% 1.000% 0.990% 1.100% 1.100%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EQUITY EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
INCOME VALUE INCOME GROWTH EQUITY EQUITY EQUITY
FUND FUND FUND FUND FUND FUND FUND(3)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waiver) .450% .430% .580% .620% .760% .868% .750%
Distribution (Rule 12b-1) Fees .250% .250% .250% .250% .250% .250% .250%
Other Expenses:
Administrative
Services Fees
(After Waiver) .280% .246% .280% .290% .280% .296% .195%
Miscellaneous
Expenses(1) .01% .174% .040% [.090]% .210% .086% .205%
----- ----- ----- ----- -----
Total Operating Expenses (After
Reimbursements and Waivers)(2) 0.990% 1.100% 1.150% [1.250]% 1.500% 1.500% 1.400%
===== ===== ===== ====== ===== ===== =====
</TABLE>
<PAGE>
(1) "Miscellaneous Expenses" have been estimated for the Equity Value and
Aggressive Equity Funds based on a projected level of average daily net
assets of $50 million per Fund. "Miscellaneous Expenses" for the current
fiscal year for each other fund are based on the actual average monthly
net assets of $___ million for the Money Market Fund, $___ million for
the High Quality Bond Fund, $___ million for the Intermediate Government
Bond Fund, $___ million for the Government/Corporate Bond Fund, $___
million for the High-Yield Bond Fund, $___ million for the Balanced Fund,
$___ million for the Equity Income Fund, $___ million for the Growth &
Income Fund, $___ million for the Equity Growth Fund, $___ million for
the Special Equity Fund. and $___ million for the International Equity
Fund.
(2) Without the voluntary expense reimbursements and fee waivers reflected in
the table, Total Operating Expenses would be as follows: ___% for the
Money Market Fund, ____% for the High Quality Bond Fund, ___% for the
Intermediate Government Bond Fund, ___% for the Government/Corporate Bond
Fund, ___% for the High-Yield Bond Fund, ___% for the Balanced Fund,
____% for the Equity Income Fund, ____% for the Growth & Income Fund,
____% for the Equity Growth Fund, _____% for the Special Equity Fund, and
___% for the International Equity Fund. Because the Equity Value and
Aggressive Equity Funds are newly organized, their expenses are estimated
for the current fiscal year and assume voluntary expense reimbursements
and fee waivers. Without the voluntary expense reimbursements and fee
waivers reflected in the Table, estimated Total Operating Expenses would
be ___% for the Equity Value Fund and ___% for the Aggressive Equity
Fund.
(3) The International Equity Fund's total operating expenses may be higher
than those of many other mutual funds that invest exclusively in U.S.
securities, since certain costs of operation, such as advisory fees and
custodian costs, are expected to be higher for a fund investing in
foreign securities.
<PAGE>
EXAMPLE
A shareholder in a Fund would pay the following expenses on a $1,000
investment assuming (i) a 5% annual return on assets and (ii) redemption at the
end of each time period.
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
Money Market Fund $ 8 $26 $44 $ 99
High Quality Bond Fund 10 32 55 122
Intermediate Government Bond Fund 10 32 [ ] [ ]
Government/Corporate Bond Fund 10 32 55 121
High-Yield Bond Fund 11 35 [ ] [ ]
Balanced Fund 11 35 61 134
Equity Income Fund 10 32 55 121
Equity Value Fund 12 36 -- --
Growth & Income Fund 12 37 63 140
Equity Growth Fund 13 40 69 151
Special Equity Fund 15 47 82 179
Aggressive Equity Fund 16 49 -- --
International Equity Fund 14 44 77 168
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RETURNS, AND ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESSER
THAN THOSE SHOWN.
The purpose of the table is to assist investors in understanding the
various costs and expenses that shareholders will bear directly and indirectly.
The expense table and example reflect a voluntary undertaking by Diversified to
waive a portion of its investment advisory fees and administrative services
fees. Without such waiver, the annual administrative services fee would be .30%
for each Fund and the annual investment advisory fee would be .25% for the
Money Market Fund, .35% for the High Quality Bond Fund, .35% for the
Intermediate Government Bond Fund, .35% for the Government/Corporate Bond Fund,
.55% for the High-Yield Bond Fund, .45% for the Balanced Fund, .45% for the
Equity Income Fund, .57% for the Equity Value Fund, .60% for the Growth &
Income Fund, .70% for the Equity Growth Fund, .80% for the Special Equity Fund,
.97% for the Aggressive Equity Fund and .75% for the International Equity Fund.
<PAGE>
The Trust has adopted a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act"). Under the Distribution Plan, the Trust may pay the
Distributor in anticipation of, or as reimbursement for, expenses incurred by
the Distributor in connection with the sale of shares of the Funds, a fee not
to exceed on an annual basis 0.25% of the average daily net assets of each
Fund. Long term shareholders may pay more than the economic equivalent of the
maximum charges permitted by the National Association of Securities Dealers,
Inc.
For more information on the expenses of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" herein.
The Trustees of the Trust believe that the aggregate per share expenses
of each Fund and its corresponding Portfolio will be less than or approximately
equal to the expenses which such Fund would incur if the Trust retained the
services of an investment adviser and the assets of such Fund were invested
directly in the types of securities being held by its corresponding Portfolio.
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
PROSPECTUS SUMMARY
Shares of the Funds are sold continuously without a sales load by the
Trust's distributor, Diversified Investors Securities Corp. (the
"Distributor").
The Trust requires a minimum initial investment of $5,000 (which is
currently being waived). There is no minimum subsequent investment. See
"Purchases and Redemptions of Shares" herein. Investors who purchase shares of
the Funds through retirement plans may be subject to different minimum
subsequent investment requirements.
Investors should contact the Distributor at (914) 697-8000 to obtain more
information on how to purchase and redeem shares of the Funds.
The fourteen Funds, their investment objectives and their Subadvisers are
as follows:
MONEY MARKET FUND. The investment objective of the Money Market Fund is
to provide liquidity and as high a level of income as is consistent with the
preservation of capital through investment in domestic and foreign U.S.
dollar-denominated money market obligations with maturities of 397 days or
less. The Subadviser to this Fund is Capital Management Group (a division of
1740 Advisers, Inc.). An investor's interest in the Money Market Fund is
neither insured nor guaranteed by the U.S. Government.
HIGH QUALITY BOND FUND. The investment objective of the High Quality Bond
Fund is to provide as high a level of current income as is consistent with the
preservation of capital through investment in high quality debt securities with
short and intermediate maturities. The Subadviser to this Fund is Merganser
Capital Management Corporation.
GOVERNMENT/CORPORATE BOND FUND. The investment objective of the
Government/Corporate Bond Fund is to achieve maximum total return through
investment in investment grade debt securities, U.S. Government and U.S.
Government agency and instrumentality securities, collateralized mortgage
obligations guaranteed by these agencies and instrumentalities and high quality
short-term obligations. The Subadviser to this Fund is Capital Management Group
(a division of 1740 Advisers, Inc.).
<PAGE>
HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to provide a high level of current income from a diversified portfolio
consisting primarily of high-yielding, fixed-income and zero coupon securities,
such as bonds, debentures and notes, convertible securities and preferred
stocks. The Subadviser to this Fund is Delaware Investment Advisers (a division
of Delaware Management Company, Inc.).
BALANCED FUND. The investment objective of the Balanced Fund is to provide
a high total investment return consistent with a broad diversified mix of
stocks, bonds and money market instruments. The Subadviser to this Fund is
Institutional Capital Corporation.
EQUITY INCOME FUND. The investment objective of the Equity Income Fund is
to provide a high level of current income through investment in a diversified
portfolio of common stocks with relatively high current yields; capital
appreciation is a secondary objective. The Subadviser to this Fund is Asset
Management Group (a division of 1740 Advisers, Inc.).
EQUITY VALUE FUND. The investment objective of the Equity Value Fund is to
provide a high total investment return through investment primarily in a
diversified portfolio of common stocks. The Fund emphasizes stocks which, in
the opinion of the Fund's investment subadviser, are trading at low valuations
relative to market and/or historical levels. The Subadviser to this Fund is Ark
Asset Management Co., Inc.
GROWTH & INCOME FUND. The investment objective of the Growth & Income Fund
is to provide current income and capital appreciation through investment
primarily in a diversified portfolio of securities selected for their potential
to generate current income or long term capital appreciation. The Subadviser to
this Fund is The Putnam Advisory Company, Inc.
EQUITY GROWTH FUND. The investment objective of the Equity Growth Fund is
to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks with potential for above-average growth
in earnings; current income is a secondary objective. The Subadviser to this
Fund is Chancellor LGT Asset Management, Inc.
SPECIAL EQUITY FUND. The investment objective of the Special Equity Fund
is to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks of small to medium size companies,
without consideration for current income. The Fund emphasizes stocks which, in
the opinion of the Fund's investment subadvisers, will present an opportunity
for significant increases in earnings, revenue and/or value. The Subadvisers to
this Fund are Ark Asset Management Co., Inc., Liberty Investment Management, a
division of Goldman Sachs Asset Management, Pilgrim Baxter & Associates, Ltd.
and Westport Asset Management, Inc.
AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity
Fund is to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks of small to medium size companies,
without consideration for current income. The Fund emphasizes stocks which, in
the opinion of the Fund's investment subadviser, present an opportunity for
significant increases in earnings, revenue and/or value. Unlike the Special
Equity Fund, the volatility of this Fund is not mitigated through the use of
multiple investment managers. The Subadviser to this Fund is McKinley Capital
Management, Inc.
INTERNATIONAL EQUITY FUND. The investment objective of the International
Equity Fund is to provide a high level of long term capital appreciation
through investment in a diversified portfolio of securities of foreign issuers.
The Subadviser to this Fund is Capital Guardian Trust Company.
There can, of course, be no assurance that any Fund or its corresponding
Portfolio will achieve its investment objective.
<PAGE>
CONDENSED FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for a share of each
Fund outstanding during the periods indicated. The information below should be
read in conjunction with the financial statements appearing in the Annual
Report to Shareholders of the Funds, which is incorporated by reference in the
Statement of Additional Information. The financial statements and notes, as
well as the table below, covering periods through December 31, 1996 have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report is
included in such Annual Report. A copy of the Annual Report may be obtained
without charge from the Funds' Distributor.
<PAGE>
<TABLE>
<CAPTION>
Intermediate
Government Government/
Money Market High Quality Bond Bond(1) Corporate Bond
------------------------- -------------------------- ----------- ---------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
------------------------- -------------------------- ----------- ----------------------
1996 1995 1994 1996 1995 1994 1996 1996) 1995 1994
---- ---- ---- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of [ ] $ 9.61 $10.00 [ ] $ 9.87 $10.00 [ ] [ ] $ 9.91 $ 10.00
period............................ ------ ------- ------ ------
Income from investment operations:
Net investment income (loss)........ [ ] 0.31 0.66 [ ] 0.42 0.18 [ ] [ ] 0.30 0.19
Net gains (losses) on investments [ ] 0.22 (0.39) [ ] 0.74 (0.12) [ ] [ ] 1.71 (0.09)
(both realized and unreleased)..... ------ ------- ------ ------- ------ ------
Total income (loss) from investment [ ] 0.53 0.27 [ ] 1.16 0.06 [ ] [ ] 2.01 0.10
operations........................ ------ ------- ------ ------- ------ ------
Less: Dividends and distributions
from:
Net investment income............. __ (0.31) (0.66) __ (0.42) (0.18) __ __ (0.28) (0.19)
Net realized gain on investments.. __ __ __ __ __ __ __ __ (0.04) __
Tax return of capital............. -- -- -- -- -- (0.01) -- -- -- --
---- ---- ---- ---- ------ ------- ---- ---- ---- ----
Total from dividends and
distributions.................... -- (0.31) (0.66) -- (0.42) (0.19) -- -- (0.32) (0.19)
---- ------- ------ ---- ------ ------- ---- ---- ------ ------
Net asset value, end of period...... [ ] $ 9.83 $ 9.61 [ ] $10.61 $9.87 [ ] [ ] $11.60 $ 9.91
======= ======= ======= ====== ====== ====== ====== ======
Ratios/supplement data:
Net assets end of period [ ] $113,491 $25,092 [ ] $71,167 $20,872 [ ] [ ] $175,079 $22,937
======== ======= ======= ======= ======== =======
Ratio of expenses to average
net assets (6)................... [ ] 67.48% 59.27% [ ] 91.16% 284.62% [ ] [ ] 56.91% 257.24%
Ratio of expenses to average net
assets (net of reimbursement)(6) [ ] 0.76% 0.51% [ ] 1.00% 0.55% [ ] [ ] 0.85% 0.54%
Ratio of net investment income to
average net assets (6)........... [ ] (61.47)% (55.80)% [ ] 83.53) (279.12)% [ ] [ ] (50.11) (251.51)%
Ratio of net investment income
to average net assets (net of [ ] 5.24% 2.90% [ ] 6.63% 4.96% [ ] [ ] 5.92% 5.18%
reimbursement)(6)................
Total return........................ [ ] 5.50% 3.45% [ ] 11.85% 0.67% [ ] [ ] 20.30% 1.10%
Portfolio Turnover Rate............. N/A N/A N/A [ ] 25% 37% [ ] [ ] 122% 122%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Equity Growth &
Balanced Equity Income Value (2) Income
------------------------ ------------------------ ----------- -----------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
------------------------ ------------------------ ----------- -----------------------
1996 1995 1994 1996 1995 1994 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ [ ] $ 10.05 $ 10.00 [ ] $ 9.93 $ 10.00 [ ] [ ] $10.22 $ 10.00
------ ------- ------ ------- ------ -------
Income from investment operations:
Net investment income (loss)........ [ ] 0.24 0.07 [ ] 0.16 0.09 __ [ ] 0.06 0.03
Net gains (losses) on investments
(both realized and unreleased)..... [ ] 2.61 0.07 [ ] 3.28 (0.07) [ ] [ ] 3.18 0.22
---- ---- ---- ------ ---- ----
Total income (loss) from investment [ ] 2.85 0.14 [ ] 3.44 0.02 [ ] [ ] 3.24 0.25
operations......................... ---- ---- ---- ---- ---- ----
Less: Dividends and distributions
from:
Net investment income __ (0.24) (0.07) __ (0.16) (0.09) __ __ (0.06) (0.03)
Net realized gain on investments.. __ (0.51) __ __ (0.04) __ __ __ (0.95) __
Tax return of capital -- (0.11) (0.02) -- (0.08) -- -- -- (0.98) --
--- ------ ------ ---- ----- ----- ---- ---- ---- ------
Total from dividends and
distributions..................... -- (0.86) (0.09) -- (0.28) (0.09) -- -- (1.99) (0.03)
--- ------ ------ ---- ------ ------ ---- ---- ------ ------
Net asset value, end of period...... [ ] $12.04 $10.05 [ ] $13.09 $9.93 [ ] [ ] $11.47 $10.22
====== ====== ====== ===== ====== ======
Ratios/supplement data:
Net assets end of period [ ] $895,351 $151,629 [ ] $590,381 $70,855 [ ] [ ] 443,638 $60,475
======== ======== ======== ======= ======== =======
Ratio of expenses to average
net assets (6).................... [ ] 9.95% 71.47% [ ] 17.40% 106.54% [ ] [ ] 21.07% 140.33%
Ratio of expenses to average net
assets (net of reimbursement)(6) [ ] 0.87% 0.49% [ ] 0.43% 0.42% [ ] [ ] 0.39% 0.43%
Ratio of net investment income to
average net assets (6)............ [ ] (5.68)% (68.13)% [ ] (14.15)(103.39)% [ ] [ ] (19.66)% (138.93)%
Ratio of net investment income
to average net assets (net of [ ] 3.40% 2.86% [ ] 2.82% 2.74% [ ] [ ] 1.02% 0.97%
reimbursement)(6)...............
Total return........................ [ ] 28.47% 1.43% [ ] 34.62% 0.24% [ ] [ ] 32.11% 2.49%
Portfolio Turnover Rate............. [ ] 124% 118% [ ] 23% 30% [ ] [ ] 155% 21%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggressive High-Yield International
Equity Growth Special Equity Equity (3) Bond (4) Equity (5)
--------------------------- ------------------------- ------------------------------------
For the For the For the
For the For the Year Year Year
Year Ended Year Ended Ended Ended Ended
--------------------------- ------------------------- ------------------------------------
1996 1995 1994 1996 1995 1994 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................. [ ] $11.35 $10.00 [ ] $10.75 $10.00 [ ] [ ] [ ]
Income from investment operations:
Net investment income (loss)........ [ ] 0.01 (0.01) [ ] __ __ __ [ ] [ ]
Net gains (losses) on investments
(both realized and unreleased)..... [ ] 2.09 1.36 [ ] 4.43 0.84 [ ] [ ] [ ]
---- ---- ---- ----
Total income (loss) from investment
operations......................... [ ] 2.10 1.35 [ ] 4.43 0.84 [ ] -- [ ]
---- ---- ---- ---- ----
Less: Dividends and distributions
from:
Net investment income __ (0.01) __ __ __ __ __ __ __
Net realized gain on investments.. __ __ __ __ (0.89) (0.09) __ __ __
Tax return of capital............. -- (0.08) -- -- (0.34) -- -- -- --
---- ------ ---- ---- ------ ---- ---- ---- ----
Total from dividends and
distributions...................... -- (0.09) -- -- (1.23) (0.09) -- -- --
---- ------ ---- ---- ------ ------ ---- ---- ----
Net asset value, end of period...... [ ] $13.36 $11.35 [ ] $13.95 $10.75 [ ] [ ] [ ]
====== ====== ====== ======
Ratios/supplement data:
Net assets end of period........... [ ] $618,317 $120,370 $600,294 $87,705 [ ] [ ] [ ]
======== ======== ======== =======
Ratio of expenses to average
net assets (6)...... [ ] 13.60% 70.79% [ ] 15.12% 99.91% [ ] [ ] [ ]
Ratio of expenses to average net
assets (net of reimbursement) (6) [ ] 0.28% 0.42% [ ] 0.71% 0.54% [ ] [ ] [ ]
Ratio of net investment income to
average net assets (6)............ [ ] (13.13)% (71.00)% [ ] (14.58)% (99.33)% [ ] [ ] [ ]
Ratio of net investment income
to average net assets (net of
reimbursement) (6)................ [ ] 0.20% (0.21)% [ ] (0.18)% 0.04% [ ] [ ] [ ]
Total return........................ [ ] 18.50% 13.58% [ ] 41.50% 8.54% [ ] [ ] [ ]
Portfolio Turnover Rate............. [ ] 62% 75% [ ] 155% 90% [ ] [ ] [ ]
</TABLE>
<PAGE>
FOOTNOTES
(1) February 22, 1996, Commencement of Operations.
(2) June 13, 1996, Commencement of Operations.
(3) June 11, 1996, Commencement of Operations.
(4) January 30, 1996, Commencement of Operations.
(5) January 18, 1996, Commencement of Operations.
[Annualized, except for year ended 12/31/95, and Money Market for year
ended 12/31/94.]
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
As noted above, the Funds seek to achieve their respective investment
objectives by investing all of their Assets in Portfolios with investment
objectives that correspond with their own. Each Fund has a different investment
objective which it pursues through the investment policies described below.
Since each Fund has a different investment objective, each can be expected to
have different investment results and to be subject to different market and
financial risks.
Diversified has contracted with one or more Subadvisers for each
Portfolio for certain investment advisory services. Diversified and the
Subadviser or Subadvisers for a particular Portfolio are referred to herein
collectively as the "Advisers".
The investment objective of a Fund or a Portfolio may be changed without
the vote of the holders of the outstanding voting securities of such Fund or
Portfolio. Shareholders of a Fund will receive 30 days' prior written notice of
any change in the investment objective of that Fund or its corresponding
Portfolio. There can be no assurance that any investment objective of any Fund
or Portfolio will be met.
MONEY MARKET FUND. The investment objective of the Money Market Fund and
the Money Market Portfolio is to provide liquidity and as high a level of
current income as is consistent with the preservation of capital. The Money
Market Fund seeks to achieve its investment objective by investing all of its
Assets in the Money Market Portfolio.
The Money Market Portfolio invests in high quality short-term money
market instruments. Securities in which the Money Market Portfolio invests may
not earn as high a level of current income as long-term or lower quality
securities, which generally have less liquidity, greater market risk and more
fluctuation in market value.
To achieve its investment objective, the Money Market Portfolio invests
in U.S. dollar-denominated short-term money market obligations, including
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations issued by domestic banks and foreign banks,
and high quality commercial paper and other short-term corporate obligations,
including those with floating or variable rates of interest. In addition, the
Money Market Portfolio may lend its portfolio securities, enter into repurchase
agreements and reverse repurchase agreements, and invest in securities issued
<PAGE>
by foreign banks and corporations outside the United States. The Money Market
Portfolio reserves the right to concentrate 25% or more of its total assets in
obligations of domestic banks.
In accordance with Rule 2a-7 under the 1940 Act, the Money Market
Portfolio will maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of 397 days or
less and invest only in U.S. dollar-denominated securities determined in
accordance with procedures established by the Board of Trustees of the
Portfolio Series (the "Board of Trustees") to present minimal credit risks and
which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (an "NRSRO") (or one NRSRO if the instrument was rated by only
one such organization) or, if unrated, are of comparable quality as determined
in accordance with procedures established by the Board of Trustees
(collectively, "Eligible Securities").
Eligible Securities include "First Tier Securities" and "Second Tier
Securities". First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The Money
Market Portfolio will invest at least 95% of its total assets in First Tier
Securities.
The NRSROs currently rating instruments of the type the Portfolio may
purchase are Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Duff & Phelps, Inc., Fitch Investors Service, Inc., IBCA Limited, IBCA Inc. and
Thomson BankWatch, Inc., and their rating criteria are described in the
Appendix to the Statement of Additional Information. The Statement of
Additional Information contains further information concerning the rating
criteria and other requirements governing the Portfolio's investments,
including information relating to the treatment of securities subject to a
tender or demand feature and securities deemed to possess a rating based on
comparable rated securities of the same issuer.
In addition, the Portfolio will not invest more than 5% of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts (including letters of credit, guaranties or
other credit support) issued by, a single issuer, except that (i) the Portfolio
may invest more than 5% of its total assets in a single issuer for a period of
up to three business days in certain limited circumstances, (ii) the Portfolio
may invest in obligations issued or guaranteed by the U.S. Government without
any such limitation, and (iii) the limitation with respect to puts does not
<PAGE>
apply to unconditional puts if no more than 10% of the Portfolio's total assets
is invested in securities issued or guaranteed by the issuer of the
unconditional put. Investments in Second Tier Securities will be limited to 5%
of the Portfolio's total assets, with the investment in any one such issuer
being limited to no more than the greater of 1% of the Portfolio's total assets
or $1,000,000. As to each security, these percentages are measured at the time
the Portfolio purchases the security.
The Money Market Portfolio seeks to achieve its investment objective
through investments in the following types of U.S. dollar-denominated money
market instruments.
BANK OBLIGATIONS. The Portfolio may invest in U.S.
dollar-denominated certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks and
domestic branches and subsidiaries of foreign banks. Certificates of
deposit are certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Such instruments
include Yankee Certificates of Deposit, which are certificates of deposit
denominated in U.S. dollars and issued in the United States by the
domestic branch of a foreign bank. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of
time at a stated interest rate. Time deposits which may be held by the
Portfolio are not insured by the Federal Deposit Insurance Corporation or
any other agency of the U.S. Government. The Portfolio will not invest
more than 10% of the value of its net assets in time deposits maturing in
longer than seven days and other instruments which are illiquid or not
readily marketable. The Portfolio may also invest in certificates of
deposit and time deposits issued by foreign banks outside the United
States.
The Portfolio may also invest in bankers' acceptances and other
short-term obligations. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The
other short-term obligations may include uninsured, direct obligations
which have either fixed, floating or variable interest rates.
To the extent the Portfolio's investments are concentrated in the
banking industry, the Portfolio will have correspondingly greater
exposure to the risk factors which are characteristic of such
investments. Sustained increases in interest rates can adversely affect
<PAGE>
the availability or liquidity and cost of capital funds for a bank's
lending activities, and a deterioration in general economic conditions
could increase the exposure to credit losses. In addition, the value of
and the investment return on the Fund's shares could be affected by
economic or regulatory developments in or related to the banking
industry, which industry also is subject to the effects of the
concentration of loan portfolios in leveraged transactions and in
particular businesses, and competition within the banking industry, as
well as with other types of financial institutions. The Portfolio,
however, will seek to minimize its exposure to such risks by investing
only in debt securities which are determined to be of high quality.
U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
include U.S. Treasury securities, which differ only in their interest
rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of
one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S.
Government agencies and instrumentalities, for example, Government
National Mortgage Association pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of
the Federal Home Loan Banks, by the right of the issuer to borrow from
the Treasury; others, such as those issued by the Federal National
Mortgage Association, by discretionary authority of the U.S. Government
to purchase certain obligations of the agency or instrumentality; and
others, such as those issued by the Student Loan Marketing Association,
only by the credit of the agency or instrumentality. While the U.S.
Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will
always do so, since it is not so obligated by law. The Portfolio will
invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The
commercial paper purchased by the Portfolio will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Portfolio may
invest consist of high quality, U.S. dollar-denominated short-term bonds
and notes issued by domestic corporations.
<PAGE>
The Portfolio may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the Securities Act of 1933, as amended (the "1933
Act"). Such commercial paper may be issued only to finance current
transactions and must mature in nine months or less. Trading of such
commercial paper is conducted primarily by institutional investors
through investment dealers, and individual investor participation in the
commercial paper market is very limited.
UNSECURED PROMISSORY NOTES. The Portfolio also may purchase
unsecured promissory notes ("Notes") which are not readily marketable and
have not been registered under the 1933 Act, provided such investments
are consistent with the Portfolio's investment objective. The Notes
purchased by the Portfolio will have remaining maturities of 13 months or
less and will be deemed by the Board of Trustees, or by the Advisers on
behalf of the Board, to present minimal credit risks and will meet the
quality criteria set forth above. The Portfolio will invest no more than
10% of its net assets in such Notes and in other securities that are not
readily marketable (which securities would include floating and variable
rate demand obligations as to which the Portfolio cannot exercise the
demand feature described in the Statement of Additional Information and
as to which there is no secondary market).
RESTRICTED SECURITIES. The Portfolio may invest in securities that
are subject to legal or contractual restrictions on resale. These
securities may be illiquid and, thus, the Portfolio may not purchase them
to the extent that more than 10% of the value of its net assets would be
invested in illiquid securities. However, if a substantial market of
qualified institutional buyers develops pursuant to Rule 144A under the
1933 Act for such securities held by the Portfolio, the Portfolio intends
to treat such securities as liquid securities in accordance with
procedures approved by the Board of Trustees. To the extent that for a
period of time qualified institutional buyers cease purchasing such
restricted securities pursuant to Rule 144A, the Portfolio's investing in
such securities may have the effect of increasing the level of
illiquidity in the Portfolio during such period.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Portfolio of an underlying debt
instrument subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the instrument at a fixed price usually not more
than one week after its purchase. The Portfolio's custodian or a
sub-custodian will have custody of securities acquired by the Portfolio
under a repurchase agreement.
<PAGE>
Repurchase agreements may be entered into for the Portfolio with
sellers, which are usually member banks of the Federal Reserve System or
member firms of the New York Stock Exchange (or a subsidiary thereof).
Such transactions afford an opportunity for the Portfolio to earn a
return on available cash with minimal market risk. Certain costs may be
incurred by the Portfolio in connection with the sale of the securities
if the seller does not repurchase them in accordance with the repurchase
agreement. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the securities, realization on the securities by
the Portfolio may be delayed or limited. Repurchase agreements are
considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes,
such as meeting larger than anticipated redemption requests, and not for
leverage, and by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the
time the Portfolio enters into a reverse repurchase agreement it will
place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase
price, including accrued interest. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of those securities. Reverse
repurchase agreements are considered to be borrowings by the Portfolio.
FOREIGN SECURITIES. The Portfolio may invest in U.S.
dollar-denominated foreign securities issued outside the United States,
such as obligations of foreign branches and subsidiaries of domestic
banks and foreign banks, including Eurodollar certificates of deposit,
Eurodollar time deposits and Canadian time deposits, commercial paper of
Canadian and other foreign issuers, and U.S. dollar-denominated
obligations issued or guaranteed by one or more foreign governments or
any of their agencies or instrumentalities. Foreign securities may
represent a greater degree of risk than do securities of domestic issuers
due to possible exchange rate fluctuations, possible exchange controls,
less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions (including possible
withholding taxes), changes in governmental administration or economic or
monetary policy (in the United States or abroad), war or expropriation.
For a complete description of foreign securities the Portfolio may
purchase, see "Investment Policies" in the Statement of Additional
Information.
<PAGE>
CERTAIN OTHER OBLIGATIONS. In order to allow for investments in new
instruments that may be created in the future, upon the Trust
supplementing this Prospectus, the Portfolio may invest in obligations
other than those listed previously, provided such investments are
consistent with the Portfolio's investment objective, policies and
restrictions.
The Statement of Additional Information includes a discussion of
additional investment techniques such as zero coupon obligations,
variable rate and floating rate securities, participation interests,
guaranteed investment contracts and when-issued and forward commitment
securities. The Statement of Additional Information also includes a
discussion of nonfundamental investment policies, as well as a listing of
specific investment restrictions which constitute fundamental policies of
the Fund or the Portfolio and cannot be changed without the approval of
the holders of a "majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Fund or the Portfolio, respectively. See
"Investment Restrictions" in the Statement of Additional Information.
HIGH QUALITY BOND FUND. The investment objective of the High Quality Bond
Fund and the High Quality Bond Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The yield of
the High Quality Bond Fund normally is expected to be higher than a money
market fund but lower than a longer-term or lower quality bond fund. Unlike a
money market fund, the Fund does not seek to maintain a stable net asset value
and may not be able to return dollar-for-dollar the money invested. The High
Quality Bond Fund seeks to achieve its investment objective by investing all of
its Assets in the High Quality Bond Portfolio.
The High Quality Bond Portfolio pursues its investment objective by
investing at least 65% of its assets under normal circumstances in high quality
debt securities with short and intermediate maturities (including repurchase
agreements and reverse repurchase agreements).
The Advisers attempt to maintain the Portfolio's "duration" between one
and four years, which means that the Portfolio's overall sensitivity to
interest rates should be slightly more than that of bonds and notes with
remaining average maturities from one to four years. The Portfolio's
dollar-weighted average maturity (or dollar-weighted average life in the case
of asset-backed and mortgage-backed securities) may be longer than four years
from time to time, but will not exceed five years under normal conditions. The
Portfolio may hold individual securities with remaining maturities of up to
thirty years.
<PAGE>
The Portfolio seeks consistency of return with minimal exposure to
negative total returns on an annual basis. The Advisers' strategy is to
position the Portfolio in those high quality sectors of the fixed income market
that offer the most attractive yields on a risk-adjusted basis. The duration of
the Portfolio will be a function of the security and sector selection process
and market conditions in general. Since the value of fixed income securities
generally fluctuates inversely with changes in interest rates, the value of
securities held by the Fund will tend to decline during periods of rising
interest rates.
The Advisers normally will select only securities having a minimum
long-term quality rating of A- by Standard & Poor's Ratings Group ("S&P") or A3
by Moody's Investors Service, Inc. ("Moody's") at the time of purchase, or, in
the case of instruments that are not rated or are rated by other agencies
(i.e., Fitch Investors Service, Inc., Duff & Phelps, Inc., etc.) are deemed by
the Advisers to be of similar quality. Money market securities will have a
minimum short-term rating of at least A-1 or P-1 by S&P or Moody's,
respectively, or an equivalent rating by other agencies. The Portfolio may
continue to hold such securities if their ratings are reduced after purchase.
The High Quality Bond Portfolio seeks to achieve its investment objective
through investments in the following types of instruments.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Portfolio may invest in
U.S. Government securities and securities issued or guaranteed by its
agencies or instrumentalities. See "U.S. Government and Agency
Securities" above under Money Market Portfolio. These securities have
varying degrees of government backing. They may be backed by the credit
of the government as a whole or only by the issuing agency. For example,
securities issued by the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association are supported by the agency's right
to borrow money from the U.S. Treasury under certain circumstances. U.S.
Treasury bonds, notes and bills, and some agency securities, such as
those issued by the Government National Mortgage Association, are backed
by the full faith and credit of the U.S. Government as to payment of
principal and interest and are the highest quality government securities.
