File Nos. 33-61810, 811-7674
As filed with the Securities and Exchange Commission on July 21, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 9 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 10 /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).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[X] 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>
THE DIVERSIFIED INVESTORS FUNDS GROUP
FORM N-1A
CROSS REFERENCE SHEET
Part A
Item No. Prospectus Headings
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
<PAGE>
Prospectus--"Management
of the Trust and Portfolio
Series"
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
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>
EXPLANATORY NOTE
This post-effective amendment no. 9 (the "Amendment") to the Registrant's
registration statement on Form N-1A (File No. 33-61810) relates to
Stephens Premium Class shares and Stephens Institutional Class shares of
(i) certain existing series of the Registrant, including Diversified
Investors Money Market Fund, Diversified Investors High-Yield Bond Fund,
Diversified Investors Equity Value Fund, Diversified Investors Equity
Growth Fund, Diversified Investors Special Equity Fund, and Diversified
Investors International Equity Fund, and (ii) certain series of the
Registrant being established by this Amendment, including Stephens
Intermediate Bond Fund and Stephens Select Equity Fund. The Amendment
does not affect the Registrant's other currently effective prospectus,
which is hereby incorporated herein by reference as most recently filed
pursuant to Rule 497 under the Securities Act of 1933, as amended.
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
STEPHENS PREMIUM CLASS SHARES
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. Eight series of shares, or Funds, of the
Trust are offered by this Prospectus:
o Diversified Investors Money Market Fund
o Stephens Intermediate Bond Fund
o Diversified Investors High-Yield Bond Fund
o Diversified Investors Equity Value Fund
o Diversified Investors Equity Growth Fund
o Diversified Investors Special Equity Fund
o Stephens Select Equity Fund
o Diversified Investors International Equity Fund
Each Fund is a separate diversified mutual fund. Stephens Premium Class
shares ("Shares") of each Fund are offered for sale by this Prospectus
exclusively to investment advisory customers of Stephens Inc. ("Stephens").
Please call [ ___________ ] to obtain more information about how to purchase
and redeem Shares.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser to each Fund and selects, subject to shareholder approval, separate
investment subadvisers that provide investment advice for the Funds.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE TRUST SEEKS TO ACHIEVE THE INVESTMENT OBJECTIVE
OF EACH FUND (OTHER THAN THE INTERMEDIATE BOND FUND AND THE SELECT EQUITY FUND)
BY INVESTING ALL OF THE INVESTABLE ASSETS ("ASSETS") OF EACH SUCH 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 THEIR CORRESPONDING FUNDS. SEE
"CORE-FEEDER STRUCTURE" ON PAGE [___]. THE TRUST SEEKS TO ACHIEVE THE
INVESTMENT OBJECTIVE OF EACH OF THE INTERMEDIATE BOND FUND AND THE SELECT
EQUITY FUND BY INVESTING ALL OF ITS ASSETS DIRECTLY IN SECURITIES. SEE
"INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES" HEREIN.
This Prospectus sets forth information about the Trust and the Funds that
a prospective investor should consider before investing. Investors should read
<PAGE>
this Prospectus and retain it for future reference. Additional information
about the Funds is contained in a Statement of Additional Information, which
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 has the same date as this Prospectus and is
incorporated by reference into this Prospectus.
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.
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.
PROSPECTUS DATED _______, 1997
<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 estimated 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 Shares of each Fund.
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
ANNUAL OPERATING EXPENSES
<TABLE>
<CAPTION>
EQUITY
MONEY INTERMEDIATE HIGH YIELD EQUITY GROWTH
MARKET FUND BOND FUND BOND FUND VALUE FUND FUND
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waiver) 0.25% 0.10% 0.53% 0.54% 0.62%
Distribution (Rule 12b-1) Fees 0.17% 0.25% 0.19% 0.25% 0.06%
Other Expenses:
Administrative and Shareholder
Services Fees 0.30% 0.39% 0.30% 0.32% 0.30%
Miscellaneous Expenses(1) 0.23% 0.16% 0.28% 0.24% 0.22%
---- ---- ---- ---- ----
Total Operating Expenses (After
Reimbursements and Waivers)(2) 0.95% 0.90% 1.30% 1.35% 1.20%
==== ==== ==== ==== ====
SPECIAL SELECT INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
Investment Advisory Fees (After Waiver) 0.80% 0.15% 0.75%
Distribution (Rule 12b-1) Fees 0.07% 0.25% 0.15%
Other Expenses:
Administrative and Shareholder
Services Fees 0.30% 0.34% 0.30%
Miscellaneous Expenses(1)0.23% 0.16% 0.25%
Total Operating Expenses (After
Reimbursements and Waivers)(2) 1.40% 0.90% 1.45%
==== ==== ====
</TABLE>
(1)"Miscellaneous Expenses" have been estimated for each of the Funds based on
a projected level of average daily net assets of (i) $50 million for each
Fund other than Intermediate Bond Fund and Select Equity Fund, and (ii) $75
million for Intermediate Bond Fund and Select Equity Fund.
<PAGE>
(2)Because Stephens Premium Class shares were not issued during the Funds' last
fiscal year, expenses for the Shares 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 equal on an annual basis to
1.53% for the Money Market Fund, 1.31% for the Intermediate Bond Fund, 1.88%
for the High-Yield Bond Fund, 1.86% for the Equity Value Fund, 1.89% for the
Equity Growth Fund, 2.08% for the Special Equity Fund, 1.36% for the Select
Equity Fund, and 2.05% for the International Equity Fund.
EXAMPLE
A shareholder in a Fund would pay the following estimated expenses on a
$1,000 investment in Shares assuming (i) a 5% annual return on assets and (ii)
redemption at the end of each time period.
FUND 1 YEAR 3 YEARS
---- ------ -------
Money Market Fund $10 $30
Intermediate Bond Fund 9 29
High-Yield Bond Fund 13 41
Equity Value Fund 14 43
Equity Growth Fund 12 38
Special Equity Fund 14 44
Select Equity Fund 9 29
International Equity Fund 15 46
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 with respect to the Funds,
other than the Intermediate Bond Fund and the Select Equity Fund. Without such
waivers, the annual investment advisory fee would be 0.25% for the Money Market
Fund, 0.55% for the High-Yield Bond Fund, 0.57% for the Equity Value Fund,
0.70% for the Equity Growth Fund, 0.80% for the Special Equity Fund and 0.75%
for the International Equity Fund.
The Trust has adopted a distribution plan (the "Distribution Plan") for
the Shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Distribution Plan, the Trust will pay the Fund's distributor in
anticipation of, or as reimbursement for, expenses incurred by the distributor
in connection with the sale of Shares, a fee equal to on an annual basis 0.25%
of the average daily net assets attributable to the Stephens Premium Class of
each Fund. Long term shareholders may pay more than the economic equivalent of
the maximum charges permitted by the National Association of Securities
<PAGE>
Dealers, Inc. The distribution fee with respect to the Stephens Premium Class
is currently being waived. For more information on the Distribution Plan, see
"Distribution Plan and Agreement" herein.
For more information on the expenses of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" herein.
With respect to each Fund that invests all of its Assets in a
corresponding Portfolio, the Trustees of the Trust believe that the aggregate
per share expenses of each such 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
Stephens Premium Class shares ("Shares") of each Fund are offered for sale
by this Prospectus at net asset value without an initial sales charge or sales
load exclusively to investment advisory customers of Stephens. Please call
[_________] to obtain more information about how to purchase and redeem Shares.
There is no minimum initial or subsequent investment amount. Each Fund is
subject to an annual distribution fee of 0.25% of the average daily net assets
of the Fund attributable to the Shares, which is currently being waived. See
"Purchases and Redemptions of Shares" herein.
The Funds, their investment objectives and their Subadvisers are set forth
below. Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser of each Fund. Because the Money Market Fund, High-Yield Bond Fund,
Equity Value Fund, Equity Growth Fund, Special Equity Fund and International
Equity Fund seek to achieve their respective investment objectives by investing
all of their Assets in a corresponding Portfolio, all references in this
Prospectus to each such Fund will include its corresponding Portfolio, except
as otherwise noted.
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 the Money Market Portfolio, the Fund invests
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.
INTERMEDIATE BOND FUND. The investment objective of the Intermediate Bond
Fund is to generate a high level of current income and preserve the value of
its investors' investment. The Fund seeks its objective by investing in a broad
range of fixed income securities, including debt securities of the U.S.
Government and its agencies and instrumentalities, debt securities of
governments of other countries, including developing countries, and preferred
stock and debt securities issued by U.S. and non-U.S. companies. The Subadviser
to this Fund is Stephens Capital Management (a division of Stephens).
HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to provide a high level of current income. Through the High-Yield Bond
Portfolio, the Fund invests in a diversified portfolio consisting primarily of
<PAGE>
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.).
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. Through the Equity Value Portfolio, the
Fund emphasizes stocks which, in the opinion of the Fund's Advisers, are
trading at low valuations relative to market and/or historical levels. The
Subadviser to this Fund is Ark Asset Management Co., 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. Through the Equity Growth
Portfolio, the Fund invests primarily in stocks of companies with market
capitalizations of $10 to $15 billion. 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.
Through the Special Equity Portfolio, the Fund emphasizes stocks which, in the
opinion of the Fund's Advisers, will present an opportunity for significant
increases in earnings and/or value, without consideration for current income.
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 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.
SELECT EQUITY FUND. The investment objective of the Select Equity Fund is
high total return. Total return consists of realized and unrealized capital
gains and losses plus income. The Fund seeks its objective by investing
primarily in equity securities of domestic corporations. The Subadviser to this
Fund is Stephens Capital Management (a division of Stephens).
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.
Through the International Equity Portfolio, the Fund invests in securities of
<PAGE>
companies in a minimum of three countries outside the United States. The
Subadviser to this Fund is Capital Guardian Trust Company.
There can, of course, be no assurance that any Fund will achieve its
investment objective. Because each of the Money Market Fund, High-Yield Bond
Fund, Equity Value Fund, Equity Growth Fund, Special Equity Fund, Aggressive
Equity Fund and International Equity Fund invests through a corresponding
Portfolio, all references in this Prospectus to each such Fund include its
corresponding Portfolio, except as otherwise noted.
INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES
Each of the Intermediate Bond and Select Equity Funds seeks to achieve its
investment objective by investing all of its Assets directly in securities as
described below. Each of the Money Market, High-Yield Bond, Equity Value,
Equity Growth, Special Equity and International Equity Funds seeks to achieve
its investment objective by investing all of its Assets in a corresponding
Portfolio with the same investment objective. 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 be subject to different
market and financial risks.
Diversified, as Adviser, has contracted with one or more Subadvisers for
certain investment advisory services. Diversified and the Subadviser or
Subadvisers for a particular Portfolio, the Intermediate Bond Fund or the
Select Equity Fund are referred to herein collectively as the "Advisers."
The investment objective of any Fund or Portfolio may be changed without
the vote of the holders of the outstanding voting securities of that 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 (if any). There can be no assurance that the 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 Fund invests in high quality short-term money market
instruments. Securities in which the Money Market Fund invests may not earn as
high a level of current income as long-term or lower quality securities, which
<PAGE>
generally have less liquidity, greater market risk and more fluctuation in
market value.
To achieve its investment objective, the Money Market Fund 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 Fund may lend its portfolio securities, enter into repurchase
agreements and reverse repurchase agreements, and invest in securities issued
by foreign banks and corporations outside the United States. The Money Market
Fund 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 Investment Company Act of 1940, 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 Fund may purchase
are Moody's Investors Service, Inc., Standard & Poor's Rating Services, 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
<PAGE>
criteria and other requirements governing the Fund'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 Fund 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 Fund 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 Fund 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 apply
to unconditional puts if no more than 10% of the Fund'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 Fund's
total assets, with the investment in any one such issuer being limited to no
more than the greater of 1% of the Fund's total assets or $1,000,000. As to
each security, these percentages are measured at the time the Fund purchases
the security.
The Money Market Fund seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS. The Fund 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 Fund are not insured by the
Federal Deposit Insurance Corporation or any other agency of the U.S.
Government. The Fund 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 Fund may
also invest in certificates of deposit and time deposits issued by
foreign banks outside the United States.
The Fund may also invest in bankers' acceptances and other
short-term obligations. Bankers' acceptances are credit instruments
<PAGE>
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 Fund's investments are concentrated in the banking
industry, the Fund will have correspondingly greater exposure to the risk
factors which are characteristic of such investments. Sustained increases
in interest rates can adversely affect 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 Fund, 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 Fund will invest
in such securities only when the Advisers are satisfied that the credit
risk with respect to the issuer is minimal.
<PAGE>
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The
commercial paper purchased by the Fund will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Fund may invest
consist of high quality, U.S. dollar-denominated short-term bonds and
notes issued by domestic corporations.
The Fund 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. 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 Fund also may purchase unsecured
promissory notes ("Notes") which are not readily marketable and have not
been registered under the Securities Act of 1933, provided such
investments are consistent with the Fund's investment objective. The
Notes purchased by the Fund 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 Fund 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 Fund cannot exercise the demand
feature described in the Statement of Additional Information and as to
which there is no secondary market).
RESTRICTED SECURITIES. The Fund may invest in securities that are
subject to legal or contractual restrictions on resale. These securities
may be illiquid and, thus, the Fund 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 Securities
Act of 1933 for such securities held by the Fund, the Fund 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 Fund's investing in such securities
may have the effect of increasing the level of illiquidity in the Fund
during such period.
<PAGE>
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Fund of an underlying debt
instrument subject to an obligation of the seller to repurchase, and the
Fund to resell, the instrument at a fixed price usually not more than one
week after its purchase. The Fund's custodian or a sub-custodian will
have custody of securities acquired by the Fund under a repurchase
agreement.
Repurchase agreements usually are entered into for the Fund with
sellers which are 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 Fund to earn a return on
available cash with minimal market risk. Certain costs may be incurred by
the Fund 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 Fund may
be delayed or limited. Repurchase agreements are considered
collateralized loans under the Investment Company Act.
The Fund 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 Fund 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 Fund may decline
below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by the Fund.
NON-U.S. SECURITIES. The Fund may invest in U.S. dollar-denominated
non-U.S. securities issued outside the United States, such as obligations
of non-U.S. branches and subsidiaries of domestic banks and non-U.S.
banks, including Eurodollar certificates of deposit, Eurodollar time
deposits and Canadian time deposits, commercial paper of Canadian and
other non-U.S. issuers, and U.S. dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their agencies or
instrumentalities. Non-U.S. 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
<PAGE>
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 non-U.S. securities the Fund may purchase, see "Investment
Policies" in the Statement of Additional Information.
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 Fund may invest in obligations other
than those listed previously, provided such investments are consistent
with the Fund'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 Investment Company Act) of the Fund or
the Portfolio, respectively. See "Investment Restrictions" in the Statement of
Additional Information.
INTERMEDIATE BOND FUND. The investment objective of the Intermediate Bond
Fund is to generate a high level of current income and preserve the value of
its investors' investment. The Fund seeks its investment objective by investing
in a broad range of fixed income securities, including debt securities of the
U.S. Government and its agencies and instrumentalities, debt securities of
governments of other countries, including developing countries, and preferred
stock and debt securities issued by U.S. and non-U.S. companies. As a
non-fundamental policy, under normal circumstances, at least 65% of the Fund's
total assets are invested in fixed income securities, but the Fund expects that
substantially all of its assets generally will be invested in fixed income
securities. Under normal circumstances, the Fund's dollar weighted average
portfolio maturity will range from three to ten years.
The Fund is designed for investors seeking a higher level of current
income than is generally available from shorter-term securities, and who are
willing to accept the greater price fluctuations associated with higher levels
of income.
<PAGE>
The Advisers actively manage the Fund's duration, the allocation of
securities across market sectors, and the selection of securities within
sectors, based on fundamental economic and capital markets research and their
outlook for interest rates. Duration is a measure of the length of life of debt
securities which takes into account payments of principal and interest on these
securities, based on their present values. Duration can be used as a measure of
the sensitivity of the Fund's market value to changes in interest rates.
Generally, the longer the duration of the Fund, the more sensitive its market
value will be to changes in interest rates.
The Advisers attempt to forecast primary trends in interest rates. These
forecasts are derived from a proprietary analysis of Federal Reserve monetary
policy, which is used to attempt to predict trends in inflation eighteen to
twenty-four months into the future.
The value of fixed income securities, including those backed by the U.S.
Government, generally goes down when interest rates go up, and vice versa.
Changes in interest rates will generally cause bigger changes in the prices of
longer-term securities than in the prices of shorter-term securities.
