1940 Act File No. 811-7774
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 21 ............................................... X
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BT INVESTMENT PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal pursuant Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Jay S. Neuman, Esquire Copies to: Burton M. Leibert, Esq.
Investors Tower Willkie Farr & Gallagher
Pittsburgh, Pennsylvania 15222-3779 One Citicorp Center
(Name and Address of Agent for Service) 153 East 53rd Street
New York, New York 10022
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Explanatory
This Amendment to the Registrant's Registration Statement on Form N-1A
(the "Registration Statement") has been filed by the Registrant to
Section 8(b) of the Investment Company Act of 1940. However,
beneficial interests in the series of the Registrant are not being
registered under the Securities Act of 1933 (the "1933 Act"), because
such interests will be issued solely in private placement transactions
that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act. Investments in the Registrant's series
may only be made by investment companies, insurance company separate
accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. The registration Statement does not
constitute an offer to sell, or the solicitation of an offer to buy,
any beneficial interests in any series of the Registrant.
BT Investment Portfolios is comprised of fifteen portfolios. This Amendment to
the Registration Statement relates only to Latin American Equity Portfolio
BT INVESTMENT PORTFOLIOS
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GLOBAL HIGH YIELD SECURITIES PORTFOLIO
LATIN AMERICAN EQUITY PORTFOLIO
SMALL CAP PORTFOLIO
PACIFIC BASIN EQUITY PORTFOLIO
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
BT Investment Portfolios (the "Trust") is a no-load, open-end
management investment company which was organized as a trust under the
laws of the State of New York on March 27, 1993. Beneficial interests
in the Trust are divided into separate series, each having a distinct
investment objectives and policies, four of which, Global High Yield
Securities Portfolio, Latin American Equity Portfolio, Small Cap
Portfolio and Pacific Basin Equity Portfolio (each a "Portfolio" and,
collectively, the "Portfolios") are described herein. Beneficial
interests in each Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"1933 Act"). Investments in the Trust may only be made by investment
companies, insurance company separate accounts, common or commingled
trust funds or similar organizations or entities that are "accredited
investors" within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any "security" within the meaning of
the 1933 Act.
The investment objective of each Portfolio is as follows:
GLOBAL HIGH YIELD SECURITIES PORTFOLIO
The Portfolio seeks high current income from investment in a
non-diversified portfolio of high yield, non-investment grade debt
securities issued in many of the world's securities markets. Capital
appreciation will be considered when consistent with the primary
investment objective of high current income. The Portfolio intends to
invest in Brady bonds and other sovereign debt and in high risk, lower
quality debt securities commonly referred to as "junk bonds" and
regarded as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligation as well as in the debt securities of issuers
located in emerging markets, Brady bonds and other sovereign debt.
The Portfolio may borrow money for investment purposes and invest up
to 10% of its assets in restricted securities (including 144A
securities), which may involve greater risk and increased Portfolio
expenses.
The Global High Yield Securities Portfolio is classified as a
"non-diversified" investment company under the 1940 Act and may invest
a greater portion of its assets in a single issuer than a diversified
fund. As a result, the Portfolio may be more susceptible to any single
economic, political or regulatory occurrence than a diversified fund.
Under normal circumstances, at least 65% of the Portfolio's assets
will be invested in high yield, noninvestment grade debt securities of
both governmental and corporate issuers in both the major
industrialized markets and the so-called "emerging markets." The
world's industrialized markets generally include but are not limited
to the following: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain,
Sweden, Switzerland, the United Kingdom, and the United States; the
world's emerging markets generally include but are not limited to the
following: Argentina, Bolivia, Brazil, Chile, China, Colombia, Costa
Rica, the Czech Republic, Ecuador, Egypt, Greece, Hungary, India,
Indonesia, Israel, the Ivory Coast, Jordan, Malaysia, Mexico, Morocco,
Nicaragua, Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal,
Rumania, Russia, Slovakia, Slovenia, South Africa, South Korea, Sri
Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam and
Zimbabwe. The Portfolio may also invest in securities of issuers
located in Eastern Europe which may at any time revert back to
communist governments and nationalized industries. Higher risk is
associated with investing in developed countries such as expropriation
and withholding dividends at the source.
Although Bankers Trust Company ("Bankers Trust"), the Trust's
investment adviser (the "Adviser") considers both industrialized and
emerging, eligible for investment pursuant to the Portfolio's
objective, the Portfolio will not be invested in all such markets at
all times. Furthermore, investing in some of these markets may be
neither feasible nor desirable from time to time, due to the lack of
adequate custodial arrangements for the Portfolio's assets, exchange
controls and overly burdensome repatriation, the lack of organized and
liquid securities markets, and unacceptable political risks. Under
normal circumstances, the Portfolio will invest in at least three of
the emerging markets listed above.