There is no assurance that the U.S. Government will support obligations
of its agencies unless it is required to do so by law. The Fund itself,
and its share price and yield, are not guaranteed by the U.S. Government.
For additional information on U.S. Government securities, see the
Statement of Additional Information.
<PAGE>
The Portfolio may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may
invest up to 100% of its assets in these instruments.
CORPORATE BONDS. The Portfolio may purchase public or private
corporate bonds, issued by domestic or foreign issuers, that meet the
Portfolio's minimum credit quality criteria at the time of purchase. The
corporate bond market is customarily subdivided into several segments,
which include industrial, public utility, rail and transportation bonds,
and bonds issued by banks and other financial institutions.
YANKEE BONDS AND EURODOLLAR BONDS. The Portfolio may purchase Yankee
and Eurodollar issues that meet its minimum credit quality standards.
Yankee issues are U.S. dollar denominated bonds issued in the United
States market by foreign issuers and are, therefore, subject to SEC
regulations. Issuers of Yankee bonds include, among others, foreign
corporations, foreign governments and agencies, and multilateral lending
institutions. Eurodollar bonds are fixed income securities that are
denominated in U.S. dollars, are underwritten by an international
syndicate, and are sold upon issuance to non-U.S. investors. U.S.-based
investors may purchase eurodollar bonds in the secondary market after a
seasoning period. Eurodollar bonds are not subject to SEC regulations.
MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Portfolio may purchase mortgage and mortgage-related securities such as
pass-throughs, collateralized mortgage obligations, and mortgage
derivatives that meet the Portfolio's minimum credit quality criteria
(collectively, "Mortgage Securities"). Mortgage pass-throughs are
securities that pass through to investors an undivided interest in a pool
of underlying mortgages. These may be issued or guaranteed by U.S.
government agencies, or may consist of whole loans originated and issued
by private limited purpose corporations or conduits.
Collateralized mortgage obligation bonds and mortgage derivatives
are obligations of special purpose corporations that are collateralized
or supported by mortgages or mortgage securities such as pass-throughs.
Principal prepayments on the underlying mortgages or loans may cause the
Mortgage Securities to be retired substantially earlier than their stated
<PAGE>
maturities or final distribution dates, resulting in a loss to the
Portfolio of all or part of the premium, if any, which the Portfolio may
pay when investing in Mortgage Securities.
Even if the U.S. government or one of its agencies guarantees
principal and interest payments of a mortgage-backed security, the market
price of a mortgage-backed security is not insured and may be subject to
market volatility. When interest rates decline, mortgage-backed
securities experience higher rates of prepayment because the underlying
mortgages are refinanced to take advantage of the lower rates. The prices
of mortgage-backed securities may not increase as much as prices of other
debt obligations when interest rates decline, and mortgage-backed
securities may not be an effective means of locking in a particular
interest rate. In addition, any premium paid for a mortgage-backed
security may be lost when it is prepaid. When interest rates go up,
mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease
more than prices of other debt obligations when interest rates go up.
ASSET-BACKED SECURITIES. The Portfolio may purchase public or
private asset-backed securities of various types, which are fixed income
securities that are collateralized or "backed" by installment receivables
(usually consumer loans) for which some type of credit enhancement is
provided. Asset-backed securities that are eligible for purchase by the
Portfolio include securities backed by automobile receivables, credit
card receivables, home equity loans, manufactured housing loans, business
and recreational vehicle loans, computer leases, and agricultural
equipment loans.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements or other forms of debt securities may
be held to provide a reserve for future purchases of securities during
periods of unusual market conditions or in order to reduce volatility, or
as a temporary defensive measure when the Advisers determine securities
markets to be overvalued. The Portfolio limits its short-term investments
to those U.S. dollar-denominated instruments which are determined by or
on behalf of the Board of Trustees to present minimal credit risks and
which are of "high quality" as determined by a major rating service
(i.e., rated P-1 by Moody's or A-1 by S&P) or, in the case of instruments
which are not rated, are of comparable quality pursuant to procedures
established by the Board of Trustees. Investments in high quality
short-term instruments may, in many circumstances, result in a lower
yield than would be available from investments in instruments with a
lower quality or longer term.
<PAGE>
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Portfolio may enter into repurchase agreements and reverse repurchase
agreements. See "Repurchase Agreements and Reverse Repurchase Agreements"
under Money Market Fund. The Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage.
RESTRICTED SECURITIES. The Portfolio may purchase securities in the
United States that are not registered for sale under federal securities
laws but which can be resold to institutions under Rule 144A under the
1933 Act. Provided that a dealer or institutional trading market in such
securities exists, these restricted securities are treated as exempt from
the Portfolio's 15% limit on illiquid securities. Under the supervision
of the Board of Trustees, the Advisers determine the liquidity of
restricted securities and, through reports from the Advisers, the Board
of Trustees will monitor trading activity in restricted securities.
Because Rule 144A is relatively new, it is not possible to predict how
these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be
adversely affected.
OPTIONS AND FUTURES CONTRACTS. The Portfolio may buy and sell
options and futures contracts to manage its exposure to changing interest
rates and securities prices. Some options and futures strategies,
including selling futures, buying puts, and writing calls, hedge the
Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of
security or index related to its investments.
Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judge
interest rates incorrectly, options and futures strategies may lower the
Fund's return. The costs of hedging are not reflected in the Fund's yield
but are reflected in the Fund's total return. The Fund could also
experience losses if the Portfolio's options and futures positions were
poorly correlated with its other investments, or if it could not close
out its positions because of an illiquid secondary market.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or
under the limited circumstances described in the Statement of Additional
<PAGE>
Information. Nevertheless, the Portfolio has the authority to write
options and may do so in the future if the Advisers determine that such
transactions are in the best interests of the Portfolio.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Portfolio, the Advisers may
purchase securities for the Portfolio on a "when-issued" or on a "forward
delivery" basis, which means that the obligations would be delivered to
the Portfolio at a future date beyond customary settlement time. Under
normal circumstances, the Portfolio would take delivery of such
securities. In general, the Portfolio would not pay for the securities
until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting
delivery of the obligations purchased on such basis, the Portfolio would
establish a segregated account consisting of cash, cash equivalents or
high grade liquid debt securities equal to the amount of its commitments
to purchase "when-issued" securities. An increase in the percentage of
the Portfolio's assets committed to the purchase of securities on a
"when-issued" basis may increase the volatility of the Fund's net asset
value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and
practices: investments in foreign securities, investments in securities
denominated in foreign currencies, options on futures contracts, foreign
currency exchange transactions and options on foreign currencies. The
Portfolio does not intend to utilize any of these investments or
practices to the extent of more than 5% of its assets.
See the Statement of Additional Information for further information.
INTERMEDIATE GOVERNMENT BOND FUND. The investment objective of the
Intermediate Government Bond Fund is to provide as high a level of current
income as is consistent with the preservation of capital. The yield of the
Intermediate Government Bond Fund normally is expected to be higher than a
money market fund but lower than a longer-term or lower quality bond fund. The
Intermediate Government Bond Fund pursues its investment objective by investing
all of its Assets in the Intermediate Government Bond Portfolio.
The Intermediate Government Bond Portfolio pursues its investment
objective by investing in high quality U.S. Government obligations and high
quality short-term obligations (including repurchase agreements and reverse
repurchase agreements). The Intermediate Government Bond Portfolio normally
will invest at least 65% of its assets in U.S. Government obligations. The
Advisers attempt to maintain the Intermediate Government Bond Portfolio's
"duration" between one and five years, which means that the Intermediate
<PAGE>
Government Bond Portfolio's overall sensitivity to interest rates should be
similar to that of bonds and notes with remaining average maturities from one
to five years. The Intermediate Government Bond Portfolio's dollar-weighted
average maturity (or dollar-weighted average life in the case of
mortgage-backed securities) may be longer than five years from time to time,
but will not exceed ten years or be less than 3 years under normal conditions.
The Intermediate Government Bond Portfolio may hold individual securities with
remaining maturities of up to thirty years.
Since the value of fixed-income securities generally fluctuates inversely
with changes in interest rates, the duration of the Intermediate Government
Bond Portfolio will vary to reflect the Advisers' assessments of prospective
changes in interest rates. The Advisers' strategy will be to adjust the
duration of the Intermediate Government Bond Portfolio so that the Intermediate
Government Bond Portfolio may benefit from relative price appreciation when
interest rates decline and may protect capital value when interest rates rise.
The success of this strategy will depend on the Advisers' ability to manage the
Intermediate Government Bond Portfolio through changes in interest rates, and
there is a risk that the value of the securities held by the Intermediate
Government Bond Portfolio will decline.
The following is a discussion of the various investments of and techniques
employed by the Intermediate Government Bond Portfolio. Additional information
about the investment policies of the Intermediate Government Bond Portfolio
appears under "Diversified Investors Portfolios" in the Statement of Additional
Information.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Intermediate Government
Bond Portfolio may invest in U.S. Government securities. See "U.S.
Government and Agency Securities" above under Money Market Fund. The
Intermediate Government Bond Portfolio may invest a portion of its assets
in short-term U.S. Government securities with remaining maturities of one
year or less and repurchase agreements relating thereto. When the
Advisers believe market conditions warrant a temporary defensive
position, the Portfolio may invest up to 100% of its assets in these
instruments.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements or other forms of debt securities may
be held to provide a reserve for future purchases of securities during
periods of unusual market conditions or in order to reduce volatility, or
<PAGE>
as a temporary defensive measure when the Advisers determine securities
markets to be overvalued. See "Short Term Instruments" above under High
Quality Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements and reverse repurchase agreements may be entered into by the
Intermediate Government Bond Portfolio. See "Repurchase Agreements and
Reverse Repurchase Agreements" above under Money Market Fund. The
Intermediate Government Bond Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage.
RESTRICTED SECURITIES. The Intermediate Government Bond Portfolio
may invest not more than 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale. See
"Restricted Securities" above under Money Market Fund.
OPTIONS AND FUTURES CONTRACTS. The Intermediate Government
Bond Portfolio may buy and sell options and futures contracts to
manage its exposure to changing interest rates and securities prices.
See "Options and Futures Contracts" above under High Quality Bond Fund.
The Intermediate Government Bond Portfolio currently does not intend
to engage in the writing of options, except for the purpose of
terminating an existing position or under the limited circumstances
described under "Diversified Investors Portfolios" in the Statement of
Additional Information. Nevertheless, the Intermediate Government Bond
Portfolio has the authority to write options and may do so in the future
if the Advisers determine that such transactions are in the best
interests of the Intermediate Government Bond Portfolio.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Intermediate Government Bond
Portfolio, the Advisers may purchase securities for the Intermediate
Government Bond Portfolio on a "when-issued" or on a "forward delivery"
basis, which means that the obligations would be delivered to the
Intermediate Government Bond Portfolio at a future date beyond customary
settlement time. See "Delayed Delivery Transactions" above under the High
Quality Bond Fund.
OTHER INVESTMENT AND INVESTMENT TECHNIQUES. The Intermediate
Government Bond Portfolio may, in each case up to 5% of the Portfolio's
assets, also utilize the following investments and investment techniques
<PAGE>
and practices: investments in foreign securities, options on futures
contracts, foreign currency exchange transactions and options on foreign
currencies. See "Diversified Investors Portfolios" in the Statement of
Additional Information for further information.
GOVERNMENT/CORPORATE BOND FUND. The investment objective of the
Government/Corporate Bond Fund and the Government/Corporate Bond Portfolio is
to achieve the maximum total return. The Government/Corporate Bond Fund yield
normally is expected to be higher than a money market fund but lower than a
longer-term or lower quality bond fund. The Government/Corporate Bond Fund
seeks to achieve its investment objective by investing all of its Assets in the
Government/Corporate Bond Portfolio.
The Government/Corporate Bond Portfolio pursues its investment objective
by investing in investment grade debt securities, U.S. Government obligations,
including U.S. Government agency and instrumentality obligations and
collateralized mortgage obligations guaranteed by these agencies and
instrumentalities, and high quality short-term obligations (including
repurchase agreements and reverse repurchase agreements). At least 65% of the
Portfolio's assets is invested in U.S. Government securities, corporate bonds
and short-term instruments.
The Advisers attempt to maintain the Government/Corporate Bond
Portfolio's "duration" between three and ten years, which means that the
Portfolio's overall sensitivity to interest rates should be slightly more than
that of bonds and notes with remaining average maturities from three to fifteen
years. The Government/Corporate Bond Portfolio's dollar-weighted average
maturity (or dollar-weighted average life in the case of mortgage-backed
securities) may be longer than fifteen years from time to time, but will not
exceed thirty years under normal conditions. The Government/Corporate Bond
Portfolio may hold individual securities with remaining maturities of up to
thirty years.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Portfolio will vary to
reflect the Advisers' assessments of prospective changes in interest rates. The
Advisers' strategy will be to adjust the duration of the Portfolio so that the
Government/Corporate Bond Portfolio may benefit from relative price
appreciation when interest rates decline and may protect capital value when
interest rates rise. The success of this strategy will depend on the Advisers'
ability to manage the Portfolio through changes in interest rates, and there is
a risk that the value of the securities held by the Portfolio will decline.
<PAGE>
The Government/Corporate Bond Portfolio seeks to achieve its investment
objective through investments in the following types of instruments.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Government/Corporate Bond
Portfolio may invest in U.S. Government securities. See "U.S. Government
and Agency Securities" above under Money Market Fund. The Portfolio may
invest a portion of its assets in short-term U.S. Government securities
with remaining maturities of one year or less and repurchase agreements
relating thereto. When the Advisers believe market conditions warrant a
temporary defensive position, the Portfolio may invest up to 100% of its
assets in these instruments.
CORPORATE BONDS. The Government/Corporate Bond Portfolio may
purchase debt securities of United States corporations only if they carry
a rating of at least Baa from Moody's or BBB from S&P or which, if not
rated by these rating agencies, are judged by the Advisers to be of
comparable quality. Securities rated Baa by Moody's or BBB by S&P may
have speculative characteristics. Changes in economic condition or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case for higher grade
securities. See the Appendix to the Statement of Additional Information
for an explanation of these ratings.
FOREIGN SECURITIES. The Government/Corporate Bond Portfolio may
invest in securities of foreign issuers. The Fund's investments in
unlisted foreign securities are subject to the overall restrictions
applicable to investments in illiquid securities. The Advisers do not
intend to concentrate more than 25% of foreign investments in any one
type of instrument or in any foreign country. Foreign securities may
represent a greater degree of risk than do securities of domestic issuers
due to possible exchange rate fluctuations, possible exchange controls,
less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions (including possible
withholding taxes), changes in governmental administration or economic or
monetary policy (in the United States or abroad), war or expropriation.
Forward foreign currency exchange contracts may also be entered into for
the purchase or sale of foreign currency solely for hedging purposes
against adverse rate changes. A currency exchange contract allows a
definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into
such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable
<PAGE>
movements in exchange rates. In addition, entering into such contracts
means incurring certain transaction costs and bearing the risks of
incurring losses if rates do not move in the direction anticipated.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements, bank certificates of deposit or other
forms of debt securities may be held to provide a reserve for future
purchases of securities, during periods of unusual market conditions or
in order to reduce volatility, or as a temporary defensive measure when
the Advisers determine securities markets to be overvalued. See "Short
Term Instruments" above under High Quality Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Government/Corporate Bond Portfolio may enter into repurchase agreements
and reverse repurchase agreements. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Fund. The Portfolio may
borrow funds for temporary or emergency purposes, such as meeting larger
than anticipated redemption requests, and not for leverage.
RESTRICTED SECURITIES. The Government/Corporate Bond Portfolio
may invest not more than 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale. See "Restricted
Securities" above under High Quality Bond Fund.
OPTIONS AND FUTURES CONTRACTS. The Government/Corporate Bond Series
may buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. See "Options and Futures
Contracts" above under High Quality Bond Fund.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or
under the limited circumstances described in the Statement of Additional
Information.
Nevertheless, the Portfolio has the authority to write options and
may do so in the future if the Advisers determine that such transactions
are in the best interests of the Portfolio.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Government/Corporate Bond
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis which means that the
securities would be delivered to the Portfolio at a future date beyond
customary settlement times. See "Delayed Delivery Transactions" above
under High Quality Bond Fund.
<PAGE>
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The
Government/Corporate Bond Portfolio may also utilize the following
investments and investment techniques and practices: options on futures
contracts and options on foreign currencies. The Portfolio does not
intend to utilize any of these investments or techniques to the extent of
more than 5% of its assets.
See the Statement of Additional Information for further information.
HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to seek a high level of current income. The High-Yield Bond Fund seeks to
achieve its investment objective by investing all of its Assets in the
High-Yield Bond Portfolio.
The High-Yield Bond Portfolio pursues its investment objective by
investing in a diversified portfolio consisting primarily of high-yielding,
fixed-income and zero coupon securities, such as bonds, debentures and notes,
convertible securities and preferred stocks. The Portfolio may invest all or a
substantial portion of its assets in lower-rated debt securities, commonly
referred to as "junk bonds". Such investments may include foreign securities
and obligations issued or guaranteed by the U.S. government, any of its states
or territories, any foreign government or any of their respective subdivisions,
agencies or instrumentalities.
The High-Yield Bond Portfolio normally will invest at least 65% of its
assets in high-yielding, income producing debt securities and preferred stocks,
including convertible and zero coupon securities. Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their face value. Certain zero coupon securities also are sold at
substantial discounts but provide for the commencement of regular interest
payments at a deferred date. The Portfolio may invest up to 35% of its assets
in equity securities, including common stocks, warrants and rights.
Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's or BB or lower by S&P. Lower-rated debt securities are
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher-rated securities and
are more sensitive to changes in the issuer's capacity to pay. Investing in
lower-rated debt securities is an aggressive approach to income investing. The
1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged corporate acquisitions and restructurings. Past
experience may not provide an accurate indication of future performance of
<PAGE>
lower-rated debt securities, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these lower-rated debt
securities will be valued in accordance with standards set by the Board of
Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing lower-rated debt securities than securities for which
more extensive quotations and last-sale information are available. Adverse
publicity and changing investor perceptions may affect the ability of outside
pricing services used by the Portfolio to value its portfolio securities, and
the Portfolio's ability to dispose of the lower-rated bonds. The market prices
of lower-rated debt securities may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. During
an economic downturn or a prolonged period of rising interest rates, the
ability of issuers of lower-rated debt to service their payment obligations,
meet projected goals, or obtain additional financing may be impaired. The
Portfolio may choose, at its own expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
interest of Portfolio investors.
The considerations discussed above for lower-rated debt securities also
are applicable to lower quality unrated debt instruments of all types,
including loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality than
rated securities but they may not be attractive to as many buyers.
The High-Yield Bond Portfolio may also seek to achieve its investment
objective through investments in the following types of instruments.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term
obligations, repurchase agreements, bank certificates of deposit or other
forms of debt securities may be held to provide a reserve for future
purchases of securities, during periods of unusual market conditions or
in order to reduce volatility, or as a temporary defensive measure when
the Advisers determine securities markets to be overvalued. See "Short
Term Instruments" above under High Quality Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
High-Yield Bond Portfolio may enter into repurchase agreements and
reverse repurchase agreements. See "Repurchase Agreements and Reverse
<PAGE>
Repurchase Agreements" above under Money Market Fund. The Portfolio may
borrow funds for temporary or emergency purposes, such as meeting larger
than anticipated redemption requests, and not for leverage.
RESTRICTED SECURITIES. The High-Yield Bond Portfolio may not
invest more than 15% of its net assets in securities that are subject to
legal or contractual restrictions on resale. See "Restricted
Securities" above under High Quality Bond Fund.
OPTIONS AND FUTURES CONTRACTS. The High-Yield Bond Portfolio may buy
and sell options and futures contracts to manage its exposure to changing
interest rates and securities prices. See "Options and Futures Contracts"
above under High Quality Bond Fund.
The Portfolio currently does not intend to engage in the writing of
options, except under the limited circumstances described in the
Statement of Additional Information. Nevertheless, the Portfolio has the
authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the
Portfolio.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the High-Yield Bond Portfolio,
the Advisers may purchase securities for the Portfolio on a "when-issued"
or on a "forward delivery" basis which means that the securities would be
delivered to the Portfolio at a future date beyond customary settlement
times. See "Delayed Delivery Transactions" above under High Quality Bond
Fund.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The High-Yield Bond
Portfolio may also utilize the following investments and investment
techniques and practices: options on futures contracts and options on
foreign currencies. The Portfolio does not intend to utilize any of these
investments or techniques to the extent of more than 5% of its assets.
See the Statement of Additional Information for further information.
BALANCED FUND. The investment objective of the Balanced Fund and the
Balanced Portfolio is to provide a high total investment return consistent with
a broad mix of stocks, bonds and money market instruments. The Balanced Fund
seeks to achieve its investment objective by investing all of its Assets in the
Balanced Portfolio.
The Balanced Portfolio pursues its investment objective by investing in a
managed mix of common stocks (and/or equivalents including American Depository
Receipts), preferred stocks, debt securities of U.S. domiciled corporations,
<PAGE>
U.S. government securities, commercial paper of U.S. corporations, and bank
obligations. The Advisers will determine the proportions of each type of
investment to achieve an asset mix they believe appropriate for an investor who
desires diversification of investment. The Balanced Portfolio will vary the
proportion of each type of asset purchased according to the Advisers'
interpretations of changes in economic conditions and the sensitivity of each
type of investment to those changes. The Advisers seek to shift emphasis among
stocks, bonds and short-term instruments to maximize participation in positive
markets and preservation of capital in negative markets and otherwise in
response to market conditions.
The Balanced Portfolio's policy is to invest its assets in a broad list
of equity and fixed-income securities, such as common stocks, preferred stocks
and bonds, including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security. Some
fixed-income securities may also have a right to purchase common stock by means
of a conversion privilege or attached warrants. The Balanced Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values. However, at least 25% of the
total assets of the Balanced Portfolio are always invested in fixed-income
senior securities including debt securities and preferred stock. In selecting
common stocks, emphasis is placed on investing in established companies with
market capitalizations of $100,000,000 or more and seasoned management teams.
Most of the Balanced Portfolio's non-convertible long-term debt investments
consist of "investment grade" securities (rated Baa or better by Moody's or BBB
or better by S&P), although unrated debt securities may be purchased and held
if they are judged by the Advisers to be of equivalent quality. Securities
rated Baa by Moody's or BBB by S&P may have speculative characteristics.
Changes in economic conditions or other circumstances may weaken more severely
the capacity of issuers of Baa or BBB securities to make principal and interest
payments than is the case for issuers of higher grade bonds. Less than 5% of
the Balanced Portfolio's investments consist of securities rated Baa by Moody's
or BBB by S&P. For a description of these ratings, see the Appendix to the
Statement of Additional Information.
The Balanced Portfolio may invest a portion of its assets in short-term
U.S. Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in these instruments or other money market instruments.
<PAGE>
EQUITY INCOME FUND. The investment objective of the Equity Income Fund
and the Equity Income Portfolio is to provide a high level of current income
through investment in a diversified portfolio of common stocks with relatively
high current yields; capital appreciation is a secondary objective. The Equity
Income Fund seeks to achieve its investment objective by investing all of its
Assets in the Equity Income Portfolio.
The Equity Income Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of companies which, in
the opinion of the Advisers, are fundamentally sound financially and which pay
relatively high dividends on a consistent basis. The Advisers attempt to manage
the Portfolio so that it will outperform other equity income funds in negative
markets. As a result of this objective, the Portfolio may underperform relative
to other equity income funds in positive markets. The Portfolio invests
primarily in common stocks and preferred stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent, in
stocks that are traded over-the-counter. The Portfolio also invests in bonds
and short-term obligations as well as securities convertible into common
stocks, preferred stocks, debt securities and short-term obligations. The
Portfolio allocates its investments among different industries and companies,
and changes its portfolio securities for investment considerations and not for
trading purposes.
The Equity Income Portfolio's policy is to invest in a broad list of
equity and fixed-income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
security. Some fixed-income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
EQUITY VALUE FUND. The investment objective of the Equity Value Fund and
the Equity Value Portfolio is to provide a high total investment return through
investment primarily in a diversified portfolio of common stocks. The Equity
Value Fund seeks to achieve its investment objective by investing all of its
Assets in the Equity Value Portfolio.
The Equity Value Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of companies which, in
the opinion of the Advisers, are trading at low valuations relative to market
and/or historical levels. These stocks tend to have relatively low
price/earnings ratios and/or relatively low price/book value ratios. Low
<PAGE>
price/earnings ratios or price/book value ratios means that the stock is less
expensive than average relative to the company's earnings or book value,
respectively. The Portfolio invests primarily in common stocks listed on the
New York Stock Exchange and on other national securities exchanges and, to a
lesser extent, in stocks that are traded over-the-counter. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
The Equity Value Portfolio may invest in a broad list of equity and
fixed-income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed-income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
GROWTH & INCOME FUND. The investment objective of the Growth & Income
Fund and the Growth & Income Portfolio is to provide current income and capital
appreciation. The Growth & Income Fund seeks to achieve its investment
objective by investing all of its Assets in the Growth & Income Portfolio.
The Growth & Income Portfolio seeks to achieve its investment objective
by investing primarily in a diversified portfolio of securities selected for
their potential to generate current income or long term capital appreciation.
In general, the objective of the Portfolio is to achieve greater potential for
capital appreciation than an income fund and less price volatility than a
growth fund. The Growth & Income Portfolio invests primarily in common stocks
and preferred stocks listed on the New York Stock Exchange and on other
national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Portfolio also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Portfolio allocates its
investments among different industries and companies and changes its portfolio
securities for investment considerations and not for trading purposes. In
general, the Portfolio seeks to invest in growing, financially stable and
undervalued companies.
The Growth & Income Portfolio's policy is to invest in a broad list of
equity and fixed income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
<PAGE>
security. Some fixed income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values.
EQUITY GROWTH FUND. The investment objective of the Equity Growth Fund
and the Equity Growth Portfolio is to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks
with potential for above average growth in earnings and dividends; current
income is a secondary objective. The Equity Growth Fund seeks to achieve its
investment objective by investing all of its Assets in the Equity Growth
Portfolio.
The Equity Growth Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of common stocks, but may also
invest in other types of securities such as preferred stocks, convertible and
non-convertible bonds, warrants and foreign securities including American
Depository Receipts ("ADRs"). Under normal circumstances, at least 65% of the
assets of the Portfolio are invested in equity securities. This is a
fundamental investment policy and may not be changed without investor approval.
The Equity Growth Portfolio invests primarily in stocks of companies that have
a market value of all their issued and outstanding common stock of $10 to $15
billion and preferred stocks listed on the New York Stock Exchange and on other
national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Portfolio also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Portfolio allocates its
investments among different industries and companies, and changes its portfolio
securities for investment considerations and not for trading purposes.
The Equity Growth Portfolio's policy is to invest in a broad list of
equity and fixed-income securities, including short-term obligations. The list
may be diversified not only by companies and industries, but also by type of
security. Some fixed-income securities may also have a call on common stock by
means of a conversion privilege or attached warrants. The Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Adviser's interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
SPECIAL EQUITY FUND. The investment objective of the Special Equity Fund
and the Special Equity Portfolio is to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks of
small to medium size companies. The Special Equity Fund is designed for
<PAGE>
investors in search of substantial long-term growth who can accept
above-average stock market risk and little or no current income. The Special
Equity Fund seeks to achieve its investment objective by investing all of its
Assets in the Special Equity Portfolio.
The Special Equity Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of stocks of small to medium
size companies which, in the opinion of the Advisers, will present an
opportunity for significant increases in earnings and/or value, without
consideration for current income. The Portfolio's primary equity investments
will be common stocks of small and medium sized U.S. companies with market
capitalizations of less than $2 billion. Multiple managers are used to control
the volatility often associated with investments in small to medium size
companies and to maximize opportunities in positive markets. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Special Equity Portfolio allocates its investments
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.
While the Special Equity Portfolio's policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings,
appreciation may be sought in other types of securities such as preferred
stocks, convertible and non-convertible bonds, warrants and foreign securities
including American Depository Receipts. The Special Equity Portfolio may vary
the percentage of assets invested in any one type of security in accordance
with the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values. In selecting stocks,
emphasis is placed on investing in companies with small to medium market
capitalizations, i.e., the market value of all issued and outstanding common
stock of the company will be less than $2 billion. Investing in equity
securities of small to medium companies involves risks not typically associated
with investment in comparable securities of large companies. Such smaller and
medium companies may have narrow product lines and limited financial and
managerial resources. Since the market for the equity securities of small and
medium companies is often characterized by less information and liquidity than
that for the equity securities of large companies, securities of such small and
medium companies may be subject to more abrupt or erratic market movements than
securities of large companies or market averages in general. Therefore, an
investment in the Special Equity Fund may be subject to greater declines in
value than an investment in an equity fund investing in the equity securities
of large companies.
<PAGE>
AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity
Fund and the Aggressive Equity Portfolio is to provide a high level of capital
appreciation through investment primarily in a diversified portfolio of common
stocks of small to medium size companies. The Aggressive Equity Fund is
designed for investors in search of substantial long-term growth who can accept
above-average stock market risk and little or no current income. The Aggressive
Equity Fund seeks to achieve its investment objective by investing all of its
Assets in the Aggressive Equity Portfolio.
The Aggressive Equity Portfolio seeks to achieve its investment objective
by investing primarily in a diversified portfolio of stocks of small to medium
size companies which, in the opinion of the Advisers, present an opportunity
for significant increases in earnings, revenue and/or value, without
consideration for current income. The Portfolio's primary equity investments
are common stocks of small and medium sized U.S. companies with market
capitalizations between $750 million and $2.5 billion. The Portfolio may also
invest in bonds and short-term obligations as well as securities convertible
into common stocks, preferred stocks, debt securities and short-term
obligations. The Aggressive Equity Portfolio allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
While the Aggressive Equity Portfolio's policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings
and/or revenue, appreciation may be sought in other types of securities such as
preferred stocks, convertible and non-convertible bonds, warrants and foreign
securities including American Depository Receipts. The Aggressive Equity
Portfolio may vary the percentage of assets invested in any one type of
security in accordance with the Advisers' interpretation of economic and market
conditions, fiscal and monetary policy, and underlying securities values.
In selecting stocks, emphasis is placed on investing in companies with
consistent, above-average and accelerating profitability and growth. These
companies tend to have higher price/earnings ratios which means that the stock
is more expensive than average relative to the company's earnings. Investing in
equity securities of small to medium companies involves risks not typically
associated with investment in comparable securities of large companies. Such
smaller and medium companies may have narrow product lines and limited
financial and managerial resources. Since the market for the equity securities
of small and medium companies is often characterized by less information and
liquidity than that for the equity securities of large companies, securities of
such small and medium companies may be subject to more abrupt or erratic market
<PAGE>
movements than securities of large companies or market averages in general.
Therefore, an investment in the Aggressive Equity Fund may be subject to
greater declines in value than an investment in an equity fund investing in the
equity securities of large companies.
INTERNATIONAL EQUITY FUND. The investment objective of the International
Equity Fund is to provide a high level of long-term capital appreciation
through investment in a diversified portfolio of securities of foreign issuers.
The International Equity Fund seeks to achieve its investment objective by
investing all of its Assets in the International Equity Portfolio.
The International Equity Portfolio seeks to achieve its investment
objective by investing primarily in foreign securities. Foreign securities are
defined as securities of issuers, wherever organized, which trade solely on a
foreign exchange or over-the-counter market, or, of issuers which in the
judgment of the Advisers, have their principal activities outside of the United
States. In determining whether an issuer's principal activities and interests
are outside the United States, the Advisers will look at such factors as the
location of the issuer's assets, operations, facilities, personnel, sales and
earnings. Under normal circumstances, at least 65% of the assets of the
Portfolio are invested in foreign equity securities. The Advisers will purchase
securities of companies in a minimum of 3 countries outside the United States.
The Advisers use an approach to investing looking to identify fundamental
values in stocks they select. Further, when allocating the Portfolio's
investments among geographic regions and individual countries, the Advisers
consider various criteria, such as prospects for relative economic growth among
countries, expected levels of inflation, government policies influencing
business conditions, and the outlook for currency relationships. The Portfolio
invests most of its assets in securities of issuers located in developed
countries in these geographic areas: Canada, the Far East, Australia and
Europe.