Investors in the Fund should be aware that prices of fixed income
securities also fluctuate based on changes in the actual or perceived
creditworthiness of issuers. The prices of lower rated securities often
fluctuate more than those of higher rated securities. Also, it is possible that
some issuers will be unable to make required payments on fixed income
securities held by the Fund.
The Fund may invest a portion of its assets in non-U.S. securities. The
special risks of investing in non-U.S. securities include possible adverse
political, social and economic developments abroad, the difficulties of
enforcing legal rights under some non-U.S. legal systems and against some
foreign governments, and different characteristics of non-U.S. economies and
markets. Non-U.S. securities often will trade in non-U.S. currencies, which can
be volatile and may be subject to governmental controls or intervention. In
addition, securities of non-U.S. issuers may be less liquid and their prices
more volatile than those of comparable U.S. issuers.
The Fund may also seek to achieve its investment objective through
investments in the following types of instruments.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Fund may invest in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, including U.S. Treasury securities, which differ only
in their interest rates, maturities and times of issuance: Treasury Bills
<PAGE>
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. See "U.S. Government and Agency
Securities" under Money Market Fund.
CORPORATE BONDS. The Fund may purchase debt securities of United
States corporations only if they carry a rating of at least Baa from
Moody's Investors Service, Inc. or BBB from Standard & Poor's Rating
Services, or are judged by the Advisers to be of comparable quality.
Securities rated Baa by Moody's or BBB by Standard & Poor's 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 Statement of Additional Information for an
explanation of these ratings.
YANKEE BONDS AND EURODOLLAR BONDS. The Fund may purchase Yankee and
eurodollar issues that meet its minimum credit quality standards. Yankee
issues are dollar denominated bonds issued in the United States market by
foreign issuers and are, therefore, subject to U.S. Securities and
Exchange Commission ("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 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.
NON-U.S. SECURITIES. The Fund may invest in securities of non-U.S.
issuers. Investments in non-U.S. securities involve risks relating
to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which
U.S. and non-U.S. issuers and markets are subject. These risks may
include expropriation, confiscatory taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of portfolio
assets and political or social instability. Enforcing legal rights may
be difficult, costly and slow in foreign countries, and there may be
special problems enforcing claims against foreign governments. In
addition, non-U.S. companies may not be subject to accounting standards
or governmental supervision comparable to U.S. companies, and there may
be less public information about their operations. Non-U.S. markets may
be less liquid and more volatile than U.S. markets, and may offer
less protection to investors such as the Fund. Prices at which the Fund
may acquire securities may be affected by trading by persons with
material non-public information and by securities transactions by brokers
<PAGE>
in anticipation of transactions by the Fund. The Fund's
investments in unlisted non-U.S. securities are subject to the
Fund's overall restrictions applicable to investments in illiquid
securities. The Advisers do not intend to concentrate more than 25%
of such non-U.S. investments in any one type of instrument or in any one
foreign country.
Because non-U.S. securities often are denominated in currencies
other than the U.S. dollar, changes in currency exchange rates will
affect the Fund's net asset value, the value of dividends and interest
earned and gains and losses realized on the sale of securities. In
addition, some non-U.S. currency values may be volatile and there is the
possibility of governmental controls on currency exchanges or
governmental intervention in currency markets.
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 Fund. 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 risks of
incurring losses if rates do not move in the direction anticipated.
The Fund may invest in issuers located in developing countries,
which are generally defined as countries in the initial stages of their
industrialization cycles with low per capita income. All of the risks of
investing of non-U.S. securities are heightened by investing in
developing countries. Shareholders should be aware that investing in the
equity and fixed income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature, and to
political systems which can be expected to have less stability, than
those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets
of developed countries with more mature economies; such markets often
have provided higher rates of return, and greater risks, to investors.
These heightened risks include (i) greater risk of expropriation,
confiscatory taxation and nationalization, and less social, political and
economic stability; (ii) the small current size of markets for securities
of issuers based in developing countries and the currently low or
non-existent volume of trading, resulting in a lack of liquidity and in
<PAGE>
price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities including restrictions on investing in
issuers or industries deemed sensitive to relevant national interests;
and (iv) the absence of developed legal structures. Such characteristics
can be expected to continue in the future.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies
trading on securities markets in the United States, which may not be
sustainable. Rapid increases in money supply in certain countries may
result in speculative investment in equity securities which may
contribute to volatility of trading markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are
higher than those involved in U.S. investing. As a result, the operating
expense ratio of the Fund may be higher than those of investment
companies investing exclusively in U.S. securities.
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 or liquidity, in order to reduce volatility, or
as a temporary defensive measure when the Advisers determine securities
markets to be overvalued. The Fund 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 Standard & Poor's) 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.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE Agreements. The Fund
may enter into repurchase agreements and reverse repurchase agreements.
See "Repurchase Agreements and Reverse Repurchase Agreements" under
Money Market Fund.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of
its net assets in securities that are subject to legal or contractual
restrictions on resale or for which there is no readily available market.
These illiquid securities may include privately placed restricted
<PAGE>
securities for which no institutional market exists. The absence of a
trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The
Fund may also purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold
to institutions pursuant to Rule 144A under the Securities Act of 1933.
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities are treated as exempt from the Fund'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 Fund could be adversely affected.
OPTIONS AND FUTURES CONTRACTS. The Fund 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 Fund's investments
against price fluctuations. Other strategies, including buying futures,
writing puts and buying calls, tend to increase market exposure. The Fund
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 Fund'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 Fund 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 Fund 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.
<PAGE>
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Fund, the Advisers may
purchase securities for the Fund on a "when-issued" or on a "forward
delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund would take delivery of such securities. In
general, the Fund 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 Fund 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 Fund'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 Fund may also
utilize the following investments and investment techniques and
practices: options on futures contracts and options on foreign
currencies. The Fund 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 Fund 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 Fund 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 Fund 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
<PAGE>
payments at a deferred date. The Fund 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 Investors Service, Inc. ("Moody's") or BB or lower by Standard
& Poor's Rating Services ("Standard & Poor's"). 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
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 Fund to value its portfolio securities, and the
Fund'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 Fund
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 Fund 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 Fund may also seek to achieve its investment
objective through investments in the following types of instruments.
<PAGE>
SHORT-TERM INSTRUMENTS. The Fund may invest in cash, commercial
paper, short-term obligations, repurchase agreements, bank certificates
of deposit or other forms of debt securities to provide a reserve for
future purchases of securities or liquidity, in order to reduce
volatility, or as a temporary defensive measure when the Advisers
determine securities markets to be overvalued. See "Short-Term
Instruments" under Intermediate Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE Agreements. The Fund
may enter into repurchase agreements and reverse repurchase agreements.
See "Repurchase Agreements and Reverse Repurchase Agreements" under Money
Market Fund. The Fund may borrow funds for temporary or emergency
purposes, such as meeting larger than anticipated redemption requests,
and not for leverage.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may
invest up to 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale or
for which there is no readily available market. See
"Illiquid and Restricted Securities" under Intermediate Bond
Fund.
OPTIONS AND FUTURES CONTRACTS. The Fund may buy and
sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. See "Options
and Futures Contracts" under Intermediate Bond Fund.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Fund, the Advisers may
purchase securities for the Fund on a "when-issued" or on a "forward
delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. See "Delayed
Delivery Transactions" under Intermediate Bond Fund.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Fund may, in each
case up to 5% of the Fund's assets, also utilize the following
investments and investment techniques and practices: options on futures
contracts and options on foreign currencies. See the Statement of
Additional Information for further information.
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.
<PAGE>
The Equity Value Fund 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
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 Fund 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 Fund 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 Fund
allocates its investments among different industries and companies, and changes
its portfolio securities for investment considerations and not for trading
purposes.
The Equity Value Fund 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 Fund 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 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 Fund 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 Fund are invested in equity securities. This is a fundamental
investment policy and may not be changed without investor approval. The Equity
Growth Fund 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 Fund also invests in bonds and short-term obligations as
well as securities convertible into common stocks, preferred stocks, debt
<PAGE>
securities and short-term obligations. The Fund allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
The Equity Growth Fund'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 Fund 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
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 Fund 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 Fund'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 Fund 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 Fund 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 Fund'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 Fund 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
<PAGE>
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.
SELECT EQUITY FUND. The investment objective of the Select Equity Fund is
high total return. Total return consists of realized and unrealized capital
gains and losses plus income. The Fund seeks its objective by investing
primarily in selected equity securities of domestic corporations.
The Advisers select stocks for the Fund based on a variety of criteria
including the company's managerial strength, prospects for growth and
competitive position. During ordinary market conditions, the Advisers intend to
keep at least 65% of the Fund's net assets invested in equity securities
consisting of common stocks and other securities with equity characteristics
such as preferred stocks, warrants, rights and convertible securities. The
common stock in which the Fund may invest includes the common stock of any
class or series or any similar equity interest, such as trust or limited
partnership interests. These equity investments may or may not pay dividends
and may or may not carry voting rights. The Fund invests in securities listed
on a securities exchange or traded in over-the-counter markets, and may invest
in certain restricted or unlisted securities.
The Fund may invest in small capitalization issuers. Small cap issuers are
those with market capitalizations below the top 1,000 stocks that comprise the
large and midrange capitalization sector of the equity market. These stocks are
comparable to, but not limited to, the stocks comprising the Russell 2000
Index, an index of small capitalization stocks. Small cap companies are
generally represented in new or rapidly changing industries. They may offer
more profit opportunity in growing industries and during certain economic
conditions than do large and medium sized companies. However, small cap
companies also involve special risks. Often, liquidity and overall business
stability of a small cap company may be less than that associated with larger
<PAGE>
capitalized companies. Small cap stocks frequently involve smaller, rapidly
growing companies with high growth rates, negligible dividend yields and
extremely high levels of volatility.
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 Fund 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 Fund 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 Fund'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 Fund
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 Fund 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
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
<PAGE>
The International Equity Fund 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 Fund 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 Fund 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 Fund. 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 ADDITIONAL INVESTMENT TECHNIQUES,
RESTRICTIONS AND POLICIES
INVESTMENT TECHNIQUES. Following is a description of certain investment
techniques employed by the Funds.
OPTIONS AND FUTURES CONTRACTS. Each of the Equity Value Fund, Equity
Growth Fund, Special Equity Fund, Select Equity Fund and International Equity
Fund may enter into transactions in futures contracts, options on futures
contracts, options on securities indexes and options on securities, for the
<PAGE>
purpose of hedging each Fund'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 Fund 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 Fund. 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 Fund 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 Fund 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 Fund.
Gain or loss to each Fund 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
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
Each Fund 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.
<PAGE>
Nevertheless, each Fund 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 Equity Value Fund, Equity Growth Fund,
Special Equity Fund, Select Equity Fund and International Equity Fund 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" under High-Yield Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Equity Value Fund, Equity Growth Fund, Special Equity Fund, Select Equity Fund
and International Equity Fund 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" under
Money Market Fund.
ILLIQUID AND RESTRICTED SECURITIES. Each of the Equity Value Fund, Equity
Growth Fund, Special Equity Fund, Select Equity Fund and International Equity
Fund may not invest more than 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale. See "Illiquid and
Restricted Securities" under High-Yield Bond Fund.
DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability of
suitable securities for each of the Equity Value Fund, Equity Growth Fund,
Special Equity Fund, Select Equity Fund and International Equity Fund, the
Advisers may purchase securities for each such Fund on a "when-issued" or on a
"forward delivery" basis. See "Delayed Delivery Transactions" above under
High-Yield Bond Fund.
FOREIGN SECURITIES. Each of the Equity Value Fund, Equity Growth Fund,
Special Equity Fund and Select Equity Fund 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 Fund'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
<PAGE>
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 Fund 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 Fund. 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 Funds may lend its portfolio
securities to brokers, dealers and other financial organizations. By lending
its securities, a Fund can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term 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 Fund will adhere to the following
conditions whenever its securities are loaned: (i) the Fund 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 Fund must be able to terminate the loan at any time; (iv) the Fund
must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (v) the Fund 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 Fund would terminate the loan and regain the
right to vote the securities.
PORTFOLIO TURNOVER. Changes to the securities of each Fund 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 Fund engages in trading if it believes a transaction
net of costs (including custodian charges) will help it achieve its investment
objective. The amount of brokerage commissions and realized capital gains will
<PAGE>
tend to increase as the level of portfolio activity increases. Portfolio
turnover rates are not expected to exceed 150% with respect to each of the
Intermediate Bond Fund and the Select Equity Fund during its initial fiscal
year. Portfolio turnover rates for each other Fund for each of the last two
fiscal years were as follows:
Turnover rates
Portfolio
1995 1996
High-Yield Bond 21% 107%
Equity Value (*) -- 65%
Equity Growth 62% 133%
Special Equity 155% 140%
International Equity 7% 29%
- -----------------
(*) The Equity Value Fund commenced operations on April 19, 1996.
BROKERAGE TRANSACTIONS. 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.
INVESTMENT RESTRICTIONS. As "diversified" funds, no more than 5% of the
assets of any Fund may be invested in the securities of one issuer (other than
U.S. Government securities), except that up to 25% of each Fund's assets may be
invested without regard to this limitation. No Fund 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. Additional fundamental investment restrictions of the Funds are
contained in the Statement of Additional Information. 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.
CORE-FEEDER STRUCTURE
Unlike the Intermediate Bond and Select Equity Funds, each of which
invests its Assets directly in securities, the Money Market, High-Yield Bond,
Equity Value, Equity Growth, Special Equity and International Equity Funds
(collectively, the "Feeder Funds") do not invest directly in securities.
Instead, each Feeder 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, holds and sells securities in accordance with its
investment objectives and policies. Of course, there can be no assurance that a
Feeder Fund or its corresponding Portfolio will achieve their objectives. The
Trust may withdraw a Feeder Fund's investment in its Portfolio at any time, and
<PAGE>
will do so if the Trust's Trustees believe it to be in the best interest of the
Feeder Fund's shareholders. If the Trust were to withdraw a Feeder Fund's
investment in its Portfolio, the Trust could either invest the Feeder Fund's
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 Feeder Fund's investment in its Portfolio, the Feeder Fund could
receive securities from the Portfolio instead of cash, causing the Feeder 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 the
Portfolio will notify its corresponding Feeder 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 Feeder Fund's
investment in its Portfolio.
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 Feeder Fund(s) and vote in accordance
with shareholder instructions. Feeder 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 Feeder Fund shareholders not voting will be voted by
the Trustees of the Trust in the same proportion as the Feeder Fund
shareholders who do, in fact, vote. Of course, a Feeder Fund could be outvoted,
or otherwise adversely affected, by other investors in its Portfolio.
Each Portfolio may sell interests to other investors in addition to its
corresponding Feeder Fund. These investors may be mutual funds which offer
shares to their shareholders with different costs and expenses than the Feeder
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 [___________] by calling
[___________].
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
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
<PAGE>
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 investment policies as the Boards of Trustees of the Trust
and the Portfolio Series may determine and pursuant to (i) Investment Advisory
Agreements with the Trust with respect to Intermediate Bond Fund and Select
Equity Fund, and (ii) Investment Advisory Agreements with the Portfolio Series
with respect to each Portfolio, Diversified manages the assets of each such
Fund or Portfolio. For its services under the Investment Advisory Agreements,
Diversified receives fees from such Funds or Portfolios accrued daily and paid
monthly at an annual rate equal to the percentages specified in the table below
of such Funds' or the Portfolios' 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.
For each Fund or Portfolio listed in the table below, Diversified has
entered into an Investment Subadvisory Agreement with the indicated
Subadvisers. For their services under each Investment 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 Fund's or
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
Fund or Portfolio by the fee schedule and dividing by 12. Each fee will be paid
on a quarterly basis.
<PAGE>
<TABLE>
<CAPTION>
FUND OR COMPENSATION(%) COMPENSATION(%)
PORTFOLIO SUBADVISERS TO ADVISER(1) TO SUBADVISERS
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
Intermediate Bond Fund Stephens Capital Management [ ] [ ](2)
(a division of Stephens)
High-Yield Bond Portfolio Delaware Investment Advisers 0.55 (3)
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (4)
Equity Growth Portfolio Chancellor LGT Asset Management, Inc. 0.62 (5)
Special Equity Portfolio (6) 0.80 0.50
Select Equity Fund Stephens Capital Management [ ] [ ](2)
(a division of Stephens)
International Equity Portfolio Capital Guardian Trust Company 0.75 (7)
</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) In addition to the subadvisory fees noted in the table, pursuant to an
agreement between Diversified and Stephens, Stephens will receive additional
compensation from the Funds' distributor for providing distribution and
marketing services with respect to the Shares. See "Distribution Plan and
Agreement" and "Strategic Alliance Agreement" herein. Stephens will also
receive compensation from the Funds for providing shareholder services to
customers of Stephens who own Shares. See "Service Agents" herein.