The Portfolio generally invests in securities which are rated BBB or
lower by Standard & Poor's Ratings Group ("S&P") or Baa or lower by
Moody's Investors Service, Inc. ("Moody's") or, if unrated, of
comparable quality in the opinion of Bankers Trust. Securities which
are rated BBB by S&P or Baa by Moody's either have speculative
characteristics or are speculative. A description of the rating
categories is contained in the Appendix herein. There is no lower
limit with respect to the rating categories for securities in which
the Portfolio may invest.
The Portfolio is not required to dispose of debt securities whose
credit quality declines at some point after the security is purchased;
however, no more than 25% of the Portfolio's assets will be invested
at any time in securities rated less than CCC by S&P or Caa by Moody's
or, if unrated, of comparable quality in the opinion of Bankers Trust.
S&P's lowest rating for bonds is CI, which is reserved for income
bonds on which no interest is being paid, and D which is reserved for
debt in default and in respect of which payment of interest or
repayment of principal is in arrears. Moody's lowest rating is C,
which is applied to bonds which have extremely poor prospects for ever
attaining any real investment standing. The Portfolio may, from time
to time, purchase defaulted debt securities if, in the opinion of
Bankers Trust, the issuer may resume interest payments in the near
future. The Portfolio will not invest more than 10% of its total
assets (at the time of purchase) in defaulted debt securities, which
may be illiquid. other than as set forth above, there is no
restriction on the percentage of the Portfolio's assets which may be
invested in bonds of a particular rating.
Lower-rated securities including securities rated from BB to D by S&P
or Ba to C by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust, will usually offer higher yields than
higher-rated securities. However, there is more risk associated with
these investments. This is because of the reduced creditworthiness and
increased risk of default that these securities carry. Lower-rated
securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which
react primarily to fluctuations in the general level of interest
rates. Short-term corporate and market developments affecting the
prices and liquidity of lower-rated securities could include adverse
news impacting major issues, and underwriters or dealers in
lower-rated or unrated securities. In addition, since there are fewer
investors in lower-rated securities, it may be harder to sell
securities at an optimum time.
An economic downturn may adversely affect the value of some
lower-rated bonds. Such a downturn may especially affect highly
leveraged companies or companies in cyclically sensitive industries,
where deterioration in a company's cash flow may impair its ability to
meet its obligation to pay principal and interest to bondholders in a
timely fashion. From time to time, as a result of changing conditions,
issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have
issued. As a result of these restructurings, holders of lower-rated
securities may receive less principal and interest than originally
expected at the time such bonds were purchased. In the event of a
restructuring, the Portfolio may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.
The secondary trading market for lower-rated bonds is generally less
liquid than the secondary trading market for higher-rated bonds.
ASSET ALLOCATION. The Portfolio invests in debt obligations allocated
among diverse markets and denominated in various currencies, including
multi-currency units such as European Currency Units. The Portfolio
may purchase securities that are issued by the government or a company
or financial institution of one country but denominated in the
currency (or muti-currency unit) of another country.
NON-DIVERSIFIED INVESTMENT COMPANY. The Global High Yield Securities
Portfolio is classified as a "non-diversified" investment company so
that with respect to 50% of the Portfolio's assets it will be able to
invest more than 5% of its assets in obligations of one or more
issuers, while being limited with respect to the other half of its
assets to investments not exceeding 5% of the Portfolio's total
assets. (A "diversified" invest company would be required under the
1940 Act to maintain at least 75% of its assets in cash (including
foreign currency), cash items, U.S. government securities, and other
securities limited per issuer to not more than 5% of the investment
company's total assets.) In order to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder (the "Code"), the Portfolio, among
other thins, may not invest more than 25% of its asset in obligations
of any one issuer (other than U.S. government securities). As a
"non-diversified" investment company, the Portfolio may invest a
greater proportion of its assets in the securities of a smaller number
of issuers and therefore may be subject to greater market and credit
risk than a more broadly diversified fund.
The Portfolio will not have more than 25% of the current value of its
total assets in any single industry, provided that this restriction
shall not apply to debt securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and
practices: short-term instruments, floating rate bonds, zero coupon
bonds, sovereign and supranational debt obligations, Brady bonds, loan
participations and assignments, convertible bonds, preferred stock,
foreign currency exchange transactions, options on foreign currencies,
options on foreign bond indices, futures contracts on foreign bond
indices, options on futures contracts, Rule 144A securities,
when-issued and delayed delivery securities, securities lending,
repurchase agreements and reverse repurchase agreements.. See
"Additional Information" for further information.
LATIN AMERICAN EQUITY PORTFOLIO.
The Portfolio seeks long-term capital appreciation from investments
primarily in the equity securities (or other securities with equity
characteristics) of companies domiciled in, or doing business in,
Latin America; the production of any current income is incidental to
this objective.
The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic
over-the-counter markets and may invest in restricted or unlisted
securities.