The International Equity Portfolio may invest up to 10% of its assets in
securities of issuers in the world's emerging markets. Countries with emerging
markets include those that have an emerging stock market as defined by the
International Finance Corporation, those with low- to middle-income economies
according to the World Bank, and those listed in World Bank publications as
developing. While the Advisers believe that these investments present the
possibility for significant growth over the long-term, they also entail
significant risks. Many investments in emerging markets can be considered
speculative, and their prices can be much more volatile than those in the more
<PAGE>
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
The International Equity Portfolio may invest in all types of securities,
most of which are denominated in foreign currencies. While the Advisers expect
that opportunities for long term capital appreciation will come primarily from
common stocks, securities convertible into common stock, non-convertible
preferred stocks and depository receipts for these securities, the Portfolio
may also invest in any type or quality of debt securities if the Advisers
believe that doing so may result in long term growth. In addition, the
Portfolio may invest in high-yielding, lower rated debt securities. See the
discussion of lower rated debt securities above under High-Yield Bond Fund
above. Forward foreign currency exchange contracts may also be entered into for
the purchase or sale of foreign currency solely for hedging purposes against
adverse rate changes on both a long and short term basis. A currency exchange
contract allows a definite price in dollars to be fixed for foreign securities
that have been purchased or sold (but not settled) for the Portfolio. Entering
into such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. In addition, entering into such contracts means incurring
certain transaction costs and bearing the risk of incurring losses if rates do
not move in the direction anticipated.
Investments in foreign equity and debt securities involve increased or
additional risks from those encountered when investing in securities of
domestic issuers. The Advisers evaluate the risks and opportunities when
investing in particular foreign securities. Such risks include (1) currency
fluctuations; (2) restrictions on, and costs associated with, the exchange of
currencies; (3) the difficulty in obtaining or enforcing a court judgment
abroad; (4) reduced levels of publicly available information concerning
issuers; (5) restrictions on foreign investment in other jurisdictions; (6)
reduced levels of governmental regulation of foreign securities markets; (7)
difficulties in effecting the repatriation of capital invested abroad; (8)
difficulties in transaction settlements and the effect of this delay on
shareholder equity; (9) foreign withholding taxes; (10) political, economic,
and similar risks, including expropriation and nationalization; (11) different
accounting, auditing, and financial standards; (12) price volatility; and (13)
the diverse structure and liquidity of various countries and regions.
CERTAIN INVESTMENT TECHNIQUES AND RESTRICTIONS
Following is a description of certain investment techniques employed by
the Portfolios.
<PAGE>
OPTIONS AND FUTURES CONTRACTS. Each of the Balanced Portfolio, Equity
Income Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity
Growth Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may enter into transactions in futures
contracts, options on futures contracts, options on securities indexes and
options on securities, for the purpose of hedging each Portfolio's securities,
which would have the effect of reducing the volatility of its net asset value.
In general, each such transaction involves the establishment of a position
which is expected to move in a direction opposite to that of the security or
securities being hedged.
For example, each Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
that Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, securities indexes or
securities in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of securities that that Portfolio intends to
purchase.
The Statement of Additional Information includes further information
about the transactions in futures and option contracts that may be entered into
by each Portfolio.
Gain or loss to each Portfolio on transactions in security index futures
or options will depend on price movements in the stock market generally (or in
a particular industry or segment of the market), rather than price movements of
individual securities. A securities index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some securities index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the SEC. Futures contracts and options on
futures contracts are traded only on designated contract markets regulated by
the Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
<PAGE>
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
Each Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in the Statement of Additional Information.
Nevertheless, each Portfolio has the authority to write options and may do so
in the future if the Advisers determine that such transactions are in the best
interests of the Fund.
SHORT-TERM INSTRUMENTS. Each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may invest in cash, commercial paper, short-term
obligations, repurchase agreements or other forms of debt securities
(including, without limitation, a short-term investment fund investing in any
of such securities). See "Short-Term Instruments" above under High Quality Bond
Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Balanced Portfolio, Equity Income Portfolio, Equity Value Portfolio, Growth &
Income Portfolio, Equity Growth Portfolio, Special Equity Portfolio, Aggressive
Equity Portfolio and International Equity Portfolio may enter into repurchase
agreements and reverse repurchase agreements and may borrow funds for temporary
or emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Fund.
RESTRICTED SECURITIES. Each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio may not invest more than 15% of its net assets
in securities that are subject to legal or contractual restrictions on resale.
See "Restricted Securities" above under High Quality Bond Fund.
DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability
of suitable securities for each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio and
International Equity Portfolio, the Advisers may purchase securities for each
such Portfolio on a "when-issued" or on a "forward delivery" basis. See
"Delayed Delivery Transactions" above under High Quality Bond Fund.
<PAGE>
FOREIGN SECURITIES. Each of the Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio and Aggressive Equity Portfolio has a
current policy not to invest more than 25% of its assets in securities of
foreign issuers, including investments in sponsored American Depository
Receipts ("ADRs"). ADRs are receipts typically issued by an American Bank or
trust company evidencing ownership of the underlying foreign securities. The
Advisers do not intend to concentrate more than 25% of such foreign investments
in any one type of instrument or in any foreign country. Each Portfolio's
investments in unlisted foreign securities, not including ADRs, are subject to
the overall restrictions applicable to investments in illiquid securities.
Foreign securities, including ADRs, may represent a greater degree of risk than
do securities of domestic issuers due to possible exchange rate fluctuations,
possible exchange controls, less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions (including
possible withholding taxes), changes in governmental administration or economic
or monetary policy (in the United States or abroad), war or expropriation. Each
Portfolio may invest up to 5% of its assets in closed-end investment companies
which primarily hold foreign securities. Forward foreign currency exchange
contracts may also be entered into for the purchase or sale of foreign currency
solely for hedging purposes against adverse rate changes. A currency exchange
contract allows a definite price in dollars to be fixed for foreign securities
that have been purchased or sold (but not settled) for each Portfolio. Entering
into such exchange contracts may result in the loss of all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. In addition, entering into such contracts means incurring
certain transaction costs and bearing the risk of incurring losses if rates do
not move in the direction anticipated.
LENDING OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
portfolio securities to brokers, dealers and other financial organizations. By
lending its securities, a Portfolio can increase its income by continuing to
receive interest on the loaned securities as well as by either investing the
cash collateral in short-term securities or obtaining yield in the form of
interest paid when U.S. Government obligations are used as collateral. There
may be risks of delay in receiving additional collateral or risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. A Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio must
receive at least 100% cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the market
value of the loaned securities including accrued interest exceeds the level of
the collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
<PAGE>
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the
loaned securities may pass to the borrower. However, if a material event
adversely affecting the loaned securities were to occur, the Portfolio would
terminate the loan and regain the right to vote the securities.
* * *
Changes to the securities of each Portfolio are generally made without
regard to the length of time a security has been held, or whether a sale would
result in the recognition of a profit or loss. Therefore, the rate of portfolio
turnover is not a limiting factor to trading when such trading is deemed
appropriate. Each Portfolio engages in trading if it believes a transaction net
of costs (including custodian charges) will help it achieve its investment
objective. The portfolio turnover rate for each Portfolio in 1996 is set forth
above under "Condensed Financial Information". The amount of brokerage
commissions and realized capital gains will tend to increase as the level of
portfolio activity increases. The primary consideration in placing portfolio
security transactions with broker-dealers for execution is to obtain, and
maintain the availability of, execution at the most favorable prices and in the
most effective manner possible. See "Portfolio Transactions and Brokerage
Commissions" in the Statement of Additional Information.
As "diversified" funds, no more than 5% of the assets of any Portfolio
may be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of each Portfolio's assets may be invested
without regard to this limitation. No Portfolio will invest more than 25% of
its assets in the securities of issuers in any one industry. These are
fundamental investment policies which may not be changed without investor
approval. As a non-fundamental operating policy, no more than 15% (10% in the
case of the Money Market Portfolio) of the net assets of any Portfolio may be
invested in (i) securities the resale of which are subject to legal or
contractual restrictions is restricted under federal securities laws and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days). Additional fundamental investment and
operating policies of the Portfolios are contained in the Statement of
Additional Information.
MASTER-FEEDER STRUCTURE
The Funds do not invest directly in securities. Instead, each Fund
invests its assets in a corresponding Portfolio, a mutual fund having the same
investment objectives and policies as that Fund. The Portfolio, in turn, buys,
<PAGE>
holds and sells securities in accordance with its investment objectives and
policies. Of course, there can be no assurance that a Fund or its corresponding
Portfolio will achieve their respective objectives. The Trust may withdraw a
Fund's investment in its corresponding Portfolio at any time, and will do so if
the Trust's Trustees believe it to be in the best interest of the Fund's
shareholders. If the Trust were to withdraw a Fund's investment in its
corresponding Portfolio, the Trust could either invest the Fund's investable
assets directly in securities in accordance with the investment policies
described above or invest in another mutual fund or pooled investment vehicle
having the same investment objectives and policies. If the Trust were to
withdraw a Fund's investment in its corresponding Portfolio, the Fund could
receive securities from the Portfolio instead of cash, causing the Fund to
incur brokerage, tax and other charges or leaving it with securities which may
or may not be readily marketable or widely diversified.
Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but a
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause the Trust to withdraw a Fund's investment in its
corresponding Portfolio.
Except as stated otherwise, all investment objectives, policies and
restrictions described herein and in the Statement of Additional Information
are nonfundamental and may be changed without investor approval. Subject to
exceptions that are not inconsistent with applicable rules or policies of the
Securities and Exchange Commission, whenever the Trust is asked to vote on
matters concerning one or more Portfolios, the Trust will hold a shareholder
meeting of the appropriate Fund(s) and vote in accordance with shareholder
instructions. Fund shareholders who do not vote will not affect the Trust's
votes at a Portfolio meeting. The percentage of the Trust's votes representing
Fund shareholders not voting will be voted by the Trustees of the Trust in the
same proportion as the Fund shareholders who do, in fact, vote. Of course, a
Fund could be outvoted, or otherwise adversely affected, by other investors in
its corresponding Portfolio.
Each Portfolio may sell interests to other investors in addition to its
corresponding Fund. These investors may be mutual funds which offer shares to
their shareholders with different costs and expenses than the Fund. Therefore,
the investment returns for all investors in funds investing in a Portfolio may
not be the same. These differences in returns are also present in other mutual
fund structures. Information concerning other holders of interests in the
Portfolios is available from Diversified at (914) 697-8000.
<PAGE>
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
The Trust has not retained the services of an investment adviser since
the Trust seeks to achieve the investment objective of each Fund by investing
all of the Assets of each Fund in a corresponding Portfolio. The respective
Boards of Trustees of the Trust and of the Portfolio Series provide broad
supervision over the affairs of the Trust and of the Portfolio Series,
respectively. The Trustees of the Trust who are not "interested persons" of the
Trust are separate from and independent from the Trustees of the Portfolio
Series who are not "interested persons" of the Portfolio Series. For further
information about the Trustees and officers of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" in the Statement of
Additional Information. A majority of each of the Trust's and the Portfolio
Series' Trustees are not affiliated with the Advisers.
INVESTMENT ADVISORY SERVICES
Subject to such policies as the Board of Trustees of the Portfolio Series
may determine and pursuant to Investment Advisory Agreements (the "Advisory
Agreements") with the Portfolio Series with respect to each Portfolio,
Diversified manages the assets of each Portfolio in accordance with the
investment policies approved by the Board of Trustees. Subject to such
policies, Diversified provides general investment advice to each Portfolio. For
its services under the Advisory Agreements, Diversified receives from each
Portfolio fees accrued daily and paid monthly at an annual rate equal to the
percentages specified in the table below of the average daily net assets.
Diversified is currently waiving a portion of its investment advisory fees. The
principal business address of Diversified is Four Manhattanville Road,
Purchase, New York 10577. Investment management decisions are taken by a
committee of Diversified's personnel and not by a particular individual.
Management's discussion of the Funds' performance for the fiscal year
ended December 31, 1996 is included in the Funds' Annual Report to
Shareholders, a copy of which may be obtained free of charge upon request from
the Funds' Distributor.
For each Portfolio, Diversified has entered into an Investment
Subadvisory Agreement (each a "Subadvisory Agreement") with the Subadvisers
listed in the table below (each a "Subadviser", and collectively the
"Subadvisers"). For its services under each Subadvisory Agreement, the
Subadvisers receive a fee from Diversified at an annual rate equal to the
percentages specified in the table below of the corresponding Portfolio's
average net assets. Each fee will be accrued monthly by multiplying the
arithmetic average of the beginning and ending monthly net assets in the
<PAGE>
Portfolio by the fee schedule and dividing by 12. Each fee will be paid on a
quarterly basis.
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIO COMPENSATION(%) COMPENSATION(%)
PORTFOLIO SUBADVISERS TO ADVISER(1) TO SUBADVISERS
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
High Quality Bond Portfolio Merganser Capital
Management Corporation 0.35 (2)
Intermediate Government Capital Management Group 0.35 0.15
Bond Portfolio
Government/Corporate Bond Capital Management Group 0.35 0.15
Portfolio
High-Yield Bond Portfolio Delaware Investment Advisers 0.55 (3)
Balanced Portfolio Institutional Capital Corporation 0.45 (4)
Equity Income Portfolio Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (5)
Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (6)
Equity Growth Portfolio Chancellor LGT Asset Management, Inc. 0.62 (7)
Special Equity Portfolio (8) 0.80 0.50
Aggressive Equity Portfolio McKinley Capital Management 0.97 (9)
International Equity Portfolio Capital Guardian Trust Company 0.75 (10)
</TABLE>
(1) The Adviser is currently waiving a portion of its fees. See "Expense
Summary" on page [ ] for a review of the fee waivers currently in effect.
(2) 0.50% on the first $10,000,000 of average net assets of the High
Quality Bond Portfolio, 0.375% on the next $15,000,000 in assets, 0.25% on the
next $75,000,000 in assets and 0.1875% on all assets in excess of $100,000,000.
(3) 0.40% on the first $20,000,000 of average net assets of the
High-Yield Bond Portfolios, 0.30% on the next $20,000,000 in assets and 0.20%
on assets in excess of $40,000,000.
(4) 0.55% on the first $25,000,000 of average net assets of the Balanced
Portfolio, 0.45% on the next $25,000,000 in assets and 0.35% on assets in
excess of $50,000,000.
(5) 0.45% on the first $100,000,000 of average net assets of the Equity
Value Portfolio, 0.40% on the next $50,000,000 in assets and 0.35% on the next
$50,000,000 in assets; when the Portfolio achieves $200,000,000 in assets, the
rate shall be 0.40% on assets up to $200,000,000 and 0.35% on assets in excess
of $200,000,000 so long as the Portfolio continues to have more than
$200,000,000 in assets.
(6) 0.30% on the first $100,000,000 of average net assets of the Growth &
Income Portfolio, 0.20% on assets in excess of $100,000,000.
<PAGE>
(7) 0.50% on the first $50,000,000 of average net assets of the Equity
Growth Portfolio, 0.30% on the next $75,000,000 in assets, 0.25% on the next
$75,000,000 in assets and 0.20% on all assets in excess of $200,000,000.
(8) The Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates, Ltd., Ark Asset Management Co., Liberty Investment Management, a
division of Goldman Sachs Asset Management, and Westport Asset Management, Inc.
(9) 0.90% on the first $10,000,000 of average net assets of the
Aggressive Equity Portfolio, 0.80% on the next $15,000,000 in assets, 0.60% on
the next $25,000,000 in assets, 0.40% on the next $50,000,000 in assets and
0.35% on assets in excess of $100,000,000.
(10) 0.75% on the first $25,000,000 of average net assets of the
International Equity Portfolio, 0.60% on the next $25,000,000 in assets, 0.425%
on the next $50,000,000 in assets and 0.375% on all assets in excess of
$250,000,000.
It is the responsibility of a Subadviser to make the day-to-day
investment decisions of the Portfolio and to place the purchase and sales
orders for securities transactions of such Portfolio, subject in all cases to
the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective Portfolio consistent with the guidelines and
directions set by Diversified and the Board of Trustees of the Portfolio
Series. Each Subadviser furnishes at its own expense all services, facilities
and personnel necessary in connection with managing the corresponding
Portfolio's investments and effecting securities transactions for a Portfolio.
Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Portfolio, Intermediate Government Bond Portfolio
and Government/Corporate Bond Portfolio with Capital Management Group, a
division of 1740 Advisers, Inc., a wholly-owned subsidiary of The Mutual Life
Insurance Company of New York ("MONY"). The address of Capital Management Group
is 1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group at December 31, 1996 were approximately $890 million,
all of which were assets of registered investment companies. The following
persons are primarily responsible for the day-to-day management of the
Portfolios (the inception date of such person's responsibility for the
Portfolios and such person's business experience for the past five years is
indicated parenthetically): Money Market Portfolio -- Nancy Fehrenbach,
Investment Vice President and Portfolio Manager (since 1994, employed by
Capital Management Group since 1994; previously employed at Fuji Bank as
Assistant Vice President, 1993, and at Merrill Lynch as Associate, 1992);
Intermediate Government Bond Portfolio and Government/Corporate Bond Portfolio
- -- Gregory Staples, Vice President (since 1996 and 1994, respectively, employed
by Capital Management Group since 1987).
<PAGE>
Diversified has entered into a Subadvisory Agreement with respect to the
High Quality Bond Portfolio with Merganser Capital Management Corporation
("Merganser"). Merganser was formed in September 1987 and is owned by certain
of its employees. Total assets under management for all institutional bond
clients at December 31, 1996 were approximately $2.1 billion, $197.3 million of
which were assets of registered investment companies. The principal business
address of Merganser is One Cambridge Center, Cambridge, Massachusetts 02142.
Investment management decisions of Merganser are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
High-Yield Bond Portfolio with Delaware Investment Advisers (a division of
Delaware Management Company, Inc.) ("Delaware"). Delaware was formed in
February 1985 and is owned by Lincoln National Corp. Total assets under
management for all high-yield bond clients at December 31, 1996 were
approximately $1.9 billion, $1.3 billion of which were assets of registered
investment companies. The principal business address of Delaware is 2005 Market
Street, Philadelphia, Pennsylvania 19103. The following person is primarily
responsible for the day-to-day management of the High-Yield Bond Portfolio (the
inception date of such person's business experience for the past five years is
indicated parenthetically): Paul Matlack, Vice President/Senior Portfolio
Manager (since 1996, employed by Delaware since 1989).
Diversified has entered into a Subadvisory Agreement with respect to the
Balanced Portfolio with Institutional Capital Corporation ("Institutional
Capital"). Institutional Capital was formed in January 1970 and is owned by
certain of its employees. Total assets under management for all balanced
clients at December 31, 1996 were approximately $579 million, $183 million of
which were assets of registered investment companies. The principal business
address of Institutional Capital is 303 West Madison Street, Chicago, Illinois
60606. Investment management decisions of Institutional Capital are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Portfolio with Asset Management Group, a division of 1740
Advisers, Inc., which is a wholly-owned subsidiary of MONY. The address of
Asset Management Group is 1740 Broadway, New York, New York 10019. Total assets
under management by Asset Management Group at December 31, 1996 were
approximately $1.3 billion, $1.1 billion of which were assets of registered
investment companies. Investment management decisions of Asset Management Group
are made by committee and not by managers individually.
<PAGE>
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Value Portfolio with Ark Asset Management Co., Inc. ("Ark"). Ark was
formed in July 1989 and is owned by Ark Asset Holdings, Inc. Ark Asset
Holdings, Inc. is owned by certain of its employees. The principal address of
Ark is 55 Water Street, New York, New York 10041. Total assets under management
for equity value clients at December 31, 1996 were approximately $14.4 billion,
$150 million of which were assets of registered investment companies.
Investment management decisions of Ark are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Portfolio with Putnam Advisory Company, Inc. ("Putnam"). Putnam
was formed in 1937 and is owned by Marsh & McLennon Companies, Inc. The
principal address of Putnam is One Post Office Square, Boston, Massachusetts
02109. Total assets under management for growth and income clients at December
31, 1996 were approximately $6.0 billion, $1.8 billion of which were assets of
registered investment companies. Investment management decisions of Putnam are
made by committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Portfolio with Chancellor LGT Asset Management, Inc.
("Chancellor"). Chancellor was formed in 1996 as a result of the merger between
LGT Asset Management, Inc., a wholly-owned subsidiary of Liechtenstein Global
Trust AG ("LGT"), and Chancellor Capital Management, Inc., a wholly-owned
subsidiary of LGT which was acquired by LGT in 1996. Chancellor is a
wholly-owned subsidiary of LGT. LGT is controlled by the Prince of
Liechtenstein Foundation, which serves as the parent organization for the
various business enterprises of the Princely Family of Liechtenstein. Total
assets under management for all equity growth clients at December 31, 1996 were
approximately $2.1 billion, none of which were assets of registered investment
companies. The principal business address of Chancellor is 1166 Avenue of the
Americas, New York, New York 10036. Investment management decisions of
Chancellor are made by committee and not by managers individually.
With respect to the Special Equity Portfolio, Diversified has entered
into Subadvisory Agreements with four Subadvisers as follows:
o Ark Asset Management Co., Inc. ("Ark") was formed in July 1989 and is
owned by Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by certain
of its employees. Total assets under management for all small capitalization
clients at December 31, 1996 were approximately $1.9 billion, $75 million of
which were assets of registered investment companies. The principal business
address of Ark is 55 Water Street, New York, New York 10041. The following
<PAGE>
person is primarily responsible for the day-to-day management of the Special
Equity Portfolio on behalf of Ark (the inception date of such person's
responsibility for the Portfolio and such person's business experience for the
past five years is indicated parenthetically): Ronald Wiener, Vice Chairman and
Portfolio Manager (since 1994, employed by Ark since 1986; previously employed
at Lehman Management Co., Inc. as Senior Vice President and Senior Portfolio
Manager, Specialty Growth Equity Management, 1989-1995).
o Liberty Investment Management ("Liberty"), a division of Goldman Sachs
Asset Management ("GSAM"), was established in January 1997 when Goldman, Sachs
and Co. acquired Liberty Investment Management, Inc. GSAM is a separate
operating division of Goldman, Sachs & Co., a worldwide investment banking
firm. Total assets under management for all equity clients of Liberty at
January 27, 1997 were approximately $37.8 billion, $5.2 billion of which were
assets of registered investment companies. The principal business address of
Liberty is 2502 Rocky Point Drive, Suite 500, Tampa, Florida 33607. The
following persons are primarily responsible for the day-to-day management of
the Special Equity Portfolio on behalf of Liberty (the inception date of each
person's responsibility for the Portfolio and such person's business experience
for the past five years is indicated parenthetically): Herbert E. Ehlers,
Managing Director (since 1994, employed by Liberty or its predecessor Liberty
Investment Management, Inc. since 1988) and Timothy G. Ebright, Portfolio
Manager (since 1994, employed by Liberty or its predecessor Liberty Investment
Management, Inc. since 1988).
o Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995 and is
owned by United Asset Management, Inc., a publicly-owned corporation. Pilgrim
succeeded to certain of the investment management businesses, and acquired the
corporate name of, Pilgrim Baxter & Associates, Ltd. in April 1995. Total
assets under management for all equity clients at December 31, 1996 were
approximately $3.2 billion, $463.7 million of which were assets of registered
investment companies. The principal business address of Pilgrim is 1255
Drummers Lanes, Wayne, Pennsylvania 19087. The following person is primarily
responsible for the day-to-day management of the Special Equity Portfolio on
behalf of Pilgrim (the inception date of such person's responsibility for the
Portfolio and such person's business experience for the past five years is
indicated parenthetically): John Force, Portfolio Manager (since 1994, employed
by Pilgrim since 1992).
o Westport Asset Management, Inc. ("Westport") was formed in July 1993
and is owned by certain of its employees. Total assets under management for all
equity clients at December 31, 1996 were approximately $860 million, $278
million of which were assets of registered investment companies. The principal
business address of Westport is 253 Riverside Avenue, Westport, Connecticut
<PAGE>
06880. The following person is primarily responsible for the day-to-day
management of the Special Equity Portfolio on behalf of Westport (the inception
date of such person's responsibility for the Portfolio and such person's
business experience for the past five years is indicated parenthetically):
Andrew Knuth, Portfolio Manager (since 1994, employed by Westport since 1983).
Diversified has entered into a Subadvisory Agreement with respect to the
Aggressive Equity Portfolio with McKinley Capital Management, Inc.
("McKinley"). McKinley was formed in March 1991 and is owned by Robert Gillam.
Total assets under management for all aggressive equity clients at December 31,
1996 were approximately $814 million, $16 million of which were assets of
registered investment companies. The principal business address of McKinley is
3301 C Street, Anchorage, Alaska 99503. The following person is primarily
responsible for the day-to-day management of the Aggressive Equity Portfolio
(the inception date of such person's responsibility for the Portfolio and such
person's business experience for the past five years is indicated
parenthetically): Robert Gilliam, Portfolio Manager (since 1996, employed by
McKinley since 1991).
Diversified has entered into a Subadvisory Agreement with respect to the
International Equity Portfolio with Capital Guardian Trust Company ("CGTC").
CGTC was formed in 1968 and is owned by The Capital Group Companies, Inc. The
principal address of CGTC is 333 South Hope Street, Los Angeles, California
90071. Total assets under management for all international equity clients by
CGTC at December 31, 1996 were approximately $21.8 billion, and total assets
under management of registered investment companies for which CGTC acts as
subadviser was $472 million as of that date. CGTC uses a system of multiple
portfolio managers pursuant to which the Portfolio is divided into segments
that are assigned to individual portfolio managers. With investment guidelines,
each portfolio manager makes individual decisions as to company, country,
industry, timing and percentage based on extensive field research and direct
company contact.
<PAGE>
For the fiscal year ended December 31, 1996, the compensation paid to the
Adviser after any applicable fee waivers as a percentage of each Portfolio's
average daily net assets was as follows:
Adviser's
Portfolio(1) compensation(2)
Money Market Portfolio 0.230%
High Quality Bond Portfolio 0.350%
Intermediate Government Bond Portfolio 0.280%
Government/Corporate Bond Portfolio 0.350%
High-Yield Bond Portfolio 0.542%
Balanced Portfolio 0.430%
Equity Income Portfolio 0.450%
Equity Value Portfolio 0.430%
Growth & Income Portfolio 0.580%
Equity Growth Portfolio 0.700%
Special Equity Portfolio 0.760%
Aggressive Equity Portfolio 0.868%
International Equity Portfolio 0.750%
(1) The Equity Value and Aggressive Equity Portfolios have been in operation
for less than a full fiscal year; the Adviser's compensation rates with respect
to these Portfolios represent annualized fees in effect for their respective
initial fiscal periods ended December 31, 1996. The Adviser's compensation rate
with respect to the Equity Growth Portfolio has been lowered to 0.62% of the
Portfolio's average daily net assets, effective November 15, 1996.
(2) The Adviser is currently waiving a portion of its fees. See "Expense
Summary" on page [ ] for a review of the fee waivers currently in effect.
DISTRIBUTION PLAN AND AGREEMENT
The Trustees of the Trust have adopted a Distribution Plan in accordance
with Rule 12b-1 under the 1940 Act after having concluded that there is a
reasonable likelihood that the Distribution Plan will benefit the Funds and
their shareholders. As contemplated by the Distribution Plan, the Distributor
acts as the agent of the Funds in connection with the offering of shares of the
Funds pursuant to a Distribution Agreement.
Under the Distribution Plan, the Distributor may receive a fee from each
Fund at an annual rate not to exceed 0.25% of the Fund's average daily net
assets in anticipation of, or as reimbursement for, expenses incurred in
connection with the sale of shares of the Fund, such as (i) payments of
quarterly trail or maintenance commissions to registered representatives of the
Distributor or other broker-dealers in an amount not to exceed on an annual
basis 0.25% of the average daily net assets maintained in the Fund by their
<PAGE>
customers, (ii) reimbursements of sales commissions advanced by the Distributor
to sales brokers, and (iii) advertising expenses and the expenses of printing
(excluding typesetting) and distributing prospectuses and reports used for
sales purposes, expenses of preparing and printing sales literature and other
distribution-related expenses. The Distributor provides to the Trustees of the
Trust a quarterly written report of amounts expended by it and the purposes for
which such expenditures were made.
ADMINISTRATOR
Pursuant to an Administrative and Transfer Agency Services Agreement with
the Trust and under the Advisory Agreement with the Portfolio Series,
Diversified, as Administrator, provides the Trust and the Portfolio Series with
general office facilities and supervises the overall administration of the
Trust and the Portfolio Series, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of the Trust or the
Portfolio Series; the preparation and filing of all documents required for
compliance by the Trust or the Portfolio Series with applicable laws and
regulations; providing equipment and clerical personnel necessary for
maintaining the organization of the Trust or the Portfolio Series; preparation
of certain documents in connection with meetings of Trustees and shareholders
of the Trust and investors in the Portfolio Series; and the maintenance of
books and records of the Trust and the Portfolio Series. Diversified provides
persons satisfactory to the Board of Trustees of each of the Trust and the
Portfolio Series to serve as officers of the Trust or the Portfolio Series, as
the case may be. Such officers, as well as certain other employees and Trustees
of the Trust or the Portfolio Series, may be directors, officers or employees
of Diversified or its affiliates. In addition, Diversified provides transfer
agency services to the Trust. For providing these services and facilities and
for bearing the related expenses, Diversified, as Administrator, receives a fee
from each Fund accrued daily and paid monthly at an annual rate equal to 0.30%
of the average daily net assets of the Fund. The Administrator is currently
waiving a portion of its administrative services fee. Diversified acts as
Administrator to the Portfolios pursuant to the Advisory Agreement and receives
no additional compensation for providing such administrative services.
CUSTODIAN
The Trust and Portfolio Series have each entered into separate Custodian
Agreements with Investors Bank & Trust Company ("IBT"), pursuant to which IBT
acts as custodian of the assets of each series of the Trust and the Portfolio
Series.
<PAGE>
SERVICE AGENTS
All shareholders must be represented by Diversified or another Service
Agent that has entered into a Service Agreement with Diversified. Diversified
acts as a Service Agent pursuant to its Administrative Services Agreement with
the Trust and receives no additional compensation from the Funds for such
shareholder services. The service fees of any other Service Agents will be paid
by Diversified from its administrative services fees. The services provided by
a Service Agent may include establishing and maintaining shareholder accounts,
processing purchase and redemption transactions, arranging for bank wires,
answering client inquiries regarding the Trust, assisting clients in changing
account designations and addresses, providing periodic statements showing the
client's account balance, transmitting proxy statements, periodic reports,
updated Prospectuses and other communications to shareholders and, with respect
to meetings of shareholders, collecting, tabulating and forwarding to the Trust
executed proxies and obtaining such other information and performing such other
services as Diversified or the Service Agent's clients may reasonably request
and agree upon with the Service Agent. Service Agents may separately charge
their clients additional fees only to cover provision of additional or more
comprehensive services not already provided under the Administrative Services
Agreement with Diversified, or of the type or scope not generally offered by a
mutual fund, such as enhanced retirement or trust reporting. Any Service Agent
must agree to transmit to shareholders who are its customers appropriate
disclosures of any fees that it may charge them directly.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES
Shares of the Trust are available to individual and institutional
investors. The Trust is also available as a funding vehicle to (i) certain
employee retirement plans of for-profit and not-for-profit entities including
those having cash or deferred arrangements and those covering self-employed
individuals and owner-employees (such as 401(k) Plans, 403(b) Plans, 457 Plans,
Money Purchase Plans, Profit Sharing Plans, Simplified Employee Pension Plans
and Keogh Plans), and (ii) qualified personal retirement plans such as IRAs and
rollover IRAs (collectively, the "Qualified Investors").
The retirement plans which may invest in the Funds are hereinafter
referred to as "Plans" and the employees, self-employed persons or individuals
participating in such Plans are hereinafter referred to as "Plan Participants".
With respect to these Plans, the employer and/or the Plan Participants will
<PAGE>
make contributions which may be invested in shares of the Funds pursuant to the
terms and conditions of the underlying Plan.
Shares of the Trust may be purchased without a sales charge on any day on
which the Adviser and applicable Subadviser or Subadvisers are open for
business ("Fund Business Day") at the net asset value next determined after an
order in proper form is transmitted to and accepted by the Distributor. The
minimum initial investment is $5,000 (the Trust is currently waiving its
minimum initial investment requirement). There is no minimum for subsequent
investments. However, a particular Plan may impose different minimum subsequent
investment requirements. Purchases will be effected on the same day the
purchase order is received by the Distributor provided such order is received
in good order prior to 4:00 p.m. New York time on any day on which the New York
Stock Exchange ("NYSE") is open for trading. Shares earn dividends from and
including the day the purchase is effected, but not on the day of redemption.
While there is no sales charge on purchases of shares, the Distributor may
receive distribution fees from the Funds. See "Management of the Trust and
Portfolio Series -- Distribution Plan and Agreement" herein. An investor may
purchase shares through the Distributor directly or by authorizing a Plan to
purchase such shares on his or her behalf through the Distributor.