(3) 0.40% on the first $20,000,000 of average net assets of the High-Yield
Bond Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on assets in
excess of $40,000,000.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. It is the Adviser's responsibility to select, subject to
the review and approval of the Board of Trustees, appropriate subadvisers with
<PAGE>
a distinguished background and to review such subadviser's continued
performance.
It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the Fund or Portfolio and to place the purchase and sales orders
for securities transactions of such Fund or Portfolio, subject in all cases to
the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective Fund or Portfolio consistent with the guidelines
and directions set by Diversified and the Boards of Trustees of the Trust and
the Portfolio Series. Each Subadviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
investments and effecting securities transactions for a Fund or Portfolio.
Diversified has entered into an Investment Subadvisory Agreement with
respect to the Money Market 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
representatives of MONY are primarily responsible for the day-to-day management
of the 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): David E. Wheeler, Investment Vice President and
Portfolio Manager (since 1997, employed by Capital Management Group since 1994;
previously employed at AIG Investment Advisers).
Diversified has entered into Investment Subadvisory Agreements with
respect to the Intermediate Bond Fund and the Select Equity Fund with Stephens
Capital Management ("SCM"), a division of Stephens, which is an indirect,
wholly-owned subsidiary of Stephens Group, Inc. Total assets under management
for all equity and fixed income clients of SCM at [ ], 1997 were approximately
$[ ] and $[ ], respectively, none of which were assets of registered investment
companies. The principal business address of SCM is 111 Center Street, Little
Rock, Arkansas 72201. The Funds are the first registered investment companies
for which SCM performs investment advisory functions. Investment management
decisions of SCM are made by committee and not by managers individually.
Diversified has entered into an Investment Subadvisory Agreement with
respect to the High-Yield Bond Portfolio with Delaware Investment Advisers
("Delaware"), a division of Delaware Management Company, Inc. Delaware was
formed in February 1985 and is owned by Lincoln National Corp. Total assets
<PAGE>
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 representative of
Delaware 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 an Investment 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 an Investment 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
Investment 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. The principal business address of Ark is 55
Water Street, New York, New York 10041. Total assets under management for
all small capitalization clients at December 31, 1996 were approximately
<PAGE>
$1.9 billion, $75 million of which were assets of registered investment
companies. The following representative of Ark 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 representatives of Liberty 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 representative of Pilgrim 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).
<PAGE>
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 06880. The following representative of
Westport 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 an Investment 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.
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:
<PAGE>
Adviser's
Portfolio(1) compensation(1)(2)
Money Market Portfolio 0.25%
High-Yield Bond Portfolio 0.00%
Equity Value Portfolio 0.10%
Equity Growth Portfolio 0.69%
Special Equity Portfolio 0.79%
International Equity Portfolio 0.68%
(1) As of December 31, 1996, the Equity Value Portfolio had been in operation
for less than a full fiscal year; the Adviser's compensation rate with respect
to this Portfolio represents annualized fees in effect for its initial fiscal
year ended December 31, 1996. The Adviser's annual compensation rate with
respect to the Equity Growth Portfolio was reduced from 0.70% to 0.62% of the
Portfolio's average daily net assets, effective November 15, 1996. As of the
same date, the Intermediate Bond and Select Equity Funds had not commenced
operations.
(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 for the Shares
of each Fund in accordance with Rule 12b-1 under the Investment Company 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, Diversified Investors Securities Corp.
(the "Distributor") acts as the agent of the Funds in connection with the
offering of Shares pursuant to a distribution agreement with the Trust with
respect to the Shares. The Distributor's address is 4 Manhattanville Road,
Purchase, New York 10577.
Under the Distribution Plan, the Distributor receives a fee from each Fund
at an annual rate equal to 0.25% of the average daily net assets attributable
to the Stephens Premium Class of that Fund, which fee is in anticipation of, or
as reimbursement for, expenses incurred in connection with the sale of Shares
of that Fund. These expenses include (i) payments of quarterly trail or
maintenance commissions to registered representatives of the Distributor or
Stephens in an amount equal to on an annual basis 0.25% of the average daily
net assets maintained in the Fund by customers of Stephens, and (ii)
advertising and marketing expenses of Stephens (including certain expenses in
soliciting new or existing clients of Stephens) 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. The distribution fee with respect to the
Stephens Premium Class is currently being waived.
<PAGE>
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.
Diversified, as Administrator, receives a fee from each Fund accrued daily
and paid monthly at an annual rate equal to [___]% of the average daily net
assets of the Fund. Diversified acts as Administrator to the Portfolios
pursuant to the Advisory Agreement with the Portfolio Series and receives no
additional compensation for providing such administrative services.
SERVICE AGENT
Pursuant to a Shareholder Services Agreement between Stephens and the
Trust, Stephens as Service Agent provides shareholder services to all holders
of Shares. As Service Agent, Stephens receives a fee from each Fund accrued
daily and paid monthly at an annual rate equal to [___]% of the average daily
net assets attributable to the Stephens Premium Class of the Fund.
All holders of Shares must be represented by Stephens as Service Agent.
The services provided by Stephens may include, among others, (i) establishing
and maintaining shareholder accounts and records, (ii) processing purchase and
redemption transactions, (iii) arranging for bank wires, (iv) answering client
inquiries regarding the Trust, including, among other things, the net asset
value of Shares, account balances, dividend amounts and dividend payment dates,
(v) assisting clients in changing account designations and addresses, (vi)
providing periodic statements showing the client's account balance, (vii)
transmitting proxy statements, periodic reports, updated Prospectuses and other
<PAGE>
communications to shareholders and, with respect to meetings of shareholders,
collecting, tabulating and forwarding to the Trust executed proxies, and (viii)
obtaining such other information and performing such other services as
customers of Stephens may reasonably request and agree upon with Stephens. In
addition, Stephens shall prepare and file with the appropriate governmental
agencies, such information, returns and reports as are required to be so filed
for reporting (i) dividends and other distributions made, (ii) amounts withheld
on dividends and other distributions and payments under applicable federal and
state laws, rules and regulations and (iii) gross proceeds of sales
transactions as required. Stephens may separately charge its customers
additional fees only to cover the provision of additional or more comprehensive
services not already provided as Service Agent, or of the type or scope not
generally offered by a mutual fund, such as enhanced retirement or trust
reporting. Stephens will transmit to shareholders who are its customers
appropriate disclosures of any fees that it may charge them directly.
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. Securities may be held by subcustodians approved by the Board of
Trustees.
STRATEGIC ALLIANCE AGREEMENT
Diversified and Stephens have entered into a Strategic Alliance Agreement
pursuant to which Diversified has agreed (subject to and consistent with its
fiduciary and other responsibilities, including those under the 1940 Act and
the Investment Advisers Act of 1940, as amended (the "Advisers Act")), among
other things, to (i) recommend the establishment of the Stephens Premium Class
and the Stephens Institutional Class of the Funds, (ii) recommend the
establishment of the Stephens Intermediate Bond and Select Equity Funds, and
(iii) provide services necessary to establish such Classes and Funds. Under the
terms of the Agreement, Diversified would retain from all revenues attributable
to the Stephens Premium Class and the Stephens Institutional Class of the Funds
("Gross Revenues") a fee equal to the following percentages of the average
daily net assets attributable to the Stephens Premium Class and the Stephens
Institutional Class of the Funds: 0.14% of the first $250 million in assets;
0.125% of the next $500 million in assets; 0.09% of the next $750 million in
assets; 0.04% of the next $250 million in assets; 0.02% of the next $250
million in assets; and, 0.01% of all assets over $2 billion. In addition,
Diversified shall be entitled to pay (or be reimbursed) from Gross Revenues,
<PAGE>
fees and expenses attributable to ongoing registration and compliance regarding
the Shares, including costs attributable to registration, custodial, accounting
and legal services. All other Gross Revenues are to be retained by Stephens.
Pursuant to the Strategic Alliance Agreement, Diversified has agreed
(subject to and consistent with its fiduciary and other responsibilities,
including those under the 1940 Act and the Advisers Act) not to recommend that
additional classes of shares of the Trust be established, if such shares would
be available for sales through a competitor of Stephens in certain markets in
which Stephens participates. The Agreement is terminable after December 31,
1998, and renews automatically each year thereafter for a one-year period
unless terminated by any party upon written notice to the other party.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES. The Funds offer other classes of shares. Stephens Premium Class
shares are offered by this Prospectus. Shares are offered for sale at net asset
value without an initial sales charge or sales load exclusively to customers of
Stephens who have entered into an investment advisory relationship with
Stephens. There is no minimum initial or subsequent investment amount.
Shares 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. 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 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 receives distribution fees from the Funds. See "Management of
the Trust and Portfolio Series -- Distribution Plan and Agreement" herein.
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.
<PAGE>
For each shareholder, Stephens as Service Agent 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 Stephens Inc. and mailing
such payment to:
Stephens Capital Management
c/o Stephens Inc.
111 Center Street
Little Rock, AK 72201
Attention: Ms. Tammy Stewart
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. To
obtain more instructions for purchases by wire transfer or to obtain more
information on how to purchase Shares, please call Ms. Tammy Stewart of
Stephens Capital Management at (501) 374-4361.
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 Funds 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 New
York Stock Exchange is closed, when trading on the Exchange is restricted, or
when the SEC determines that an emergency exists to warrant such an action, the
Trust may suspend redemption rights or postpone the date of payment.
Investors subject to federal income tax who redeem Shares may recognize
capital gain or loss for federal income tax purposes. See "Other
<PAGE>
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.
REDEMPTIONS BY MAIL
Redemption requests may be mailed to Stephens as Service Agent 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
Stephens Capital Management at the following address:
Stephens Capital Management
c/o Stephens Inc.
111 Center Street
Little Rock, AK 72201
Attention: Ms. Tammy Stewart
REDEMPTIONS 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. 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.
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
<PAGE>
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 the identical class of the
other Funds offered by this Prospectus 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. To effect exchanges, investors should
call Ms. Tammy Stewart of Stephens Capital Management at (501) 374-4361.
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. Participants in any Stephens Capital Management program
who are subject to federal income tax and sell shares in such program in order
to invest in Shares of the Funds 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 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 to risk of loss if such instruction is
subsequently found not to be genuine. The Trust, the Distributor and Stephens
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
<PAGE>
genuine. To the extent that the Trust, the Distributor or Stephens 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,
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.
Historical performance information for periods prior to the establishment
of the Stephens Premium Class shares for each of the Funds will be that of the
respective Diversified Class shares and will be presented in accordance with
applicable SEC staff interpretations.
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:
<PAGE>
MONY POOLED
FUND SEPARATE ACCOUNT
Money Market...................... Pooled Account No. 4
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 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.
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............... ----- ----- ----- ----- -----
High-Yield Bond............ N/A N/A N/A N/A -----
Equity Value............... N/A N/A N/A N/A -----
Equity Growth.............. ----- ----- N/A N/A -----
Special Equity............. ----- ----- ----- ----- -----
International Equity....... ----- ----- N/A N/A -----
Composite Performance of Subadvisers. The following table sets 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, Equity Growth
Fund and Aggressive Equity 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.
<PAGE>
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 the Investment Company
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.
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.
The Subadvisers' composite performance data shown below were calculated in
accordance with recommended standards of the Association for Investment
Management and Research, retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses, and
deductions for brokerage commissions and execution costs. 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.
<PAGE>
Since
1 Year 5 Years 10 Years Inception
-------- -------- -------- ---------
Delaware Investment Advisers,
Subadviser to High-Yield Bond
Portfolio (1)
Subadviser's composite (2).... ___% ___% ___% ___%
Benchmark Index (3)........... ___% ___% ___% ___%
Peer Group (4)................ ___% ___% ___% ___%
Ark Asset Management Co., Inc.
Subadviser to Equity Value
Portfolio (5)
Subadviser's composite (6).... ___% ___% ___% ___%
Benchmark Index (7)........... ___% ___% ___% ___%
Peer Group (8)................ ___% ___% ___% ___%
Chancellor LGT Asset Management
Inc., Subadviser to Equity Growth
Portfolio (9)
Subadviser's composite (10)... ___% ___% ___% ___%
Benchmark Index (11).......... ___% ___% ___% ___%
Peer Group (12)............... ___% ___% ___% ___%
- -----------------
(1) Performance 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 Market Yield Index. The
Salomon Brothers High-Yield Market Index tracks the performance of below
investment-grade corporate bonds issued in the United States. The index
includes cash-pay and deferred-interest bonds that are public, have a fixed
coupon and are non convertible. To enter the index, bonds must also have $50
million or more in face value outstanding, one year or more left to maturity,
and one high-yield rating by Moody's or Standard & Poor's. The index excludes
bonds of bankrupt issuers.
(4) The Peer Group is the Lipper High Current Yield Fund Index. The Lipper High
Current Yield Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "Aim at high (relative) current
yield from fixed income securities. No quality or maturity restrictions. Tend
to invest in lower grade debt issues".
(5) Performance through December 31, 1996.
(6) Commencement of investment operations is April 1, 1985 for the Subadviser's
composite.
(7) The Benchmark Index is the Russell 1000 Value Index. The Russell 1000 Value
Index measures the performance of those companies included in the Russell 1000
Index with lower price-to-book ratios and lower forecasted growth values. The
Russell 1000 Index measures the performance of the one thousand largest U.S.
companies based on total market capitalization, which represents approximately
88% of the investable U.S. equity market.
(8) The Peer Group is the Lipper Growth & Income Fund Index. The Lipper Growth
& Income Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "A fund which combines a growth of
earnings orientation and an income requirement for level and/or rising
dividends".
(9) Performance through December 31, 1996.
<PAGE>
(10)Commencement of investment operations is January 1, 1984 for the
Subadviser's composite.
(11) The Benchmark Index is the Russell 1000 Growth Index. The Russell 1000
Growth Index measures the performance of those companies included
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. The Russell 1000 Index measures the performance of
the one thousand largest U.S. companies based on total market capitalization,
which represents approximately 88% of the investable U.S. equity market.
(12) The Peer Group is the Lipper Growth Fund Index. The Lipper Growth Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which normally invests in companies whose
long-term earnings are expected to grow significantly faster than the earnings
of the stocks represented in the major unmanaged stock indices".
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 New York Stock Exchange, currently 4:00 p.m., New York
time, unless the Exchange closes earlier, by dividing the value of a Fund's net
assets attributable to its Stephens Premium Class (i.e., the value of its
investment in that Fund's Portfolio and other assets attributable to the class
less the liabilities attributable to the class, including expenses payable or
accrued) by the number of Shares of the Fund outstanding at the time the
determination is made.
Each Fund 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 Boards of Trustees of the Trust and the Portfolio Series. 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
investment income" includes all dividends, interest and other income earned by
a Fund, net of a Fund's expenses.
Investors may elect to receive dividends and distributions declared by a
Fund either in cash or additional Shares of that Fund at the net asset value
<PAGE>
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 gains.
TAX MATTERS
The following discussion is for general information only and,
specifically, does not purport to address the taxation of investors in all
circumstances. 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.
Investors 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
<PAGE>
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 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
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
<PAGE>
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 Investment
Advisory Agreements.
In the event a particular expense is not reasonably allocable by class or
to a particular class, it shall be treated as a Fund expense or a Trust
expense. Trust expenses directly attributable to a Fund are charged to the
Fund; other expenses are allocated proportionately among all the series in the
Trust in relation to the net assets of each series.
Total expenses of each Fund for the fiscal year ended December 31, 1996
(expressed as a percentage of average daily net assets) are set forth in the
following table. No Stephens Premium Class shares were outstanding during that
year.
Fund(1) Total expenses(1)(2)
Money Market Fund 0.80%
High-Yield Bond Fund 1.10%
Equity Value Fund 1.07%
Equity Growth Fund 1.20%
Special Equity Fund 1.49%
International Equity Fund 1.41%
(1) As of December 31, 1996, the High-Yield Bond, Equity Value and
International Equity Funds had 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 these
Funds will be responsible are listed above under "Expenses". As of the same
date, the Intermediate Bond and Equity Funds had not commenced operations.
(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
<PAGE>
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. The Trust may also divide shares in each series into classes.
Shares of each class of a Fund represent an equal pro rata interest in
such Fund and, generally, have identical voting, dividend, liquidation, and
other rights, preferences, powers, terms and conditions, except that: (a) each
class has a different designation; (b) each class of shares bears any class
expenses; (c) each class has exclusive voting rights on any matter submitted to
shareholders that related solely to its distribution arrangement, and (d) each
class has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class.