It is expected under normal circumstances, that at least 65% of the
Portfolio's total assets will be invested in the equity securities of
Latin American issuers. For the purposes of this Registration
Statement, "Latin America" is defined as Mexico, and all the countries
in Central America and South America, including Argentina, Brazil,
Chile Columbia, Peru, and Venezuela. The Portfolio will invest in
Argentina, Brazil, Chile, Colombia, Peru, Mexico and Venezuela.
As used in this Registration Statement, "securities of Latin American
issuers" is defined as: (i) securities of companies the principal
securities trading market for which is Latin America; (ii) securities,
traded in any market, of companies that derive 50% or more of their
total revenue from either goods or services produced in Latin America
or sales made in Latin America; (iii) securities of companies
organized under the laws of, and with a principal office in, Latin
America; and (iv) securities issued or guaranteed by the government of
a country in Latin America, its agencies or instrumentalities,
political subdivisions or the central bank of such a country.
Determinations as to eligibility will be made by Bankers Trust, under
the supervision of the Board of Trustees of the Trust, based on
publicly available information and inquiries made to the issuers.
Bankers Trust intends to consider investment only in those countries
in Latin America in which it believes investing is feasible and does
not involve undue political risk. At the date of this amendment, this
list included Argentina, Brazil, Chile, Columbia, Mexico, Peru and
Venezuela. The list of acceptable countries will be reviewed by
Bankers Trust and approved by the Trust's Board of Trustees on a
periodic basis and any additions or deletions with respect to such
list will be made in accordance with changing economic and political
circumstances involving such countries.
The Portfolio may invest in securities of companies having various
levels of net worth, including small companies whose securities may be
more volatile than securities offered by larger companies with higher
levels of net worth.
In other countries and regions where capital markets are
underdeveloped or not easily accessed and information is difficult to
obtain, the Portfolio may choose to invest only at the market level.
Here, to the extent available and consistent with applicable
regulations, the Portfolio may seek to achieve country exposure
through the use of options or futures based on an established local
index or through investment in other registered investment companies.
Investment in other investment companies is limited in amount by the
1940 Act, will involve the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies
and may result in a duplication of fees and expenses.
FIXED INCOME INVESTMENTS. For purposes of seeking capital
appreciation, the Portfolio may invest up to 35% of its total assets
in debt securities of Latin American issuers which are rated at least
C by S&P or Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust. As an operating policy which may be changed
by the Board of Trustees, the Portfolio will not invest more than 10%
of its total assets in debt securities rated BBB or lower by S&P or
Baa or lower by Moody's. Securities which are rated BBB by S&P or Baa
by Moody's possess speculative characteristics. bonds rated C by S&P
are of the lowest quality and may be used when the issuer has filed a
bankruptcy petition, but debt payments are still being paid. Mood's
lowest rating is C, which is applied to bonds which have extremely
poor prospects of ever attaining any real investment standing. Certain
debt securities can provide the potential for capital appreciation
based on various factors such as changes in interest rates, economic
and market conditions, improvement in an issuer's ability to repay
principal and pay interest and ratings upgrades. Additionally,
convertible bonds offer the potential for capital appreciation through
the conversion feature, which enables the holder of the bond to
benefit from increases in the market price of the securities into
which they are convertible.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and
practices: Brady bonds, foreign currency exchange transactions,
options on foreign currencies, American Depositary Receipts ("ADRs"),
Global Depositary Receipts("GDRs"), European Depositary Receipts
("EDRs"), options on stocks, options on foreign stock indices, futures
contracts on foreign stock indices, options on futures contracts,
when-issued and delayed delivery securities, Rule 144A securities,
short-term instruments, repurchase agreements, leverage and securities
lending. See "Additional Information" for further information.
SMALL CAP PORTFOLIO.
The Small Cap Portfolio's investment objective is long-term capital
growth; the production of any current income is secondary to this
objective.
The Portfolio seeks to provide long-term capital growth by investing
in equity securities of smaller companies. The Portfolio's policy is
to invest in equity securities of smaller companies that the Adviser,
believes are in an early stage or transitional point in their
development and have demonstrated or have the potential for above
average capital growth. The Adviser will select companies which have
the potential to gain market share in their industry, achieve and
maintain high and consistent profitability or produce increased
earnings. The Adviser also seeks companies with strong company
management and superior fundamental strength.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Adviser takes advantage of its
market access and the research available to it to select investments
in promising growth companies that are involved in new technologies,
new products, foreign markets and special developments, such as
research discoveries, acquisitions, recapitalizations, liquidations,
or management changes, and companies whose stock may be undervalued by
the market. These situations are only illustrative of the types of
investment the Portfolio may make. The Portfolio is free to invest in
any common stock which in the Adviser's judgment provides above
average potential for long-term growth of capital and income.