Checks received from an investor are invested in full and fractional
shares. If shares are purchased with a check that does not clear, the purchase
will be canceled and any losses or fees incurred in the transaction will be the
responsibility of such investor. Checks must be drawn on or payable through a
U.S. bank and be in U.S. dollars. If shares are purchased by check and a
redemption request relating to such shares is received within 15 days of a
purchase, the Trust will release such redemption proceeds when the check
clears. It is possible, although unlikely, that this could take up to 15 days.
Each Fund reserves the right to cease offering its shares for sale at any
time or to reject any order for the purchase of its shares.
DIRECT PURCHASES. For each shareholder who purchases shares directly
through the Distributor, the Trust establishes an open account to which all
shares purchased are credited together with any dividends and capital gains
distributions which are paid in additional shares. See "Other Information --
Distributions" herein. Initial and subsequent purchases may be made by writing
a check (in U.S. dollars) payable to The Diversified Investors Funds Group and
mailing such payment to:
<PAGE>
The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577
In the case of an initial purchase, the check must be accompanied by a
completed Account Application.
An investor desiring to purchase shares by a wire transfer of funds
should request its bank to transmit immediately available funds. The
information transmitted with the funds must include the investor's name and
address and a statement indicating whether a new account is being established
by such wire transfer or whether such wire transfer is being made by a
shareholder with an account with the Trust. If the initial purchase by an
investor is by a wire transfer of funds, an account number will be assigned to
such investor and an Account Application must be subsequently completed and
mailed to the Trust. For purchases by wire transfer, please call
[_____________] at [____________] to obtain wire instructions.
For further information on how to purchase shares from the Distributor,
an investor should contact the Distributor directly at (914) 697-8000.
PURCHASES THROUGH PLANS. Participants in group employee retirement plans
should obtain directly from their plan administrator, and should read in
conjunction with this Prospectus, the materials provided by their plan
administrator describing the procedures by which Fund shares may be purchased
and redeemed and any other conditions for participation in such plan.
Underlying Plans which include fixed investment options issued by insurance
companies may restrict or prohibit the purchase of shares of certain of the
Funds with monies withdrawn from any such fixed interest investment option.
REDEMPTIONS
An investor may redeem all or any portion of the shares in its account at
any time at the net asset value next determined after a redemption request in
proper form is received and accepted by the Distributor. Investment return and
principal value of an investment in the Trust will fluctuate, so that the value
of shares redeemed may be more or less than the investor's cost.
Redemption proceeds normally will be paid or mailed within seven days
following receipt of a redemption request in good order; however, when the NYSE
is closed, when trading on the NYSE is restricted, or when the Securities and
Exchange Commission determines that an emergency exists to warrant such an
<PAGE>
action, the Trust may suspend redemption rights or postpone the date of
payment.
The Trust reserves the right to redeem shares in the account of any
investor if at any time the total value of such account falls below $1,000 for
any reason other than a decrease in the net asset value of its shares. An
investor will be notified that the value of its account is less than the
minimum amount and allowed 15 days to make an additional investment before the
redemption is processed. Shares will be redeemed at the net asset value on the
date of redemption.
Investors subject to federal income tax who redeem shares may recognize
capital gain or loss for federal income tax purposes. Redemptions of shares may
be taxable events to Qualified Investors otherwise subject to tax on which a
Qualified Investor may realize a gain or loss. See "Other Information--Tax
Matters" below for a description of certain tax consequences of an investment
in the Trust.
Investors should be aware that redemptions may not be processed if a
redemption request is not submitted in proper form. To be in proper form, the
Trust must have received the shareholder's taxpayer identification number and
address. As discussed under "Other Information--Tax Matters" below, the Trust
may be required to impose "back-up" withholding of federal income tax on
dividends, distributions and redemption proceeds when non-corporate investors
have not provided a certified taxpayer identification number.
REDEMPTION OF SHARES PURCHASED DIRECTLY THROUGH THE DISTRIBUTOR
Redemption by Letter. Redemptions may be made by letter to the
Distributor specifying the dollar amount or number of shares to be redeemed,
account number and the name of the Fund. The letter must be signed in exactly
the same way the account is registered (if there is more than one owner of the
shares, each owner must sign).
An investor may redeem shares in any amount by written request mailed to
The Diversified Investors Funds Group at the following address:
The Diversified Investors Fund Group
Four Manhattanville Road
Purchase, New York 10577
Redemption by Wire or Telephone. An investor may redeem shares by wire or
by telephone if it has checked the appropriate box on the Account Application.
<PAGE>
These redemptions may be paid from the Trust by check or wire transfer. The
Trust reserves the right to refuse telephone wire redemptions and may limit the
amount involved or the number of telephone redemptions. The telephone
redemption procedure may be modified or discontinued at any time by the Trust.
Instructions for wire redemptions are set forth in the Purchase Application.
REDEMPTION OF SHARES PURCHASED BY PLAN PARTICIPANTS. For investors who
are Plan Participants, the proper form for a redemption request may vary in
accordance with the terms of the underlying Plan through which a Qualified
Investor or Plan Participant invests in the Trust. Plan Participants should
contact their Plan administrator, if appropriate, or the Distributor at for
further information on how to redeem shares of a Fund.
SIGNATURE GUARANTEES
To protect investors and the Trust from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Trust to be
sure that the entity requesting redemption is the entity that is authorized to
request redemption from that account. Signature guarantees are required for:
(1) any redemptions by mail if the proceeds are to be paid to someone else or
are to be sent to an address other than an investor's address as shown on the
Trust's records; (2) any redemptions by mail which request that the proceeds be
wired to a bank, (3) redemption requests for more than $50,000; and (4)
requests to transfer the registration of shares to another owner. These
requirements may be waived in certain instances.
The Trust will accept signature guarantees from all institutions which
are eligible to provide them under federal or state law, provided the
individual giving the signature guarantee is authorized to do so. Institutions
which typically are eligible to provide signature guarantees include commercial
banks, trust companies, brokers, dealers, national securities exchanges,
savings and loan associations and credit unions. A signature guarantee is not
the same as a notarized signature.
EXCHANGE PRIVILEGES
Subject to applicable legal constraints, investors may exchange their
shares in a Fund for shares of any other series of the Trust at net asset value
without a sales charge. An exchange may result in a change in the number of
shares held, but not in the value of such shares immediately after the
exchange. Each exchange involves the redemption of the shares to be exchanged
and the purchase of the shares of the other series of the Trust. Plan
Participants should contact their Plan administrator, if appropriate, for
<PAGE>
further information regarding exchanges. Investors should call the Distributor
at (914) 697-8000 to effect exchanges. Some underlying Plans may provide for
exchange privileges with other investment options available under such Plans.
Underlying Plans which include fixed investment options issued by insurance
companies may restrict or prohibit exchanges of shares of certain of the Funds
for shares of other series of the Trust if the shares of the Fund to be
exchanged have been purchased with monies withdrawn from any such fixed
interest investment option. Some Plans may impose charges and additional
restrictions.
Investors subject to federal income tax who exchange shares in one Fund
for shares in another Fund may recognize capital gain or loss for federal
income tax purposes.
The Trust reserves the right to terminate or modify the exchange
privilege in the future. An investor considering an exchange should carefully
read the Prospectus with respect to the Fund(s) being purchased in the exchange
and consider the differences in investment objectives and policies before
making an exchange.
All investors and Plan Participants should be aware that redemption or
exchange transactions authorized by telephone and reasonably believed to be
genuine by the Trust or the Distributor may subject the investor or Plan
Participant to risk of loss if such instruction is subsequently found not to be
genuine. The Trust and the Distributor will employ reasonable procedures,
including requiring investors to give certain identification information and
tape recording of telephone instructions, to confirm that instructions
communicated by telephone are genuine. To the extent that the Trust or the
Distributor fail to use reasonable procedures to verify the genuineness of
telephone instructions, they may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
PERFORMANCE INFORMATION
From time to time, the Trust may provide yield and/or total return
quotations for any of the Funds and may also quote fund rankings in the
relevant fund category from various sources, such as Russell Data Services (a
division of Frank Russell Company), Lipper Analytical Services, Inc.,
Weisenberger Investment Company Service, Morningstar, Inc. and CDA. The current
yield for a Fund will be calculated by dividing net investment income per share
during a recent 30-day period by the net asset value per share on the last day
of the period and annualizing the resulting quotient. Total return quotations
will reflect the annual percentage change over stated periods in the value of
an investment in a Fund. Yield reflects only net income as of a stated time,
<PAGE>
while total return reflects all components of investment return over a stated
period of time. A Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which a Fund will calculate its yield and
total return, see the Statement of Additional Information.
Investors should note that the investment results of a Fund will
fluctuate over time, and any presentation of a Fund's current yield or total
return for any prior period should not be considered a representation of what
an investment may earn or what an investor's yield or total return may be in
any future period.
The following tables set forth the average annual total returns of all
institutional private accounts and collective investment vehicles managed by
the Subadvisers to the Portfolios corresponding to the High Yield Bond Fund,
Equity Value Fund, Aggressive Equity Fund and Growth & Income Fund with
investment objectives, policies and restrictions substantially similar to each
such Fund and its corresponding Portfolio and which have been managed as each
Portfolio is expected to be managed. The data is provided to illustrate the
past performance of the Subadvisers in managing substantially similar accounts
as measured against specified market indices and does not represent the
performance of such Funds. Investors should not consider this performance data
as an indication of future performance of the Funds or their corresponding
Subadvisers.
The institutional private accounts and collective investment vehicles
that are included in the Subadvisers' composites are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Funds or the Portfolios by 1940 Act or Subchapter M
of the Code. Consequently, the performance results of the Subadvisers'
composites could have been adversely affected if the institutional private
accounts and collective investment vehicles included in the composites had been
regulated as investment companies under the federal securities laws. Returns
for each period are adjusted to assume that all charges, expenses and fees of
each Fund and its corresponding Portfolio which are presently in effect were
deducted during such periods. The investment results of the Subadvisers'
composites presented below are unaudited and are not intended to predict or
suggest the returns that might be experienced by the Funds or an individual
investing in any of the Funds. Investors should also be aware that the use of a
methodology different from that used to calculate the performance data set
forth below could result in different performance data.
<PAGE>
Composite Performance for Delaware Investment Advisers, Subadviser to High
Yield Bond Portfolio.
Subadviser's Benchmark
composite (2) Index (3)
1 Year (1)..............9.25% 10.85%
5 Years(1).............10.06% 12.73%
10 Years (1)............9.56% ______%
Since inception (1)...______% ______%
- -----------------
(1) Through December 31, 1996.
(2) Commencement of investment operations is June 30, 1985 for the
Subadviser's composite.
(3) The Benchmark Index is the Salomon Brothers High Yield Index.
[Description].
Composite Performance for ARK Asset Management Co., Inc., Subadviser to Equity
Value Portfolio.
Subadviser's Benchmark
composite (2) Index (3)
1 Year (1).............23.23% 21.64%
5 Years(1).............18.47% 17.26%
10 Years (1)...........15.82% 14.69%
Since inception (1)....17.06% 15.93%
- -----------------
(1) Through December 31, 1996.
(2) Commencement of investment operations is June 30, 1985 for the
Subadviser's composite.
(3) The Benchmark Index is the Russell 1000 Value Index. [Description].
<PAGE>
Composite Performance for McKinley Capital Management, Inc., Subadviser to
Aggressive Equity Portfolio.
Subadviser's Benchmark
composite (2) Index (3)]
1 Year (1)............ 16.22% 11.26%
5 Years(1).............20.23% 11.69%
Since inception (1)....27.38% 12.09%
- -----------------
(1) Through December 31, 1996.
(2) Commencement of investment operations is September 30, 1990 for the
Subadviser's composite.
(3) The Benchmark Index is the Russell 2000 Growth Index. [Description].
Composite Performance for Putnam Advisory Company, Inc., Subadviser to Growth &
Income Portfolio since November 14, 1995.
Subadviser's Benchmark
composite (2) Index (3)
1 Year (1).............21.32% 23.25%
5 Years(1).............15.98% 15.26%
Since inception (1)....18.01% 16.44%
- -----------------
(1) Through December 31, 1996.
(2) Commencement of investment operations is March 31, 1989 for the
Subadviser's composite.
(3) The Benchmark Index is the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The S&P 500 is used as a broad-based measurement of
changes in domestic stock market conditions and is based on the average
performance of 500 widely held common stocks traded in the United States.
<PAGE>
Composite Performance for Chancellor LGT Asset Management, Inc.,
Subadviser to Equity Growth Portfolio since November 15, 1996.
Subadviser's Benchmark
composite (2) Index (3)
1 Year (1).............19.60% 23.12%
5 Years(1).............11.84% 13.38%
10 Years (1)...........17.55% 15.43%
Since inception (1)....17.93% 15.43%
- -----------------
(1) Through December 31, 1996.
(2) Commencement of investment operations is March 31, 1989 for the
Subadviser's composite.
(3) The Benchmark Index is the Russell 1000 Growth Index. [Description].
OTHER INFORMATION
NET ASSET VALUE
The net asset value of shares of the Funds is determined each Fund
Business Day. This determination is made once each day as of the close of
regular trading on the NYSE, currently 4:00 p.m., New York time unless the NYSE
closes earlier, by dividing the value of a Fund's net assets (i.e., the value
of its investment in its Portfolio and other assets less its liabilities,
including expenses payable or accrued) by the number of shares of the Fund
outstanding at the time the determination is made.
Each Portfolio values its assets based on their current market value when
market quotations are available. Where market quotations are not available,
assets are valued at fair value as determined in good faith under the direction
of the Portfolio Series' Board of Trustees. Debt obligations with 60 days or
less remaining to maturity may be valued by the amortized cost method which the
Portfolio Series' Trustees have determined to constitute fair value for such
securities.
DISTRIBUTIONS
The Funds intend to distribute all net investment income and net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) to shareholders. Dividends from net investment income (which
may include net short-term capital gains) and distributions from net capital
gains, if any, are normally declared and paid once a year in December. "Net
<PAGE>
investment income" includes all dividends, interest and other income earned by
a Fund, net of a Fund's expenses.
All dividends and distributions declared by a Fund will be reinvested in
additional shares of that Fund at net asset value determined on the business
day immediately following the record date of the distribution. A Fund may make
additional distributions if necessary to avoid a 4% federal excise tax on
certain undistributed income and capital gain.
TAX MATTERS
The following discussion is for general information only and,
specifically, does not purport to address the taxation of investors in all
circumstances or of contributors to, participants in, and beneficiaries under
any Qualified Investor. A prospective investor should consult with its own
adviser as to the tax consequences of an investment in the Trust, including the
state and local tax treatment of distributions from a Fund.
Each Fund intends to elect to be, and to qualify to be treated as, a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Funds
(through their interest in the Portfolios) must meet certain income,
distribution and diversification requirements. Provided a Fund meets all such
requirements, no entity level federal income or excise taxes will be required
to be paid by that Fund on that part of its investment company taxable income
(consisting generally of net income and net short-term capital gain, if any)
and net capital gain that is distributed to shareholders. A Fund's foreign
source income may, however, be subject to foreign taxes withheld at the source.
The Trust is organized as a Massachusetts business trust, and under current law
the Funds will not be liable for any income or franchise tax in the
Commonwealth of Massachusetts as long as the Funds qualify as regulated
investment companies under the Code. The Portfolios will also not be required
to pay any federal income or excise taxes.
Retirement plans satisfying all conditions applicable to them under the
Code which invest in the Fund generally will not be subject to federal tax
liability on either distributions from the Funds or redemptions of shares of
the Funds. Rather, participants in such Plans will be taxed when they begin
taking distributions from the investing Plan in accordance with the rules under
the Code governing the taxation of such distributions. Qualified Investors
otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Funds, and on any gain realized
on redemption of Fund shares, where the Qualified Investor is subject to the
<PAGE>
unrelated business taxable income provisions of the Code with respect to its
investment in the Funds because, e.g., its acquisition of shares in a Fund was
financed with debt.
Individual and institutional investors, and Qualified Investors which for
any reason prove not to be exempt from federal income taxation, will be subject
to tax on distributions received from the Funds irrespective of the fact that
such distributions are reinvested in additional shares. Distributions to such
investors, other than of net capital gains, will be taxable as ordinary income;
distributions of net capital gains would be taxable to such Investors as
long-term capital gain without regard to the length of time they have held
shares in a Fund. A portion of the dividends received from a Fund investing in
corporate stocks (but none of that Fund's capital gain distributions) may
qualify for the dividends-received deduction for corporations. Certain
distributions declared in October, November or December of a calendar year and
paid to an investor which is subject to tax on the distribution in January of
the succeeding calendar year are taxable to such investor as if paid on
December 31 of the year in which they were declared. Fund distributions will
reduce a Fund's net asset value per share. Shareholders who buy shares shortly
before a Fund makes a distribution may thus pay the full price for the shares
and then effectively receive a portion of the purchase price back as a
distribution, subject to tax in the case of investors otherwise subject to
income taxation.
Shortly after the end of each calendar year, each investor other than a
Qualified Investor will receive a statement setting forth the federal income
tax status of all distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing return of capital (which is free of current taxes but results
in a basis reduction) and the amount, if any, of federal income tax withheld.
Each Fund intents to withhold U.S. federal income tax at the rate of 30% on
distributions and other payments that are subject to such withholding and that
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
Each fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable distributions and redemption proceeds paid to any
investor (including investors who are neither citizens nor residents of the
U.S.) who does not furnish to the Fund certain information and certifications
or is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments which have been subject to 30% withholding.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Trust and its shareholders. Please refer
to the Statement of Additional Information for a more extensive discussion. In
<PAGE>
addition, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their own tax advisers concerning the tax consequences of an investment
in the Trust.
EXPENSES
The respective expenses of the Trust and the Portfolio Series include the
compensation of their respective Trustees who are not affiliated with the
Adviser or any Subadviser; governmental fees; interest charges; taxes; fees and
expenses of independent auditors, of legal counsel and of any transfer agent,
custodian, registrar or dividend disbursing agent of the Trust or the Portfolio
Series; insurance premiums; and expenses of calculating the net asset value of,
and the net income on, interests in the Portfolios and shares of the Funds.
Expenses of the Trust also include all fees under its Administrative
Services Agreement; expenses of distributing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
reports, notices, proxy statements and reports to shareholders and to
governmental officers and commissions; expenses of shareholder and Trustee
meetings; expenses relating to the issuance, registration and qualification of
shares of the Funds and the preparation, printing and mailing of prospectuses
for such purposes; and membership dues in the Investment Company Institute
allocable to the Trust.
Expenses of the Portfolio Series also include expenses connected with the
execution, recording and settlement of security transactions; fees and expenses
of the Portfolio Series' custodian for all services to the Portfolios,
including safekeeping of funds and securities and maintaining required books
and accounts; expenses of preparing and mailing reports to investors and to
governmental officers and commissions; expenses of meetings of investors and
Trustees; and the advisory fees payable to the Adviser under the Advisory
Agreements.
<PAGE>
For the fiscal year ended December 31, 1996, the total expenses of each
Fund and its corresponding Portfolio after any applicable fee waivers and
expense reimbursements as a percentage of a Fund's average daily net assets
were as follows:
Fund(1) Total expenses(2)
Money Market Fund 0.800%
High Quality Bond Fund 1.000%
Intermediate Government Bond Fund 1.000%
Government/Corporate Bond Fund 0.990%
High-Yield Bond Fund 1.100%
Balanced Fund 1.100%
Equity Income Fund 0.990%
Equity Value Fund 1.100%
Growth & Income Fund 1.150%
Equity Growth Fund 1.250%
Special Equity Fund 1.500%
Aggressive Equity 1.500%
International Equity Fund 1.400%
(1) The Equity Value and Aggressive Equity Funds have been in operation for
less than a full year; total expenses represent annualized total expenses for
their respective initial fiscal periods ended December 31, 1996. The types of
expenses for which the Equity Value and Aggressive Equity Funds will be
responsible are listed above under "Expenses".
(2) The Adviser is currently waiving a portion of its fees and reimbursing
certain expenses. See "Expense Summary" on page [ ] for a discussion of the fee
waivers and expense reimbursements currently in effect.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Shares of Beneficial Interest (par
value $0.00001 per share) and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the Trust. The Trust reserves the right to create and issue
additional series of shares, in which case the shares of each series would
participate equally in the earnings, dividends and assets of the particular
series.
Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. Shares have no preference, preemptive, conversion
or similar rights. Shares when issued are fully paid and nonassessable, except
as set forth below. Shareholders are entitled to one vote for each share held
on matters on which they are entitled to vote. The Trust is not required to
hold, and has no current intention of holding, annual meetings of shareholders
although the Trust will hold special meetings of Fund shareholders when in the
judgment of the Trustees of the Trust it is necessary or desirable to submit
<PAGE>
matters for a shareholder vote. Shares of each Fund are entitled to vote
separately to approve amendments to the Trust's distribution plan or changes in
fundamental investment policies or restrictions for that Fund, but shares of
all Funds will vote together in the election or selection of Trustees and
independent accountants for the Trust. If requested to do so by 10% of the
Trust's outstanding shares, a meeting of Trust shareholders will be called for
the purpose of voting on the removal of a Trustee or Trustees. The Trust will
assist in shareholder communications as required by Section 16(c) of the 1940
Act.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the Trustees of the Trust believe that the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and a Fund
itself was unable to meet its obligations.
The Portfolio Series is organized as a trust under the laws of the State
of New York. The Portfolio Series' Declaration of Trust provides that each Fund
and other entities investing in a Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Portfolio. However, the Trustees of
the Trust believe that the risk of the Funds incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
For more information regarding the Trustees of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" in the Statement of
Additional Information. The interests in the Portfolio Series are divided into
the separate Portfolios. Investors in each Portfolio will vote separately or
together in the same manner as shareholders of the Funds will vote with respect
to the Trust.
Each investor in a Portfolio, including the Trust, may add to or reduce
its investment in a Portfolio on each day the Adviser and applicable Subadviser
or Subadvisers are open for business ("Portfolio Business Day"). As of the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
each such day, the value of each investor's beneficial interest in a Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected as of 4:00 p.m., New York time, on such
day, will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such
<PAGE>
investor's investment in the Portfolio as of 4:00 p.m., New York time, on such
day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Portfolio effected as of 4:00
p.m., New York time, on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m., New York time, on
such day, plus or minus, as the case may be, the amount of net additions to or
reductions in the aggregate investments in the Portfolio by all investors in
the Portfolio. The percentage so determined will then be applied to determine
the value of the investor's interest in the Portfolio as of 4:00 p.m., New York
time, on the following Portfolio Business Day.
The Trust's Statement of Additional Information, dated [ ], 1997,
contains more detailed information about the Trust and the Portfolio Series,
including information related to (i) investment policies and restrictions, (ii)
the Trustees, officers, Adviser, Subadvisers and Administrator, (iii) portfolio
transactions and brokerage commissions, (iv) the Funds' shares, including
rights and liabilities of shareholders, (v) additional performance information,
including the method used to calculate yield and total rate of return and (vi)
the determination of the net asset value of shares of the Funds.
<PAGE>
TABLE OF CONTENTS PAGE
Expense Summary ____
Prospectus Summary ____
Condensed Financial Information ____
Investment Objectives and Policies of the Funds ____
Certain Investment Techniques and Restrictions ____
Master-Feeder Structure ____
Management of the Trust and Portfolio Series ____
Purchases and Redemptions of Shares ____
Other Information ____
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, Statement
of Additional Information or official sales literature in connection with the
offering of the Funds' shares and, if given or made, such other information or
representations must not be relied on as having been authorized by the Trust or
the Distributor. This Prospectus does not constitute an offer in any state in
which, or to any person to whom, such offer may not lawfully be made.
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
Four Manhattanville Road, Purchase, New York 10577
(914) 697-8000
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED __________, 1997
THE DIVERSIFIED INVESTORS FUNDS GROUP
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
The Diversified Investors Funds Group (the "Trust") is comprised of
thirteen funds. This Statement of Additional Information describes the shares
of each such fund, including Diversified Investors Money Market Fund (the
"Money Market Fund"), Diversified Investors High Quality Bond Fund (the "High
Quality Bond Fund"), Diversified Investors Intermediate Government Bond Fund
(the "Intermediate Government Bond Fund"), Diversified Investors
Government/Corporate Bond Fund (the "Government/Corporate Bond Fund"),
Diversified Investors High-Yield Bond Fund (the "High-Yield Bond Fund"),
Diversified Investors Balanced Fund (the "Balanced Fund"), Diversified
Investors Equity Income Fund (the "Equity Income Fund"), Diversified Investors
Equity Value Fund (the "Equity Value Fund"), Diversified Investors Growth &
Income Fund (the "Growth & Income Fund"), Diversified Investors Equity Growth
Fund (the "Equity Growth Fund"), Diversified Investors Special Equity Fund (the
"Special Equity Fund"), Diversified Investors Aggressive Equity Fund
("Aggressive Equity Fund") and Diversified Investors International Equity Fund
(the "International Equity Fund") (each a "Fund", and collectively the
"Funds").
TABLE OF CONTENTS PAGE
The Trust.................................................................. __
Investment Objective, Policies and Associated Risk Factors of the Funds.... __
Performance Information.................................................... __
Determination of Net Asset Value; Valuation of Securities ................. __
Management of the Trust and Portfolio Series............................... __
Taxation................................................................... __
Distribution Plan.......................................................... __
Independent Accountants.................................................... __
Description of the Trust; Fund Shares...................................... __
Experts.................................................................... __
Financial Statements....................................................... __
Appendix................................................................... __
<PAGE>
The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577
914-697-8000
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the Funds'
Prospectus dated _______, 1997, as amended from time to time (the
"Prospectus"). This Statement of Additional Information should be read only in
conjunction with the Prospectus, a copy of which may be obtained by an investor
without charge by contacting Diversified Investors Securities Corp. ("DISC"),
the Funds' Distributor, at the address and telephone number shown above for The
Diversified Investors Funds Group. Terms used but not defined herein, which are
defined in the Prospectus, are used herein as defined in the Prospectus.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
THE TRUST
The Trust is an open-end diversified management investment company which
was organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 23, 1993. Shares of the Trust are divided into thirteen
separate series described herein. Each such series or Fund seeks to achieve its
investment objective by investing all of its Assets in a corresponding
Portfolio, as follows:
CORRESPONDING NAME OF PORTFOLIO
DIVERSIFIED INVESTORS FUND NAME IN DIVERSIFIED INVESTORS PORTFOLIOS
Money Market Fund...................... Money Market Portfolio
High Quality Bond Fund................. High Quality Bond Portfolio
Intermediate Government Bond Fund...... Intermediate Government Bond Portfolio
Government/Corporate Bond Fund......... Government/Corporate Bond Portfolio
High-Yield Bond Fund................... High-Yield Bond Portfolio
Balanced Fund.......................... Balanced Portfolio
Equity Income Fund..................... Equity Income Portfolio
Equity Value Fund...................... Equity Value Portfolio
Growth & Income Fund................... Growth & Income Portfolio
Equity Growth Fund..................... Equity Growth Portfolio
Special Equity Fund.................... Special Equity Portfolio
Aggressive Equity Fund................. Aggressive Equity Portfolio
International Equity Fund.............. International Equity Portfolio
As of the date hereof, there are no other active series of the Trust.
However, additional series may be added from time to time. Each of the
Portfolios is a series of Diversified Investors Portfolios (the "Portfolio
Series").
<PAGE>
The investment adviser of each Portfolio is Diversified Investment
Advisors, Inc. ("Diversified" or the "Adviser"). The subadviser (the
"Subadviser") of each Portfolio is set forth in the table below.
CORRESPONDING
FUND PORTFOLIO SUBADVISER
Money Market Fund.................... 1740 Advisers, Inc.
High Quality Bond Fund............... Merganser Capital Management Corporation
Intermediate Government Bond Fund.... 1740 Advisers, Inc.
Government/Corporate Bond Fund....... 1740 Advisers, Inc.
High-Yield Bond Fund................. Delaware Investment Advisers
Balanced Fund........................ Institutional Capital Corporation
Equity Value Fund.................... ARK Asset Management Co., Inc.
Equity Income Fund................... 1740 Advisers, Inc.
Growth & Income Fund................. Putnam Advisory Company, Inc.
Equity Growth Fund................... Chancellor LGT Asset Management, Inc.
Special Equity Fund.................. See below1
Aggressive Equity Fund............... McKinley Capital Management, Inc.
International Equity Fund............ Capital Guardian Trust Company
- --------------------
1Diversified Investors Special Equity Fund has four Subadvisers: Pilgrim Baxter
& Associates; Ark Asset Management Co., Inc.; Liberty Investment Management, a
division of Goldman Sachs Asset Management; and Westport Asset Management, Inc.
As to each Portfolio, the Adviser and its Subadviser or Subadvisers are
referred to herein collectively as the "Advisers."
INVESTMENT OBJECTIVE, POLICIES AND
ASSOCIATED RISK FACTORS
INVESTMENT OBJECTIVES
The investment objective of each Fund and Portfolio is described in the
Funds' Prospectus. There can, of course, be no assurance that a Fund or its
corresponding Portfolio will achieve their investment objective.
INVESTMENT POLICIES
Each Fund seeks to achieve its investment objective by investing all of
its Assets in its corresponding Portfolio, as shown above. The Trust may
withdraw a Fund's investment from its Portfolio at any time if the Board of
Trustees of the Trust determines that it is in the best interests of the Fund
to do so.
Since the investment characteristics of each Fund correspond directly to
those of its corresponding Portfolio, the following supplements the discussions
of the various investments of and techniques employed by the Portfolios set
forth in the Prospectus of the Funds.
<PAGE>
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject
to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state
regulation as well as governmental action in the country in which the foreign
bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
<PAGE>
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. A Portfolio
will invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
The Portfolios may purchase three types of commercial paper, as
classified by exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"). The three types include open market, privately
placed, and letter of credit commercial paper. Trading of such commercial paper
is conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is openly
traded, including directly issued paper. "Open market" paper's 1933 Act
exemption is under Section 3(a)(3) which limits the use of proceeds to current
transactions, limits maturities to 270 days and requires that the paper contain
no provision for automatic rollovers.
PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts
transactions by an issuer not involving any public offering. The commercial
paper may only be offered to a limited number of accredited investors.
"Privately placed" commercial paper has no maturity restriction.
LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for
repayment of the notes. Unlike "open market" and "privately placed" commercial
paper, "letter of credit" paper has no limitations on purchases.
VARIABLE RATE AND FLOATING RATE SECURITIES
The Portfolios may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit a Portfolio to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct
<PAGE>
arrangements between the Portfolio, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such
obligations normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are collateralized by letters of credit or other
credit support arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Portfolio may invest in obligations which are not
so rated only if the Advisers determine that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Advisers, on behalf of a Portfolio, will consider on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations held by the Portfolio. The Portfolios will not
invest more than 15% (10% in the case of the Money Market Portfolio) of the
value of their net assets in floating or variable rate demand obligations as to
which they cannot exercise the demand feature on not more than seven days'
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable. See "Investment Restrictions"
below.
PARTICIPATION INTERESTS
A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Advisers
must have determined that the instrument is of comparable quality to those
instruments in which a Portfolio may invest. For certain participation
interests, a Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's participation
interest in the security, plus accrued interest. As to these instruments, a
Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
A Portfolio will not invest more than 15% (10% in the case of the Money Market
Portfolio) of its net assets in participation interests that do not have this
demand feature, and in other securities that are not readily marketable. See
"Investment Restrictions" below.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
<PAGE>
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them which, if possible at all, would result in additional expense and delay.
Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.
The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Portfolio Series' Board of Trustees. In
reaching liquidity decisions, the Advisers will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security,
(2) the number of dealers and other potential purchasers wishing to purchase or
sell the security, (3) dealer undertakings to make a market in the security and
(4) the nature of the security and of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
UNSECURED PROMISSORY NOTES
A Portfolio also may purchase unsecured promissory notes ("Notes") which
are not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Portfolio's investment
objective. The Notes purchased by the Portfolio will have remaining maturities
of 13 months or less and will be deemed by the Board of Trustees of the
Portfolio Series to present minimal credit risks and will meet the quality
criteria set forth above under "Investment Policies." The Portfolio will invest
no more than 15% (10% in the case of the Money Market Portfolio) of its net
assets in such Notes and in other securities that are not readily marketable
(which securities would include floating and variable rate demand obligations
as to which the Portfolio cannot exercise the demand feature described above
and as to which there is no secondary market). See "Investment Restrictions"
below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller
(which is usually a member bank of the Federal Reserve System or a member firm
of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
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the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government
agency issues. Under the Investment Company Act of 1940, as amended (the "1940
Act"), repurchase agreements may be considered to be loans by the buyer. A
Portfolio's risk is limited to the ability of the seller to pay the agreed upon
amount on the delivery date. If the seller defaults, the underlying security
constitutes collateral for the seller's obligation to pay although a Portfolio
may incur certain costs in liquidating this collateral and in certain cases may
not be permitted to liquidate this collateral. All repurchase agreements
entered into by the Portfolios are fully collateralized, with such collateral
being marked to market daily.