THE FUNDS OFFER OTHER CLASSES OF SHARES. STEPHENS PREMIUM CLASS SHARES ARE
OFFERED BY THIS PROSPECTUS. STEPHENS INSTITUTIONAL CLASS SHARES OF THE FUNDS
AND DIVERSIFIED CLASS SHARES OF CERTAIN OF THE FUNDS AND CERTAIN OTHER SERIES
OF SHARES OF THE TRUST ALSO ARE OFFERED BY THE TRUST. DIVERSIFIED CLASS SHARES
AND STEPHENS INSTITUTIONAL CLASS SHARES ARE SUBJECT TO DIFFERENT DISTRIBUTION
AND SHAREHOLDER SERVICING EXPENSES THAN STEPHENS PREMIUM CLASS SHARES, WHICH
WILL AFFECT THE PERFORMANCE OF THOSE SHARES. CALL THE DISTRIBUTOR AT (914)
697-8000 FOR MORE INFORMATION.
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 matters for a
shareholder vote. Shares of each Fund or class are entitled to vote separately
to approve amendments to the Trust's distribution plan applicable to that Fund
or class 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 Investment Company 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
<PAGE>
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. The risk of a Fund
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
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.
<PAGE>
* * *
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 ____
Investment Objectives and Principal Policies ____
Certain Additional Investment Techniques,
Restrictions and Policies ____
Core-Feeder Structure ____
Management of the Trust and Portfolio Series ____
Purchases and Redemptions of Shares ____
Performance Information ____
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
PLEASE DIRECT INVESTOR INQUIRIES TO:
Stephens Capital Management
111 Center Street
Little Rock, Arkansas 72201
(501) 374-4361
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
STEPHENS INSTITUTIONAL CLASS SHARES
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. Eight series of shares, or Funds, of the
Trust are offered by this Prospectus:
o Diversified Investors Money Market Fund
o Stephens Intermediate Bond Fund
o Diversified Investors High-Yield Bond Fund
o Diversified Investors Equity Value Fund
o Diversified Investors Equity Growth Fund
o Diversified Investors Special Equity Fund
o Stephens Select Equity Fund
o Diversified Investors International Equity Fund
Each Fund is a separate diversified mutual fund. Stephens Institutional
Class shares ("Shares") of each Fund are offered for sale by this Prospectus
exclusively to investment advisory customers of Stephens Inc. ("Stephens").
Please call [ ___________ ] to obtain more information about how to purchase
and redeem Shares.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser to each Fund and selects, subject to shareholder approval, separate
investment subadvisers that provide investment advice for the Funds.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE TRUST SEEKS TO ACHIEVE THE INVESTMENT OBJECTIVE
OF EACH FUND (OTHER THAN THE INTERMEDIATE BOND FUND AND THE SELECT EQUITY FUND)
BY INVESTING ALL OF THE INVESTABLE ASSETS ("ASSETS") OF EACH SUCH 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 THEIR CORRESPONDING FUNDS. SEE
"CORE-FEEDER STRUCTURE" ON PAGE [___]. THE TRUST SEEKS TO ACHIEVE THE
INVESTMENT OBJECTIVE OF EACH OF THE INTERMEDIATE BOND FUND AND THE SELECT
EQUITY FUND BY INVESTING ALL OF ITS ASSETS DIRECTLY IN SECURITIES. SEE
"INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES" HEREIN.
This Prospectus sets forth information about the Trust and the Funds that
a prospective investor should consider before investing. Investors should read
<PAGE>
this Prospectus and retain it for future reference. Additional information
about the Funds is contained in a Statement of Additional Information, which
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 has the same date as this Prospectus and is
incorporated by reference into this Prospectus.
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.
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.
PROSPECTUS DATED _______, 1997
<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 estimated 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 Shares of each Fund.
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
ANNUAL OPERATING EXPENSES
<TABLE>
<CAPTION>
EQUITY
MONEY INTERMEDIATE HIGH YIELD EQUITY GROWTH
MARKET FUND BOND FUND BOND FUND VALUE FUND FUND
<S> <C> <C> <C> <C> <C>
Investment Advisory Fees (After Waiver) 0.25% 0.10% 0.53% 0.54% 0.62%
Distribution (Rule 12b-1) Fees 0.00% 0.24% 0.00% 0.02% 0.00%
Other Expenses:
Administrative and Shareholder
Services Fees 0.30% 0.30% 0.30% 0.30% 0.30%
Miscellaneous Expenses(1) 0.20% 0.16% 0.27% 0.24% 0.08%
---- ---- ---- ---- ----
Total Operating Expenses (After
Reimbursements and Waivers)(2) 0.75% 0.80% 1.10% 1.10% 1.00%
==== ==== ==== ==== ====
SPECIAL SELECT INTERNATIONAL
EQUITY FUND EQUITY FUND EQUITY FUND
Investment Advisory Fees (After Waiver) 0.80% 0.15% 0.75%
Distribution (Rule 12b-1) Fees 0.00% 0.24% 0.00%
Other Expenses:
Administrative and Shareholder
Services Fees 0.30% 0.30% 0.30%
Miscellaneous Expenses(1)0.10% 0.15% 0.20%
Total Operating Expenses (After
Reimbursements and Waivers)(2) 1.20% 0.85% 1.25%
==== ==== ====
</TABLE>
(1)"Miscellaneous Expenses" have been estimated for each of the Funds based on
a projected level of average daily net assets of (i) $50 million for each
Fund other than Intermediate Bond Fund and Select Equity Fund, and (ii) $75
million for Intermediate Bond Fund and Select Equity Fund.
<PAGE>
(2)Because Stephens Institutional Class shares were not issued during the
Funds' last fiscal year, expenses for the Shares 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 equal on
an annual basis to 1.38% for the Money Market Fund, 1.16% for the
Intermediate Bond Fund, 1.73% for the High-Yield Bond Fund, 1.71% for the
Equity Value Fund, 1.74% for the Equity Growth Fund, 1.93% for the Special
Equity Fund, 1.21% for the Select Equity Fund, and 1.90% for the
International Equity Fund.
EXAMPLE
A shareholder in a Fund would pay the following estimated expenses on a
$1,000 investment in Shares assuming (i) a 5% annual return on assets and (ii)
redemption at the end of each time period.
FUND 1 YEAR 3 YEARS
---- ------ -------
Money Market Fund $8 $24
Intermediate Bond Fund 8 26
High-Yield Bond Fund 11 35
Equity Value Fund 11 35
Equity Growth Fund 10 32
Special Equity Fund 12 38
Select Equity Fund 9 27
International Equity Fund 13 40
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 with respect to the Funds,
other than the Intermediate Bond Fund and the Select Equity Fund. Without such
waivers, the annual investment advisory fee would be 0.25% for the Money Market
Fund, 0.55% for the High-Yield Bond Fund, 0.57% for the Equity Value Fund,
0.70% for the Equity Growth Fund, 0.80% for the Special Equity Fund and 0.75%
for the International Equity Fund.
The Trust has adopted a distribution plan (the "Distribution Plan") for
the Shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Distribution Plan, the Trust will pay the Fund's distributor in
anticipation of, or as reimbursement for, expenses incurred by the distributor
in connection with the sale of Shares, a fee equal to on an annual basis 0.25%
of the average daily net assets attributable to the Stephens Institutional
Class of each Fund. Long term shareholders may pay more than the economic
equivalent of the maximum charges permitted by the National Association of
<PAGE>
Securities Dealers, Inc. The distribution fee with respect to the Stephens
Institutional Class is currently being waived. For more information on the
Distribution Plan, see "Distribution Plan and Agreement" herein.
For more information on the expenses of the Trust and the Portfolio
Series, see "Management of the Trust and Portfolio Series" herein.
With respect to each Fund that invests all of its Assets in a
corresponding Portfolio, the Trustees of the Trust believe that the aggregate
per share expenses of each such 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
Stephens Institutional Class shares ("Shares") of each Fund are offered
for sale by this Prospectus at net asset value without an initial sales charge
or sales load exclusively to investment advisory customers of Stephens. Please
call [_________] to obtain more information about how to purchase and redeem
Shares. The minimum initial investment amount is [$__________]; the minimum
subsequent investment amount is [$__________]. Each Fund is subject to an
annual distribution fee of 0.25% of the average daily net assets of the Fund
attributable to the Shares, which is currently being waived. See "Purchases and
Redemptions of Shares" herein.
The Funds, their investment objectives and their Subadvisers are set forth
below. Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser of each Fund. Because the Money Market Fund, High-Yield Bond Fund,
Equity Value Fund, Equity Growth Fund, Special Equity Fund and International
Equity Fund seek to achieve their respective investment objectives by investing
all of their Assets in a corresponding Portfolio, all references in this
Prospectus to each such Fund will include its corresponding Portfolio, except
as otherwise noted.
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 the Money Market Portfolio, the Fund invests
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.
INTERMEDIATE BOND FUND. The investment objective of the Intermediate Bond
Fund is to generate a high level of current income and preserve the value of
its investors' investment. The Fund seeks its objective by investing in a broad
range of fixed income securities, including debt securities of the U.S.
Government and its agencies and instrumentalities, debt securities of
governments of other countries, including developing countries, and preferred
stock and debt securities issued by U.S. and non-U.S. companies. The Subadviser
to this Fund is Stephens Capital Management (a division of Stephens).
HIGH-YIELD BOND FUND. The investment objective of the High-Yield Bond Fund
is to provide a high level of current income. Through the High-Yield Bond
<PAGE>
Portfolio, the Fund invests 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
Subadviser to this Fund is Delaware Investment Advisers (a division of Delaware
Management Company, 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. Through the Equity Value Portfolio, the
Fund emphasizes stocks which, in the opinion of the Fund's Advisers, are
trading at low valuations relative to market and/or historical levels. The
Subadviser to this Fund is Ark Asset Management Co., 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. Through the Equity Growth
Portfolio, the Fund invests primarily in stocks of companies with market
capitalizations of $10 to $15 billion. 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.
Through the Special Equity Portfolio, the Fund emphasizes stocks which, in the
opinion of the Fund's Advisers, will present an opportunity for significant
increases in earnings and/or value, without consideration for current income.
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 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.
SELECT EQUITY FUND. The investment objective of the Select Equity Fund is
high total return. Total return consists of realized and unrealized capital
gains and losses plus income. The Fund seeks its objective by investing
primarily in equity securities of domestic corporations. The Subadviser to this
Fund is Stephens Capital Management (a division of Stephens).
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.
Through the International Equity Portfolio, the Fund invests in securities of
<PAGE>
companies in a minimum of three countries outside the United States. The
Subadviser to this Fund is Capital Guardian Trust Company.
There can, of course, be no assurance that any Fund will achieve its
investment objective. Because each of the Money Market Fund, High-Yield Bond
Fund, Equity Value Fund, Equity Growth Fund, Special Equity Fund, Aggressive
Equity Fund and International Equity Fund invests through a corresponding
Portfolio, all references in this Prospectus to each such Fund include its
corresponding Portfolio, except as otherwise noted.
INVESTMENT OBJECTIVES AND PRINCIPAL POLICIES
Each of the Intermediate Bond and Select Equity Funds seeks to achieve its
investment objective by investing all of its Assets directly in securities as
described below. Each of the Money Market, High-Yield Bond, Equity Value,
Equity Growth, Special Equity and International Equity Funds seeks to achieve
its investment objective by investing all of its Assets in a corresponding
Portfolio with the same investment objective. 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 be subject to different
market and financial risks.
Diversified, as Adviser, has contracted with one or more Subadvisers for
certain investment advisory services. Diversified and the Subadviser or
Subadvisers for a particular Portfolio, the Intermediate Bond Fund or the
Select Equity Fund are referred to herein collectively as the "Advisers."
The investment objective of any Fund or Portfolio may be changed without
the vote of the holders of the outstanding voting securities of that 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 (if any). There can be no assurance that the 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 Fund invests in high quality short-term money market
instruments. Securities in which the Money Market Fund invests may not earn as
high a level of current income as long-term or lower quality securities, which
<PAGE>
generally have less liquidity, greater market risk and more fluctuation in
market value.
To achieve its investment objective, the Money Market Fund 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 Fund may lend its portfolio securities, enter into repurchase
agreements and reverse repurchase agreements, and invest in securities issued
by foreign banks and corporations outside the United States. The Money Market
Fund 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 Investment Company Act of 1940, 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 Fund may purchase
are Moody's Investors Service, Inc., Standard & Poor's Rating Services, 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
<PAGE>
criteria and other requirements governing the Fund'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 Fund 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 Fund 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 Fund 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 apply
to unconditional puts if no more than 10% of the Fund'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 Fund's
total assets, with the investment in any one such issuer being limited to no
more than the greater of 1% of the Fund's total assets or $1,000,000. As to
each security, these percentages are measured at the time the Fund purchases
the security.
The Money Market Fund seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS. The Fund 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 Fund are not insured by the Federal Deposit
Insurance Corporation or any other agency of the U.S. Government. The Fund
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 Fund may also invest in
certificates of deposit and time deposits issued by foreign banks outside
the United States.
The Fund may also invest in bankers' acceptances and other short-term
obligations. Bankers' acceptances are credit instruments evidencing the
<PAGE>
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 Fund's investments are concentrated in the banking
industry, the Fund will have correspondingly greater exposure to the risk
factors which are characteristic of such investments. Sustained increases
in interest rates can adversely affect 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 Fund, 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 Fund will invest
in such securities only when the Advisers are satisfied that the credit
risk with respect to the issuer is minimal.
<PAGE>
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The
commercial paper purchased by the Fund will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Fund may invest
consist of high quality, U.S. dollar-denominated short-term bonds and
notes issued by domestic corporations.
The Fund 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. 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 Fund also may purchase unsecured
promissory notes ("Notes") which are not readily marketable and have not
been registered under the Securities Act of 1933, provided such
investments are consistent with the Fund's investment objective. The
Notes purchased by the Fund 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 Fund 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 Fund cannot exercise the demand
feature described in the Statement of Additional Information and as to
which there is no secondary market).
RESTRICTED SECURITIES. The Fund may invest in securities that are
subject to legal or contractual restrictions on resale. These securities
may be illiquid and, thus, the Fund 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 Securities
Act of 1933 for such securities held by the Fund, the Fund 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 Fund's investing in such securities
may have the effect of increasing the level of illiquidity in the Fund
during such period.
<PAGE>
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Fund of an underlying debt
instrument subject to an obligation of the seller to repurchase, and the
Fund to resell, the instrument at a fixed price usually not more than one
week after its purchase. The Fund's custodian or a sub-custodian will
have custody of securities acquired by the Fund under a repurchase
agreement.
Repurchase agreements usually are entered into for the Fund with
sellers which are 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 Fund to earn a return on
available cash with minimal market risk. Certain costs may be incurred by
the Fund 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 Fund may
be delayed or limited. Repurchase agreements are considered
collateralized loans under the Investment Company Act.
The Fund 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 Fund 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 Fund may decline
below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by the Fund.
NON-U.S. SECURITIES. The Fund may invest in U.S. dollar-denominated
non-U.S. securities issued outside the United States, such as obligations
of non-U.S. branches and subsidiaries of domestic banks and non-U.S.
banks, including Eurodollar certificates of deposit, Eurodollar time
deposits and Canadian time deposits, commercial paper of Canadian and
other non-U.S. issuers, and U.S. dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their agencies or
instrumentalities. Non-U.S. 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
<PAGE>
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 non-U.S. securities the Fund may purchase, see "Investment
Policies" in the Statement of Additional Information.
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 Fund may invest in obligations other
than those listed previously, provided such investments are consistent
with the Fund'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 Investment Company Act) of the Fund or
the Portfolio, respectively. See "Investment Restrictions" in the Statement of
Additional Information.
INTERMEDIATE BOND FUND. The investment objective of the Intermediate Bond
Fund is to generate a high level of current income and preserve the value of
its investors' investment. The Fund seeks its investment objective by investing
in a broad range of fixed income securities, including debt securities of the
U.S. Government and its agencies and instrumentalities, debt securities of
governments of other countries, including developing countries, and preferred
stock and debt securities issued by U.S. and non-U.S. companies. As a
non-fundamental policy, under normal circumstances, at least 65% of the Fund's
total assets are invested in fixed income securities, but the Fund expects that
substantially all of its assets generally will be invested in fixed income
securities. Under normal circumstances, the Fund's dollar weighted average
portfolio maturity will range from three to ten years.