Under normal market conditions, the Portfolio will invest at least 65%
of the value of its total assets in smaller companies (with market
capitalizations of less than $750 million at the time of purchase that
offer strong potential for capital growth). Small capitalization
companies have the potential to show earnings growth over time that is
well above the growth rate of the overall economy. The Portfolio may
also invest in larger, more established companies that the Adviser
believes may offer the potential for strong capital growth due to
their relative market position, anticipated earnings growth, changes
in management or other similar opportunities. The Portfolio will
follow a disciplined selling process to lessen market risks.
For temporary defensive purposes, when in the opinion of the Adviser
market conditions warrant, the Portfolio may invest all or a portion
of its assets in common stocks or larger, more established companies
or in fixed-income securities or short-term money market securities.
To the extent the Portfolio is engaged in temporary defensive
investments, the Portfolio will not be pursuing its investment
objective.
The Portfolio may also invest up to 25% of its assets in similar
securities of foreign issuers. For further information on foreign
investments and related hedging techniques, see "Risk Factors,"
"Additional Information," and Part B to this Registration Statement.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and
practices: short-term instruments, options on stocks, options on
stocks indices, futures contracts on stock indices, options on futures
contracts, foreign currency exchange transactions, options on foreign
currencies, Rule 144A securities, when-issued and delayed delivery
securities, securities lending, foreign instruments and repurchase
agreements. See "Additional Information" for further information.
PACIFIC BASIN EQUITY PORTFOLIO.
The Portfolio seeks long-term capital appreciation from investment
primarily in the equity securities (or other securities with equity
characteristics) of companies domiciled in, or doing business in the
Pacific Basin region, other than Japan; the production of any current
income is incidental to this objective. Investment in such securities
involves certain considerations which are not normally involved in
investment in securities of U.S. issuers. The Portfolio may invest up
to 10% of its assets in restricted securities (including 144A
securities) which may involve greater risk and increased Portfolio
expenses.
For purposes of this Registration Statement, "issuers domiciled in, or
doing business in, the Pacific Basin region (other than Japan)" shall
include securities of issuers: (1) which are organized under the laws
of Pacific Basin countries (see below); (2) for which the principal
securities trading market is in a Pacific Basin country; and (3) which
derive a significant proportion (at least 50 percent) of their
revenues or profits from goods produced or sold, investments made, or
services performed in the countries of the Pacific Basin or which have
at least 50 percent of their assets situated in the countries of the
Pacific Basin. The production of any income is incidental to this
objective. It is expected under normal conditions that at least 65% of
the Portfolio's assets will be invested in the equity securities of
issuers based in at least three countries in the Pacific Basin.
For purposes of this Registration Statement, the "Pacific Basin"
includes, but is not limited to, the following countries: Hong Kong,
India, Indonesia, Malaysia, New Zealand, Pakistan, the Philippines,
People's Republic of China ("China"), Singapore, Sri Lanka, South
Korea, Thailand, Taiwan, and Vietnam.
The Portfolio will be managed using a disciplined, value-oriented
investment philosophy that stresses the inherent value of, and the
medium term outlook for, the companies under examination. Experience
has proven that often the real basis of a business is quite different
from that perceived by the market: a misconception that usually
results in its shares trading below its true business or replacement
value. The exploitation of this "perception/reality" gap is a hallmark
of the investment style that has been adopted for the Portfolio, and a
potential source of value for its investors.
"Value" investing means trying to find companies which are mispriced
by the market for reasons of neglect, fashion or misconception. These
opportunities arise out of legislative changes, industrial
restructuring and technology advancements, for example. As a result,
the Adviser, and the sub-investment adviser attach great importance to
analyzing trends and accessing possible breaks with traditional price
patterns. At the company level, the emphasis is placed on assessing
the inherent "business" value of the firm. While this often varies
from the stock market's valuation, the Adviser and the sub-investment
adviser believe a company's stock price tends to gravitate to their
"business" value over time.
The Portfolio invests primarily in the equity securities of foreign
issuers, consisting of common stock and other securities with equity
characteristics. These issuers are primarily established companies
based in developed countries outside the United States. However, the
Portfolio may also invest in securities of issuers in underdeveloped
countries. Investments in these countries will be based on an
acceptable degree of risk in anticipation of superior returns. Under
normal circumstances, the Portfolio will invest at least 65% of the
value of its total assets in the equity securities of issuers based in
at least three countries in the Pacific Basin.
The Portfolio will not invest more than 20% of the value of its total
assets in issuers domiciled in China.
For further discussion of the unique risks associated with investing
in foreign securities in both developed and under developed countries,
see "Risk Factors" herein and in Part B.
The Portfolio's investments will generally be diversified among
several geographic regions and countries in the Pacific Basin.
Criteria for determining the appropriate distribution of investment
among various countries and regions include the prospects for relative
growth among foreign countries, expected levels of inflation,
government policies influencing business conditions, the outlook for
currency relationships and the range of alternative opportunities
available to international investors.