The Portfolios may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or high-grade
debt obligations having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
FOREIGN SECURITIES--ALL PORTFOLIOS
The Portfolios may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Portfolio, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Portfolio's assets may
be released prior to receipt of payment, may expose a Portfolio to increased
risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the United States.
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FOREIGN SECURITIES--MONEY MARKET PORTFOLIO
The Money Market Portfolio may invest in the following foreign
securities: (i) U.S. dollar-denominated obligations of foreign branches and
subsidiaries of domestic banks and foreign banks (such as Eurodollar CDs, which
are U.S. dollar-denominated CDs issued by branches of foreign and domestic
banks located outside the United States; Eurodollar TDs ("ETDs"), which are
U.S. dollar-denominated deposits in a foreign branch of a foreign or domestic
bank; and Canadian TDs, which are essentially the same as ETDs except they are
issued by branches of major Canadian banks), (ii) high quality, U.S.
dollar-denominated short-term bonds and notes (including variable amount master
demand notes) issued by foreign corporations, (including Canadian commercial
paper, which is commercial paper issued by a Canadian corporation or a Canadian
counterpart of a U.S. corporation, and Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer) and (iii) U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Advisers to be of comparable
quality to the other obligations in which the Money Market Portfolio may
invest. Such securities also include debt obligations of supranational
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
FOREIGN SECURITIES--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
Not more than 5% of a Portfolio's assets may be invested in closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments
may be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses. Securities of
foreign issuers include investments in sponsored American Depository Receipts
("ADRs"). ADRs are depository receipts for securities of foreign issuers and
provide an alternative method for a Portfolio to make foreign investments.
These securities will not be denominated in the same currency as the securities
into which they may be converted. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets. ADRs are receipts typically issued
by a U.S. bank or trust company evidencing ownership of the underlying
securities.
The Portfolios may invest in foreign securities that impose restrictions
on transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because some Portfolios may buy and sell securities denominated in
currencies other than the U.S. dollar and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Portfolios from time to
time may enter into foreign currency exchange transactions to convert to and
from different foreign currencies and to convert foreign currencies to and from
the U.S. dollar. The Portfolios either enter into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or use forward contracts to purchase or sell foreign currencies.
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A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit requirement
and is traded at a net price without commission. A Portfolio maintains with its
custodian a segregated account of high grade liquid assets in an amount at
least equal to its obligations under each forward foreign currency exchange
contract. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolios may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position. With respect to Portfolios
other than the International Equity Portfolio consideration of the prospect for
currency parities will be incorporated into the Advisers' long-term investment
decisions. Therefore these Portfolios will not routinely enter into foreign
currency hedging transactions with respect to security transactions; however,
the Advisers believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when they determine that the transactions
would be in a Portfolio's best interest. Although these transactions tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might be realized
should the value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
such securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event a Portfolio's ability to
utilize forward contracts in the manner set forth in the Prospectus may be
restricted. Forward contracts may reduce the potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts may not eliminate fluctuations in the
underlying U.S. dollar equivalent value of the prices of or rates of return on
a Portfolio's foreign currency denominated portfolio securities and the use of
such techniques will subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, a Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit a Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio's assets that are the subject
of such cross-hedges are denominated.
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GUARANTEED INVESTMENT CONTRACTS
The Portfolios may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a Portfolio makes
cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the fund guaranteed interest.
The GICs provide that this guaranteed interest will not be less than a certain
minimum rate. The insurance company may assess periodic charges against a GIC
for expenses and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. Because a Portfolio may not
receive the principal amount of a GIC from the insurance company on seven days'
notice or less, the GIC is considered an illiquid investment and, together with
other instruments in a Portfolio which are not readily marketable, will not
exceed 15% (10% in the case of the Money Market Portfolio) of the Portfolio's
net assets. The term of a GIC will be 13 months or less. In determining average
weighted portfolio maturity, a GIC will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of the
guaranteed interest rate or the period of time remaining until the principal
amount can be recovered from the issuer through demand.
WHEN-ISSUED SECURITIES
The Portfolios may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
Portfolios would take delivery of such securities. When a Portfolio commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, the
Portfolio establishes procedures consistent with the relevant policies of the
SEC. Since those policies currently recommend that an amount of a Portfolio's
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Portfolio expects always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although a Portfolio does
not intend to make such purchases for speculative purposes and intends to
adhere to the provisions of SEC policies, purchases of securities on such bases
may involve more risk than other types of purchases. For example, a Portfolio
may have to sell assets which have been set aside in order to meet redemptions.
Also, if a Portfolio determines it is advisable as a matter of investment
strategy to sell the "when-issued" or "forward delivery" securities, a
Portfolio would be required to meet its obligations from the then available
cash flow or the sale of securities, or, although it would not normally expect
to do so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Portfolio's payment
obligation).
ZERO COUPON OBLIGATIONS
A Portfolio may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since dividend income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Portfolio
may have to sell other securities to pay said accrued dividends prior to
maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS--
PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
General. The successful use of such instruments draws upon the Advisers'
skill and experience with respect to such instruments. Should interest or
exchange rates move in an unexpected manner, a Portfolio may not achieve the
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anticipated benefits of futures contracts or options on futures contracts or
may realize losses and thus will be in a worse position than if such strategies
had not been used. In addition, the correlation between movements in the price
of futures contracts or options on futures contracts and movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses.
Futures Contracts. A Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities or foreign currencies,
or contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Portfolio may
enter into futures contracts which are based on debt securities that are backed
by the full faith and credit of the U.S. Government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association
modified pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. A Portfolio may also enter into futures contracts which are based on
bonds issued by entities other than the U.S. Government.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the futures
position. When a Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or entirely,
offset increases in the cost of securities that the Portfolio intends to
purchase. As such purchases are made, the corresponding positions in stock
index futures contracts will be closed out. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It
is expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
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clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Portfolio which holds or intends to acquire fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase, a
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the debt securities owned by the Portfolio. If interest rates did increase, the
value of the debt security in a Portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at approximately the same
rate, thereby keeping the net asset value of the Portfolio from declining as
much as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an investment
technique allows a Portfolio to maintain a defensive position without having to
sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a Portfolio
could take advantage of the anticipated rise in the value of debt securities
without actually buying them until the market had stabilized. At that time, the
futures contracts could be liquidated and the Portfolio could then buy debt
securities on the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such futures
contracts will consist of cash, cash equivalents or high quality liquid debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers
believe that use of such contracts will benefit the Portfolios, if the
Advisers' investment judgment about the general direction of interest rates is
incorrect, a Portfolio's overall performance would be poorer than if it had not
entered into any such contract. For example, if a Portfolio has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of debt securities held by it and interest rates decrease instead,
the Portfolio will lose part or all of the benefit of the increased value of
its debt securities which it has hedged because it will have offsetting losses
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in its futures positions. In addition, in such situations, if a Portfolio has
insufficient cash, it may have to sell debt securities to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be,
at increased prices which reflect the rising market. A Portfolio may have to
sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Portfolios intend to purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against
any decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on futures may to some
extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased.
The Board of Trustees of the Portfolio Series has adopted the requirement
that futures contracts and options on futures contracts be used either (i) as a
hedge without regard to any quantitative limitation, or (ii) for other purposes
to the extent that immediately thereafter the aggregate amount of margin
deposits on all (non-hedge) futures contracts of the Portfolio and premiums
paid on outstanding (non-hedge) options on futures contracts owned by the
Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be
changed by the Portfolio Series' Board of Trustees without considering the
policies and concerns of the various applicable federal and state regulatory
agencies.
Options on Foreign Currencies. A Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be
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utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Portfolio could sustain losses
on transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where a Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
The Portfolios intend to write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
other foreign currency held in its portfolio. A call option is also covered if
the Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, U.S. Government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The Portfolios also intend to write call options on foreign currencies
that are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security which
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the Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate.
In such circumstances, the Portfolio collateralizes the option by maintaining
in a segregated account with its custodian, cash or U.S. Government securities
or other high quality liquid debt securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars marked to market
daily.
Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a Portfolio
in futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options on currencies
may be traded over-the-counter. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-counter
market. For example, exercise and settlement of such options must be made
exclusively through the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
<PAGE>
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to
cover written over-the-counter options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the
repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
The Portfolios may write (sell) covered call and put options to a limited
extent on its portfolio securities ("covered options"). However, a Portfolio
may forego the benefits of appreciation on securities sold or may pay more than
the market price on securities acquired pursuant to call and put options
written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which a Portfolio has no
control, the Portfolio must sell the underlying security to the option holder
at the exercise price. By writing a covered call option, a Portfolio forgoes,
in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which a Portfolio has no control, the Portfolio must purchase the
underlying security from the option holder at the exercise price. By writing a
covered put option, a Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. A Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing
purchase transaction." Where a Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
<PAGE>
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated
on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which
it may invest. A Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. A Portfolio would ordinarily have a gain if the value of the securities
increased above the exercise price sufficiently to cover the premium and would
have a loss if the value of the securities remained at or below the exercise
price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolios have adopted certain other nonfundamental policies
concerning option transactions which are discussed below. A Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
The Portfolios may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
<PAGE>
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolios will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Advisers will monitor
the creditworthiness of dealers with whom a Portfolio enters into such options
transactions under the general supervision of the Portfolio Series' Trustees.
OPTIONS ON SECURITIES INDICES--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
In addition to options on securities, the Portfolios may also purchase
and write (sell) call and put options on securities indices. Such options give
the holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolios will not purchase such options unless
the Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Portfolios' securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Advisers may be forced to liquidate portfolio
securities to meet settlement obligations.
SHORT SALES "AGAINST THE BOX"--PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
In a short sale, a fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Portfolio may
engage in short sales only if at the time of the short sale it owns or has the
right to obtain, at no additional cost, an equal amount of the security being
sold short. This investment technique is known as a short sale "against the
box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.
The Portfolios will not engage in short sales against the box for
investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security (or a security convertible or exchangeable for such
security), or when a Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
<PAGE>
income tax purposes or for purposes of satisfying certain tests applicable to
regulated investment companies under the Code. In such case, any future losses
in a Portfolio's long position should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a loss
in the short position. The extent to which such gains or losses are reduced
depends upon the amount of the security sold short relative to the amount a
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolios endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.
As a nonfundamental operating policy, the Advisers do not expect that
more than 40% of a Portfolio's total assets would be involved in short sales
against the box. The Advisers do not currently intend to engage in such sales.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created
in the future, upon the Trust supplementing the Prospectus, a Portfolio or
Portfolios may invest in obligations other than those listed previously,
provided such investments are consistent with a Fund's and its corresponding
Portfolio's investment objective, policies and restrictions.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, the Advisers also make their own
evaluations of these securities, subject to review by the Board of Trustees of
the Portfolio Series. After purchase by a Portfolio, an obligation may cease to
be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event would require a Portfolio to dispose of the
obligation, but the Advisers will consider such an event in their determination
of whether a Portfolio should continue to hold the obligation. A description of
the ratings used herein and in the Funds' Prospectus is set forth in the
Appendix to this Statement of Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each
Fund and each Portfolio and may not be changed with respect to the Fund or the
Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the 1940 Act and as used in this Statement
of Additional Information and the Prospectus means, with respect to the Fund
(or the Portfolio), the lesser of (i) 67% or more of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Portfolio)
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Portfolio)
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities of the Fund (or of the total beneficial interests of the
Portfolio). Whenever the Trust is requested to vote on a fundamental policy of
a Portfolio, the Trust will hold a meeting of the corresponding Fund's
shareholders and will cast its vote as instructed by that Fund's shareholders.
If a percentage or a rating restriction on investment or utilization of assets
is adhered to at the time an investment is made or assets are so utilized, a
later change in such percentage resulting from changes in a Portfolio's total
<PAGE>
assets or the value of a Portfolio's securities, or a later change in the
rating of a portfolio security, will not be considered a violation of the
relevant policy.
As a matter of fundamental policy, no Portfolio (or Fund) may (except
that no investment restriction of a Fund shall prevent a Fund from investing
all of its assets in an open-end investment company with substantially the same
investment objective as that Fund):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value
of the Portfolio's (Fund's) assets (including such borrowing) less
liabilities (not including such borrowing), it may borrow money and enter
into reverse repurchase agreements, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered a pledge of
assets for purposes of this restriction and except that assets may be
pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute;
(2) underwrite securities issued by other persons except insofar as
the Portfolio Series or the Portfolio (the Trust or the Fund) may
technically be deemed an underwriter under the 1933 Act in selling a
portfolio security;
(3) make loans to other persons except (a) through the lending of
the Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) total assets (taken at
market value), (b) through the use of repurchase agreements or the
purchase of short-term obligations or (c) by purchasing debt securities
of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary
course of business (the Portfolio Series (Trust) may hold and sell, for
the Portfolio's (Fund's) portfolio, real estate acquired as a result of
the Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed appropriate
for the achievement of the Portfolio's (Fund's) investment objective(s),
up to 25% of its total assets may be invested in any one industry (except
that the Money Market Portfolio (Money Market Fund) reserves the freedom
of action to concentrate 25% or more of its assets in obligations of
domestic branches of domestic banks); or
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
Non-Fundamental Restrictions. Each Portfolio (or the Trust, on behalf of
each Fund) will not as a matter of operating policy (except that no operating
<PAGE>
policy shall prevent a Fund from investing all of its assets in an open-end
investment company with substantially the same investment objective as that
Fund):
(i) borrow money for any purpose in excess of 10% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio (Fund)
may borrow for temporary or emergency purposes up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's (Fund's) net assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
reverse repurchase agreements, when-issued securities and other similar
investment techniques are not considered a pledge of assets for purposes
of this restriction;
(iii)purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and except
that deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(iv) invest for the purpose of exercising control or management;
(v) purchase securities issued by any other investment company
except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the
open market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be purchased
for the Portfolio (Fund) if such purchase at the time thereof would cause
(a) more than 10% of the Portfolio's (Fund's) total assets (taken at the
greater of cost or market value) to be invested in the securities of such
issuers; (b) more that 5% of the Portfolio's (Fund's) total assets (taken
at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (Fund); and
provided further that the Portfolio (Fund) may not purchase any security
from any open-end investment company;
(vi) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio (Fund) to hold more than 10% of any
class of securities of such issuer, for which purposes all indebtedness
of an issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(vii)purchase or retain in the Portfolio's (Fund's) portfolio any
securities issued by an issuer any of whose officers, directors, trustees
or security holders is an officer or Trustee of the Portfolio Series
(Trust), or is an officer or partner of the Adviser or Subadviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of 1%
of the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;
(viii) invest more than 5% of the Portfolio's (Fund's) net assets in
warrants or rights (valued at the lower of cost or market), but not more
<PAGE>
than 2% of the Portfolio's (Fund's) net assets may be invested in
warrants not listed on the New York Stock Exchange or the American Stock
Exchange;
(ix) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio (Fund) owns an equal amount of
such securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of equivalent
kind and amount) if such short sales represent more than 25% of the
Portfolio's (Fund's) net assets (taken at market value); provided,
however, that the value of the Portfolio's (Fund's) short sales of
securities (excluding U.S. Government securities) of any one issuer may
not be greater than 2% of the value (taken at market value) of the
Portfolio's (Fund's) net assets or more than 2% of the securities of any
class of any issuer; or
(x) enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are not
readily marketable (which securities would include participation
interests that are not subject to the demand feature described in the
Fund's then-current Prospectus and floating and variable rate demand
obligations as to which no secondary market exists and the Portfolio
cannot exercise the demand feature described in the Fund's then-current
Prospectus on not more than seven days' notice), if, in the aggregate,
more than 15% (10% in the case of the Money Market Portfolio(Fund)) of
its net assets would be so invested. A Portfolio (Fund) may not invest in
TDs maturing in more than seven days.
Policies (i) through (x) may be changed by the Board of Trustees of the
Portfolio Series or the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Therefore,
the rate of portfolio turnover is not a limiting factor when changes are
appropriate. Portfolio trading is engaged in for a Portfolio if the Advisers
believe that a transaction net of costs (including custodian charges) will help
achieve the Portfolio's investment objective.
A Portfolio's purchase and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Portfolios do
not anticipate paying brokerage commissions in such transactions. Any
transactions for which a Portfolio pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.
Allocations of transactions, including their frequency, to various
dealers is determined by the Subadvisers in their best judgment and in a manner
deemed to be in the best interest of the investors in a Portfolio rather than
by any formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for a Portfolio will be made independently from
those for any other account or investment company that is or may in the future
become managed by the Advisers or their affiliates. If, however, a Portfolio
<PAGE>
and other investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by the Subadvisers occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the Subadvisers whose
investment portfolios are managed internally, rather than by the Subadvisers,
might seek to purchase or sell the same type of investments at the same time as
a Portfolio. Such an event might also adversely affect that Portfolio.
The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1994: $[ ].
Fiscal year ended December 31, 1995: $[ ].
Fiscal year ended December 31, 1996: $[ ].
Equity Income Portfolio
Fiscal year ended December 31, 1994: $[ ].
Fiscal year ended December 31, 1995: $[ ].
Fiscal year ended December 31, 1996: $[ ].
Equity Value Portfolio
Fiscal year ended December 31, 1996: $[ ].
Growth & Income Portfolio
Fiscal year ended December 31, 1994: $[ ].
Fiscal year ended December 31, 1995: $[ ].
Fiscal year ended December 31, 1996: $[ ].
Equity Growth Portfolio
Fiscal year ended December 31, 1994: $[ ].
Fiscal year ended December 31, 1995: $[ ].
Fiscal year ended December 31, 1996: $[ ].
Special Equity Portfolio
Fiscal year ended December 31, 1994: $[ ].
Fiscal year ended December 31, 1995: $[ ].
Fiscal year ended December 31, 1996: $[ ].
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $[ ].
International Equity Portfolio
Fiscal year ended December 31, 1996: $[ ].
<PAGE>
PERFORMANCE INFORMATION
MONEY MARKET FUND
For the Money Market Fund, yield is computed in accordance with a
standardized method which involves determining the net change in the value of a
hypothetical pre-existing Money Market Fund account having a balance of one
share at the beginning of a seven calendar day period for which yield is to be
quoted, dividing the net change by the value of the account at the beginning of
the period to obtain the base period return, and annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares and fees that may
be charged to shareholder accounts, in proportion to the length of the base
period and the Money Market Fund's average account size, but does not include
realized gains and losses or unrealized appreciation and depreciation.
Effective annualized yield is computed by adding 1 to the base period return
(calculated as described above), raising that sum to a power equal to 365
divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held by the Money Market Portfolio, portfolio
maturity and operating expenses. An investor's principal in the Money Market
Fund is not guaranteed. See "Determination of Net Asset Value" for a discussion
of the manner in which the Money Market Fund's price per share is determined.
From time to time, the Money Market Fund in its advertising and sales
literature may refer to the growth of assets managed or administered by the
Adviser over certain time periods.
Comparative performance information may be used from time to time in
advertising or marketing the Money Market Fund's shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report.
Morningstar, Inc., CDA and other publications.
The annualized current seven-day yield of the Money Market Fund for the
year ended December 31, 1996 was 5.16%. For the same period the annualized
effective seven-day yield, based upon dividends declared daily and reinvested
monthly, of the Money Market Fund was 5.30%.
ALL FUNDS
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner for each Fund:
TOTAL RETURN: The Fund's total return will be calculated for certain
periods by determining the average annual compounded rates of return over
those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the
end of the periods. The Fund may also calculate (i) a total return
assuming an initial account value of $1,000 and/or (ii) total rates of
return which represent aggregate performance over a period of
year-by-year performance.
<PAGE>
YIELD: The Fund's yield quotation will be based on the annualized
net investment income per share of the Fund over a 30-day period. The
current yield for the Fund is calculated by dividing the net investment
income per share of the Fund earned during the period by the net asset
value per share of the Fund on the last day of that period. The resulting
figure is then annualized. Net investment income per share is determined
by dividing (i) the dividends and interest earned during the period,
minus accrued expenses for the period, by (ii) the average number of Fund
shares entitled to receive dividends during the period multiplied by the
net asset value per share on the last day of the period.
Total returns calculated for any of the following Funds for any period
which includes a period prior to the "reorganization date" will reflect the
performance of the corresponding Pooled Separate Account. The "reorganization
date" is the date on which the corresponding Pooled Separate Account of The
Mutual Life Insurance Company of New York ("MONY") set forth below contributed
all of its assets to the corresponding Portfolio of Diversified Investors
Portfolios in which the corresponding Fund invests its assets:
FUND MONY POOLED SEPARATE ACCOUNT
Money Market...................... Pooled Account No. 4
High Quality Bond................. Pooled Account No. 15
Intermediate Government Bond...... Pooled Account No. 10d
Government/Corporate Bond......... Pooled Account No. 5
Balanced.......................... Pooled Account No. 14
Equity Income..................... Pooled Account No. 6
Growth & Income................... Pooled Account No. 10a
Equity Growth..................... Pooled Account No. 1
Special Equity.................... Pooled Account No. 10b
International Equity.............. Pooled Account No. 12
Such total returns calculated for each of the Funds listed above will
reflect the performance of the corresponding Pooled Separate Account only from
the date that such corresponding Pooled Separate Account adopted investment
objectives, policies and practices substantially similar to those of the
corresponding Portfolio of the Fund. All total return percentages for such
periods will reflect the historical rates of return of the corresponding Pooled
Separate Account for such period adjusted to assume that all charges, expenses
and fees of the applicable Fund which are presently in effect were deducted
during such period. The corresponding Pooled Separate Accounts were not
registered under the Investment Company Act of 1940 and, therefore, were not
subject to certain investment restrictions imposed by that Act. If the
corresponding Pooled Separate Accounts had been registered under that Act,
investment performance might have been adversely affected.
<PAGE>
As of December 31, 1996, the average annual total returns for each of the
following Funds, including the pooled accounts noted above, were as follows:
FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
ENDED ENDED ENDED ENDED THROUGH
FUND 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
Money Market................. 4.87% 4.61% 3.9% 5.5% 7.81%
High Quality Bond............ 4.51% 5.54% 5.64% N/A 6.73%
Intermediate Government Bond. 3.61% 4.82% 5.67% N/A 7.18%
Government/Corporate Bond.... 2.74% 6.07% 7.35% 8.0% 8.85%
High Yield Bond.............. 10.11% N/A N/A N/A 11.55%
Balanced..................... 16.39% 13.98% N/A N/A 13.76%
Equity Income................ 17.91% 16.47% 14.71% 13.08% 13.87%
Equity Value................. [ ] N/A N/A N/A [ ]
Growth & Income.............. 21.61% 15.75% 13.17% 13.53% 13.52%
Equity Growth................ 17.93% 13.40% N/A N/A 12.20%
Special Equity............... 25.76% 21.17% 16.81% 17.01% 16.13%
Aggressive Equity............ [ ] N/A N/A N/A [ ]
International Equity......... 15.24% 10.87% N/A N/A 15.73%
Any yield or total return quotation provided for a Fund should not be
considered as representative of the performance of the Fund in the future since
the net asset value of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Portfolio, but also on
changes in the current value of such securities and on changes in the expenses
of the Fund and the Portfolio. These factors and possible differences in the
methods used to calculate yields and total return should be considered when
comparing the yield and total return of the Fund to yields and total rates of
return published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. A Portfolio may invest in
some instruments not eligible for inclusion in such an index, and may be
prohibited from investing in some instruments included in this index.
Evaluations of a Fund's performance made by independent sources may also be
used in advertisements concerning a Fund. Sources for a Fund's performance
information may include, but are not limited to, the following:
Asian Wall Street Journal, a weekly Asian newspaper that often
reviews U.S. mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial
weekly that periodically reviews mutual fund performance data.
<PAGE>
Business Week, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds
investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment
advisory publication that periodically features the performance of a
variety of securities.
Consumer Digest, a monthly business/financial magazine that includes
a "Money Watch" section featuring financial news.
Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."
Financial Times, Europe's business newspaper, which features from
time to time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes
a "Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time
reports the performance of specific investment companies in the mutual
fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Investor's Daily, a daily newspaper that features financial,
economic and business news.
Lipper Analytical Services, Inc.'s Mutual Fund
Performance Analysis, a weekly publication of industry-wide
mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly
covers financial news.
Personal Investing News, a monthly news publication that often
reports on investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs
and growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that
periodically reports mutual fund performance data.
<PAGE>
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The Trust determines the net asset value of the shares of each Fund each
day that the Advisers of the corresponding Portfolio are open for business. (As
a result, a Fund will normally determine its net asset value every weekday
except for the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas.) This daily determination of net asset value is made as of the close
of regular trading on the New York Stock Exchange, currently 4:00 p.m., New
York time unless the Exchange closes earlier, by dividing the total assets of a
Fund less all of its liabilities, by the total number of shares of a Fund
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of net asset value next following
the receipt of any purchase or redemption order deemed to be in good order.
(See "Purchases and Redemptions of Shares" in the Prospectus.)
Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
closes and the time when a Fund's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Board of Trustees of
the Portfolio Series.
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Short-term obligations which
mature in 60 days or less are valued at amortized cost, which approximates fair
value as determined by the Board of Trustees. Futures and option contracts that
are traded on commodities or securities exchanges are normally valued at the
settlement price on the exchange on which they are traded. Portfolio securities
<PAGE>
(other than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If neither of these alternatives is available or both are deemed not to
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Board of Trustees, in good faith, will establish a conversion rate
for such currency.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
the Portfolio Series' Board of Trustees. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Portfolio could expect to
receive upon its current sale. Some, but not necessarily all, of the general
factors which may be considered in determining fair value include: (i) the
fundamental analytical data relating to the investment; (ii) the nature and
duration of restrictions on disposition of the securities; and (iii) an
evaluation of the forces which influence the market in which these securities
are purchased and sold. Without limiting or including all of the specific
factors which may be considered in determining fair value, some of the specific
factors include: type of security, financial statements of the issuer, cost at
date of purchase, size of holding, discount from market value, value of
unrestricted securities of the same class at the time of purchase, special
reports prepared by analysts, information as to any transactions or offers with
respect to the security, existence of merger proposals or tender offers
affecting the securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
Each investor in each Portfolio, including the corresponding Fund, may
add to or reduce its investment in the Portfolio on each day that the Adviser
and the Subadviser of the Portfolio are open for business. As of 4:00 p.m. (New
York time) (or any earlier close of regular trading on the Exchange) on each
such day, the value of each investor's interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or reductions which are to be
effected on that day will then be effected. The investor's percentage of the
aggregate beneficial interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of net additions to or reductions in the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m. on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied
to determine the value of the investor's interest in a Portfolio as of 4:00
p.m. on the following day the New York Stock Exchange is open for trading.
<PAGE>
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
The respective Trustees and officers of the Trust and the Portfolio
Series and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio Series, as the case may be. Unless otherwise indicated,
the address of each Trustee and officer of the Trust and the Portfolio Series
is Four Manhattanville Road, Purchase, New York 10577.
TRUSTEES OF THE TRUST
Donald E. Flynn*........ Vice President, AEGON USA, Inc., 1988 to present;
Executive Vice President, AEGON USA Investment
Management, Inc., 1988 to present; Vice President,
AEGON USA Managed Portfolios, Inc., 1988 to
present. Age: 56.
Robert Lester Lindsay... Retired; Executive Vice President, The Mutual Life
Insurance Company of New York (prior to July 1989);
His address is Two Huguenot Center, Tenafly,
New Jersey 07670-2520. Age: 62.
Nikhil Malvania......... Partner, Deaner-Malvania Associates (since 1991);
Manager and Vice President, Strategic Planning
Associates (prior to 1991). His address is 88 Perry
Street, New York, New York 10014. Age: 45.
Joyce Galpern Norden.... 5/95 to present--Co-Director, Urman's Health Clinical
Research Program Medical Center, University of
Pennsylvania. 10/93 to 5/95--Foundations Director,
American Jewish Committee. 2/91 to 9/93--Executive
Director, Food-People Allied to Combat Hunger Inc.
Her address is Nine Evergreen Way, North Tarrytown,
New York 10591. Age: 57.
Tom A. Schlossberg*..... President, Diversified, 10/92 to present; Executive
Vice President and Head of Pension Operations, The
Mutual Life Insurance Company of New York, 1/93 to
12/93. Age: 47.
TRUSTEES OF THE PORTFOLIO SERIES
In addition to the Trustees below, Messrs. Schlossberg and Flynn serve as
Trustees of the Portfolio Series.
Neal M. Jewell.......... 1/95 to present--Consultant. 11/91 to 1/95,
Executive Vice President, 1/90 to 10/91--Director of
Overseas Pensions, American International Group Asset
Management. His address is 355 Thornridge Drive,
Stamford, Connecticut 06903. Age: 62.
<PAGE>
Eugene M. Mannella...... Vice President, Investment Management Services, Inc.
(since August 1993); Senior Vice President, Lehman
Brothers Inc. (May 1986 to August 1993). His address
is Two Orchard Neck Road, Center Moriches,
New York 11934. Age: 43.
Patricia L. Sawyer...... Executive Vice President and Director, Robert L.
Smith & Co. (since July 1990); Vice President,
American Express (September 1988 to July 1990). Her
address is 256 West 10th Street, New York, New York
10014. Age: 46.
OFFICERS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board and Mr. Flynn is Vice President of the Trust and the Portfolio Series.
Each other officer also holds the same position indicated with the Trust and
the Portfolio Series.
Robert F. Colby......... Secretary; Vice President and Chief Corporate
Counsel, Mutual Life Insurance Company of New York,
4/93 to 12/93; Vice President and General Counsel,
Diversified, 11/93 to present; Vice President of
DISC, 11/93 to present. Age: 41.
Alfred C. Sylvain....... Treasurer and Assistant Secretary; Vice President and
Treasurer of Diversified, 11/93 to present; Treasurer
of DISC., 11/93 to present; Vice President, Mutual
Life Insurance Company of New York, 1/91 to present.
Age: 45.
John F. Hughes.......... Assistant Secretary; Senior Counsel, Mutual Life
Insurance Company of New York, 1/88 to present; Vice
President and Senior Counsel, Diversified, 11/93 to
present; Assistant Secretary, DISC. 11/93 to present.
Age: 56.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Description of the Trust; Fund
Shares."
PRINCIPAL HOLDERS OF SECURITIES
At April 1, 1997, the following investors held more than 5% of the
outstanding shares of the following Funds.
Money Market Fund: Paula C. Mister, 3101 Jackson Ridge Court, Phoenix, MD 21131
(___ shares owned-- ___%), Patrick L. Applegate, 4001 Chesley Avenue,
Baltimore, MD 21206 (___ shares owned--___%); Joanne Green, 34 Barton Hill,
Hampton, Connecticut 06424 (___ shares owned--___%).
Government/Corporate Bond Fund: Henry L. Gutman, 7704 Crossland Road,
Baltimore, MD 21208 (____ shares owned--____%); Helen P. Sigwad, 6G Fallen Tree
Court, Relay, MD 21227 (____ shares owned--____%).
Balanced Fund: David R. Berger, 360 Leatherwood Place, Baltimore,
MD 21237 (____ shares owned-- ___%).
<PAGE>
Equity Income Fund: Suzanne S. Stuntz, 5506 Southbend Road,
Baltimore, MD 21209 (____ shares owned--____%).
Growth & Income Fund: Henry L. Gutman, 7704 Crossland Road,
Baltimore, MD 21208 (____ shares owned--____%).
Special Equity Fund: Jack Blair, 13008 Coverbridge Road,
Cellarsburg, IN 47172 (____ shares owned-- ___%).
At April 1, 1997, AUSA Life Insurance Company, Inc. ("AUSA"), Four
Manhattanville Road, Purchase, New York 10577 and The Mutual Life Insurance
Company ("MONY"), 1740 Broadway, New York, New York 10019 owned the following
percentage interests of the outstanding beneficial interests of the Portfolios
indicated (all such interests being held in separate accounts of AUSA and MONY,
respectively):
AUSA MONY
Money Market ____% ____%
High Quality Bond ____ ____
Intermediate Government Bond ____ ____
Government/Corporate Bond ____ ____
High-Yield Bond ____ ____
Balanced ____ ____
Equity Income ____ ____
Growth & Income ____ ____
Equity Growth ____ ____
Special Equity ____ ____
International Equity ____ ____
<PAGE>
COMPENSATION
For the fiscal year ended December 31, 1996, the Trust provided the
following compensation to its Trustees.