The Fund is designed for investors seeking a higher level of current
income than is generally available from shorter-term securities, and who are
willing to accept the greater price fluctuations associated with higher levels
of income.
<PAGE>
The Advisers actively manage the Fund's duration, the allocation of
securities across market sectors, and the selection of securities within
sectors, based on fundamental economic and capital markets research and their
outlook for interest rates. Duration is a measure of the length of life of debt
securities which takes into account payments of principal and interest on these
securities, based on their present values. Duration can be used as a measure of
the sensitivity of the Fund's market value to changes in interest rates.
Generally, the longer the duration of the Fund, the more sensitive its market
value will be to changes in interest rates.
The Advisers attempt to forecast primary trends in interest rates. These
forecasts are derived from a proprietary analysis of Federal Reserve monetary
policy, which is used to attempt to predict trends in inflation eighteen to
twenty-four months into the future.
The value of fixed income securities, including those backed by the U.S.
Government, generally goes down when interest rates go up, and vice versa.
Changes in interest rates will generally cause bigger changes in the prices of
longer-term securities than in the prices of shorter-term securities.
Investors in the Fund should be aware that prices of fixed income
securities also fluctuate based on changes in the actual or perceived
creditworthiness of issuers. The prices of lower rated securities often
fluctuate more than those of higher rated securities. Also, it is possible that
some issuers will be unable to make required payments on fixed income
securities held by the Fund.
The Fund may invest a portion of its assets in non-U.S. securities. The
special risks of investing in non-U.S. securities include possible adverse
political, social and economic developments abroad, the difficulties of
enforcing legal rights under some non-U.S. legal systems and against some
foreign governments, and different characteristics of non-U.S. economies and
markets. Non-U.S. securities often will trade in non-U.S. currencies, which can
be volatile and may be subject to governmental controls or intervention. In
addition, securities of non-U.S. issuers may be less liquid and their prices
more volatile than those of comparable U.S. issuers.
The Fund may also seek to achieve its investment objective through
investments in the following types of instruments.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Fund may invest in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, including U.S. Treasury securities, which differ only
in their interest rates, maturities and times of issuance: Treasury Bills
<PAGE>
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. See "U.S. Government and Agency
Securities" under Money Market Fund.
CORPORATE BONDS. The Fund may purchase debt securities of United
States corporations only if they carry a rating of at least Baa from
Moody's Investors Service, Inc. or BBB from Standard & Poor's Rating
Services, or are judged by the Advisers to be of comparable quality.
Securities rated Baa by Moody's or BBB by Standard & Poor's 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 Statement of Additional Information for an
explanation of these ratings.
YANKEE BONDS AND EURODOLLAR BONDS. The Fund may purchase Yankee and
eurodollar issues that meet its minimum credit quality standards. Yankee
issues are dollar denominated bonds issued in the United States market by
foreign issuers and are, therefore, subject to U.S. Securities and
Exchange Commission ("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 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.
NON-U.S. SECURITIES. The Fund may invest in securities of non-U.S.
issuers. Investments in non-U.S. securities involve risks relating to
political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and
non-U.S. issuers and markets are subject. These risks may include
expropriation, confiscatory taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets and
political or social instability. Enforcing legal rights may be difficult,
costly and slow in foreign countries, and there may be special problems
enforcing claims against foreign governments. In addition, non-U.S.
companies may not be subject to accounting standards or governmental
supervision comparable to U.S. companies, and there may be less public
information about their operations. Non-U.S. markets may be less liquid and
more volatile than U.S. markets, and may offer less protection to investors
such as the Fund. Prices at which the Fund may acquire securities may be
affected by trading by persons with material non-public information and
<PAGE>
by securities transactions by brokers in anticipation of transactions
by the Fund. The Fund's investments in unlisted non-U.S.
securities are subject to the Fund's overall restrictions
applicable to investments in illiquid securities. The Advisers do
not intend to concentrate more than 25% of such non-U.S. investments
in any one type of instrument or in any one foreign country.
Because non-U.S. securities often are denominated in currencies
other than the U.S. dollar, changes in currency exchange rates will
affect the Fund's net asset value, the value of dividends and interest
earned and gains and losses realized on the sale of securities. In
addition, some non-U.S. currency values may be volatile and there is the
possibility of governmental controls on currency exchanges or
governmental intervention in currency markets.
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 Fund. 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 risks of
incurring losses if rates do not move in the direction anticipated.
The Fund may invest in issuers located in developing countries,
which are generally defined as countries in the initial stages of their
industrialization cycles with low per capita income. All of the risks of
investing of non-U.S. securities are heightened by investing in
developing countries. Shareholders should be aware that investing in the
equity and fixed income markets of developing countries involves exposure
to economic structures that are generally less diverse and mature, and to
political systems which can be expected to have less stability, than
those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets
of developed countries with more mature economies; such markets often
have provided higher rates of return, and greater risks, to investors.
These heightened risks include (i) greater risk of expropriation,
confiscatory taxation and nationalization, and less social, political and
economic stability; (ii) the small current size of markets for securities
of issuers based in developing countries and the currently low or
non-existent volume of trading, resulting in a lack of liquidity and in
<PAGE>
price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities including restrictions on investing in
issuers or industries deemed sensitive to relevant national interests;
and (iv) the absence of developed legal structures. Such characteristics
can be expected to continue in the future.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies
trading on securities markets in the United States, which may not be
sustainable. Rapid increases in money supply in certain countries may
result in speculative investment in equity securities which may
contribute to volatility of trading markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently
are higher than those involved in U.S. investing. As a result, the
operating expense ratio of the Fund may be higher than those of
investment companies investing exclusively in U.S. securities.
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 or liquidity, in order to reduce volatility, or
as a temporary defensive measure when the Advisers determine securities
markets to be overvalued. The Fund 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 Standard & Poor's) 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.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE Agreements.
agreements. See "Repurchase The Fund may enter into repurchase
agreements and reverse repurchase Agreements and Reverse Repurchase
Agreements" under Money Market Fund.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up to 15% of
its net assets in securities that are subject to legal or contractual
restrictions on resale or for which there is no readily available market.
These illiquid securities may include privately placed restricted
<PAGE>
securities for which no institutional market exists. The absence of a
trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The
Fund may also purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold
to institutions pursuant to Rule 144A under the Securities Act of 1933.
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities are treated as exempt from the Fund'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 Fund could be adversely affected.
OPTIONS AND FUTURES CONTRACTS. The Fund 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 Fund's investments
against price fluctuations. Other strategies, including buying futures,
writing puts and buying calls, tend to increase market exposure. The Fund
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 Fund'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 Fund 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 Fund 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.
<PAGE>
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Fund, the Advisers may
purchase securities for the Fund on a "when-issued" or on a "forward
delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund would take delivery of such securities. In
general, the Fund 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 Fund 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 Fund'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 Fund may also
utilize the following investments and investment techniques and
practices: options on futures contracts and options on foreign
currencies. The Fund 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 Fund 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 Fund 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 Fund 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
<PAGE>
payments at a deferred date. The Fund 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 Investors Service, Inc. ("Moody's") or BB or lower by Standard
& Poor's Rating Services ("Standard & Poor's"). 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
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 Fund to value its portfolio securities, and the
Fund'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 Fund
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 Fund 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 Fund may also seek to achieve its investment
objective through investments in the following types of instruments.
<PAGE>
SHORT-TERM INSTRUMENTS. The Fund may invest in cash, commercial
paper, short-term obligations, repurchase agreements, bank certificates
of deposit or other forms of debt securities to provide a reserve for
future purchases of securities or liquidity, in order to reduce
volatility, or as a temporary defensive measure when the Advisers
determine securities markets to be overvalued. See "Short-Term
Instruments" under Intermediate Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE Agreements. The Fund
may enter into repurchase agreements and reverse repurchase agreements.
See "Repurchase Agreements and Reverse Repurchase Agreements" under Money
Market Fund. The Fund may borrow funds for temporary or emergency
purposes, such as meeting larger than anticipated redemption requests,
and not for leverage.
ILLIQUID AND RESTRICTED SECURITIES. The Fund may invest up
to 15% of its net assets in securities that are subject to legal or
contractual restrictions on resale or for which there is no readily
available market. See "Illiquid and Restricted Securities" under
Intermediate Bond Fund.
OPTIONS AND FUTURES CONTRACTS. The Fund may buy and sell options
and futures contracts to manage its exposure to changing interest rates
and securities prices. See "Options and Futures Contracts" under
Intermediate Bond Fund.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the
availability of suitable securities for the Fund, the Advisers may
purchase securities for the Fund on a "when-issued" or on a "forward
delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. See "Delayed
Delivery Transactions" under Intermediate Bond Fund.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Fund may, in each
case up to 5% of the Fund's assets, also utilize the following
investments and investment techniques and practices: options on futures
contracts and options on foreign currencies. See the Statement of
Additional Information for further information.
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.
<PAGE>
The Equity Value Fund 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
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 Fund 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 Fund 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 Fund
allocates its investments among different industries and companies, and changes
its portfolio securities for investment considerations and not for trading
purposes.
The Equity Value Fund 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 Fund 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 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 Fund 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 Fund are invested in equity securities. This is a fundamental
investment policy and may not be changed without investor approval. The Equity
Growth Fund 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 Fund also invests in bonds and short-term obligations as
well as securities convertible into common stocks, preferred stocks, debt
<PAGE>
securities and short-term obligations. The Fund allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
The Equity Growth Fund'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 Fund 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
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 Fund 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 Fund'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 Fund 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 Fund 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 Fund'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 Fund 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
<PAGE>
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.
SELECT EQUITY FUND. The investment objective of the Select Equity Fund is
high total return. Total return consists of realized and unrealized capital
gains and losses plus income. The Fund seeks its objective by investing
primarily in selected equity securities of domestic corporations.
The Advisers select stocks for the Fund based on a variety of criteria
including the company's managerial strength, prospects for growth and
competitive position. During ordinary market conditions, the Advisers intend to
keep at least 65% of the Fund's net assets invested in equity securities
consisting of common stocks and other securities with equity characteristics
such as preferred stocks, warrants, rights and convertible securities. The
common stock in which the Fund may invest includes the common stock of any
class or series or any similar equity interest, such as trust or limited
partnership interests. These equity investments may or may not pay dividends
and may or may not carry voting rights. The Fund invests in securities listed
on a securities exchange or traded in over-the-counter markets, and may invest
in certain restricted or unlisted securities.
The Fund may invest in small capitalization issuers. Small cap issuers
are those with market capitalizations below the top 1,000 stocks that comprise
the large and midrange capitalization sector of the equity market. These stocks
are comparable to, but not limited to, the stocks comprising the Russell 2000
Index, an index of small capitalization stocks. Small cap companies are
generally represented in new or rapidly changing industries. They may offer
more profit opportunity in growing industries and during certain economic
conditions than do large and medium sized companies. However, small cap
companies also involve special risks. Often, liquidity and overall business
stability of a small cap company may be less than that associated with larger
<PAGE>
capitalized companies. Small cap stocks frequently involve smaller, rapidly
growing companies with high growth rates, negligible dividend yields and
extremely high levels of volatility.
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 Fund 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 Fund 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 Fund'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 Fund
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 Fund 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
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
<PAGE>
The International Equity Fund 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 Fund 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 Fund 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 Fund. 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 ADDITIONAL INVESTMENT TECHNIQUES,
RESTRICTIONS AND POLICIES
INVESTMENT TECHNIQUES. Following is a description of certain investment
techniques employed by the Funds.
OPTIONS AND FUTURES CONTRACTS. Each of the Equity Value Fund, Equity
Growth Fund, Special Equity Fund, Select Equity Fund and International Equity
Fund may enter into transactions in futures contracts, options on futures
contracts, options on securities indexes and options on securities, for the
<PAGE>
purpose of hedging each Fund'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 Fund 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 Fund. 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 Fund 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 Fund 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 Fund.
Gain or loss to each Fund 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
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
Each Fund 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.
<PAGE>
Nevertheless, each Fund 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 Equity Value Fund, Equity Growth Fund,
Special Equity Fund, Select Equity Fund and International Equity Fund 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" under High-Yield Bond Fund.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Equity Value Fund, Equity Growth Fund, Special Equity Fund, Select Equity Fund
and International Equity Fund 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" under
Money Market Fund.
ILLIQUID AND RESTRICTED SECURITIES. Each of the Equity Value Fund, Equity
Growth Fund, Special Equity Fund, Select Equity Fund and International Equity
Fund may not invest more than 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale. See "Illiquid and
Restricted Securities" under High-Yield Bond Fund.
DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability of
suitable securities for each of the Equity Value Fund, Equity Growth Fund,
Special Equity Fund, Select Equity Fund and International Equity Fund, the
Advisers may purchase securities for each such Fund on a "when-issued" or on a
"forward delivery" basis. See "Delayed Delivery Transactions" above under
High-Yield Bond Fund.
FOREIGN SECURITIES. Each of the Equity Value Fund, Equity Growth Fund,
Special Equity Fund and Select Equity Fund 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 Fund'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,
<PAGE>
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 Fund 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 Fund. 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 Funds may lend its portfolio
securities to brokers, dealers and other financial organizations. By lending
its securities, a Fund can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term 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 Fund will adhere to the following
conditions whenever its securities are loaned: (i) the Fund 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 Fund must be able to terminate the loan at any time; (iv) the Fund
must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (v) the Fund 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 Fund would terminate the loan and regain the
right to vote the securities.
PORTFOLIO TURNOVER. Changes to the securities of each Fund 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 Fund engages in trading if it believes a transaction
net of costs (including custodian charges) will help it achieve its investment
objective. The amount of brokerage commissions and realized capital gains will
<PAGE>
tend to increase as the level of portfolio activity increases. Portfolio
turnover rates are not expected to exceed 150% with respect to each of the
Intermediate Bond Fund and the Select Equity Fund during its initial fiscal
year. Portfolio turnover rates for each other Fund for each of the last two
fiscal years were as follows:
Turnover rates
Portfolio
1995 1996
High-Yield Bond 21% 107%
Equity Value (*) -- 65%
Equity Growth 62% 133%
Special Equity 155% 140%
International Equity 7% 29%
- -----------------
(*) The Equity Value Fund commenced operations on April 19, 1996.
BROKERAGE TRANSACTIONS. 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.
INVESTMENT RESTRICTIONS. As "diversified" funds, no more than 5% of the
assets of any Fund may be invested in the securities of one issuer (other than
U.S. Government securities), except that up to 25% of each Fund's assets may be
invested without regard to this limitation. No Fund 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. Additional fundamental investment restrictions of the Funds are
contained in the Statement of Additional Information. 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.
CORE-FEEDER STRUCTURE
Unlike the Intermediate Bond and Select Equity Funds, each of which
invests its Assets directly in securities, the Money Market, High-Yield Bond,
Equity Value, Equity Growth, Special Equity and International Equity Funds
(collectively, the "Feeder Funds") do not invest directly in securities.
Instead, each Feeder 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, holds and sells securities in accordance with its
investment objectives and policies. Of course, there can be no assurance that a
Feeder Fund or its corresponding Portfolio will achieve their objectives. The
Trust may withdraw a Feeder Fund's investment in its Portfolio at any time, and
<PAGE>
will do so if the Trust's Trustees believe it to be in the best interest of the
Feeder Fund's shareholders. If the Trust were to withdraw a Feeder Fund's
investment in its Portfolio, the Trust could either invest the Feeder Fund's
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 Feeder Fund's investment in its Portfolio, the Feeder Fund could
receive securities from the Portfolio instead of cash, causing the Feeder 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 the
Portfolio will notify its corresponding Feeder 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 Feeder Fund's
investment in its Portfolio.
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 Feeder Fund(s) and vote in accordance
with shareholder instructions. Feeder 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 Feeder Fund shareholders not voting will be voted by
the Trustees of the Trust in the same proportion as the Feeder Fund
shareholders who do, in fact, vote. Of course, a Feeder Fund could be outvoted,
or otherwise adversely affected, by other investors in its Portfolio.
Each Portfolio may sell interests to other investors in addition to its
corresponding Feeder Fund. These investors may be mutual funds which offer
shares to their shareholders with different costs and expenses than the Feeder
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 [___________] by calling
[___________].
MANAGEMENT OF THE TRUST AND PORTFOLIO SERIES
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
<PAGE>
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 investment policies as the Boards of Trustees of the Trust
and the Portfolio Series may determine and pursuant to (i) Investment Advisory
Agreements with the Trust with respect to Intermediate Bond Fund and Select
Equity Fund, and (ii) Investment Advisory Agreements with the Portfolio Series
with respect to each Portfolio, Diversified manages the assets of each such
Fund or Portfolio. For its services under the Investment Advisory Agreements,
Diversified receives fees from such Funds or Portfolios accrued daily and paid
monthly at an annual rate equal to the percentages specified in the table below
of such Funds' or the Portfolios' 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.