In countries and regions where capital markets are underdeveloped or
not easily accessed and information is difficult to obtain, the
Portfolio may choose to invest only at the market level. Here, to the
extent available and consistent with applicable regulations, the
Portfolio may seek to achieve country exposure through the use of
options on futures based on an established local index or through
investment in other registered investment companies. Investment in
other investment companies is limited in amount by the 1940 Act, will
involve the indirect payment of a portion of the expenses, including
advisory fees, of such other investment companies and may result in a
duplication of fees and expenses.
The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic
over-the-counter markets and may invest in restricted unlisted
securities.
The remainder of the Portfolio's assets will be invested in dollar and
non-dollar denominated short-term instruments. These investments are
subject to the conditions described under "Short-Term Investment"
below.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and
practices; short-term instruments, foreign currency exchange
transactions, options on foreign currencies, ADRs, GDRs, EDRs, options
on stocks, options on foreign stock indices, future contracts on
foreign stock indices, options on futures contracts, Rule 144A
securities, when-issued and delayed delivery securities, securities
lending and repurchase agreements. See "Additional Information" for
further information.
Investments in the Portfolios are not obligations of, or guaranteed
by, the Adviser with respect to each Portfolio, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
ADDITIONAL INFORMATION ABOUT THE INVESTMENT POLICIES OF EACH PORTFOLIO
APPEARS IN PART B. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT
OBJECTIVE OF THE PORTFOLIOS WILL BE ACHIEVED.
EQUITY SECURITIES. As used herein, "equity securities" are defined as
common stock, preferred stock, trust or limited partnership interests,
rights and warrants, to subscribe to or purchase such securities,
sponsored or unsponsored ADRs, EDRs, GDRs, and convertible securities,
consisting of debt securities or preferred stock that may be converted
into common stock or that carry the right to purchase common stock.
Common stocks, the most familiar type, represent and equity
(ownership) interest in a corporation. Although equity securities have
a history of long-term growth in value, their prices fluctuate based
on changes in a company's financial condition and on overall market
and economic conditions. Smaller companies are especially sensitive to
these factors.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers
to borrow money from investor. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay
current interest, but are purchased at a discount from their face
values. Debt securities, loans, and other direct debt have varying
degrees of quality and varying levels of sensitivity to changes in
interests rates. Longer-term bonds are generally more sensitive to
interest rate changes than short-term bonds.
Lower-quality foreign government securities are often considered to be
speculative and involve greater risk of default or price changes, or
they may already be in default. These risks are in addition to the
general risks associated with foreign securities.
SHORT-TERM INSTRUMENTS. The Portfolios intend to stay invested in the
securities described above to the extent practical in light of each
Portfolios objective and long-term investment perspective. However,
each Portfolio's assets may be invested in short-term instruments with
remaining maturities of 397 days or less to meet anticipated
redemptions and expenses for day-to-day operating purposes and when,
in Bankers Trust's opinion, it is advisable to adopt a temporary
defensive position because of unusual and adverse conditions affecting
the equity markets.
In addition, when a Portfolio experiences large cash inflows through
the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are
unavailable in sufficient quantities or at attractive prices, the
Portfolio may hold short-term investments for a limited time pending
availability of such equity securities. Short-term instruments consist
of foreign and domestic: (i) short-term obligations of sovereign
governments, their agencies, instrumentalities, authorities or
political subdivisions; (ii) other short-term debt securities rated Aa
or higher by Moody's or AA or higher by S&P or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial
paper; (iv) bank obligations, including negotiable certificates of
deposit, time deposits and banker's acceptances; and (v) repurchase
agreements. At the time the Portfolio invests in commercial paper,
bank obligations or repurchase agreements, the issuer of the issuer's
parent must have outstanding debt rated Aa or higher by Moody's or AA
or higher by S&P or outstanding commercial paper or bank obligations
rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion
of Bankers Trust. These instruments may be denominated in U.S. dollars
or in foreign currencies.
FIXED INCOME INVESTMENTS. For purposes of seeking capital
appreciation, Latin American Equity Portfolio may invest up to 35% of
its assets in debt securities (defined as bonds, notes, debentures,
commercial paper, certificates of deposits, time deposits and banker's
acceptances) of Latin American issuers which are rated at least C by
S&P or C by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust. See "Risk Factors." As an operating policy,
which may be changed by the Board of Trustees of the Trust, the
Portfolio will not invest more than 10% of its total assets in debt
securities rated BBB or lower by S&P or Baa or lower by Moody's.