TOTAL
COMPENSATION
AGGREGATE FROM THE TRUST AND
NAME OF COMPENSATION FUND COMPLEX
PERSON, FROM PAID TO
POSITION THE TRUST TRUSTEES
Tom A. Schlossberg -0- -0-
Trustee
Donald E. Flynn -0- -0-
Trustee
Robert L. Lindsay $9,000 $9,000
Trustee
Nikhil Malvania $9,000 $9,000
Trustee
Joyce Galpern Norden $9,000 $9,000
Trustee
For the fiscal year ended December 31, 1996, the Portfolio Series
provided the following compensation to its Trustees.
TOTAL
COMPENSATION
FROM THE PORTFOLIO
AGGREGATE SERIES AND
NAME OF COMPENSATION FUND COMPLEX
PERSON, FROM PAID TO
POSITION THE PORTFOLIO SERIES DIRECTORS
Tom A. Schlossberg None None
Trustee
Donald E. Flynn None None
Trustee
Neal M. Jewell $10,000 $10,000
Trustee
Eugene M. Manella $10,000 $10,000
Trustee
Patricia L. Sawyer $10,000 $10,000
Trustee
INVESTMENT ADVISORY SERVICES
The Adviser manages the assets of each Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory Agreement") with the Portfolio
Series with respect to that Portfolio and the investment policies described
herein and in the Prospectus for the corresponding Fund. Subject to such
further policies as the Portfolio Series' Board of Trustees may determine, the
Adviser provides general investment advice to each Portfolio.
<PAGE>
For each Portfolio, the Adviser has entered into an Investment
Subadvisory Agreement (each a "Subadvisory Agreement") with each Subadviser.
Each Advisory Agreement provides that the Adviser or a Subadviser, as the
case may be, may render services to others. Each agreement is terminable
without penalty on not more than 60 days' nor less than 30 days' written notice
by a Portfolio when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of its
investment) or by a vote of a majority of the Board of Trustees of the
Portfolio Series, or by the Adviser or a Subadviser on not more than 60 days'
nor less than 30 days' written notice, as the case may be, and will
automatically terminate in the event of its assignment. Each agreement provides
that neither the Adviser nor Subadviser nor their personnel shall be liable for
any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of security transactions
for the corresponding Portfolio, except for willful misfeasance, bad faith,
gross negligence or reckless disregard of its or their obligations and duties
under the Advisory Agreement and the Subadvisory Agreement, as the case may be.
The Adviser's and Subadviser's fees are described in the Funds'
Prospectus.
Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the
employment of independent investment managers in an innovative investment
structure.
Diversified services over $[8] billion in retirement plan assets and has
offices in Boston, Charlotte, Chicago, Cincinnati, Dallas, Houston, New
Orleans, New York, Philadelphia, Portland and San Francisco. It maintains
recordkeeping for 300,000 participants and has 490 employees dedicated to
retirement plan investment and administration. Its employees average more than
seven years of retirement plan experience.
As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not-for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance.
Diversified's investment structure provides access to an array of
complementary investment alternatives representing the major asset classes
along the risk/reward spectrum. Subadvisers are selected from more than 2,000
highly accomplished independent firms. Each subadviser's performance is
carefully monitored by Diversified taking into consideration fund performance
in light of investment objectives and policies and level of risk.
Through a rigorous portfolio manager selection process which includes
researching each subadviser's asset class, track record, organizational
structure, management team, consistency of performance and assets under
management, five to ten subadvisers are chosen. Out of that group, Diversified
then carefully chooses the three most qualified subadvisers based on
performance evaluation, ownership structure, personnel and philosophy to return
for an on-site visit and a quantitative and qualitative analysis by the
investment committee. Out of those three subadvisers, Diversified then hires
the most qualified, independent subadviser for each Portfolio, subject to
approval by the Portfolio Series' Board of Trustees including a majority of the
Trustees who are not "interested persons" of the Portfolio Series.
<PAGE>
Diversified brings comprehensive monitoring and control to the investment
management process. It seeks superior portfolio management and moves
purposefully in replacing managers when warranted. From a plan sponsor's
perspective, replacing a manager, and not the investment fund, is a key
advantage in avoiding the expense and difficulty of re-enrolling participants
or disrupting established plan administration. Replacing a Subadviser, however,
will necessitate a shareholder proxy solicitation which involves other expenses
to a Fund.
Highly disciplined manager evaluation on both a quantitative and
qualitative basis, is an ongoing process. Diversified's Manager Monitoring
Group gathers and analyzes performance and Diversified's Investment Committee
reviews it. Performance attribution, risk/return ratios and purchase/sale
assessments are prepared monthly and, each quarter, a more comprehensive review
is completed which consists of manager visits, fundamental analysis and
statistical analysis. Extensive quarterly analysis is conducted to ensure that
the investment fund is being managed in line with the stated objectives.
Semiannually, the Investment Committee reviews the back-up manager selection,
regression analysis and universe comparisons.
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment so that,
should a manager change be warranted, the transition can be effected on a
timely basis.
For the fiscal year ended December 31, 1994, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.................... $312,079 $29,141
High Quality Bond............... 607,967 20,204
Intermediate Government Bond.... 246,814 32,308
Government/Corporate Bond....... 776,654 10,376
Balanced........................ 443,372 38,936
Equity Income................... 2,470,354 2,000
Growth & Income................. 576,431 23,276
Equity Growth................... 629,874 31,377
Special Equity.................. 1,628,738 61,756
<PAGE>
For the fiscal year ended December 31, 1995, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market..................... $_____ $_____
High Quality Bond................ _____ _____
Intermediate Government Bond..... _____ _____
Government/Corporate Bond........ _____ _____
High-Yield Bond.................. _____ _____
Balanced......................... _____ _____
Equity Income.................... _____ _____
Growth & Income.................. _____ _____
Equity Growth.................... _____ _____
Special Equity................... _____ _____
International Equity............. _____ _____
For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market...................... $_____ $_____
High Quality Bond................. _____ _____
Intermediate Government Bond...... _____ _____
Government/Corporate Bond......... _____ _____
High-Yield Bond................... _____ _____
Balanced.......................... _____ _____
Equity Income..................... _____ _____
Equity Value...................... _____ _____
Growth & Income................... _____ _____
Equity Growth..................... _____ _____
Special Equity.................... _____ _____
Aggressive Equity................. _____ _____
International Equity.............. _____ _____
ADMINISTRATOR
Diversified provides administrative services to the Portfolios under
Advisory Agreements with each of the Portfolios, and to the Trust under the
Administrative Services and Transfer Agency Services Agreement with the Trust.
These agreements are described in the Prospectus. Each such agreement provides
that Diversified may render services to others as administrator. In addition,
each agreement terminates automatically if it is assigned and may be terminated
without penalty, in the case of the Portfolio Series, by majority vote of the
Funds and of the other investors in the Portfolio Series (with the vote of each
being in proportion to the amount of its investment) or, in the case of the
Trust, by majority vote of the Trust's shareholders, or by either party on not
more than 60 days' nor less than 30 days' written notice. Each agreement also
provides that neither Diversified nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in connection
with administrative services provided to any Fund or Portfolio, except for
willful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their duties or
obligations under said agreements.
<PAGE>
CUSTODIAN AND TRANSFER AGENT
Pursuant to the Administrative and Transfer Agency Services Agreement,
Diversified acts as transfer agent for each of the Funds (the "Transfer
Agent"). The Transfer Agent maintains an account for each shareholder of a
Fund, performs other transfer agency functions, and acts as dividend disbursing
agent for each Fund.
Pursuant to two Custodian Agreements, Investors Bank & Trust Company acts
as the custodian of each Fund's assets, i.e., each Fund's interest in its
corresponding Portfolio, and as the custodian of each Portfolio's assets (the
"Custodian"). The Custodian's responsibilities include safeguarding and
controlling the Portfolios' cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest on the
Portfolios' investments, maintaining books of original entry for portfolio
accounting and other required books and accounts, and calculating the daily net
asset value of beneficial interests in each Portfolio. Securities held by the
Portfolios may be deposited into the Federal Reserve-Treasury Department Book
Entry System or the Depository Trust Company and may be held by a subcustodian
bank if such arrangements are reviewed and approved by the Trustees of the
Portfolio Series. The Custodian does not determine the investment policies of
the Portfolios or decide which securities the Portfolios will buy or sell. A
Portfolio may, however, invest in securities of the Custodian and may deal with
the Custodian as principal in securities and foreign exchange transactions. For
its services, the Custodian will receive such compensation as may from time to
time be agreed upon by it and the Trust and the Portfolio Series.
TAXATION
Each Fund intends to qualify as a regulated investment company ("RIC") for
federal income tax purposes by meeting all applicable requirements of
Subchapter M of the Code, including requirements as to the nature of the Fund's
gross income, the amount of Fund distributions and the composition and holding
period of the Fund's portfolio assets. Because each Fund intends to distribute
all of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code, it
is expected that no Fund will be required to pay any entity level federal
income or excise taxes, although foreign-source income may be subject to
foreign withholding taxes. If a Fund should fail to qualify as a "regulated
investment company" in any year, the Fund will incur a regular corporate
federal income tax upon its taxable income (thereby reducing the return
realized by Fund shareholders) and Fund distributions would constitute ordinary
corporate dividends when issued to shareholders. However, shareholders who are
Qualified Investors would not, in that event, incur any income tax liability on
such distributions provided they remain exempt from federal income tax.
Under interpretations of the Internal Revenue Service (1) each Portfolio
will be treated for federal income tax purposes as a partnership which is not a
publicly traded partnership and (2) for purposes of determining whether a Fund
satisfies requirements of Subchapter M of the Code, the Fund, as an investor in
its corresponding Portfolio, will be deemed to own a proportionate share of
that Portfolio's assets and will be deemed to be entitled to the Portfolio's
income attributable to that share. The Portfolio Series has advised the Funds
that it intends to conduct the Portfolios' operations so as to enable
investors, including the Funds, to satisfy those requirements.
DISTRIBUTIONS
Tax-qualified retirement plans which invest in any Fund generally will not
be subject to tax liability on either distributions from a Fund or redemptions
of shares of a Fund. Rather, participants are taxed when they take
<PAGE>
distributions from the underlying plan in accordance with the rules under the
Code governing the taxation of such distributions. Qualified Investors
otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Fund, and any gain realized on
redemption of Fund shares, where the Investor is subject to the unrelated
business taxable income provisions of the Code with respect to its investment
in the Fund because, e.g., its acquisition of shares in the Fund was financed
with debt.
Individual and institutional investors, and Qualified Investors which for
any reason prove not to be exempt from federal income taxation, will be subject
to tax on distributions received from the Fund irrespective of the fact that
such distributions are reinvested in additional shares. Distributions to such
investors, other than of net capital gains, will be taxable as ordinary income;
distributions of net capital gains would be taxable to such Investors as
long-term capital gain without regard to the length of time they have held in
shares in the Fund. A portion of the dividends received from a Fund investing
in corporate stocks (but none of that Fund's capital gain distribution) may
qualify for the dividends-received deduction for corporations. Availability of
the deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Certain dividends declared in
October, November or December of a calendar year and paid to a Qualified
Investor which is subject to tax on the distribution in January of the
succeeding calendar year are taxable to such Investor as if paid on December 31
of the year in which they were declared. Fund distributions will reduce a
Fund's net asset value per share. Shareholders who buy shares shortly before a
Fund makes a distribution may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a distribution,
subject to tax in the case of investors otherwise subject to income taxation.
Distributions and certain other payments to persons who are not citizens
or residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable distributions
and other payments to Non-U.S. Persons that are subject to withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. Distributions received from a Fund by Non-U.S.
Persons may also be subject to tax under the laws of their own jurisdictions.
Each Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable distributions and redemption proceeds paid to any
shareholder (including a non-U.S. Person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
SALE OF SHARES
Any gain or loss realized by a shareholder subject to federal income tax
upon the sale or other disposition of shares of a Fund, or upon receipt of a
distribution in complete liquidation of a Fund, generally will be a capital
gain or loss that will be long-term or short-term depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange of a Fund's shares by such a shareholder will be disallowed to the
extent the shares disposed of are replaced (including by shares acquired
pursuant to reinvested distribution) within a period of 61 days beginning 30
days before and ending 30 days after the disposition. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any
loss realized by such a shareholder on a disposition of a Fund's shares held
<PAGE>
for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain received by the shareholder
with respect to such shares.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a Fund
may be different from those described herein. Foreign shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Fund.
TAXATION OF THE PORTFOLIO SERIES
The Portfolio Series, if treated for tax purposes as a partnership, would
not be subject to federal income taxation. Instead, a Fund would take into
account, in computing its federal income tax liability, its share of the
Portfolio Series' income, gains, losses, deductions, credits and tax preference
items, without regard to whether it has received any cash distributions from
the Portfolio Series.
Withdrawals by a Fund from its corresponding Portfolio generally will not
result in such Fund recognizing any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent that any cash
distributed exceeds the basis of a Fund's interest in its Portfolio prior to
the distribution, (2) income or gain will be realized if the withdrawal is in
liquidation of a Fund's entire interest in the Portfolio Series and includes a
disproportionate share of any unrealized receivables held by the Portfolio
Series, and (3) loss will be recognized if the distribution is in liquidation
of that entire interest and consists solely of cash and/or unrealized
receivables. The basis of a Fund's interest in the Portfolio Series generally
equals the amount of cash and the basis of any property that the Fund invests
in its corresponding Portfolio, increased by the Fund's share of income from
that Portfolio and decreased by the amount of any cash distributions and the
basis of any property distributed from its corresponding Portfolio.
FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries; it is not
expected that the Portfolios or the Funds will be able to "pass through" to the
Fund shareholders subject to tax any foreign tax credits with respect to these
taxes.
Tax conventions between certain countries and the United States may reduce
or eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of assets to be invested in various
countries will vary.
EFFECTS OF CERTAIN INVESTMENTS AND INVESTMENT POLICIES
A Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders
otherwise subject to taxation. Any investment in zero coupon securities,
deferred interest bonds, payment-in-kind bonds, certain stripped securities,
and certain securities purchased at a market discount will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
<PAGE>
A Fund's transactions in options, futures contracts and forward contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example,
certain positions held by a Fund on the last business day of each taxable year
will be marked to market (i.e., treated as if closed out) on that day, and any
gain or loss associated with the positions will be treated as 60% long-term and
40% short-term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, futures contracts,
forward contracts, and swaps and related transactions to the extent necessary
to meet the requirements of Subchapter M of the Code. As a result, however, a
Portfolio may be forced to defer the closing out of certain options and futures
contracts beyond the time when it otherwise would be advantageous to do so.
Special tax considerations apply with respect to foreign investments of a
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and loss. The holding of foreign currencies for
nonhedging purposes and investment by a Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that each Fund
continues to qualify as a RIC for federal income tax purposes. The investment
by each Fund in its corresponding Portfolio does not cause a Fund to be liable
for any income or franchise tax in the State of New York.
The Portfolio Series is organized as a New York trust. The Portfolio
Series is not subject to any income or franchise tax in the State of New York
or, so long as it is treated as a partnership (not taxable as a publicly traded
partnership) for federal income tax purposes, the Commonwealth of
Massachusetts.
Distributions of a Fund that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest. Shareholders of the Funds may be subject to state and local
taxes on a Fund's distributions to them. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.
DISTRIBUTION PLAN
The Trust has adopted a Distribution Plan (the "Distribution Plan") in
accordance with Rule 12b-1 under the 1940 Act after having concluded that there
is a reasonable likelihood that the Distribution Plan will benefit the Funds
and their shareholders. The Distribution Plan provides that the Distributor may
receive a fee from each Fund at an annual rate not to exceed 0.25% of that
Fund's average daily net assets in anticipation of, or as reimbursement for,
expenses incurred in connection with the sale of shares of the Fund, such as
advertising expenses and the expenses of printing (excluding typesetting) and
<PAGE>
distributing Prospectuses and reports used for sales purposes, expenses of
preparing and printing of sales literature and other distribution-related
expenses.
The Distribution Plan will continue in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trust's Trustees and a majority of the Trust's Trustees who are not "interested
persons" of the Trust and who have no direct or indirect financial interest in
the operation of the Distribution Plan or in any agreement related to such Plan
("Qualified Trustees"). The Distribution Plan requires that at least quarterly
the Trust and the Distributor shall provide to the Board of Trustees and the
Board of Trustees shall review a written report of the amounts expended (and
the purposes therefor) under the Distribution Plan. The Distribution Plan
further provides that the selection and nomination of the Trust's disinterested
Trustees shall be committed to the discretion of the Trust's disinterested
Trustees then in office. The Distribution Plan may be terminated with respect
to a Fund at any time by a vote of a majority of the Trust's Qualified Trustees
or by vote of a majority of the outstanding voting securities of that Fund. The
Distribution Plan may not be amended to increase materially the amount of
permitted expenses thereunder without the approval of a majority of the
outstanding voting securities of the Fund and may not be materially amended in
any case without a vote of the majority of both the Trust's Trustees and the
Trust's Qualified Trustees. The Distributor will preserve copies of any plan,
agreement or report made pursuant to the Distribution Plan for a period of not
less than six years from the date of the Distribution Plan, and for the first
two years the Distributor will preserve such copies in an easily accessible
place.
As contemplated by the Distribution Plan, Diversified Investors Securities
Corp. acts as the agent of the Funds in connection with the offering of shares
of the Funds pursuant to a Distribution Agreement (the "Distribution
Agreement"). After the Prospectuses and periodic reports have been prepared,
set in type and mailed to existing shareholders, the Distributor pays for the
printing and distribution of copies of the Prospectuses and periodic reports
which are used in connection with the offering of shares of the Funds to
prospective investors. The Prospectus contains a description of fees payable to
the Distributor under the Distribution Agreement.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Funds' and the Portfolios'
independent accountants providing audit and accounting services including (i)
audit of the annual financial statements, (ii) assistance and consultation with
respect to the preparation of filings with the SEC and (iii) preparation of
annual income tax returns.
DESCRIPTION OF THE TRUST; FUND SHARES
The Trust is a Massachusetts business trust established under a
Declaration of Trust dated as of April 23, 1993. Its authorized capital
consists of an unlimited number of shares of beneficial interest of $0.00001
par value which may be issued in separate series. Currently, the Trust has
thirteen active series, although additional series may be established from time
to time. If additional series are established, each share of a series will
represent an equal proportionate interest in that series with each other share
of the series.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with such a share of the general
<PAGE>
liabilities of the Trust. Expenses with respect to any two or more series are
to be allocated in proportion to the asset value of the respective series
except where allocations of direct expenses can otherwise be fairly made. The
officers of the Trust, subject to the general supervision of the Trustees, have
the power to determine which liabilities are allocable to a given series, or
which are general or allocable to two or more series. In the event of the
dissolution or liquidation of the Trust or any series, the holders of the
shares of any series are entitled to receive as a class the value of the
underlying assets of such shares available for distribution to shareholders.
Shares of the Trust entitle their holder to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of each
Fund and provides for indemnification and reimbursement of expenses out of Fund
property for any shareholder held personally liable for the obligations of a
particular Fund. The Declaration of Trust also provides for the maintenance, by
or on behalf of the Trust and the Funds, of appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Funds, their shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and a Fund itself was unable to meet
its obligations.
EXPERTS
The financial statements incorporated herein have been so included in
reliance on the report of Coopers & Lybrand L.L.P. independent accountants,
given on the authority of said firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The financial statements of the Trust and the Portfolio Series as of
December 31, 1996 have been filed with the Securities and Exchange Commission
as part of the Fund's annual report pursuant to Section 30(b) of the 1940 Act
and Rule 30b2-1 thereunder, and are hereby incorporated herein by reference
from such report. A copy of such report will be provided without charge to each
person receiving this Statement of Additional Information.
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA--An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated AA differs from the highest rated obligations only
in a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A--An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB--An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
Plus (+) or minus (-)--The ratings from AA to BB may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper, including Tax Exempt
A-1--A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2--A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3--A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
<PAGE>
MOODY'S
Corporate and Municipal Bonds
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt 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.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Commercial Paper
PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
-- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
<PAGE>
<TABLE>
<CAPTION>
Investment Adviser of the Portfolio Series,
Administrator and Transfer Agent
<S> <C>
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, NY 10577
FUNDS GROUP THE DIVERSIFIED INVESTORS
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government
Bond Fund
Diversified Investors Government/Corporate
Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
Investment Subadvisers of the Portfolios
Diversified Investors Money Market Fund,
Diversified Investors Intermediate Government
Bond Fund and Diversified Investors
Government/Corporate Bond Fund
Capital Management Group
1740 Broadway
New York, NY 10019
Diversified Investors High Quality Bond Fund
Merganser Capital Management Corporation
One Cambridge Center
Cambridge, MA 02142
Diversified Investors High-Yield Bond Fund
Delaware Investment Advisers
2005 Market Street
Philadelphia, Pennsylvania 19103
</TABLE>
<PAGE>
Diversified Investors Balanced Fund
Institutional Capital Corporation
303 West Madison Street
Chicago, IL 60606
Diversified Investors Equity Income Fund
Asset Management Group
1740 Broadway
New York, NY 10019
Diversified Investors Equity Value Fund
ARK Asset Management Co., Inc.
55 Water Street
New York, NY 10041
Diversified Investors Growth & Income Fund
Putnam Advisory Company, Inc.
One Post Office Square
Boston, MA 02109
Diversified Investors Equity Growth Fund
Chancellor LGT Asset Management, Inc.
1166 Avenue of the Americas
New York, NY 10036
Diversified Investors Special Equity Fund
Pilgrim Baxter & Associates
1255 Drummers Lane
Wayne, PA 19087
ARK Management Co., Inc.
One New York Plaza
New York, NY 10004
Liberty Investment Management
2502 Rocky Point Drive
Tampa, FL 33607
Westport Asset Management, Inc.
53 Riverside Avenue
Westport, CT 06880
Diversified Investors Aggressive Equity Fund
McKinley Capital Management, Inc.
3301 C Street
Anchorage, AK 99503
Diversified Investors International Equity Fund
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071
<PAGE>
Distributor
Diversified Investors Securities Corp.
Four Manhattanville Road
Purchase, NY 10577
Custodian
Investors Bank & Trust Company
89 South Street
Boston, MA 02205-1537
Independent Accountants
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The financial statements included in Part A are as follows:
Financial Highlights:
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors Balanced Fund
Diversified Investors Equity Income Fund
Diversified Investors Equity Value Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Special Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
The financial statements incorporated by reference into Part B are as follows:
THE DIVERSIFIED INVESTORS FUNDS GROUP
Statements of Assets and Liabilities at December 31, 1996
Statements of Operations For the Year Ended December 31, 1996
Statements of Changes in Net Assets For the Years Ended December 31, 1995
and December 31, 1996
Notes to Financial Statements at December 31, 1996
DIVERSIFIED INVESTORS PORTFOLIOS
Statements of Assets and Liabilities at December 31, 1996
Statements of Operations For the Year Ended December 31, 1996
Statements of Changes in Net Assets For the Years Ended December 31, 1995
and December 31, 1996
Portfolio of Investments at December 31, 1996
Notes to Financial Statements at December 31, 1996
(b) Exhibits:
1. Declaration of Trust of the Registrant; Amended and Restated
Establishment and Designation of Series of Shares of Beneficial
Interest.(*)
2. By-Laws of the Registrant.(*)
<PAGE>
6. Distribution Agreement between the Registrant and Diversified Investors
Securities Corp.(1)
8. Custodian Agreement between the Registrant and Investors Bank & Trust
Company.(1)
9. Administrative and Transfer Agency Services Agreement between the Registrant
and Diversified Investment Advisors, Inc.(1)
10. Opinion of Counsel.(1)
11. Consent of Independent Auditors.(**)
13. Investor Representation Letter of Initial Shareholder.(1)
15. Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act
of 1940, as amended.(1)
16. Schedule for computation of performance quotations.(2)
17. Financial Data Schedules.(**)
19. Powers of Attorney.(*)
- --------------------------
(1) Incorporated herein by reference from pre-effective amendment no. 2 to the
Registrant's registration statement (the "Registration Statement") on Form N-1A
(File no. 33-61810) as filed with the U.S. Securities and Exchange Commission
(the "Commission") on January 3, 1994.
(2) Incorporated herein by reference from post-effective amendment no. 2 to the
Registration Statement as filed with the Commission on April 28, 1995.
(*) Filed herewith.
(**) To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "Management of the Trust and Portfolio Series Trustees and Officers
of the Trust" in the Statement of Additional Information filed as part of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS FEBRUARY 14, 1997*
Diversified Investors Balanced Fund [ ]
Diversified Investors Money Market Fund [ ]
Diversified Investors Growth & Income Fund [ ]
Diversified Investors Equity Growth Fund [ ]
Diversified Investors Equity Income Fund [ ]
Diversified Investors Special Equity Fund [ ]
Diversified Investors High Quality Bond Fund [ ]
Diversified Investors Government/Corporate Bond Fund [ ]
Diversified Investors Intermediate Government Bond Fund [ ]
<PAGE>
Diversified Investors High-Yield Bond Fund [ ]
Diversified Investors Equity Value Fund [ ]
Diversified Investors Aggressive Equity Fund [ ]
Diversified Investors International Equity Fund [ ]
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of the Registrant's Declaration of Trust,
filed as an Exhibit herewith.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers
and controlling persons of the Trust pursuant to the Trust's Declaration of
Trust, or otherwise, the Trust has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Trust of expenses
incurred or paid by a Trustee, officer or controlling person of the Trust in
the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Diversified Investors Securities Corp. is the principal underwriter
(the "Distributor") of the Registrant. The Distributor also serves as the
exclusive placement agent for Diversified Investors Portfolios.
(b) The names, titles and principal business addresses of the officers
and directors of the Distributor are as stated on Form U-4 filed by each
individual officer and of Form BD including Schedule A thereof (File No.
8-45671) (filed on August 31, 1993 and amended September 20, 1993), the text of
which is herein incorporated by reference.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Diversified Investment Advisors, Inc.
4 Manhattanville Road
Purchase, New York 10577
(administrator and transfer agent)
Diversified Investors Securities Corp.
4 Manhattanville Road
Purchase, New York 10577
(distributor)
<PAGE>
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205-1537
(custodian)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the 1940 Act were applicable to the
Registrant, except that the request referred to in the third full paragraph
thereof may only be made by shareholders who hold in the aggregate at least 10%
of the outstanding shares of the Registrant, regardless of the net asset value
of shares held by such requesting shareholders.
(b) If the information called for by Item 5A of Form N-1A is contained in
the latest annual report to shareholders, the Registrant will furnish each
person to whom a Part A is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the County of Westchester and the State of New York, on the
28th day of February, 1997.
THE DIVERSIFIED INVESTORS FUNDS GROUP
By: /s/ Tom A. Schlossberg
Tom A. Schlossberg
Trustee, President,
Chief Executive
Officer and Chairman
of the Board of Trustees
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated on February 28th, 1997.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
Tom A. Schlossberg Trustee, President, Chief Executive
Officer and Chairman of the Board of
Trustees
*/s/ Donald E. Flynn
Donald E. Flynn Trustee
*/s/ Robert Lester Lindsay
Robert Lester Lindsay Trustee
*/s/ Nikhil Malvania
Nikhil Malvania Trustee
*/s/ Joyce Galpern Norden
Joyce Galpern Norden Trustee
/s/ Alfred C. Sylvain
Alfred C. Sylvain Treasurer and Principal Accounting
Officer
*By:
/s/ Robert F. Colby
Robert F. Colby
Attorney-in-fact pursuant to powers of attorney filed herewith
<PAGE>
SIGNATURES
Diversified Investors Portfolios has duly caused this registration
statement on Form N-1A of The Diversified Investors Funds Group to be signed on
its behalf by the undersigned, thereunto duly authorized in the County of
Westchester and the State of New York, on the 28th day of February, 1997.
DIVERSIFIED INVESTORS PORTFOLIOS
By /s/ Tom A. Schlossberg
Tom A. Schlossberg
Trustee, President, Chief
Executive Officer and
Chairman of the Board of
Trustees of the Portfolios
This post-effective amendment to the registration statement on Form N-1A
of The Diversified Investors Funds Group has been signed below by the following
persons in the capacities indicated on February 28th, 1997.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
Tom A. Schlossberg Trustee, President, Chief Executive
Officer and Chairman of the Board of
Trustees of the Portfolios
Neal M. Jewell Trustee of the Portfolios
Eugene M. Mannella Trustee of the Portfolios
Patricia L. Sawyer Trustee of the Portfolios
/s/ Alfred C. Sylvain
Alfred C. Sylvain Principal Accounting Officer of the
Portfolios
Robert F. Colby
Attorney-in-Fact
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
EXHIBIT INDEX
EXHIBIT NO.
1. Declaration of Trust of the Registrant; Amended and Restated
Establishment and Designation of Series of Shares of Beneficial
Interest.
2. By-Laws of the Registrant.
19. Powers of Attorney.
THE DIVERSIFIED INVESTORS FUNDS GROUP
______________________
DECLARATION OF TRUST
Dated as of April 23, 1993
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I--Name and Definitions
Section 1.1 Name 1
Section 1.2 Definitions 1
ARTICLE II--Trustees
Section 2.1 Number of Trustees 3
Section 2.2 Term of Office of Trustees 3
Section 2.3 Resignation and Appointment of Trustees 4
Section 2.4 Vacancies 4
Section 2.5 Delegation of Power to Other Trustees 5
ARTICLE III--Powers of Trustees
Section 3.1 General 5
Section 3.2 Investments 6
Section 3.3 Legal Title 8
Section 3.4 Issuance and Repurchase of Securities 8
Section 3.5 Borrowing Money; Lending Trust Property 8
Section 3.6 Delegation; Committees 8
Section 3.7 Collection and Payment 8
Section 3.8 Expenses 9
Section 3.9 Manner of Acting; By-Laws 9
Section 3.10 Miscellaneous Powers 9
Section 3.11 Principal Transactions 10
Section 3.12 Trustees and Officers as Shareholders 10
ARTICLE IV--Investment Adviser, Distributor, Administrator,
Transfer Agent and Shareholder Servicing Agents
Section 4.1 Investment Adviser 11
Section 4.2 Distributor 12
Section 4.3 Administrator 12
Section 4.4 Transfer Agent and Shareholder Servicing Agents 12
Section 4.5 Parties to Contract 12
<PAGE>
-ii-
ARTICLE V--Limitations of Liability of Shareholders, Trustees and
Others
Section 5.1 No Personal Liability of Shareholders, Trustees,
etc. 13
Section 5.2 Non-Liability of Trustees, etc. 14
Section 5.3 Mandatory Indemnification; Insurance 14
Section 5.4 No Bond Required of Trustees 16
Section 5.5 No Duty of Investigation; Notice in Trust 16
Instruments, etc.
Section 5.6 Reliance on Experts, etc. 17
ARTICLE VI--Shares of Beneficial Interest
Section 6.1 Beneficial Interest 17
Section 6.2 Rights of Shareholders 17
Section 6.3 Trust Only 18
Section 6.4 Issuance of Shares 18
Section 6.5 Register of Shares 18
Section 6.6 Transfer of Shares 19
Section 6.7 Notices 19
Section 6.8 Voting Powers 19
Section 6.9 Series Designation 20
ARTICLE VII--Redemptions
Section 7.1 Redemptions 23
Section 7.2 Suspension of Right of Redemption 24
Section 7.3 Disclosure of Holding 24
Section 7.4 Redemptions of Accounts of Less than Minimum Amount 25
ARTICLE VIII--Determination of Net Asset Value, Net Income and 25
Distributions
<PAGE>
-iii-
ARTICLE IX--Duration; Termination of Trust; Amendment; Mergers, etc.