For each Fund or Portfolio listed in the table below, Diversified has
entered into an Investment Subadvisory Agreement with the indicated
Subadvisers. For their services under each Investment 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 Fund's or
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
Fund or Portfolio by the fee schedule and dividing by 12. Each fee will be paid
on a quarterly basis.
<PAGE>
<TABLE>
<CAPTION>
FUND OR COMPENSATION(%) COMPENSATION(%)
PORTFOLIO SUBADVISERS TO ADVISER(1) TO SUBADVISERS
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
Intermediate Bond Fund Stephens Capital Management [ ] [ ](2)
(a division of Stephens)
High-Yield Bond Portfolio Delaware Investment Advisers 0.55 (3)
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (4)
Equity Growth Portfolio Chancellor LGT Asset Management, Inc. 0.62 (5)
Special Equity Portfolio (6) 0.80 0.50
Select Equity Fund Stephens Capital Management [ ] [ ](2)
(a division of Stephens)
International Equity Portfolio Capital Guardian Trust Company 0.75 (7)
</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) In addition to the subadvisory fees noted in the table, pursuant to an
agreement between Diversified and Stephens, Stephens will receive additional
compensation from the Funds' distributor for providing distribution and
marketing services with respect to the Shares. See "Distribution Plan and
Agreement" and "Strategic Alliance Agreement" herein. Stephens will also
receive compensation from the Funds for providing shareholder services to
customers of Stephens who own Shares. See "Service Agents" herein.
(3) 0.40% on the first $20,000,000 of average net assets of the High-Yield
Bond Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on assets in
excess of $40,000,000.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. It is the Adviser's responsibility to select, subject to
the review and approval of the Board of Trustees, appropriate subadvisers with
<PAGE>
a distinguished background and to review such subadviser's continued
performance.
It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the Fund or Portfolio and to place the purchase and sales orders
for securities transactions of such Fund or Portfolio, subject in all cases to
the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective Fund or Portfolio consistent with the guidelines
and directions set by Diversified and the Boards of Trustees of the Trust and
the Portfolio Series. Each Subadviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
investments and effecting securities transactions for a Fund or Portfolio.
Diversified has entered into an Investment Subadvisory Agreement with
respect to the Money Market 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
representatives of MONY are primarily responsible for the day-to-day management
of the 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): David E. Wheeler, Investment Vice President and
Portfolio Manager (since 1997, employed by Capital Management Group since 1994;
previously employed at AIG Investment Advisers).
Diversified has entered into Investment Subadvisory Agreements with
respect to the Intermediate Bond Fund and the Select Equity Fund with Stephens
Capital Management ("SCM"), a division of Stephens, which is an indirect,
wholly-owned subsidiary of Stephens Group, Inc. Total assets under management
for all equity and fixed income clients of SCM at [ ], 1997 were approximately
$[ ] and $[ ], respectively, none of which were assets of registered investment
companies. The principal business address of SCM is 111 Center Street, Little
Rock, Arkansas 72201. The Funds are the first registered investment companies
for which SCM performs investment advisory functions. Investment management
decisions of SCM are made by committee and not by managers individually.
Diversified has entered into an Investment Subadvisory Agreement with
respect to the High-Yield Bond Portfolio with Delaware Investment Advisers
("Delaware"), a division of Delaware Management Company, Inc. Delaware was
formed in February 1985 and is owned by Lincoln National Corp. Total assets
<PAGE>
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 representative of
Delaware 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 an Investment 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 an Investment 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
Investment 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. The principal business address of Ark is 55
Water Street, New York, New York 10041. Total assets under management for
<PAGE>
all small capitalization clients at December 31, 1996 were approximately
$1.9 billion, $75 million of which were assets of registered investment
companies. The following representative of Ark 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 representatives of Liberty 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 representative of Pilgrim 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).
<PAGE>
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 06880. The following representative of
Westport 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 an Investment 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.
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:
<PAGE>
Adviser's
Portfolio(1) compensation(1)(2)
Money Market Portfolio 0.25%
High-Yield Bond Portfolio 0.00%
Equity Value Portfolio 0.10%
Equity Growth Portfolio 0.69%
Special Equity Portfolio 0.79%
International Equity Portfolio 0.68%
(1) As of December 31, 1996, the Equity Value Portfolio had been in operation
for less than a full fiscal year; the Adviser's compensation rate with respect
to this Portfolio represents annualized fees in effect for its initial fiscal
year ended December 31, 1996. The Adviser's annual compensation rate with
respect to the Equity Growth Portfolio was reduced from 0.70% to 0.62% of the
Portfolio's average daily net assets, effective November 15, 1996. As of the
same date, the Intermediate Bond and Select Equity Funds had not commenced
operations.
(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 for the Shares
of each Fund in accordance with Rule 12b-1 under the Investment Company 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, Diversified Investors Securities Corp.
(the "Distributor") acts as the agent of the Funds in connection with the
offering of Shares pursuant to a distribution agreement with the Trust with
respect to the Shares. The Distributor's address is 4 Manhattanville Road,
Purchase, New York 10577.
Under the Distribution Plan, the Distributor receives a fee from each Fund
at an annual rate equal to 0.25% of the average daily net assets attributable
to the Stephens Institutional Class of that Fund, which fee is in anticipation
of, or as reimbursement for, expenses incurred in connection with the sale of
Shares of that Fund. These expenses include (i) payments of quarterly trail or
maintenance commissions to registered representatives of the Distributor or
Stephens in an amount equal to on an annual basis 0.25% of the average daily
net assets maintained in the Fund by customers of Stephens, and (ii)
advertising and marketing expenses of Stephens (including certain expenses in
soliciting new or existing clients of Stephens) 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. The distribution fee with respect to the
Stephens Institutional Class is currently being waived.
<PAGE>
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.
Diversified, as Administrator, receives a fee from each Fund accrued daily
and paid monthly at an annual rate equal to [___]% of the average daily net
assets of the Fund. Diversified acts as Administrator to the Portfolios
pursuant to the Advisory Agreement with the Portfolio Series and receives no
additional compensation for providing such administrative services.
SERVICE AGENT
Pursuant to a Shareholder Services Agreement between Stephens and the
Trust, Stephens as Service Agent provides shareholder services to all holders
of Shares. As Service Agent, Stephens receives a fee from each Fund accrued
daily and paid monthly at an annual rate equal to [___]% of the average daily
net assets attributable to the Stephens Institutional Class of the Fund.
All holders of Shares must be represented by Stephens as Service Agent.
The services provided by Stephens may include, among others, (i) establishing
and maintaining shareholder accounts and records, (ii) processing purchase and
redemption transactions, (iii) arranging for bank wires, (iv) answering client
inquiries regarding the Trust, including, among other things, the net asset
value of Shares, account balances, dividend amounts and dividend payment dates,
(v) assisting clients in changing account designations and addresses, (vi)
providing periodic statements showing the client's account balance, (vii)
transmitting proxy statements, periodic reports, updated Prospectuses and other
<PAGE>
communications to shareholders and, with respect to meetings of shareholders,
collecting, tabulating and forwarding to the Trust executed proxies, and (viii)
obtaining such other information and performing such other services as
customers of Stephens may reasonably request and agree upon with Stephens. In
addition, Stephens shall prepare and file with the appropriate governmental
agencies, such information, returns and reports as are required to be so filed
for reporting (i) dividends and other distributions made, (ii) amounts withheld
on dividends and other distributions and payments under applicable federal and
state laws, rules and regulations and (iii) gross proceeds of sales
transactions as required. Stephens may separately charge its customers
additional fees only to cover the provision of additional or more comprehensive
services not already provided as Service Agent, or of the type or scope not
generally offered by a mutual fund, such as enhanced retirement or trust
reporting. Stephens will transmit to shareholders who are its customers
appropriate disclosures of any fees that it may charge them directly.
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. Securities may be held by subcustodians approved by the Board of
Trustees.
STRATEGIC ALLIANCE AGREEMENT
Diversified and Stephens have entered into a Strategic Alliance Agreement
pursuant to which Diversified has agreed (subject to and consistent with its
fiduciary and other responsibilities, including those under the 1940 Act and
the Investment Advisers Act of 1940, as amended (the "Advisers Act")), among
other things, to (i) recommend the establishment of the Stephens Institutional
Class and the Stephens Premium Class of the Funds, (ii) recommend the
establishment of the Stephens Intermediate Bond and Select Equity Funds, and
(iii) provide services necessary to establish such Classes and Funds. Under the
terms of the Agreement, Diversified would retain from all revenues attributable
to the Stephens Institutional Class and the Stephens Premium Class of the Funds
("Gross Revenues") a fee equal to the following percentages of the average
daily net assets attributable to the Stephens Institutional Class and the
Stephens Premium Class of the Funds: 0.14% of the first $250 million in assets;
0.125% of the next $500 million in assets; 0.09% of the next $750 million in
assets; 0.04% of the next $250 million in assets; 0.02% of the next $250
million in assets; and, 0.01% of all assets over $2 billion. In addition,
Diversified shall be entitled to pay (or be reimbursed) from Gross Revenues,
<PAGE>
fees and expenses attributable to ongoing registration and compliance regarding
the Shares, including costs attributable to registration, custodial, accounting
and legal services. All other Gross Revenues are to be retained by Stephens.
Pursuant to the Strategic Alliance Agreement, Diversified has agreed
(subject to and consistent with its fiduciary and other responsibilities,
including those under the 1940 Act and the Advisers Act) not to recommend that
additional classes of shares of the Trust be established, if such shares would
be available for sales through a competitor of Stephens in certain markets in
which Stephens participates. The Agreement is terminable after December 31,
1998, and renews automatically each year thereafter for a one-year period
unless terminated by any party upon written notice to the other party.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES. The Funds offer other classes of shares. Stephens Institutional
Class shares are offered by this Prospectus. Shares are offered for sale at net
asset value without an initial sales charge or sales load exclusively to
customers of Stephens who have entered into an investment advisory relationship
with Stephens. The minimum initial investment amount is [$__________]; the
minimum subsequent investment amount is [$__________].
Shares 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. 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 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 receives distribution fees from the Funds. See "Management of
the Trust and Portfolio Series -- Distribution Plan and Agreement" herein.
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.
<PAGE>
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.
For each shareholder, Stephens as Service Agent 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 Stephens Inc. and mailing
such payment to:
Stephens Capital Management
c/o Stephens Inc.
111 Center Street
Little Rock, AK 72201
Attention: Ms. Tammy Stewart
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. To
obtain more instructions for purchases by wire transfer or to obtain more
information on how to purchase Shares, please call Ms. Tammy Stewart of
Stephens Capital Management at (501) 374-4361.
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 Funds 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 New
York Stock Exchange is closed, when trading on the Exchange is restricted, or
when the SEC determines that an emergency exists to warrant such an action, the
Trust may suspend redemption rights or postpone the date of payment.
<PAGE>
Investors subject to federal income tax who redeem Shares may recognize
capital gain or loss for federal income tax purposes. 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.
REDEMPTIONS BY MAIL
Redemption requests may be mailed to Stephens as Service Agent 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
Stephens Capital Management at the following address:
Stephens Capital Management
c/o Stephens Inc.
111 Center Street
Little Rock, AK 72201
Attention: Ms. Tammy Stewart
REDEMPTIONS 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. 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.
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
<PAGE>
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 the identical class of the
other Funds offered by this Prospectus 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. To effect exchanges, investors should
call Ms. Tammy Stewart of Stephens Capital Management at (501) 374-4361.
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. Participants in any Stephens Capital Management program
who are subject to federal income tax and sell shares in such program in order
to invest in Shares of the Funds 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 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 to risk of loss if such instruction is
subsequently found not to be genuine. The Trust, the Distributor and Stephens
will employ reasonable procedures, including requiring investors to give
<PAGE>
certain identification information and tape recording of telephone
instructions, to confirm that instructions communicated by telephone are
genuine. To the extent that the Trust, the Distributor or Stephens 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,
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.
Historical performance information for periods prior to the establishment
of the Stephens Institutional Class shares for each of the Funds will be that
of the respective Diversified Class shares and will be presented in accordance
with applicable SEC staff interpretations.
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:
<PAGE>
MONY POOLED
FUND SEPARATE ACCOUNT
Money Market...................... Pooled Account No. 4
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 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.
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............... ----- ----- ----- ----- -----
High-Yield Bond............ N/A N/A N/A N/A -----
Equity Value............... N/A N/A N/A N/A -----
Equity Growth.............. ----- ----- N/A N/A -----
Special Equity............. ----- ----- ----- ----- -----
International Equity....... ----- ----- N/A N/A -----
Composite Performance of Subadvisers. The following table sets 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, Equity Growth
Fund and Aggressive Equity 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.
<PAGE>
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 the Investment Company
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.
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.
The Subadvisers' composite performance data shown below were calculated in
accordance with recommended standards of the Association for Investment
Management and Research, retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses, and
deductions for brokerage commissions and execution costs. 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.
<PAGE>
Since
1 Year 5 Years 10 Years Inception
-------- -------- -------- ---------
Delaware Investment Advisers,
Subadviser to High-Yield Bond
Portfolio (1)
Subadviser's composite (2).... ___% ___% ___% ___%
Benchmark Index (3)........... ___% ___% ___% ___%
Peer Group (4)................ ___% ___% ___% ___%
Ark Asset Management Co., Inc.
Subadviser to Equity Value
Portfolio (5)
Subadviser's composite (6).... ___% ___% ___% ___%
Benchmark Index (7)........... ___% ___% ___% ___%
Peer Group (8)................ ___% ___% ___% ___%
Chancellor LGT Asset Management
Inc., Subadviser to Equity Growth
Portfolio (9)
Subadviser's composite (10)... ___% ___% ___% ___%
Benchmark Index (11).......... ___% ___% ___% ___%
Peer Group (12)............... ___% ___% ___% ___%
- -----------------
(1) Performance 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 Market Yield Index. The
Salomon Brothers High-Yield Market Index tracks the performance of below
investment-grade corporate bonds issued in the United States. The index
includes cash-pay and deferred-interest bonds that are public, have a fixed
coupon and are non convertible. To enter the index, bonds must also have $50
million or more in face value outstanding, one year or more left to maturity,
and one high-yield rating by Moody's or Standard & Poor's. The index excludes
bonds of bankrupt issuers.
(4) The Peer Group is the Lipper High Current Yield Fund Index. The Lipper High
Current Yield Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "Aim at high (relative) current
yield from fixed income securities. No quality or maturity restrictions. Tend
to invest in lower grade debt issues".
(5) Performance through December 31, 1996.
(6) Commencement of investment operations is April 1, 1985 for the Subadviser's
composite.
(7) The Benchmark Index is the Russell 1000 Value Index. The Russell 1000 Value
Index measures the performance of those companies included in the Russell 1000
Index with lower price-to-book ratios and lower forecasted growth values. The
Russell 1000 Index measures the performance of the one thousand largest U.S.
companies based on total market capitalization, which represents approximately
88% of the investable U.S. equity market.
(8) The Peer Group is the Lipper Growth & Income Fund Index. The Lipper Growth
& Income Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "A fund which combines a growth of
earnings orientation and an income requirement for level and/or rising
dividends".
(9) Performance through December 31, 1996.
<PAGE>
(10)Commencement of investment operations is January 1, 1984 for the
Subadviser's composite.
(11) The Benchmark Index is the Russell 1000 Growth Index. The Russell 1000
Growth Index measures the performance of those companies included
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values. The Russell 1000 Index measures the performance of
the one thousand largest U.S. companies based on total market capitalization,
which represents approximately 88% of the investable U.S. equity market.
(12) The Peer Group is the Lipper Growth Fund Index. The Lipper Growth Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which normally invests in companies whose
long-term earnings are expected to grow significantly faster than the earnings
of the stocks represented in the major unmanaged stock indices".
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 New York Stock Exchange, currently 4:00 p.m., New York
time, unless the Exchange closes earlier, by dividing the value of a Fund's net
assets attributable to its Stephens Institutional Class (i.e., the value of its
investment in that Fund's Portfolio and other assets attributable to the class
less the liabilities attributable to the class, including expenses payable or
accrued) by the number of Shares of the Fund outstanding at the time the
determination is made.
Each Fund 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 Boards of Trustees of the Trust and the Portfolio Series. 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
investment income" includes all dividends, interest and other income earned by
a Fund, net of a Fund's expenses.