Securities which are rated BBB by S&P or Baa by Moody's either have
speculative characteristics or are speculative. Investments in
lower-rated long-term obligations, including securities rated from BB
to C by S&P or Ba to C by Moody's, or if unrated, of comparable
quality in the opinion of Bankers Trust, involve special risks as
compared with investments in higher-rated debt obligations, including
greater sensitivity to general economic downturns and significant
increases in interest rates, greater market price volatility, and less
liquid secondary trading markets. Regardless of rating levels, all
debt securities considered for purchase (whether rated or unrated)
will be carefully analyzed by Bankers Trust to insure, to the extent
possible, that the planned investment is sound. Certain debt
securities can provide the potential for capital appreciation based on
various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and
pay interest and ratings upgrades. Additionally, convertible bonds
offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from
increases in the market price of the securities into which they are
convertible.
BRADY BONDS. Global High Yield Securities Portfolio and Latin American
Equity Portfolio may also invest in "Brady bonds," which have recently
been issued by the governments of Argentina, Costa Rica, Mexico,
Nigeria, Uruguay, Venezuela, Brazil and the Philippines, as well as
other emerging market countries. Most Brady bonds are currently rated
below BBB by S&P or Baa by Moody's. While Bankers Trust is not aware
of the occurrence of any payment defaults on Brady bonds, investors
should recognize that these debt securities have been issued only
recently and, accordingly, do not have a long payment history. Brady
bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are actively traded in the
secondary market for Latin American debt.
LEVERAGE. Global High Yield Securities Portfolio and Latin American
Equity Portfolio may each borrow up to one-third of the value of its
total assets, from banks or through the use of reverse repurchase
agreements, to increase its holdings of portfolio securities. Under
the 1940 Act, the Portfolio is required to maintain continuous asset
coverage of 300% with respect to such borrowings and to sell (within
three days) sufficient. Portfolio holdings to restore such coverage if
it should decline to less than 300% due to market fluctuations or
otherwise, even if such liquidations of each Portfolio's holdings may
be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of the Portfolio's securities and
money borrowed by the Portfolio will be subject to interest and other
costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) which may or may not exceed the
income received from the securities purchased with borrowed funds.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio agrees to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them
at a mutually agreed date and price. At the time the Portfolio enters
into a reverse repurchase agreement it will place in a segregated
custodial account cash, U.S. government securities or high grade,
liquid debt obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Portfolio may
decline below the repurchase price of those securities. Reverse
repurchase agreements are considered to be borrowings by the Portfolio
for purposes of the limitations described in "Leverage" above.
REPURCHASE AGREEMENTS. Each Portfolio may engage in repurchase
agreement transactions with banks and governmental securities dealers
approved by the Trustees of the Portfolio. Under the terms of a
typical repurchase agreement, a Portfolio would acquire an underlying
debt obligation of a kind in which the Portfolio could invest for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Portfolio to resell,
the obligation at an agreed price and time, thereby determining the
yield during the Portfolio's holding period. This arrangement results
in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. The value of the underlying
securities will be at least equal at all time to the total amount of
the repurchase obligations, including interest. The Portfolio bears a
risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Portfolio is delayed in
or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of
the underlying securities during the period in which the Portfolio
seeks to assert these rights. Bankers Trust, acting under the
supervision of the Board of Trustees of the Trust reviews the
creditworthiness of those banks and dealers with which the portfolio
enters in repurchase agreements and monitors on an ongoing basis the
value of the securities subject to repurchase agreements to ensure
that it is maintained at the required level. Repurchase agreements are
considered collateralized loans under the 1940 Act.
ZERO COUPON SECURITIES. The Global High Yield Securities Portfolio may
purchase zero coupon securities which are the separate income or
principal components of a debt instrument. These include risks that
are similar to those of other debt securities, although they may be
more volatile, and certain zero coupon securities move in the same
direction as interest rates.
FLOATING RATE BONDS. The Global High Yield Securities Portfolio may
purchase floating rate bonds which may have interest rates that move
in tandem with a benchmark, helping to stabilize their prices.
ASSET ALLOCATION. Global High Yield Securities Portfolio invests in
debt obligations allocated among diverse markets and denominated in
various currencies, including multi-currency units such as European
Currency Units ("ECUs"). The Portfolio may purchase securities that
are issued by the government or a company or financial institution of
one country but denominated in the currency (or multi-currency unit)
of another country. Bankers Trust will allocate the assets of the
Portfolio in securities of issuers in countries and currency
denominations where the combination of fixed income market returns,
the price appreciation potential of fixed income securities and
currency exchange rate movements will present opportunities primarily
for high current income and secondarily for capital appreciation. In
so doing, Bankers Trust intends to take full advantage of the
different yield, risk and return characteristics that investment in
the fixed income markets of different countries can provide.
Fundamental economic strength, credit quality, currency and interest
rate trends and diversification to manage risk will be the principal
determinants of the emphasis given to various country, geographic and
industry sectors within the Portfolio. Securities held by the
Portfolio may be invested without limitation as to maturity and are
summarized according to the following general classifications,
emerging market debt securities, Brady bonds, loan participations and
assignments, convertible bonds, preferred stock and industrialized
market debt securities.