Section 9.1 Duration 26
Section 9.2 Termination of Trust 26
Section 9.3 Amendment Procedure 27
Section 9.4 Merger, Consolidation and Sale of Assets 28
Section 9.5 Incorporation, Reorganization 29
Section 9.6 Incorporation or Reorganization of Series 29
ARTICLE X--Reports to Shareholders and Shareholder Communications 30
ARTICLE XI--Miscellaneous
Section 11.1 Filing 30
Section 11.2 Governing Law 31
Section 11.3 Counterparts 31
Section 11.4 Reliance by Third Parties 31
Section 11.5 Provisions in Conflict with Law or
Regulations 31
Section 11.6 Principal Office 31
APPENDIX I--Series Designation
<PAGE>
DECLARATION OF TRUST
OF
THE DIVERSIFIED INVESTORS FUNDS GROUP
____________
Dated as of April 23, 1993
____________
WHEREAS, the Trustees desire to establish a trust for the investment and
reinvestment of funds contributed thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the trust
assets be divided into transferable Shares of Beneficial Interest (par value
$0.00001 per share) ("Shares") issued in one or more series as hereinafter
provided; and
NOW THEREFORE, the Trustees hereby declare that all money and property
contributed to the trust established hereunder shall be held and managed in
trust for the benefit of holders, from time to time, of the Shares issued
hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "The
Diversified Investors Funds Group".
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.3 hereof.
<PAGE>
(b) "By-Laws" means the By-laws referred to in Section 3.9 hereof, as from
time to time amended.
(c) "Commission" has the meaning given that term in the 1940 Act.
(d) "Custodian" means a party employed by the Trust to furnish services as
described in Article X of the By-Laws.
(e) "Declaration" means this Declaration of Trust as amended from time to
time. Reference in this Declaration of Trust to "Declaration", "hereof",
"herein", and "hereunder" shall be deemed to refer to this Declaration rather
than the article or section in which such words appear.
(f) "Distributor" means a party furnishing services to the Trust pursuant
to any contract described in Section 4.2 hereof.
(g) "Interested Person" has the meaning given that term in the 1940 Act.
(h) "Investment Adviser" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.1 hereof.
(i) "Majority Shareholder Vote" has the same meaning as the phrase "vote
of a majority of the outstanding voting securities" as defined in the 1940 Act,
except that such term may be used herein with respect to the Shares of the
Trust as a whole or the Shares of any particular series, as the context may
require.
(j) "1940 Act" means the Investment Company Act of 1940 and the Rules and
Regulations thereunder, as amended from time to time.
(k) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign.
(l) "Shareholder" means a record owner of outstanding Shares.
(m) "Shares" means the Shares of Beneficial Interest into which the
beneficial interest in the Trust shall be divided from time to time or, when
used in relation to any particular series of Shares established by the Trustees
pursuant to Section 6.9 hereof, equal proportionate transferable units into
which such series of Shares shall be divided from time to time. The term
"Shares" includes fractions of Shares as well as whole Shares.
<PAGE>
(n) "Shareholder Servicing Agent" means a party furnishing services to the
Trust pursuant to any shareholder servicing contract described in Section 4.4
hereof.
(o) "Transfer Agent" means a party furnishing services to the Trust
pursuant to any transfer agency contract described in Section 4.4 hereof.
(p) "Trust" means the trust created hereby.
(q) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including, without limitation, any and all property
allocated or belonging to any series of Shares pursuant to Section 6.9 hereof.
(r) "Trustees" means the persons who have signed the Declaration, so long
as they shall continue in office in accordance with the terms hereof, and all
other persons who may from time to time be duly elected or appointed, qualified
and serving as Trustees in accordance with the provisions hereof, and reference
herein to a Trustee or the Trustees shall refer to such person or persons in
their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
Section 2.1. Number of Trustees. The number of Trustees shall be such
number as shall be fixed from time to time by a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be less than
three nor more than 15.
Section 2.2. Term of Office of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the Trustees shall hold office during the
lifetime of this Trust and until its termination as hereinafter provided;
except that (a) any Trustee may resign his trust (without need for prior or
subsequent accounting) by an instrument in writing signed by him and delivered
to the other Trustees, which shall take effect upon such delivery or upon such
later date as is specified therein; (b) any Trustee may be removed with cause,
at any time by written instrument signed by at least two-thirds of the
remaining Trustees, specifying the date when such removal shall become
effective; (c) any Trustee who has attained a mandatory retirement age
<PAGE>
established pursuant to any written policy adopted from time to time by at
least two thirds of the Trustees shall, automatically and without action of
such Trustee or the remaining Trustees, be deemed to have retired in accordance
with the terms of such policy, effective as of the date determined in
accordance with such policy; (d) any Trustee who has become incapacitated by
illness or injury as determined by a majority of the other Trustees, may be
retired by written instrument signed by a majority of the other Trustees,
specifying the date of his retirement; and (e) a Trustee may be removed at any
meeting of Shareholders by a vote of two thirds of the outstanding Shares. For
purposes of the foregoing clause (b), the term "cause" shall include, but not
be limited to, failure to comply with such written policies as may from time to
time be adopted by at least two thirds of the Trustees with respect to the
conduct of Trustees and attendance at meetings. Upon the resignation,
retirement or removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Trust or the remaining Trustees any
Trust Property held in the name of the resigning, retiring or removed Trustee.
Upon the incapacity or death of any Trustee, his legal representative shall
execute and deliver on his behalf such documents as the remaining Trustees
shall require as provided in the preceding sentence.
Section 2.3. Resignation and Appointment of Trustees. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of an increase in number, or
for any other reason, exist, a majority of the remaining Trustees shall fill
such vacancy by appointing such other individual as they in their discretion
shall see fit. Any such appointment shall not become effective, however, until
the person named in the written instrument of appointment shall have accepted
in writing such appointment and agreed in writing to be bound by the terms of
the Declaration. The power of appointment is subject to the provisions of
Section 16(a) of the 1940 Act.
Section 2.4. Vacancies. The death, declination, resignation, retirement,
removal or incapacity of the Trustees, or any one of them, shall not operate to
annul the Trust or to revoke any existing agency created pursuant to the terms
of this Declaration. Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in Section 2.3, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by the
Declaration.
<PAGE>
Section 2.5. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six months at
any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two Trustees personally exercise the powers granted to the Trustees
under the Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
Section 3.1. General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without the Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as the Trustees deem necessary, proper
or desirable in order to promote the interests of the Trust although such
things are not herein specifically mentioned. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
The Trustees in all instances shall act as principals, and are and shall
be free from the control of the Shareholders. The Trustees shall have full
power and authority to do any and all acts and to make and execute any and all
contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to Trust
investments, but shall have full authority and power to make any and all
investment which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust.
<PAGE>
The Trust shall be of the type commonly called a Massachusetts business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 3.2. Investments. (a) The Trustees shall have the power:
(i) to conduct, operate and carry on the business of an investment
company;
(ii) to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of U.S. and foreign currencies, any form of
gold or other precious metal, commodity contracts, any form of option contract,
contracts for the future acquisition or delivery of fixed income or other
securities, shares of, or any other interest in, any investment company as
defined in the Investment Company Act of 1940, and securities and related
derivatives of every nature and kind, including, without limitation, all types
of bonds, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers' acceptances,
and other securities of any kind, issued, created, guaranteed or sponsored by
any and all Persons, including, without limitation,
(A) states, territories and possessions of the United States and the
District of Columbia and any political subdivision, agency or instrumentality
of any such Person,
(B) the U.S. Government, any foreign government, any political subdivision
or any agency or instrumentality of the U.S. Government, any foreign government
or any political subdivision of the U.S. Government or any foreign government,
(C) any international or supranational instrumentality,
(D) any bank or savings institution, or
(E) any corporation, trust, partnership or other organization organized
under the laws of the United States or of any state, territory or possession
thereof, or under any foreign law;
<PAGE>
or in "when issued" contracts for any such securities, to retain Trust assets
in cash and from time to time to change the securities or obligations in which
the assets of the Trust are invested; and to exercise any and all rights,
powers and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation, the
right to consent and otherwise act with respect thereto, with power to
designate one or more Persons to exercise any of said rights, powers and
privileges in respect of any of said investments; and
(iii) to hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form; or either in its own
name or in the name of a custodian or a nominee or nominees, subject in either
case to proper safeguards according to the usual practice of Massachusetts
trust companies or investment companies.
(iv) to definitively interpret the investment objective, policies and
limitations of the Trust or any series.
(v) to carry on any other business in connection with or incidental to any
of the foregoing powers, to do everything necessary, proper or desirable for
the accomplishment of any purpose or the attainment of any object or the
furtherance of any power hereinbefore set forth, and to do every other act or
thing incidental or appurtenant to or connected with the aforesaid purposes,
objects or powers.
(b) The Trustees shall not be limited to investing in securities or
obligations maturing before the possible termination of the Trust, nor shall
the Trustees be limited by any law limiting the investments which may be made
by fiduciaries.
(c) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without any
requirement of approval by shareholders to either invest all or a portion of
the Trust Property, or sell all or a portion of the Trust Property and invest
the proceeds of such sales, in another investment company that is registered
under the 1940 Act.
Section 3.3. Legal Title. Legal title to all Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name
of one or more of the Trustees, or in the name of the Trust, or in the name of
any other Person or nominee, on such terms as the Trustees may determine. The
right, title and interest of the Trustees in the Trust Property shall vest
<PAGE>
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee, such Trustee shall automatically
cease to have any right, title or interest in any of the Trust Property, and
the right, title and interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered.
Section 3.4. Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section
6.9 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds of the Trust or other Trust
Property whether capital or surplus or otherwise, to the full extent now or
hereafter permitted by the laws of the Commonwealth of Massachusetts governing
business corporations.
Section 3.5. Borrowing Money; Lending Trust Property. The Trustees shall
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the Trust Property, to
endorse, guarantee, or undertake the performance of any obligation, contract or
engagement of any other Person and to lend Trust Property.
Section 3.6. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees,
independent contractors or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient.
Section 3.7. Collection and Payment. Subject to Section 6.9 hereof, the
Trustees shall have power to collect all property due to the Trust; to pay all
claims, including taxes, against the Trust Property; to prosecute, defend,
compromise or abandon any claims relating to the Trust Property; to foreclose
any security interest securing any obligations, by virtue of which any property
is owed to the Trust; and to enter into releases, agreements and other
instruments.
Section 3.8. Expenses. Subject to Section 6.9 hereof, the Trustees shall
have the power to incur and pay any expenses which in the opinion of the
Trustees are necessary or incidental to carry out any of the purposes of the
Declaration, and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
<PAGE>
officers, employees and Trustees. The Trustees shall be reimbursed from the
Trust estate or the assets belonging to the appropriate series for their
expenses and disbursements and for all losses and liabilities by them incurred
in administering the Trust; and for the payment of such expenses,
disbursements, losses and liabilities, the Trustees shall have a lien on the
assets belonging to the appropriate series prior to any rights of interests of
the Shareholders thereto.
Section 3.9. Manner of Acting; By-Laws. Except as otherwise provided
herein or in the By-Laws, any action to be taken by the Trustees may be taken
by a majority of the Trustees present at a meeting of Trustees at which a
quorum (as determined in the By-Laws) is present, including any meeting held by
means of a conference telephone circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each other, or
by written consents of a majority of the Trustees. The Trustees may adopt
By-Laws not inconsistent with this Declaration to provide for the conduct of
the business of the Trust and may amend or repeal such By-Laws to the extent
such power is not reserved to the Shareholders.
Section 3.10. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate,
and appoint from their own number, and terminate, any one or more committees
which may exercise some or all of the power and authority of the Trustees as
the Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, the Administrator, Trustees,
officers, employees, agents, the Investment Adviser, the Distributor, selected
dealers or independent contractors of the Trust against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (e) establish pension, profit-sharing, Share purchase, and
other retirement, incentive and benefit plans for any Trustees, officers,
employees or agents of the Trust; (f) to the extent permitted by law, indemnify
any person with whom the Trust has dealings, including any Investment Adviser,
Administrator, Custodian, Distributor, Transfer Agent, Shareholder Servicing
Agent, any dealer, or any other agent or independent contractor, to such extent
as the Trustees shall determine; (g) guarantee indebtedness or contractual
obligations of others; (h) determine and change the fiscal year of the Trust
<PAGE>
and the method by which its accounts shall be kept; and (i) adopt a seal for
the Trust, provided, that the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
Section 3.11. Principal Transactions. Except in transactions permitted by
the 1940 Act, or any order of exemption issued by the Commission, the Trustees
shall not, on behalf of the Trust, buy any securities (other than Shares) from
or sell any securities (other than Shares) to, or lend any assets of the Trust
to, any Trustee or officer of the Trust or any firm of which any such Trustee
or officer is a member acting as principal, or have any such dealings with any
Investment Adviser, Administrator, Shareholder Servicing Agent, Custodian
(other than repurchase agreements), Distributor or Transfer Agent or with any
Interested Person of such Person; but the Trust may, upon customary terms,
employ any such Person, or firm or company in which such Person is an
Interested Person, as broker, legal counsel, registrar, transfer agent,
dividend disbursing agent or custodian.
Section 3.12. Trustees and Officers as Shareholders. Except as hereinafter
provided, no officer, Trustee or member of any advisory board of the Trust, and
no member, partner, officer, director or trustee of the Investment Adviser,
Administrator or of the Distributor, and no Investment Adviser, Administrator
or Distributor of the Trust, shall take long or short positions in the
securities issued by the Trust. The foregoing provision shall not prevent:
(a) The Distributor from purchasing Shares from the Trust if such
purchases are limited (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to purchases for
the purpose of filling orders for Shares received by the Distributor and
provided that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase orders for
Shares, unless the Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent for the account of the
Trust;
(c) The purchase from the Trust or from the Distributor of Shares by any
officer, Trustee or member of any advisory board of the Trust or by any member,
partner, officer, director or trustee of the Investment Adviser or of the
Distributor at a price not lower than the net asset value of the Shares at the
moment of such purchase, provided that any such sales are only to be made
<PAGE>
pursuant to a uniform offer described in the current prospectus or statement of
additional information for the Shares being purchased; or
(d) The Investment Adviser, the Distributor, the Administrator, or any of
their officers, partners, directors or trustees from purchasing Shares prior to
the effective date of the Trust's Registration Statement under the Securities
Act of 1933, as amended, relating to the Shares.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR, ADMINISTRATOR, TRANSFER
AGENT AND SHAREHOLDER SERVICING AGENTS
Section 4.1. Investment Adviser. Subject to a Majority Shareholder Vote of
the Shares of each series affected thereby, the Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts whereby the other party to each such contract shall
undertake to furnish the Trust such management, investment advisory,
statistical and research facilities and services, promotional activities, and
such other facilities and services, if any, with respect to one or more series
of Shares, as the Trustees shall from time to time consider desirable and all
upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provision of the Declaration, the Trustees may
delegate to the Investment Adviser authority (subject to such general or
specific instructions as the Trustees may from time to time adopt) to effect
purchases, sales, loans or exchanges of assets of the Trust on behalf of the
Trustees or may authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of the
Investment Adviser (and all without further action by the Trustees). Any of
such purchases, sales, loans or exchanges shall be deemed to have been
authorized by all the Trustees. Such services may be provided by one or more
Persons.
Section 4.2. Distributor. The Trustees may in their discretion from time
to time enter into one or more distribution contracts providing for the sale of
Shares whereby the Trust may either agree to sell the Shares to the other party
to any such contract or appoint any such other party its sales agent for such
Shares. In either case, any such contract shall be on such terms and conditions
as the Trustees may in their discretion determine, provided that such terms and
conditions are not inconsistent with the provisions of the Declaration or the
By-Laws; and such contract may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may
<PAGE>
provide that such other party may enter into selected dealer and sales
agreements with registered securities dealers and depository institutions to
further the purpose of the distribution or repurchase of the Shares. Such
services may be provided by one or more Persons.
Section 4.3. Administrator. The Trustees may in their discretion from time
to time enter into one or more administrative services contracts whereby the
other party to each such contract shall undertake to furnish such
administrative services to the Trust as the Trustees shall from time to time
consider desirable and all upon such terms and conditions as the Trustees may
in their discretion determine, provided that such terms and conditions are not
inconsistent with the provisions of this Declaration or the By-Laws. Such
services may be provided by one or more Persons.
Section 4.4. Transfer Agent and Shareholder Servicing Agents. The Trustees
may in their discretion from time to time enter into one or more transfer
agency and shareholder servicing contracts whereby the other party to each such
contract shall undertake to furnish such transfer agency and/or shareholder
services to the Trust or to shareholders of the Trust as the Trustees shall
from time to time consider desirable and all upon such terms and conditions as
the Trustees may in their discretion determine, provided that such terms and
conditions are not inconsistent with the provisions of this Declaration or the
By-Laws. Such services may be provided by one or more Persons. Except as
otherwise provided in the applicable shareholder servicing contract, a
Shareholder Servicing Agent shall be deemed to be the record owner of
outstanding Shares beneficially owned by customers of such Shareholder
Servicing Agent for whom it is acting pursuant to such shareholder servicing
contract.
Section 4.5. Parties to Contract. Any contract of the character described
in Section 4.1, 4.2 1 4.3 or 4.4 of this Article IV or any Custodian contract
as described in Article X of the By-Laws may be entered into with any Person,
although one or more of the Trustees or officers of the Trust may be an
officer, partner, director, trustee, shareholder, or member of such other party
to the contract, and no such contract shall be invalidated or rendered voidable
by reason of the existence of any such relationship; nor shall any Person
holding such relationship be liable merely by reason of such relationship for
any loss or expense to the Trust under or by reason of any such contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article IV or the By-Laws. The same Person may be the other party to
contracts entered into pursuant to Sections 4.1, 4.2, 4.3 and 4.4 above or any
Custodian contract as described in Article X of the By-Laws, and any individual
<PAGE>
may be financially interested or otherwise affiliated with Persons who are
parties to any or all of the contracts mentioned in this Section 4.5.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDER
TRUSTEES AND OTHERS
Section 5.1. No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer or employee of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust and
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If
any Shareholder, Trustee, officer or employee, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability, he shall not, on
account thereof, be held to any personal liability. The Trust shall indemnify
and hold each Shareholder harmless from and against all claims and liabilities
to which such Shareholder may become subject by reason of his being or having
been a Shareholder, and shall reimburse such Shareholder for all legal and
other expenses reasonably incurred by him in connection with any such claim or
liability. The rights accruing to a Shareholder under this Section 5.1 shall
not exclude any other right to which such Shareholder may be lawfully entitled,
nor shall anything herein contained restrict the right of the Trust to
indemnify or reimburse a Shareholder in any appropriate situation even though
not specifically provided herein. Notwithstanding any other provision of this
Declaration to the contrary, no Trust Property shall be used to indemnify or
reimburse any Shareholder of any Shares of any series other than Trust Property
allocated or belonging to that series.
Section 5.2. Non-Liability of Trustees, etc. No Trustee, officer or
employee of the Trust shall be liable to the Trust or to any Shareholder,
Trustee, officer, employee, or agent thereof for any action or failure to act
(including without limitation the failure to compel in any way any former or
acting Trustee to redress any breach of trust), or for any error of judgment or
mistake of fact or law, except for his own bad faith, wilful misfeasance, gross
negligence or reckless disregard of his duties.
Section 5.3. Mandatory Indemnification; Insurance. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
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(i) every person who is or has been a Trustee or officer of the Trust
shall be indemnified by the Trust, to the fullest extent permitted by law
(including the 1940 Act) as currently in effect or as hereafter amended,
against all liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been
a Trustee or officer and against amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim", "action", "suit", or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or the Shareholders by reason of a
final adjudication by the court or other body before which the proceeding was
brought that he engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
(iii) in the event of a settlement involving a payment by a Trustee or
officer or other disposition not involving a final adjudication as provided in
paragraph (b) (i) or (b) (ii) above resulting in a payment by a Trustee or
officer, unless there has been either a determination that such Trustee or
officer did not engage in wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that he did not engage in such conduct:
(a) by vote of a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in office
act on the matter); or
(b) by written opinion of independent legal counsel.
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(c) Subject to the provisions of the 1940 Act, the Trust may maintain
insurance for the protection of the Trust Property, its present of former
Shareholders, Trustees, officers, employees, independent contractors and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability (whether or not the Trust would have the power to indemnify such
Persons against such liability), and such other insurance as the Trustees in
their sole judgment shall deem advisable.
(d) The rights of indemnification herein provided shall be severable,
shall not affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a Person who has ceased to be such
a Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such Person. Nothing contained herein shall affect any rights
to indemnification to which personnel other than Trustees and officers may be
entitled by contract or otherwise under law.
(e) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising out
of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on
the matter) or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 5.3 a "Disinterested Trustee" is one (i) who is
not an 'Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
<PAGE>
Section 5.4. No Bond Required of Trustees. No Trustee shall be obligated
to give any bond or other security for the performance of any of his duties
hereunder.
Section 5.5. No Duty of Investigation; Notice in Trust Instruments, etc.
No purchaser, lender, Shareholder Servicing Agent, Transfer Agent or other
Person dealing with the Trustees or any officer, employee or agent of the Trust
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered
to or on the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively presumed to have been executed
or done by the executors thereof only in their capacity as Trustees under the
Declaration or in their capacity as officers, employees or agents of the Trust.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or undertaking made or issued by the Trustees shall
recite that the same is executed or made by them not individually, but as
Trustees under the Declaration, and that the obligations of any such instrument
are not binding upon any of the Trustees or Shareholders individually, but bind
only the trust estate, and may contain any further recital which they or he may
deem appropriate, but the omission of such recital shall not operate to bind
any of the Trustees or Shareholders individually. The Trustees shall at all
times maintain insurance for the protection of the Trust Property,
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.
Section 5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to the
Trust by any of its officers or employees or by the Investment Adviser, the
Distributor, Transfer Agent, any Shareholder Servicing Agent, selected dealers,
accountants, appraisers or other experts or consultants selected with
reasonable care by the Trustees, officers or employees of the Trust, regardless
of whether such counsel or expert may also be a Trustee.
ARTICLE VI
<PAGE>
SHARES OF BENEFICIAL INTEREST
Section 6.1. Beneficial Interest. The interest of the beneficiaries
hereunder may be divided into transferable Shares, which may be divided into
one or more series as provided in Section 6.9 hereof. Each such series shall
have such class or classes of Shares as the Trustees may from time to time
determine. The number of Shares authorized hereunder is unlimited. The Trustees
may divide or combine the Shares into a greater of lesser number, and may
classify or reclassify any unissued Shares into one or more series or classes
of Shares. All Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall be
fully paid and non-assessable.
Section 6.2. Rights of Shareholders. The ownership of the Trust Property
of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to assume any losses of the Trust or suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in the Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion
or exchange rights, except as the Trustees may determine with respect to any
series of Shares. Every Shareholder by virtue of having become a Shareholder
shall be held expressly to have assented and agreed to the terms of this
Declaration and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the Trust
nor entitle the representative of any deceased Shareholder to an accounting or
to take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust.
Section 6.3. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and the
Shareholders. It is not the intention of the Trustees to create a general
partnership, limited partnership, joint stock association, corporation,
bailment or any form of legal relationship other than a trust. Nothing in the
Declaration shall be construed to make the Shareholders, either by themselves
or with the Trustees, partners or members of a joint stock association.
Section 6.4. Issuance of Shares. The Trustees, in their discretion may,
from time to time without vote of the Shareholders, issue Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
<PAGE>
such party or parties and for such amount and type of consideration, including
cash or property, and on such terms as the Trustees may deem best, and may in
such manner acquire other assets (including the acquisition of assets subject
to, and in connection, with the assumption of liabilities) and businesses. In
connection with any issuance of Shares, the Trustees may issue fractional
Shares. The Trustees may from time to time divide or combine the Shares of any
series into a greater or lesser number without thereby changing their
proportionate beneficial interests in Trust Property allocated or belonging to
such series. Contributions to the Trust may be accepted for, and Shares shall
be redeemed as, whole Shares and/or fractions of a Share.
Section 6.5. Register of Shares. A register or registers shall be kept at
the principal office of the Trust or at an office of the Transfer Agent (and/or
any sub-transfer agent which may be a Shareholder Servicing Agent) which
register or registers, taken together, shall contain the names and addresses of
the Shareholders and the number of Shares held by them respectively and a
record of all transfers thereof. Such register or registers shall be conclusive
as to who are the holders of the Shares and who shall be entitled to receive
dividends or distributions or otherwise to exercise or enjoy the rights of
Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-Laws provided, until he has given his address to the Transfer Agent, a
sub-transfer agent, or such other officer or agent of the Trustees as shall
keep the said register for entry thereon. It is not contemplated that
certificates will be issued for the Shares; however, the Trustees, in their
discretion, may authorize the issuance of Share certificates and promulgate
appropriate rules and regulations as to their use.
The Trust shall be entitled to treat the holder of record of any Share or
Shares as the holder in fact thereof, and shall not be bound to recognize any
equitable or other claim of interest in such Share or Shares on the part of any
other person except as may be otherwise expressly provided by law.
Section 6.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees, the
Transfer Agent or a sub-transfer agent, of a duly executed instrument of
transfer, together with any certificate or certificates (if issued) for such
Shares and such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon such
delivery the transfer shall be recorded on the register of the Trust. Until
<PAGE>
such record is made, the Shareholder of record shall be deemed to be the holder
of such Shares for all purposes hereunder and neither the Trustees nor any
Transfer Agent, a sub-transfer agent or registrar nor any officer, employee or
agent of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees, the Transfer
Agent or a sub-transfer agent; but until such record is made, the Shareholder
of record shall be deemed to be the holder of such Shares for all purposes
hereunder and neither the Trustees nor any Transfer Agent, sub-transfer agent
or registrar nor any officer or agent of the Trust shall be affected by any
notice of such death, bankruptcy or incompetence, or other operation of law.
Section 6.7. Notices. Any and all notices to which any Shareholder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 6.8. Voting Powers. The Shareholders shall have power to vote only
(i) for the election of Trustees as provided in Section 16 of the 1940 Act, (or
any other applicable current or successor provision), (ii) for the removal of
Trustees as provided in Section 2.2 hereof, (iii) with respect to any
investment advisory or management contract as provided in Section 4.1 hereof,
(iv) with respect to termination of the Trust as provided in Section 9.2
hereof, (v) with respect to any amendment of this Declaration to the extent and
as provided in Section 9.3 hereof, (vi) with respect to any merger,
consolidation or sale of assets as provided in Sections 9.4 and 9.6 hereof,
(vii) with respect to incorporation of the Trust or any series to the extent
and as provided in Sections 9.5 and 9.6 hereof, (viii) to the same extent as
the stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (ix) with respect to such additional matters relating to the Trust as may
be required by the Declaration, the By-Laws or any registration of the Trust
with the Commission (or any successor agency) or any state, or as the Trustees
may consider necessary or desirable. Each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote, except that Shares held
in the treasury of the Trust shall not be voted. Shares shall be voted by
individual series on any matter submitted to a vote of the Shareholders of the
<PAGE>
Trust except as provided in Section 6.9(g) hereof. There shall be no cumulative
voting in the election of Trustees. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law,
the Declaration or the By-Laws to be taken by Shareholders. At any meeting of
Shareholders of the Trust or of any series of the Trust, a Shareholder
Servicing Agent may vote any shares as to which such Shareholder Servicing
Agent is the agent of record and which are not otherwise represented in person
or by proxy at the meeting, proportionately in accordance with the votes cast
by beneficial owners of all shares otherwise represented at the meeting in
person or by proxy as to which such Shareholder Servicing Agent is the agent of
record. Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for quorum purposes. The By-Laws may include further
provisions for Shareholder votes and meetings and related matters.
Section 6.9. Series Designation. As set forth in Appendix I hereto, the
Trustees have authorized the division of Shares into series, as designated and
established pursuant to the provisions of Appendix I and this Section 6.9. The
Trustees, in their discretion, may authorize the division of Shares into one or
more additional series, and the different series shall be established and
designated, and the variations in the relative rights, privileges and
preferences as between the different series shall be fixed and determined by
the Trustees upon and subject to the following provisions:
(a) All Shares shall be identical except that there may be such variations
as shall be fixed and determined by the Trustees between different series as to
purchase price, right of redemption and the price, terms and manner of
redemption, and special and relative rights as to dividends and on liquidation.
(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired
of any series into one or more series that may be established and designated
from time to time. The Trustees may hold as treasury shares (of the same or
some other series), reissue for such consideration and on such terms as they
may determine, or cancel any Shares of any series reacquired by the Trust at
their discretion from time to time.
(c) All consideration received by the Trust for the issuance or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income and earnings thereon,
<PAGE>
profits therefrom, and proceeds thereof, including any proceeds derived from
the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be, shall irrevocably belong to that series for all purposes, subject only to
the rights of creditors of such series, and shall be so recorded upon the books
of account of the Trust. In the event that there are any assets, income,
earnings, profits, proceeds, funds or payments which are not readily
identifiable as belonging to any particular series, the Trustees shall allocate
them to and among any one or more of the series established and designated from
time to time in such manner and on such basis as the Trustees, in their sole
discretion, deem fair and equitable. Each such allocation by the Trustees shall
be conclusive and binding upon the Shareholders of all series for all purposes.
No Shareholder of any particular series shall have any claim on or right to any
assets allocated or belonging to any other series of Shares.
(d) The assets belonging to each particular series shall be charged with
the liabilities of the Trust in respect of that series and all expenses, costs,
charges and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular series shall be allocated and
charged by the Trustees to and among any one or more of the series established
and designated from time to time in such manner and on such basis as the
Trustees, in their sole discretion, deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all series for all purposes.
The Trustees shall have full discretion, to the extent not inconsistent with
the 1940 Act, to determine which items shall be treated as income and which
items as capital; and each such determination and allocation shall be
conclusive and binding upon the Shareholders. Under no circumstances shall the
assets allocated or belonging to any particular series be charged with
liabilities, expenses, costs, charges or reserves attributable to any other
series. All Persons who have extended credit which has been allocated to a
particular series, or who have a claim or contract which has been allocated to
any particular series, shall look only to the assets of that particular series
for payment of such credit, claim or contract.
(e) The power of the Trustees to invest and reinvest the Trust Property
allocated or belonging to any particular series shall be governed by Section
3.2 hereof unless otherwise provided in the instrument of the Trustees
establishing such series which is hereinafter described.
(f) Each Share of a series shall represent a beneficial interest in the
net assets allocated or belonging to such series only, and such interest shall
<PAGE>
not extend to the assets of the Trust generally. Dividends and distributions on
Shares of a particular series may be paid with such frequency as the Trustees
may determine, which may be monthly or otherwise, pursuant to a standing vote
or votes adopted only once or with such frequency as the Trustees may
determine, to the Shareholders of that series only, from such of the income and
capital gains, accrued or realized, from the assets belonging to that series,
as the Trustees may determine, after providing for actual and accrued
liabilities belonging to that series. All dividends and distributions on Shares
of a particular series shall be distributed pro rata to the Shareholders of
that series in proportion to the number of Shares of that series held by such
Shareholders at the date and time of record established for the payment of such
dividends or distributions. Shares of any particular series of the Trust may be
redeemed solely out of Trust Property allocated or belonging to that series.
Upon liquidation or termination of a series of the Trust, Shareholders of such
series shall be entitled to receive a pro rata share of the net assets of such
series only.
(g) Notwithstanding any provision hereof to the contrary, on any matter
submitted to a vote of the Shareholders of the Trust, all Shares then entitled
to vote shall be voted by individual series, except that (i) when required by
the 1940 Act to be voted in the aggregate, Shares shall not be voted by
individual series, and (ii) when the Trustees have determined that the matter
affects only the interests of Shareholders of one or more series or classes of
Shares of a series, only Shareholders of such series or class shall be entitled
to vote thereon.
(h) The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such instrument, or
upon a resolution adopted by a majority of the Trustees and the execution by an
officer of the Trust on behalf of the Trustees of an instrument setting forth
such establishment and designation and the relative rights and preferences of
such series, or as otherwise provided in such instrument. At any time that
there are no Shares outstanding of any particular series previously established
and designated, the Trustees may by an instrument executed by a majority of
their number abolish that series and the establishment and designation thereof.
Each instrument referred to in this paragraph shall have the status of an
amendment to this Declaration.
(i) Notwithstanding anything in this Declaration to the contrary, the
Trustees may, in their discretion, authorize the division of Shares of any
series into Shares of one or more classes or subseries of such series. All
<PAGE>
Shares of a class or a subseries shall be identical with each other and with
the Shares of each other class or subseries of the same series except for such
variations between classes or subseries as may be approved by the Board of
Trustees and be permitted under the 1940 Act or pursuant to any exemptive order
issued by the Commission.