Investors may elect to receive dividends and distributions declared by a
Fund either in cash or additional Shares of that Fund at the net asset value
<PAGE>
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 gains.
TAX MATTERS
The following discussion is for general information only and,
specifically, does not purport to address the taxation of investors in all
circumstances. 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.
Investors 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
<PAGE>
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 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
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
<PAGE>
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 Investment
Advisory Agreements.
In the event a particular expense is not reasonably allocable by class or
to a particular class, it shall be treated as a Fund expense or a Trust
expense. Trust expenses directly attributable to a Fund are charged to the
Fund; other expenses are allocated proportionately among all the series in the
Trust in relation to the net assets of each series.
Total expenses of each Fund for the fiscal year ended December 31, 1996
(expressed as a percentage of average daily net assets) are set forth in the
following table. No Stephens Institutional Class shares were outstanding during
that year.
Fund(1) Total expenses(1)(2)
Money Market Fund 0.80%
High-Yield Bond Fund 1.10%
Equity Value Fund 1.07%
Equity Growth Fund 1.20%
Special Equity Fund 1.49%
International Equity Fund 1.41%
(1) As of December 31, 1996, the High-Yield Bond, Equity Value and
International Equity Funds had 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 these
Funds will be responsible are listed above under "Expenses". As of the same
date, the Intermediate Bond and Equity Funds had not commenced operations.
(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
<PAGE>
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. The Trust may also divide shares in each series into classes.
Shares of each class of a Fund represent an equal pro rata interest in
such Fund and, generally, have identical voting, dividend, liquidation, and
other rights, preferences, powers, terms and conditions, except that: (a) each
class has a different designation; (b) each class of shares bears any class
expenses; (c) each class has exclusive voting rights on any matter submitted to
shareholders that related solely to its distribution arrangement, and (d) each
class has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class.
THE FUNDS OFFER OTHER CLASSES OF SHARES. STEPHENS INSTITUTIONAL CLASS
SHARES ARE OFFERED BY THIS PROSPECTUS. STEPHENS PREMIUM CLASS SHARES OF THE
FUNDS AND DIVERSIFIED CLASS SHARES OF CERTAIN OF THE FUNDS AND CERTAIN OTHER
SERIES OF SHARES OF THE TRUST ALSO ARE OFFERED BY THE TRUST. DIVERSIFIED CLASS
SHARES AND STEPHENS PREMIUM CLASS SHARES ARE SUBJECT TO DIFFERENT DISTRIBUTION
AND SHAREHOLDER SERVICING EXPENSES THAN STEPHENS INSTITUTIONAL CLASS SHARES,
WHICH WILL AFFECT THE PERFORMANCE OF THOSE SHARES. CALL THE DISTRIBUTOR AT
(914) 697-8000 FOR MORE INFORMATION.
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 matters for a
shareholder vote. Shares of each Fund or class are entitled to vote separately
to approve amendments to the Trust's distribution plan applicable to that Fund
or class 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 Investment Company 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
<PAGE>
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. The risk of a Fund
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
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.
<PAGE>
* * *
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 ____
Investment Objectives and Principal Policies ____
Certain Additional Investment Techniques,
Restrictions and Policies ____
Core-Feeder Structure ____
Management of the Trust and Portfolio Series ____
Purchases and Redemptions of Shares ____
Performance Information ____
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
PLEASE DIRECT INVESTOR INQUIRIES TO:
Stephens Capital Management
111 Center Street
Little Rock, Arkansas 72201
(501) 374-4361
<PAGE>
THE DIVERSIFIED INVESTORS FUNDS GROUP
DIVERSIFIED INVESTORS MONEY MARKET FUND
DIVERSIFIED INVESTORS HIGH QUALITY BOND FUND
DIVERSIFIED INVESTORS INTERMEDIATE GOVERNMENT BOND FUND
STEPHENS INTERMEDIATE 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
STEPHENS SELECT EQUITY FUND
DIVERSIFIED INVESTORS AGGRESSIVE EQUITY FUND
DIVERSIFIED INVESTORS INTERNATIONAL EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED _______, 1997
The Diversified Investors Funds Group (the "Trust") is comprised of
fifteen separate series of shares or 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"),
Stephens Intermediate Bond Fund (the "Intermediate 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"), Stephens Select Equity Fund (the "Select 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"). Shares of the Funds are
divided into separate classes of shares. Each Fund other than the Intermediate
Bond Fund and the Select Equity Fund issues Diversified Class shares. In
addition, the following Funds also issue Stephens Premium Class shares and
Stephens Institutional Class shares: Money Market Fund, Intermediate Bond Fund,
High-Yield Bond Fund, Equity Value Fund, Equity Growth Fund, Special Equity
Fund, Select Equity Fund and International Equity Fund.
<PAGE>
The Diversified Investors Funds Group
Four Manhattanville Road
Purchase, New York 10577
914-697-8000
TABLE OF CONTENTS PAGE
The Trust..................................................... __
Investment Objectives, 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...................................................... __
This Statement of Additional Information sets forth information which may
be of interest to investors but which is not necessarily included in the
separate Prospectuses (each a "Prospectus") for each of the classes of shares
of the Funds. This Statement of Additional Information should be read only in
conjunction with a Prospectus, a copy of which may be obtained by an investor
without charge. To obtain a Prospectus dated [________], 1997, as amended from
time to time, with respect to Diversified Class shares, please contact
Diversified Investors Securities Corp., the Funds' Distributor, at the address
and telephone number shown above for The Diversified Investors Funds Group. To
obtain a Prospectus dated [________], 1997, as amended from time to time, with
respect to Stephens Premium Class shares or Stephens Institutional Class
shares, please contact [ _________ ] at [ _________ ]. Terms used but not
defined herein, which are defined in a 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 a diversified, open-end 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 fifteen
separate series described herein. Each series, or Fund, other than the
Intermediate Bond Fund and the Select Equity Fund, seeks to achieve its
investment objective by investing all of its Assets in a corresponding
Portfolio, as follows:
CORRESPONDING PORTFOLIO OF
FUND 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
Each of the Portfolios is a series of Diversified Investors Portfolios
(the "Portfolio Series"). The Intermediate Bond Fund and the Select Equity Fund
seek to achieve their respective investment objectives by investing directly in
securities pursuant to the investment strategies and techniques specified
herein and in each Prospectus for the Funds. The Trust may create additional
series from time to time.
<PAGE>
The investment adviser of the Intermediate Bond Fund, the Select Equity
Fund and each Portfolio is Diversified Investment Advisors, Inc. ("Diversified"
or the "Adviser"). The subadviser (the "Subadviser") of each such Funds and
each Portfolio is set forth in the table below.
FUND OR PORTFOLIO CORRESPONDING SUBADVISER
Money Market Portfolio............ 1740 Advisers, Inc.
High Quality Bond Portfolio....... Merganser Capital Management Corporation
Intermediate Government Bond Portfolio 1740 Advisers, Inc.
Intermediate Bond Fund............ Stephens Capital Management
Government/Corporate Bond Portfolio 1740 Advisers, Inc.
High-Yield Bond Portfolio......... Delaware Investment Advisers
Balanced Portfolio................ Institutional Capital Corporation
Equity Value Portfolio............ ARK Asset Management Co., Inc.
Equity Income Portfolio........... 1740 Advisers, Inc.
Growth & Income Portfolio......... Putnam Advisory Company, Inc.
Equity Growth Portfolio........... Chancellor LGT Asset Management, Inc.
Special Equity Portfolio.......... (1)
Select Equity Fund................ Stephens Capital Management
Aggressive Equity Portfolio....... McKinley Capital Management,
Inc.
International Equity Portfolio.... Capital Guardian Trust Company
_________________
(1) Special Equity Portfolio 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 Fund or Portfolio listed above, the Adviser and its Subadviser
or Subadvisers are referred to herein collectively as the "Advisers."
INVESTMENT OBJECTIVES, POLICIES AND
ASSOCIATED RISK FACTORS
INVESTMENT OBJECTIVES
The investment objective of each Fund is described in each Prospectus for
that Fund. There can, of course, be no assurance that a Fund will achieve its
investment objective. Because the Money Market Fund, High Quality Bond Fund,
Intermediate Government Bond Fund, Government/Corporate Bond Fund, High-Yield
Bond Fund, Balanced Fund, Equity Value Fund, Equity Income Fund, Growth &
Income Fund, Equity Growth Fund, Special Equity Fund, Aggressive Equity Fund
and International Equity Fund seek to achieve their respective investment
objectives by investing all of their Assets in a corresponding Portfolio, all
references in this Statement of Additional Information to each such Fund
include its corresponding Portfolio, except as otherwise noted.
INVESTMENT POLICIES
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.
<PAGE>
The following supplements the discussion of the various investment
strategies and techniques employed by the Funds, as set forth in each
Prospectus for the Funds.
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. 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
and time deposits, 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
certificates of deposit and time deposits 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.
<PAGE>
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. A Fund 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 Funds 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.
<PAGE>
VARIABLE RATE AND FLOATING RATE SECURITIES
The Funds 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 Fund to invest fluctuating amounts, which
may change daily without penalty, pursuant to direct arrangements between the
Fund, 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 Fund'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 Fund 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 Fund may invest. The Advisers, on behalf of a
Fund, will consider on an ongoing basis the creditworthiness of the issuers of
the floating and variable rate demand obligations held by the Fund. The Funds
will not invest more than 15% (10% in the case of the Money Market Fund) 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 Fund may purchase from financial institutions participation interests
in securities in which such Fund may invest. A participation interest gives a
Fund an undivided interest in the security in the proportion that the Fund'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 Fund, 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 Fund may
invest. For certain participation interests, a Fund will have the right to
demand payment, on not more than seven days' notice, for all or any part of the
Fund's participation interest in the security, plus accrued interest. As to
these instruments, a Fund 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
<PAGE>
portfolio. A Fund will not invest more than 15% (10% in the case of the Money
Market Fund) 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
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
Fund under the supervision of the Portfolio Series' or the Trust's Boards 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 Fund 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 Fund's investment objective.
The Notes purchased by the Fund will have remaining maturities of 13 months or
less and will be deemed by the Board of Trustees of the Portfolio Series or the
Trust to present minimal credit risks and will meet the quality criteria set
forth above under "Investment Policies." The Fund will invest no more than 15%
(10% in the case of the Money Market Fund) of its net assets in such Notes and
<PAGE>
in other securities that are not readily marketable (which securities would
include floating and variable rate demand obligations as to which the Fund
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
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
Fund'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 Fund 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 Funds are fully collateralized, with such collateral being marked
to market daily.
The Funds 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 Fund 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 Fund may decline below the repurchase price of
those securities.
FOREIGN SECURITIES--ALL FUNDS
The Funds 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 Fund, 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
<PAGE>
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Fund's assets may be
released prior to receipt of payment, may expose a Fund 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.
FOREIGN SECURITIES--MONEY MARKET FUND
The Money Market Fund 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 Fund 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--FUNDS OTHER THAN MONEY MARKET FUND
Not more than 5% of a Fund'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 Fund 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 Funds 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
<PAGE>
Because some Funds 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 Funds 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 Funds 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.
A forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded
at a net price without commission. A Fund maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Funds 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 Funds other
than the International Equity Fund consideration of the prospect for currency
parities will be incorporated into the Advisers' long-term investment
decisions. Therefore these Funds 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 Fund'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 Fund's ability to utilize forward
contracts in the manner set forth in each Prospectus for the Funds 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 Fund 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 Fund's foreign currency denominated portfolio securities and the use of such
techniques will subject the Fund 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
<PAGE>
asset that is the subject of the hedge generally will not be precise. In
addition, a Fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit a Fund's ability to use such
contract to hedge or cross-hedge its assets. Also, with regard to a Fund'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 Fund's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Fund's assets that are the subject of such cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
The Funds may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, a Fund 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 Fund 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 Fund which are not readily marketable, will not exceed 15%
(10% in the case of the Money Market Fund) of the Fund'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 Funds may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, the Funds
would take delivery of such securities. When a Fund commits to purchase a
security on a "when-issued" or on a "forward delivery" basis, the Fund
establishes procedures consistent with the relevant policies of the SEC. Since
those policies currently recommend that an amount of a Fund's assets equal to
the amount of the purchase be held aside or segregated to be used to pay for
the commitment, the Fund 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 Fund 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 Fund may have to sell assets which
have been set aside in order to meet redemptions. Also, if a Fund determines it
is advisable as a matter of investment strategy to sell the "when-issued" or
"forward delivery" securities, a Fund 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 Fund's payment obligation).
ZERO COUPON OBLIGATIONS
A Fund 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
<PAGE>
until maturity. Since dividend income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Fund 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--
FUNDS OTHER THAN MONEY MARKET FUND
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 Fund may not achieve the
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 Fund 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 Fund 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 Fund 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 Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Fund'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 Fund 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 Fund 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 Fund 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 Fund 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 Fund 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
<PAGE>
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
clearinghouse associated with the exchange on which the contracts are traded, a
Fund 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 Fund which holds or intends to acquire fixed-income securities, is to
attempt to protect the Fund 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 Fund
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 Fund. If interest rates did increase, the value of the
debt security in a Fund would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund 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 Fund
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 Fund 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 Fund could then buy debt securities on
the cash market. To the extent a Fund enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund'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 Fund 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.
<PAGE>
In addition, futures contracts entail risks. Although the Advisers
believe that use of such contracts will benefit the Funds, if the Advisers'
investment judgment about the general direction of interest rates is incorrect,
a Fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Fund 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 Fund 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 in its futures positions.
In addition, in such situations, if a Fund 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 Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Futures Contracts. The Funds may 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 Fund 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 Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund'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 Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in
the price of securities which the Fund intends to purchase. If a put or call
option the Fund has written is exercised, the Fund 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 Fund'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 Fund 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 Fund 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.
<PAGE>
The Boards of Trustees of the Portfolio Series and the Trust have 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 Fund and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Fund does not exceed 5% of the market value of the total assets of the
Fund. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Fund may not exceed 50% of the market value of the
total assets of the Fund. Neither of these restrictions will be changed by the
Portfolio Series' or the Trust's Boards 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
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 Fund may purchase put options on the foreign currency. If the value of the
currency does decline, a Fund 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 Fund 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 Fund 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 Fund 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 Fund may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund 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 Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund 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 Fund 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 Fund 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 Funds intend that any call options on foreign currencies that they
write will be covered. A call option written on a foreign currency by a Fund is
"covered" if the Fund owns the underlying foreign currency covered by the call
<PAGE>
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
Fund 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 Fund
in cash, U.S. Government securities and other high quality liquid debt
securities in a segregated account with its custodian.
The Funds may also 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 the Fund 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 Fund 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 Fund 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 Fund 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
<PAGE>
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 Fund'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 obligations.
Until such time as the staff of the SEC changes its position, each Fund 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 Fund'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--FUNDS OTHER THAN MONEY MARKET FUND
The Funds may write (sell) covered call and put options to a limited
extent on their portfolio securities ("covered options"). However, a Fund 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 Fund.
When a Fund 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 Fund 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 Fund has no control, the Fund must
sell the underlying security to the option holder at the exercise price. By
writing a covered call option, a Fund 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 Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund 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
Fund has no control, the Fund must purchase the underlying security from the
<PAGE>
option holder at the exercise price. By writing a covered put option, a Fund,
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 Fund will
only write put options involving securities for which a determination is made
at the time the option is written that the Fund wishes to acquire the
securities at the exercise price.
A Fund 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 Fund 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.
When a Fund writes an option, an amount equal to the net premium received
by the Fund is included in the liability section of the Fund'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
Fund enters into a closing purchase transaction, the Fund 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 Fund 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
Fund.
A Fund may purchase call and put options on any securities in which it may
invest. A Fund 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 Fund, in exchange for the premium paid, to purchase a
security at a specified price during the option period. A Fund 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 Fund 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 Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund'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 Fund's
portfolio securities. Put options also may be purchased by a Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. A Fund 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.
<PAGE>
The Funds have adopted certain other nonfundamental policies concerning
option transactions which are discussed below. A Fund'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 Funds 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 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 Funds
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 Fund enters into such options
transactions under the general supervision of the Portfolio Series' and Trust's
Trustees.
OPTIONS ON SECURITIES INDICES--FUNDS OTHER THAN MONEY MARKET FUND
In addition to options on securities, the Funds 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
Funds 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 Funds 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 Funds' 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"--FUNDS OTHER THAN MONEY MARKET FUND
<PAGE>
In a short sale, a fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Fund 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 Fund 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 Fund 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 Fund's long position.