EMERGING MARKETS DEBT SECURITIES. Global High Yield Securities
Portfolio invests in emerging market debt securities. In addition to
the risks inherent in investment in debt securities of U.S. issuers,
investments in debt securities denominated in foreign currencies
involve certain other risks. Less public information may be available
concerning non-U.S. issuers as compared to U.S. issuers. Non-U.S.
issuers are generally not subject to accounting, auditing and
financial practices comparable to those applicable to U.S. issuers.
In investing in bonds denominated in non-U.S. currencies, the
Portfolio may be subject to the risk of currency fluctuations.
Non-U.S. currencies may be affected by devaluation, adverse political
and economic developments, and governmental restrictions. The values
of foreign investments and the investment income derived from them may
also be affected adversely by changes in currency exchange control
regulations. Although the Portfolio will invest primarily in
securities denominated in U.S. dollars or in currencies that are fully
convertible into U.S. dollars, it is a possibility that individual
securities might suffer loss of value or liquidity due to foreign
government imposition of currency exchange controls.
Securities denominated in foreign currencies of U.S. or non-U.S.
issuers may be less liquid and their prices more volatile than
securities issued by U.S. issuers and denominated in U.S. dollars. In
addition, investing in non-U.S. securities and securities denominated
in non-U.S. currencies often entails costs not associated with
investments in U.S. dollar-denominated securities of U.S. issuers such
as the cost of converting U.S. dollars to foreign currency, and higher
brokerage commissions, custodial expenses and other fees. Non-U.S.
dollar denominated securities may be subject to withholding or other
taxes in the relevant jurisdiction, which may reduce the yield on the
securities to the Portfolio and which may not be recoverable by the
Portfolio or its investors.
SOVEREIGN AND SUPERNATIONAL DEBT SECURITIES. Debt instruments issued
or guaranteed by foreign governments, agencies and supranational
organizations ("sovereign debt obligations"), especially sovereign
debt obligations of developing countries, may involve a higher degree
of risk, and may be in default or present the risk of default. The
issuers of the obligation or the governmental authorities that control
the repayment of the debt may be unable or unwilling to repay
principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of
principal and interest may depend on political as well as economic
factors.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global High Yield Securities
Portfolio may invest in fixed and floating rate loans ("loans")
arranged through private negotiations between a borrower and one or
more institutions ("lenders"). The majority of the Portfolio's
investments in loans in emerging markets is expected to be in the form
of participations in loans ("participations") and assignments of
portions of loans from third parties ("assignments"). The Portfolio
may also invest in loans, participations or assignments of loans to
borrowers located in the industrialized world. Participations
typically will result in the Portfolio having a contractual
relationship only with the lender, not the borrower. The Portfolio
will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from
the borrower. In connection with purchasing participations, the
Portfolio generally will have no right to enforce compliance by the
borrower with the terms of the loan agreement relating to the loan
("loan agreement"), nor any rights of set-off against the borrower,
and the Portfolio may not directly benefit from any collateral
supporting the loan in which it has purchased the participation. As a
result, the Portfolio will assume the credit risk of both the borrower
and the lender that is selling the participation. In the event of the
insolvency of the lender selling the participation, the Portfolio may
be treated as a general creditor of the lender and may not benefit
from any set-off between the lender and the borrower. The Portfolio
will acquire participations only if the lender interpositioned between
the Portfolio and the borrower is determined by Bankers Trust to be
creditworthy. When the Portfolio purchases assignments from lenders,
the Portfolio will acquire direct rights against the borrower on the
loan; however, since assignments are arranged through private
negotiations between the potential assignees and assignors, the rights
and obligations acquired by the Portfolio as the purchaser of an
assignment may differ from, and be more limited than, those held by
the assigning lender.
The Portfolio may have difficulty disposing of assignments and
participations. The liquidity of such securities is limited and the
Portfolio anticipates that such securities could only be sold to a
limited number of institutional investors. The lack of a liquid
secondary market could have an adverse impact on the value of such
securities and on the Portfolio's ability to dispose of particular
assignments or participations when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower. The lack of a
liquid secondary market for assignments and participations may make it
more difficult in valuing the Portfolio and, therefore, calculating
the net asset value of the Portfolio. All assignments and
participations shall be considered to be illiquid securities by the
Portfolio. The investment by the Portfolio in illiquid securities,
including assignments and participations, is limited to a total of 15%
of total assets.
CONVERTIBLE SECURITIES. A convertible security is a fixed income
security, such as a bond or preferred stock which may be converted at
a stated price within a specific period of time into a specified
number of shares of common stock of the same or different issuer.
Convertible securities are senior to common stock in a corporation's
capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed income stream- generally
higher in yield than in the income derivable from a common stock but
lower than that afforded by a non-convertible debt security- a
convertible security also affords an investor the opportunity, through
its conversion feature, to participate in the capital appreciation of
common stock into which it is convertible.