ARTICLE VII
REDEMPTIONS
Section 7.1 Redemptions. In case any Shareholder at any time desires to
dispose of his Shares, he may deposit his certificate or certificates therefor,
duly endorsed in blank or accompanied by an instrument of transfer executed in
blank, or if the Shares are not represented by any certificate, a written
request or other such form of request as the Trustees may from time to time
authorize, at the office of the Transfer Agent, the Shareholder Servicing Agent
which is the agent of record for such Shareholder, or at the office of any bank
or trust company, either in or outside of the Commonwealth of Massachusetts,
which is a member of the Federal Reserve System and which the said Transfer
Agent or the said Shareholder Servicing Agent has designated in writing for
that purpose, together with an irrevocable offer in writing in a form
acceptable to the Trustees to sell the Shares represented thereby to the Trust
at the net asset value per Share thereof (less any applicable redemption fee or
sales charge), next determined after such deposit as provided in Section 8.1
hereof. Payment (which may be in cash or in kind) for said Shares shall be made
to the Shareholder within seven days after the date on which the deposit is
made, unless (i) the date of payment is postponed pursuant to Section 7.2
hereof, or (ii) the receipt, or verification of receipt, of the purchase price
for the Shares to be redeemed is delayed, in either of which events payment may
be delayed beyond seven days.
Section 7.2 Suspension of Right of Redemption. The Trust may declare a
suspension of the right of redemption or postpone the date of payment of the
redemption proceeds for the whole or any part of any period (i) during which
the New York Stock Exchange is closed other than customary week-end and holiday
closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which
disposal by the Trust of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Trust fairly to determine the value
of its net assets, or (iv) during which the Commission for the protection of
Shareholders by order permits the suspension of the right of redemption or
postponement of the date of payment of the redemption proceeds; provided that
<PAGE>
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii) or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the
close of business on the business day next following the declaration of
suspension, and thereafter there shall be no right of redemption or payment of
the redemption proceeds until the Trust shall declare the suspension at an end,
except that the suspension shall terminate in any event on the first day on
which said stock exchange shall have reopened or the period specified in (ii)
or (iii) shall have expired (as to which, in the absence of an official ruling
by the Commission, the determination of the Trust shall be conclusive). In the
case of a suspension of the right of redemption, a Shareholder may either
withdraw his request for redemption or receive payment based on the net asset
value existing after the termination of the suspension.
Section 7.3. Disclosure of Holding. The Shareholders of the Trust shall
upon demand disclose to the Trustees in writing such information with respect
to direct and indirect ownership of Shares of the Trust as the Trustees deem
necessary to comply with the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), or to comply with the requirements of any other
authority. Upon the failure of a Shareholder to disclose such information and
to comply with such demand of the Trustees, the Trust shall have the power to
redeem such Shares at a redemption price determined in accordance with Section
7.1 hereof.
Section 7.4 Redemptions of Accounts of Less than Minimum Amount. The
Trustees shall have the power, and any Shareholder Servicing Agent with whom
the Trust has so agreed (or a subcontractor of such Shareholder Servicing
Agent) shall have the power, at any time to redeem Shares of any Shareholder at
a redemption price determined in accordance with Section 7.1 hereof if at such
time the aggregate net asset value of the Shares owned by such Shareholder is
less than a minimum amount as determined from time to time and disclosed in a
prospectus of the Trust or in the Shareholder Servicing Agent's (or
subcontractor's) agreement with its customer. A Shareholder shall be notified
that the aggregate value of his Shares is less than such minimum amount and
allowed 60 days to make an additional investment before redemption is
processed.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
<PAGE>
(a) The Trustees may from time to time declare and pay dividends and other
distributions. The Trustees, in their absolute discretion, may prescribe and
shall set forth in the By-Laws or in a duly adopted vote or votes of the
Trustees such bases and times for determining the per Share net asset value of
the Shares or net income, or the declaration and payment of dividends and
distributions, as they may deem necessary or desirable.
(b) Dividends and other distributions may be declared pursuant to a
standing resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, and may be payable in Shares of that series or
class thereof, as appropriate, at the election of each Shareholder of that
series or class. All dividends and distributions on Shares of a particular
series shall be distributed pro rata to the holders of that series in
proportion to the number of Shares of that series held by such payment of such
dividends or distributions, except that such dividends and distributions shall
approximately reflect expenses allocated to a particular class of such series.
(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a "stock dividend" pro rata
among the Shareholders of a particular series or of a class thereof as of the
record date of that series.
ARTICLE IX
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 9.1. Duration. The Trust shall continue without limitation of time
but subject to the provisions of this Article IX.
Section 9.2. Termination of Trust. (a) The Trust may be terminated (i) by
a Majority Shareholder Vote of its Shareholders, or (ii) by the Trustees by
written notice to the Shareholders. Any series of the Trust may be terminated
(i) by a Majority Shareholder Vote of the Shareholders of that series, or (ii)
by the Trustees by written notice to the Shareholders of that series. Upon the
termination of the Trust or any series of the Trust:
(i) The Trust or series of the Trust shall carry on no business except for
the purpose of winding up its affairs;
<PAGE>
(ii) The Trustees shall proceed to wind up the affairs of the Trust or
series of the Trust and all the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or series of the Trust shall have
been wound up, including the power to fulfill or discharge the contracts of the
Trust, collect the assets of the Trust or series of the Trust, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property of the Trust or series of the Trust to one or more
Persons at public or private sale for consideration which may consist in whole
or in part of cash, securities or other property of any kind, discharge or pay
the liabilities of the Trust or series of the Trust, and to do all other acts
appropriate to liquidate the business of the Trust or series of the Trust;
provided, that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all of the Trust Property of the Trust or
series of the Trust shall require Shareholder approval in accordance with
Section 9.4 or 9.6 hereof, respectively; and
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of the Trust or series of the Trust, in
cash or in kind or partly in cash and partly in kind, among the Shareholders of
the Trust or series of the Trust according to their respective rights.
(b) After termination of the Trust or series of the Trust and distribution
to the Shareholders of the Trust or series of the Trust as herein provided, a
majority of the Trustees shall execute and lodge among the records of the Trust
an instrument in writing setting forth the fact of such termination, and the
Trustees shall thereupon be discharged from all further liabilities and duties
hereunder with respect to the Trust or series of the Trust, and the rights and
interests of all Shareholders of the Trust or series of the Trust shall
thereupon cease.
Section 9.3. Amendment Procedure. All rights granted to Shareholders
hereunder are granted subject to a right to amend this Declaration, except as
otherwise provided. (a) This Declaration may be amended by a Majority
Shareholder Vote of the Shareholders or by any instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the holders
of not less than a majority of the Shares of the Trust. The Trustees may also
amend this Declaration without the vote or consent of Shareholders to designate
series in accordance with Section 6.9 hereof, to change the name of the Trust,
to supply any omission, to cure, correct or supplement any ambiguous, defective
or inconsistent provision hereof, or to conform this Declaration to the
<PAGE>
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Code or to (i) change the
state or other jurisdiction designated herein as the state or other
jurisdiction whose laws shall be the governing law hereof, (ii) effect such
changes herein as the Trustees find to be necessary or appropriate (A) to
permit the filing of this Declaration under the laws of such state or other
jurisdiction applicable to trusts or voluntary associations, (B) to permit the
Trust to elect to be treated as a "regulated investment company" under the
applicable provisions of the Code or (C) to permit the transfer of shares (or
to permit the transfer of any other beneficial interests or shares in the
Trust, however denominated), and (iii) in conjunction with any amendment
contemplated by the foregoing clause (i) or the foregoing clause (ii) to make
any and all such further changes or modifications to this Declaration as the
Trustees find to be necessary or appropriate, any finding of the Trustees
referred to in the foregoing clause (ii) or clause (iii) to be conclusively
evidenced by the execution of any such amendment by a majority of the Trustees,
but the Trustees shall not be liable for failing so to do.
(b) No amendment which the Trustees have determined would affect the
rights, privileges or interests of holders of a particular series of Shares,
but not the rights, privileges or interests of holders of all series of Shares
generally, and which would otherwise require a Majority Shareholder Vote under
paragraph (a) of this Section 9.3, may be made except with the vote or consent
by a Majority Shareholder Vote of Shareholders of such series.
(c) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without any
requirement of approval by shareholders to either invest all or a portion of
the Trust Property, or sell all or a portion of the Trust Property and invest
the proceeds of such sales, in another investment company that is registered
under the 1940 Act.
(d) Notwithstanding any other provision hereof, no amendment may be made
under this Section 9.3 which would change any rights with respect to the
Shares, or any series of Shares, by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the Majority Shareholder Vote of the Shares or
that series of Shares. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability
of the Shareholders, Trustees, officers, employees and agents of the Trust or
to permit assessments upon Shareholders.
<PAGE>
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees as aforesaid, and executed by a majority of the Trustees, shall be
conclusive evidence of such amendment when lodged among the records of the
Trust.
(f) Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares of the Trust shall have become effective,
this Declaration may be amended in any respect by the affirmative vote of a
majority of the Trustees or by an instrument signed by a majority of the
Trustees.
Section 9.4. Merger, Consolidation and Sale of Assets. The Trust may merge
or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property (or all or substantially all of the Trust Property allocated or
belonging to a particular series of the Trust) including its good will, upon
such terms and conditions and for such consideration when and as authorized at
any meeting of Shareholders called for such purpose by the vote of the holders
of two-thirds of the outstanding Shares of all series of the Trust voting as a
single class, or of the affected series of the Trust, as the case may be, or by
an instrument or instruments in writing without a meeting, consented to by the
vote of the holders of two-thirds of the outstanding Shares of all series of
the Trust voting as a single class, or of the affected series of the Trust, as
the case may be; provided, however, that if such merger, consolidation, sale,
lease or exchange is recommended by the Trustees, the vote or written consent
by Majority Shareholder Vote shall be sufficient authorization; and any such
merger, consolidation, sale, lease or exchange shall be deemed for all purposes
to have been accomplished under and pursuant to the statutes of the
Commonwealth of Massachusetts. Nothing contained herein shall be construed as
requiring approval of Shareholders for any sale of assets in the ordinary
course of the business of the Trust.
Section 9.5. Incorporation, Reorganization. With the approval of the
holders of a majority of the Shares outstanding and entitled to vote, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization to take over
all of the Trust Property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey and transfer the
Trust Property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
<PAGE>
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any
other interest. Subject to Section 9.4 hereof, the Trustees may also cause a
merger or consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to
the extent permitted by law. Nothing contained in this Section 9.5 shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organization or entities.
Section 9.6. Incorporation or Reorganization of Series. With the approval
of a Majority Shareholder Vote of any series, the Trustees may sell, lease or
exchange all of the Trust Property allocated or belonging to that series, or
cause to be organized or assist in organizing a corporation or corporations
under the laws of any other jurisdiction, or any other trust, unit investment
trust, partnership, association or other organization, to take over all of the
Trust Property allocated or belonging to that series and to sell, convey and
transfer such Trust Property to any such corporation, trust, unit investment
trust, partnership, association, or other organization in exchange for the
shares or securities thereof or otherwise.
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
ARTICLE XI
MISCELLANEOUS
Section 11.1. Filing. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of the Commonwealth of Massachusetts and
<PAGE>
in such other place or places as may be required under the laws of the
Commonwealth of Massachusetts and may also be filed or recorded in such other
places as the Trustees deem appropriate. Each amendment shall be signed a
majority of the Trustees or shall be accompanied by a certificate of an
appropriate officer of the Trust stating that such amendment was properly
approved. Unless such amendment or certificate sets forth a later date on which
it shall take effect, any amendment shall take effect as of its approval. A
restated Declaration, integrating into a single instrument all of the
provisions of the Declaration which are then in effect and operative, may be
executed from time to time by a majority of the Trustees and shall be
conclusive evidence of all amendments contained therein and may thereafter be
referred to in lieu of this original Declaration and the various amendments
thereto.
Section 11.2. Governing Law. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction
of every provision hereof shall be subject to and construed according to the
laws of said Commonwealth.
Section 11.3. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 11.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, is a Trustee hereunder
certifying to: (i) the number or identity of Trustees or Shareholders, (ii) the
due authorization of the execution of any instrument or writing, (iii) the form
of any vote passed at a meeting of Trustees or Shareholders, (iv) the fact that
the number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration, (v) the form
of any By-Laws adopted by or the identity of any officers elected by the
Trustees, or (vi) the existence of any fact or facts which in any manner
relates to the affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any Person dealing with the Trustees and their
successors.
Section 11.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any such provision is in conflict
with the 1940 Act, the regulated investment company provisions of the Code or
with other applicable laws and regulations, the conflicting provision shall be
deemed never to have constituted a part of this Declaration; provided however,
<PAGE>
that such determination shall not affect any of the remaining provisions of
this Declaration or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
Section 11.6. Principal Office. The principal office of the Trust is 6 St.
James Avenue, 9th Floor, Boston, Massachusetts, 02116 or such other address
determined by the Trustees.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument as of
the 23rd day of April, 1993.
/s/James B. Craver
James B. Craver
as Trustee
and not individually
6 St. James Avenue
Boston, Massachusetts
/s/Thomas M. Lenz
Thomas M. Lenz
as Trustee
and not individually
6 St. James Avenue
Boston, Massachusetts
/s/Andres E. Saldana
Andres E. Saldana
as Trustee
and not individually
6 St. James Avenue
Boston, Massachusetts
<PAGE>
Appendix I
THE DIVERSIFIED INVESTORS FUNDS GROUP
Amended and Restated Establishment and
Designation of Series of Shares of
Beneficial Interest (par value $0.00001 per share)
Dated as of February 20, 1996
Pursuant to Section 6.9 of the Declaration of Trust, dated as of April 23,
1993, as amended (as so amended, the "Declaration of Trust"), of The
Diversified Investors Funds Group (the "Trust"), the Trustees of the Trust
hereby amend and restate the Establishment and Designation of Series appended
to the Declaration of Trust to establish and designate the "Diversified
Investors Equity Value Fund" and the "Diversified Investors Aggressive Equity
Fund" as additional series of Shares (as defined in the Declaration of Trust)
to the Trust's eleven series of Shares (each a "Fund" and collectively the
"Funds") having the following special and relative rights:
1. The Funds shall be designated as follows:
Diversified Investors Balanced Fund
Diversified Investors Money Market Fund
Diversified Investors Growth & Income Fund
Diversified Investors Equity Growth Fund
Diversified Investors Equity Income Fund
Diversified Investors Special Equity Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Government/Corporate Bond Fund
Diversified Investors Intermediate Government Bond Fund
Diversified Investors High-Yield Bond Fund
Diversified Investors International Equity Fund
Diversified Investors Equity Value Fund
Diversified Investors Aggressive Equity Fund
2. Each Fund shall be authorized to hold cash, invest in securities,
instruments and other properties and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Securities Act of 1933 to the extent pertaining to the offering of
Shares of such Fund. Each Share of a Fund shall be redeemable, shall be
entitled to one vote (or fraction thereof in respect of a fractional Share) on
matters on which Shares of the Fund shall be entitled to vote, shall represent
a pro rata beneficial interest in the assets allocated or belonging to the
<PAGE>
Fund, and shall be entitled to receive its pro rata share of the net assets of
the Fund upon liquidation of the Fund, all as provided in Section 6.9 of the
Declaration of Trust. The proceeds of sales of Shares of a Fund, together with
any income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to that Fund, unless otherwise required by law.
3. Shareholders of each Fund shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to the Fund as provided in, Rule 18f-2, as
from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated among the
Funds as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets and
expenses, to change the designation of any Fund created previously or now or
hereafter created, or otherwise to change the special and relative rights of
any Fund.
IN WITNESS WHEREOF, the undersigned have signed this instrument as of
February 20, 1996. This instrument may be executed by the Trustees on separate
counterparts but shall be effective only when signed by a majority of the
Trustees.
/s/Donald E. Flynn
Donald E. Flynn
As Trustee and not Individually
/s/Robert Lester Lindsay
Robert Lester Lindsay
As Trustee and not Individually
/s/Nikhil Malvania
Nikhil Malvania
As Trustee and not Individually
<PAGE>
/s/Joyce Galpern Norden
Joyce Galpern Norden
As Trustee and not Individually
/s/Thomas A. Schlossberg
Thomas A. Schlossberg
As Trustee and not Individually
BY-LAWS OF THE DIVERSIFIED INVESTORS FUNDS GROUP
ARTICLE I
DEFINITIONS
The terms "Commission", "Declaration", "Distributor", "Investment
Adviser", "Majority Shareholder Vote", "1940 Act", "Shareholder", "Shares",
"Transfer Agent", "Trust", "Trust Property" and "Trustees" have the respective
meanings given them in the Declaration of Trust of The Diversified Investors
Funds Group dated as of April 23, 1993.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the principal
office of the Trust in the Commonwealth of Massachusetts shall be in the City
of Boston, County of Suffolk.
Section 2.Other Offices. The Trust may have offices in such other places
without as well as within the Commonwealth as the Trustees may from time to
time determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. A meeting of Shareholders may be called at any time
by a majority of the Trustees and shall be called by any Trustee upon written
request, which shall specify the purpose or purposes for which such meeting is
to be called, of Shareholders holding in the aggregate not less than 10% of the
outstanding Shares entitled to vote on the matters specified in such written
request. Any such meeting shall be held within or without the Commonwealth of
Massachusetts on such day and at such time as the Trustees shall designate. The
holders of a majority of outstanding Shares entitled to vote present in person
or by proxy shall constitute a quorum at any meeting of the Shareholders. In
the absence of a quorum, a majority of outstanding Shares entitled to vote
present in person or by proxy may adjourn the meeting from time to time until a
quorum shall be present.
Whenever a matter is required to be voted by Shareholders of the Trust in
the aggregate under Section 6.8 and Section 6.9 and Section 6.9(g) of the
<PAGE>
Declaration, the Trust may either hold a meeting of Shareholders of all series,
as defined in Section 6.9 of the Declaration, to vote on such matter, or hold
separate meetings of shareholders of each of the individual series to vote on
such matter, provided that (i) such separate meetings shall be held within one
year of each other, (ii) a quorum consisting of the holders of the majority of
outstanding Shares of the individual series entitled to vote present in person
or by proxy shall be present at each such separate meeting and (iii) a quorum
consisting of the holders of a majority of all Shares of the Trust entitled to
vote present in person or by proxy shall be present in the aggregate at such
separate meetings, and the votes of Shareholders at all such separate meetings
shall be aggregated in order to determine if sufficient votes have been cast
for such matter to be voted.
Section 2. Notice of Meetings. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder entitled to vote at such meeting at his
address as recorded on the register of the Trust, mailed at least 10 days and
not more than 60 days before the meeting. Only the business stated in the
notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice. No notice need be
given to any Shareholder who shall have failed to inform the Trust of his
current address or if a written waiver of notice, executed before or after the
meeting by the Shareholder or his attorney thereunto authorized, is filed with
the records of the meeting.
Where separate meetings are held for Shareholders of each of the
individual series to vote on a matter required to be voted on by Shareholders
of the Trust in the aggregate, as provided in Article III, Section 1 above,
notice of each such separate meeting shall be provided in the manner described
above in this Section 2.
Section 3. Record Date. For the purpose of determining the Shareholders
who are entitled to notice of and to vote at any meeting, or to participate in
any distribution, or for the purpose of any other action, the Trustees may from
time to time close the transfer books for such period, not exceeding 30 days,
as the Trustees may determine; or without closing the transfer books the
Trustees may fix a date not more than 60 days prior to the date of any meeting
of Shareholders or distribution or other action as a record date for the
determination of the persons to be treated as Shareholders of record for such
purpose.
<PAGE>
Where separate meetings are held for Shareholders of each of the
individual series to vote on a matter required to be voted on by Shareholders
of the Trust in the aggregate, as provided in Article III, Section I above, the
record date of each such separate meeting shall be determined in the manner
described above in this Section 3.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, for verification prior to the time at which such vote shall be
taken. Pursuant to a vote of a majority of the Trustees, proxies may be
solicited in the name of the Trust or one or more Trustees or officers of the
Trust. Only Shareholders of record shall be entitled to vote. Each full Share
shall be entitled to one vote and fractional Shares shall be entitled to a vote
of such fraction. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Share,
but if more than one of them shall be present at such meeting in person or by
proxy, and such joint owners or their proxies so present disagree as to any
vote to be cast, such vote shall not be received in respect of such Share. A
proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. If the holder of any such
Share is a minor or a person of unsound mind, and subject to guardianship or to
the legal control of any other person as regards the charge or management of
such Share, such Share may be voted by such guardian or such other person
appointed or having such control, and such vote may be given in person or by
proxy. Unless otherwise specifically limited by their terms, proxies shall
entitle the holder thereof to vote at any adjournment of a meeting.
Section 5. Inspection of Records. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted shareholders
of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
<PAGE>
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairman or by any
Trustee. Notice of the time and place of each meeting other than regular or
stated meetings shall be given by the Secretary or an Assistant Secretary or by
the officer or Trustee calling the meeting and shall be mailed to each Trustee
at least two days before the meeting, or shall be telegraphed, cabled, or
wirelessed to each Trustee at his business address, or personally delivered to
him at least one day before the meeting. Notice of a meeting need not be given
to any Trustee if a written waiver of notice, executed by him before or after
the meeting, is filed with the records of the meeting, or to any Trustee who
attends the meeting without protesting prior thereto or at its commencement the
lack of notice to him. A notice or waiver of notice need not specify the
purpose of any meeting. The Trustees may meet by means of a telephone
conference circuit or similar communications equipment by means of which all
persons participating in the meeting can hear each other, which telephone
conference meeting shall be deemed to have been held at a place designated by
the Trustees at the meeting. Any action required or permitted to be taken at
any meeting of the Trustees may be taken by the Trustees without a meeting if
all the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be
treated as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees shall
constitute a quorum for the transaction of business at any regular or special
meeting of the Trustees and (except as otherwise required by law, the
Declaration or these By-Laws) the act of a majority of the Trustees present at
any such meeting, at which a quorum is present, shall be the act of the
Trustees. In the absence of a quorum, a majority of the Trustees present may
adjourn the meeting from time to time until a quorum shall be present. Notice
of an adjourned meeting need not be given.
<PAGE>
ARTICLE V
COMMITTEES AND ADVISORY BOARD
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three Trustees to hold office at the
pleasure of the Trustees. While the Trustees are not in session, the Executive
Committee shall have the power to conduct the current and ordinary business of
the Trust, including the purchase and sale of securities and the designation of
securities to be delivered upon redemption of Shares of the Trust, and such
other powers of the Trustees as the Trustees may, from time to time, delegate
to the Executive Committee except those powers which by law, the Declaration or
these By-Laws the Trustees are prohibited from so delegating. The Trustees may
also elect from their own number other Committees from time to time, the number
composing such Committees, the powers conferred upon the same (subject to the
same limitations as with respect to the Executive Committee) and the term of
membership on such Committees to be determined by the Trustees. The Trustees
may designate a chairman of any such Committee. In the absence of such
designation a Committee may elect its own chairman. The Trustees may abolish
any Committee at any time. The Trustees shall have power to rescind any action
of any Committee, but no such rescission shall have retroactive effect.
Section 2. Meeting, Quorum and Manner of Acting. The Trustees may (i)
provide for stated meetings of any Committee, (ii) specify the manner of
calling and notice required for special meetings of any Committee, (iii)
specify the number of members of a Committee required to constitute a quorum
and the number of members of a Committee required to exercise specified powers
delegated to such Committee, (iv) authorize the making of decisions to exercise
specified powers by written assent of the requisite number of members of a
Committee without a meeting, and (v) authorize the members of a Committee to
meet by means of a telephone conference circuit. Unless the Trustees so
provide, all the Committees shall be governed by the same rules as the full
Board is.
Each Committee may, but is not required to, keep regular minutes of its
meetings and records of decisions taken without a meeting and cause them to be
recorded in a book designated for that purpose and kept in the office of the
Trust.
Section 3. Advisory Board. The Trustees may appoint an Advisory Board to
consist in the first instance of not less than three members. Members of such
<PAGE>
Advisory Board shall not be Trustees or officers and need not be Shareholders.
A member of such Advisory Board shall hold office for such period as the
Trustees may by vote provide and may resign therefrom by a written instrument
signed by him which shall take effect upon its delivery to the Trustees. The
Advisory Board shall have no legal powers and shall not perform the functions
of Trustees in any manner, such Advisory Board being intended merely to act in
an advisory capacity. Such Advisory Board shall meet at such times and upon
such notice as the Trustees may by vote provide.
Section 4. Chairman. The Trustees may, by a majority vote of all the
Trustees, elect from their own number a Chairman, to hold office until his
successor shall have been duly elected and qualified. The Chairman shall not
hold any other office. The Chairman may be, but need not be, a Shareholder. The
Chairman shall preside at all meetings of the Trustees and shall have such
other duties as from time to time may be assigned to him by the Trustees.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, each of whom shall be elected by the
Trustees. The Trustees may elect or appoint such other officers or agents as
the business of the Trust may require, including one or more Vice Presidents,
one or more Assistant Treasurers, and one or more Assistant Secretaries. The
Trustees may delegate to any officer or committee the power to appoint any
subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration or these By-Laws, the President, the Treasurer and the
Secretary shall hold office until his respective successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. The Secretary and Treasurer may be the same person. A Vice
President and the Treasurer or a Vice President and the Secretary may be the
same person, but the offices of Vice President, Secretary and Treasurer shall
not be held by the same person. Except as above provided, any two offices may
be held by the same person. Any officer may be, but does not need be, a Trustee
or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer with or without cause by a vote of a majority
<PAGE>
of the Trustees. Any officer or agent appointed by any officer or committee may
be removed with or without cause by such appointing officer or committee.
Section 4. Powers and Duties of the President. The President, unless the
Chairman, if any, is so appointed by the Trustees, shall be the principal
executive officer of the Trust. Subject to the control of the Trustees and any
committee of the Trustees, the President shall at all times exercise a general
supervision and direction over the affairs of the Trust. The President shall
have the power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he may find necessary to
transact the business of the Trust. The President shall also have the power to
grant, issue, execute or sign such powers of attorney, proxies or other
documents as may be deemed advisable or necessary in the furtherance of the
interests of the Trust. The President shall have such other powers and duties
as, from time to time, may be conferred upon or assigned to him by the
Trustees.
Section 5. Powers and Duties of Vice Presidents. In the absence or
disability of the President, the Vice President or, if there are more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees or the President.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his hands to such custodian
as the Trustees may employ pursuant to Article X hereof. The Treasurer shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the same and shall in general perform all the
duties incident to the office of Treasurer and such other duties as from time
to time may be assigned to him by the Trustees. The Treasurer shall give a bond
for the faithful discharge of his duties, if required to do so by the Trustees,
in such sum and with such surety or sureties as the Trustees shall require. The
Treasurer shall be responsible for the general supervision of the Trust's funds
and property and for the general supervision of the Trust's custodian.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Shareholders in proper books provided for
<PAGE>
that purpose; shall keep the minutes of all meetings of the Trustees; shall
have custody of the seal of the Trust; and shall have charge of the Share
transfer books, lists and records unless the same are in the charge of the
Transfer Agent. The Secretary shall attend to the giving and serving of all
notices by the Trust in accordance with the provisions of these By-Laws and as
required by law; and subject to these By-Laws, shall in general perform all the
duties incident to the office of Secretary and such other duties as from time
to time may be assigned to him by the Trustees.
Section 8. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from
time to time may be assigned to him by the Trustees. Each Assistant Treasurer
shall give a bond for the faithful discharge of his duties, if required to do
so by the Trustees, in such sum and with such surety or sureties as the
Trustees shall require.
Section 9. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all of the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable law or provision of the Declaration,
the compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers,
by any committee of officers upon whom such power may be conferred by the
Trustees.
No officer shall be prevented from receiving such compensation as such
officer by reason of the fact that he is also a Trustee.
Section 11. Execution of Papers. Except as the Trustees may generally or
in particular cases authorize, all deeds, leases, transfers, contracts, bonds,
notes, checks, drafts and other obligations made, accepted or endorsed by the
Trust shall be executed by the President, any Vice President, or the Treasurer,
or by whomever else shall be designated for that purpose by the Trustees, and
need not bear the seal of the Trust.
<PAGE>
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall be determined by the Trustees,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been
telegraphed, cabled or wirelessed for the purposes of these By- Laws when it
has been delivered to a representative of any telegraph, cable or wireless
company with instruction that it be telegraphed, cabled or wirelessed. Any
notice shall be deemed to be given at the time when the same shall be mailed,
telegraphed, cabled or wirelessed.
ARTICLE X
CUSTODIAN
Section 1. Appointment and Duties. The Trustees shall at all times employ
a bank or trust company having a capital, surplus and undivided profits of at
least $5,000,000 as custodian with authority as its agent, but subject to such
restrictions, limitations and other requirements, if any, as may be contained
in the Declaration, these By-Laws and the 1940 Act:
(i) to hold the securities owned by the Trust
and deliver the same upon written order;
(ii) to receive and receipt for any monies due
to the Trust and deposit the same in its own
<PAGE>
banking department or elsewhere as the Trustees
may direct;
(iii)to disburse such funds upon orders or
vouchers;
(iv) if authorized by the Trustees, to keep the
books and accounts of the Trust and furnish
clerical and accounting services; and
(v) if authorized by the Trustees, to compute
the net income of the Trust and the net asset
value of Shares;
all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian and upon such terms and conditions as may be agreed upon between
the custodian and such sub-custodian and approved by the Trustees. Subject to
the approval of the Trustees, the custodian may enter into arrangements with
securities depositories. All such custodial, sub-custodial and depository
arrangements shall be subject to, and comply with, the provisions of the 1940
Act and the rules and regulations promulgated thereunder.
Section 2. Central Certificate System. Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the custodian
to deposit all or any part of the securities owned by the Trust (1) in a system
for the central handling of securities established by a national securities
exchange or a national securities association registered with the Commission
under the Securities Exchange Act of 1934, pursuant to which system all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust or its
custodian; or (2) with such other person as may be permitted by the Commission,
or otherwise in accordance with the 1940 Act.
Section 3. Acceptance of Receipts in Lieu of Certificates. Subject to such
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
<PAGE>
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
Section 4. Provisions of Custodian Contract. The following provisions
shall apply to the employment of a custodian pursuant to this Article X and to
any contract entered into with the custodian so employed:
(a) The Trustees shall cause to be delivered to the custodian all
securities owned by the Trust or to which it may become entitled, and shall
order the same to be delivered by the custodian only upon completion of a sale,
exchange, transfer, pledge, or other disposition thereof, and upon receipt by
the custodian of the consideration therefor or a certificate of deposit or a
receipt of an issuer or of its Transfer Agent, all as the Trustees may
generally or from time to time require or approve, or to a successor custodian;
and the Trustees shall cause all funds owned by the Trust or to which it may
become entitled to be paid to the custodian, and shall order the same disbursed
only for investment against delivery of the securities acquired, or in payment
of expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a successor custodian; provided,
however, that nothing herein shall prevent delivery of securities for
examination to the broker purchasing the same in accord with the "street
delivery" custom whereby such securities are delivered to such broker in
exchange for a delivery receipt exchanged on the same day for an uncertified
check of such broker to be presented on the same day for certification.
(b) In case of the resignation, removal or inability to serve of any such
custodian, the Trust shall promptly appoint another bank or trust company
meeting the requirements of this Article X as successor custodian. The
agreement with the custodian shall provide that the retiring custodian shall,
upon receipt of notice of such appointment, deliver all Trust Property in its
possession to and only to such successor, and that pending appointment of a
successor custodian, or a vote of the Shareholders to function without a
custodian, the custodian shall not deliver any Trust Property to the Trust, but
may deliver all or any part of the Trust Property to a bank or trust company
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus and undivided profits (as shown in its last
published report) of at least $5,000,000; provided that arrangements are made
for the Trust Property to be held under terms similar to those on which they
were held by the retiring custodian.
<PAGE>
ARTICLE XI
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted (a) by the Shareholders by a Majority Shareholder Vote,
or (b) by the Trustees, provided, however, that no By-Law may be amended,
adopted or repealed by the Trustees if such amendment, adoption or repeal
requires, pursuant to law, the Declaration or these By-Laws, a vote of the
Shareholders.
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Funds Group (the "Trust") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trust to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/Donald E. Flynn
Donald E. Flynn
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Donald E. Flynn
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Funds Group (the "Trust") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trust to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/Robert L. Lindsay
Robert L. Lindsay
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Robert L.
Lindsay to me known to be the person described in and who executed the
foregoing instrument, and acknowledged that he executed same.
/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Funds Group (the "Trust") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trust to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/Nikhil Malvania
Nikhil Malvania
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Nikhil Malvania
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Funds Group (the "Trust") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trust to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/Joyce Norden
Joyce Norden
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Joyce Norden to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Funds Group (the "Trust") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933, and
any and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Trust to comply with such Acts, the rules,
regulations and requirements of the Securities and Exchange Commission, and the
securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/Tom Schlossberg
Tom Schlossberg
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Tom Schlossberg
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