The Funds will not engage in short sales against the box for investment
purposes. A Fund 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 Fund wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal 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 Fund'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 Fund owns. There are certain
additional transaction costs associated with short sales against the box, but
the Funds 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 Fund'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 each Prospectus for a Fund, that
Fund may invest in obligations other than those listed previously, provided
such investments are consistent with the Fund'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 Boards of Trustees of
the Portfolio Series and the Trust. After purchase by a Fund, an obligation may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event would require a Fund to dispose of the
obligation, but the Advisers will consider such an event in their determination
of whether a Fund should continue to hold the obligation. A description of the
ratings used herein and in each Prospectus for the Funds 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.
<PAGE>
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 each 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
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);
<PAGE>
(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 Fund, other than the
Intermediate Bond Fund and Select Equity Fund) will not as a matter of
operating policy (except that no operating 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
<PAGE>
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
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
time deposits 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 Fund if the Advisers believe
that a transaction net of costs (including custodian charges) will help achieve
the Fund's investment objective.
<PAGE>
A Fund's purchases 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 Funds do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Fund 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 Fund 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 Fund 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 Fund 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 Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for a Fund 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 Fund. Such an event
might also adversely affect that Fund.
The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1994: $245,752.
Fiscal year ended December 31, 1995: $199,128.
Fiscal year ended December 31, 1996: $317,179.
Equity Income Portfolio
Fiscal year ended December 31, 1994: $487,599.
Fiscal year ended December 31, 1995: $377,904.
Fiscal year ended December 31, 1996: $565,943.
Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207.
Growth & Income Portfolio
Fiscal year ended December 31, 1994: $ 64,869.
Fiscal year ended December 31, 1995: $348,828.
Fiscal year ended December 31, 1996: $397,075.
Equity Growth Portfolio
Fiscal year ended December 31, 1994: $162,258.
<PAGE>
Fiscal year ended December 31, 1995: $174,716.
Fiscal year ended December 31, 1996: $670,631.
Special Equity Portfolio
Fiscal year ended December 31, 1994: $308,251.
Fiscal year ended December 31, 1995: $425,803.
Fiscal year ended December 31, 1996: $678,431.
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $15,490.
International Equity Portfolio
Fiscal year ended December 31, 1995: $ 38,261.
Fiscal year ended December 31, 1996: $211,629.
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 of a class 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 of a class
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 Fund, 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 price per share of each class of the Money Market Fund 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 shares of each class of the Money Market Fund,
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 Diversified Class shares of
the Money Market Fund for the year ended December 31, 1996 was 5.16%. For the
<PAGE>
same period, the annualized effective seven-day yield, based upon dividends
declared daily and reinvested monthly, of the Diversified Class shares of the
Money Market Fund was 5.30%.
ALL FUNDS
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the performance of each class of shares
of the Funds 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 total return of each class 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 in a
class (with all distributions reinvested) to reach the value of that
investment at the end of the periods. The Funds 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.
YIELD: The yield quotation of each class will be based with respect
to a class on the annualized net investment income per share over a
30-day period. The current yield for each class is calculated with
respect to a class by dividing the net investment income per share of the
class earned during the period by the net asset value per share of the
class on the last day of that period. The resulting figure is then
annualized. Net investment income per share of a class is determined by
dividing (i) the dividends and interest earned during the period
attributable to a class, minus accrued expenses for the period
attributable to a class, by (ii) the average number of shares of the
class entitled to receive dividends during the period multiplied by the
net asset value per share of the class on the last day of the period.
Historical performance information for periods prior to the establishment
(where applicable) of Stephens Premium Class shares or Stephens Institutional
Class shares for a Fund will be that of the respective Diversified Class shares
for that Fund and will be presented in accordance with applicable SEC staff
interpretations.
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
<PAGE>
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.
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
Any yield or total return quotation provided for a class of a Fund should
not be considered as representative of the performance of that class or Fund in
the future since the net asset value of shares of the class 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 class and of the Fund and corresponding
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 a class 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.
<PAGE>
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.
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.
<PAGE>
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.
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 each class of shares of each
Fund each day that the Advisers of the corresponding Fund are open for
business. As a result, a Fund will normally determine the net asset value of
its classes 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 attributable to a class less all of the
liabilities attributable to that class, by the total number of shares of that
class 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 each Prospectus for
the Funds.)
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
<PAGE>
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Boards of Trustees of
the Portfolio Series and the Funds.
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
(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' and the Trust's Boards 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 Fund 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.
<PAGE>
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.
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.... Co-Director, Urman's Health Clinical Research Program
Medical Center, University of Pennsylvania (since May
1995). Foundations Director, American Jewish
Committee (October 1993 to May 1995). Executive
Director, Food-People Allied to Combat Hunger Inc.
(February 1991 to September 1993). Her address is
Nine Evergreen Way, North Tarrytown, New York
10591. Age: 57.
<PAGE>
Tom A. Schlossberg*..... President, Diversified (since October 1992).
Executive Vice President and Head of Pension
Operations, The Mutual Life Insurance Company of New
York, (January 1993 to December 1993. 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.......... Consultant (since 1995). Executive Vice President
(November 1991 to January 1995), Director of Overseas
Pensions (January 1990 to October 1991), American
International Group Asset Management. His address is
355 Thornridge Drive, Stamford, Connecticut 06903.
Age: 62.
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,
(April 1993 to December 1993); Vice President and
General Counsel, Diversified, (since November 1993);
Vice President of DISC, (since November 1993). Age: 41.
Alfred C. Sylvain....... Treasurer and Assistant Secretary; Vice President
and Treasurer of Diversified, (since November 1993);
Treasurer of DISC., (since November 1993); Vice
President, Mutual Life Insurance Company of New York,
(since January 1991). Age: 45.
John F. Hughes.......... Assistant Secretary; Senior Counsel, Mutual Life
Insurance Company of New York, (since January 1988);
Vice President and Senior Counsel, Diversified,
(since November 1993); Assistant Secretary, DISC.
(since November 1993). Age: 56.
<PAGE>
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 [_____], 1997, the Trustees and officers of the Trust and the Portfolio
Series as a group held less than 1% of the outstanding shares of each class of
each Fund. As of the same date, there were no outstanding Stephens Premium
Class shares or Stephens Institutional Class shares of any Fund, and the
following investors held more than 5% of the outstanding Diversified Class
shares of the following Funds.
[Fund name]: ______.
[Fund name]: ______.
At [_____], 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 ____ ____
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 $9,750 $9,750
Trustee
Nikhil Malvania $9,750 $9,750
Trustee
Joyce Galpern Norden $9,750 $9,750
Trustee
<PAGE>
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 $9,750 $9,750
Trustee
Eugene M. Manella $9,750 $9,750
Trustee
Patricia L. Sawyer $9,750 $9,750
Trustee
INVESTMENT ADVISORY SERVICES
The Adviser manages the assets of (i) the Intermediate Bond and Select
Equity Funds and (ii) each Portfolio, in each case pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust or the Portfolio
Series, as the case may be, with respect to each such Fund or Portfolio, and
subject to the investment policies described herein and in each Prospectus for
the Funds. Subject to such further policies as the Boards of Trustees of the
Trust and the Portfolio Series may determine, the Adviser provides general
investment advice to each such Fund and each Portfolio.
For the Intermediate Bond and Select Equity Funds (each a "Stand-Alone
Fund") and 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 Stand-Alone Fund or Portfolio when authorized either by majority vote of
the investors in the Stand-Alone Fund or 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 Trust or Portfolio Series, as the case may be, 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
Stand-Alone Fund or 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 with respect to a Fund are described
in each Prospectus for the Fund.
<PAGE>
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 $10 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 400,000 participants and has 600 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. 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 Board of Trustees of the Portfolio Series, including a majority
of the Trustees who are not "interested persons" of the Portfolio Series. With
respect to the Stand-Alone Funds only, Diversified appointed Stephens as
subadviser in the context of a broad strategic alliance with Stephens through
which the Trust makes available its Stephens Premium Class shares and Stephens
Institutional Class shares exclusively to customers of Stephens. Pursuant to
the requirements of the 1940 Act, the selection of Stephens as subadviser to
the Stand-Alone Funds was approved by the Board of Trustees of the Trust,
including a majority of the Trustees who are not "interested persons" of the
Trust, and the initial shareholder of each Stand-Alone Fund.
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. 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.
<PAGE>
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 23,726
Equity Growth.............. 629,874 31,377
Special Equity............. 1,628,738 61,756
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................. $ 391,657 $22,086
High Quality Bond............ 562,958 9,897
Intermediate Government Bond. 286,019 44,808
Government/Corporate Bond... 1,011,116 --
High-Yield Bond............. 11,146 11,146
Balanced................... 639,345 51,146
Equity Income.............. 2,878,308 --
Growth & Income............ 639,911 28,140
Equity Growth.............. 1,272,213 --
Special Equity............. 2,018,861 92,511
International Equity....... 143,910 6,191
<PAGE>
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............... $ 445,832 $ 680
High Quality Bond.......... 627,049 --
Intermediate Government Bond 340,989 27,685
Government/Corporate Bond.. 1,232,524 --
High-Yield Bond............ 60,742 60,742
Balanced................... 995,489 --
Equity Income.............. 3,895,211 --
Equity Value............... 84,055 70,088
Growth & Income............ 1,052,349 39,117
Equity Growth.............. 1,730,632 1,462
Special Equity............. 3,255,893 47,350
Aggressive Equity.......... 95,060 57,964
International Equity....... 799,760 69,256
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 each Prospectus for the Funds. 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.
Diversified acts as Administrator to the Portfolios pursuant to the Advisory
Agreement with the Portfolio Series and receives no additional compensation for
providing such administrative services.
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, including, where applicable, a 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 cash and securities of each Fund and
Portfolio, handling the receipt and delivery of securities, determining income
and collecting interest on the investments of each Fund and Portfolio,
maintaining books of original entry for portfolio accounting and other required
<PAGE>
books and accounts, and calculating the daily net asset value of beneficial
interests in each Fund and Portfolio. Securities held by the Funds or
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
Trust or the Portfolio Series, as the case may be. The Custodian does not
determine the investment policies of the Funds or Portfolios or decide which
securities the Portfolios will buy or sell. A Fund or 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
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
<PAGE>
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
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.
<PAGE>
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.
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.
<PAGE>
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 separate Distribution Plan with respect to each
class of shares (each a "Distribution Plan") in accordance with Rule 12b-1
under the 1940 Act after having concluded that there is a reasonable likelihood
that each Distribution Plan will benefit the Trust, the class of each Fund
covered by that Distribution Plan, and the holders of shares of that class. The
Distribution Plans provide that the Distributor may receive a fee from each
Fund at an annual rate not to exceed 0.25% of the average daily net assets of a
Fund attributable to Diversified Class shares, 0.25% of the average daily net
assets of a Fund attributable to Stephens Premium Class shares, and 0.25% of
the average daily net assets of a Fund attributable to Stephens Institutional
Class shares, 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 distributing
Prospectuses and reports used for sales purposes, expenses of preparing and
printing of sales literature and other distribution-related expenses.
Each 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"). Each 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
<PAGE>
the purposes therefor) under the Distribution Plan. Each 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. Each Distribution Plan may be terminated 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 the applicable class. Each
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 applicable class 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 each Distribution Plan for a period
of not less than six years from the date of such plan, agreement, or report,
and for the first two years the Distributor will preserve such copies in an
easily accessible place.
As contemplated by each 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 separate Distribution Agreement with
respect to each class of shares (each a "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. Each
Prospectus contains a description of fees payable to the Distributor under the
Distribution Agreement with respect to the class of shares offered pursuant to
that Prospectus.
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
fifteen 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 Trust may also establish classes of shares within each
series at any time.
The assets of the Trust received for the issue or sale of the shares of
each class of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such class and constitute the underlying assets of such class. The underlying
assets of each class of each series are segregated on the books of account, and
are to be charged with the liabilities in respect to such class and with such a
share of the general liabilities of the Trust.
In the event a particular expense is not reasonably allocable by class or
to a particular class, it shall be treated as a Fund expense or a Trust
expense. Trust expenses directly attributable to a Fund are charged to the
Fund; other expenses are allocated proportionately among all the series in the
Trust in relation to the net assets of each series.
<PAGE>
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 class or series, or which are general or allocable to two or more classes
or series. In the event of the dissolution or liquidation of the Trust or any
class or series, the holders of the shares of any class or 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 class or series on matters affecting an
individual class or series. For example, a change in the distribution fee
applicable to a class would be voted only by shareholders of the class
involved. Similarly, 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
<PAGE>
from such report. A copy of such report will be provided without charge to each
person receiving this Statement of Additional Information.
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>
Investment Adviser of the Portfolio Series,
Administrator and Transfer Agent
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, NY 10577 THE DIVERSIFIED INVESTORS FUNDS GROUP
Diversified Investors Money Market Fund
Diversified Investors High Quality Bond Fund
Diversified Investors Intermediate Government
Bond Fund
Stephens Intermediate 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
Stephens Select Equity Fund
Diversified Investors Aggressive Equity Fund
Diversified Investors International Equity Fund
Investment Subadvisers of the Funds
Stephens Intermediate Bond Fund
and Stephens Select Equity Fund
Stephens Capital Management
111 Center Street
Little Rock, Arkansas 72201
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
<PAGE>
Diversified Investors High-Yield Bond Fund
Delaware Investment Advisers
2005 Market Street
Philadelphia, Pennsylvania 19103
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
<PAGE>
Diversified Investors International Equity Fund
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, CA 90071
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>
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
Financial Highlights
Report of Independent Accountants
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
Financial Highlights Report of Independent Accountants
(b) Exhibits:
1. Declaration of Trust of the Registrant; Amended and Restated Establishment
and Designation of Series of Shares of Beneficial Interest.(3)
2. By-Laws of the Registrant.(3)
6. Distribution Agreement between the Registrant and Diversified Investors
Securities Corp. ("DISC").(1)
6A. Distribution Agreement between the Registrant and DISC regarding
Stephens Premium Class shares.(**)
6B. Distribution Agreement between the Registrant and DISC regarding
Stephens Institutional Class shares. (**)
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. ("Diversified").(1)
9A. Administrative Services Agreement between the Registrant and
Diversified regarding Stephens Premium Class shares and Stephens Institutional
Class shares. (**)
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 (the "1940 Act").(1)
15A. Distribution Plan pursuant to Rule 12b-1 under the 1940 Act regarding
Stephens Premium Class Shares. (**)
15B. Distribution Plan pursuant to Rule 12b-1 under the 1940 Act regarding
Stephens Institutional Class shares. (**)
16. Schedule for computation of performance quotations.(2)
17. Financial Data Schedules.(**)
19. Powers of Attorney.(4)
______________________
(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.
<PAGE>
(3) Incorporated herein by reference from post-effective amendment no. 7
to the Registration Statement as filed with the Commission on February 28,
1997.
(4) Incorporated herein by reference from post-effective amendment no. 8
to the Registration Statement as filed with the Commission on April 29, 1997.
(**) 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 [ ], 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 [ ]
Diversified Investors High-Yield Bond Fund [ ]
Diversified Investors Equity Value Fund [ ]
Diversified Investors Aggressive Equity Fund [ ]
Diversified Investors International Equity Fund [ ]
Stephens Intermediate Bond Fund 0
Stephens Select Equity Fund 0
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
<PAGE>
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.
Diversified Investment Advisors, Inc. ("Diversified") is an indirect,
wholly-owned subsidiary of AEGON USA, Inc., a financial services holding
company whose primary emphasis is life and health insurance and annuity and
investment products. AEGON is an indirect, wholly-owned subsidiary of AEGON nv,
a Netherlands corporation which is a publicly traded international insurance
group.
Stephens Capital Management is a division of Stephens, Inc., which is an
indirect, wholly-owned subsidiary of Stephens Group, Inc.
Information as to the name, address and principal business of the
directors and executive officers of Diversified and Stephens, Inc. is included
in their respective Form ADV, each as filed with the Commission, and such
information is hereby incorporated herein by reference from each such Form ADV.
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 on 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 hereby
incorporated herein 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
21st day of July, 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 July 21, 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 previously
filed
<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 21st day of July, 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 July 21, 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
*/s/ Neal M. Jewell
Neal M. Jewell Trustee of the Portfolios
*/s/ Eugene M. Mannella
Eugene M. Mannella Trustee of the Portfolios
*/s/ Patricia L. Sawyer
Patricia L. Sawyer Trustee of the Portfolios
/s/ Alfred C. Sylvain
Alfred C. Sylvain Principal Accounting Officer of the
Portfolios
*By
Robert F. Colby
Attorney-in-Fact pursuant to powers of attorney previously
filed