In general, the market value of a convertible security is the higher
of its investment value (its value as a fixed income security) or its
conversion value (the value of the underlying shares of common stock
if the security is converted). As a fixed income security, the market
value of a convertible security generally increases when interest
rates decline and generally decreases when interest rates rise;
however, the price of a convertible security generally increases as
the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines.
Investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
PREFERRED STOCK. The Portfolios may also invest in preferred stock of
U.S. and non-U.S. issuers. Preferred stock has a preference in
liquidation (and, generally dividends) over common stock but is
subordinated in liquidation to debt. As a general rule the market
value of preferred stocks with fixed dividend rates and no conversion
rights varies inversely with interest rates and perceived credit risk,
with the price determined by the dividend rate. Some preferred stocks
are convertible into other securities, for example common stock, at a
fixed price and ratio or upon the occurrence of certain events. The
market price of convertible preferred stocks generally reflects an
element of conversion value. Because many preferred stocks lack a
fixed maturity date, these securities generally fluctuate
substantially in value when interest rates change; such fluctuations
often exceed those of long-term bonds of the same issuer. Some
preferred stocks pay an adjustable dividend that may be based on an
index, formula, auction procedure or other dividend rate reset
mechanism. In the absence of credit deterioration, adjustable rate
preferred stocks tend to have more stable market values than fixed
rate preferred stocks.
All preferred stocks are also subject to the same types of credit
risks of the issuer as those described above for corporate bonds. In
addition, because preferred stock is junior to debt securities and
other obligations of an issuer, deterioration in the credit rating of
the issuer will cause greater changes in the value of a preferred
stock than in more senior debt security with similar yield
characteristics. Preferred stocks may be rated by S&P and Moody's
although there is no minimum rating which a preferred stock must have
(and a preferred stock may not be rated) to be an eligible investment
for the Portfolio. Bankers Trust expects, however, that generally the
preferred stocks in which the Portfolio invests will be rated at least
CCC by S&P or Caa by Moody's or, if unrated, of comparable quality in
the opinion of Bankers Trust Preferred stocks rated CCC by S&P are
regarded as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations and represent the highest
degree of speculation among securities rated between BB and CCC;
preferred stocks rated Caa by Moody's are likely to be in arrears on
dividend payments. Moody's rating with respect to preferred stocks
does not purport to indicate the future status of payments of
dividends.
INDUSTRIALIZED MARKET DEBT SECURITIES. Under normal market conditions,
Global High Yield Securities Portfolio will invest in certain
securities that are issued by corporate or guaranteed borrowers
located in the world's industrialized markets. These debt securities
may pay interest in cash or in additional securities, at fixed or
adjustable rates or may be zero coupon securities and may be
convertible into common stock or other securities. Bankers Trust
selects securities for the Portfolio by considering, among other
factors, price and yield, interest coverage and financial resources,
the liquidity of the secondary trading market in the security, factors
relating to the issuer's industry in general and its sensitivity to
economic conditions, its operating history and quality of management,
and regulatory matters.
The Portfolio will invest in higher-yielding, lower-rated U.S.
dollar-denominated debt securities, which may involve high risk and
are predominantly speculative in character. These securities are
commonly known as "junk bonds." Investments in lower-rated long-term
debt obligations, including securities rated from BB to D by S&P or Ba
to C by Moody's or, if unrated, of comparable quality in the opinion
of Bankers Trust involve special risks as compared with investments in
higher-rated debt obligations, including greater sensitivity to
general economic downturns and significant increases in interest
rates, greater market price volatility, and less liquid secondary
trading markets. See "Risk Factors." The net asset value of the
Portfolio can be expected to increase or decrease depending on real or
perceived changes in the credit risks associated with the Portfolio's
investments, changes in interest rates and other factors generally
affecting the credit markers.
Most of the debt securities in which the Portfolio invests are rated,
at the time of investment, at least CCC by S&P or Caa by Moody's or,
if unrated, of comparable quality in the opinion of Bankers Trust.
Such securities are regarded by S&P as predominantly speculative with
respect to the capacity to pay interest and repay principal in
accordance with the terms of the contract. Debt rated Caa by Moody's
is regarded as being of poor standing and may be in default or there
may be present elements of danger with respect to the payment of
principal or interest.
Certain of the debt securities in which the Portfolio invests are
rated, at the time of investment, or may be downgraded while held by
the Portfolio, to ratings below CCC by S&P or Caa by Moody's or, if
unrated, their credit quality may be, or may decline to, levels less
than the equivalent of such ratings in the opinion of Bankers Trust.
Such debt securities are highly speculative and may be in default or
payment of interest or principal may be in arrears. The issuers of
such securities may be involved in bankruptcy or reorganization
proceedings or may be restructuring outstanding debt. Default debt
securities may never resume interest payments or repay principal.
Investing in bankrupt and troubled companies involves special risk.
The Portfolio will not invest more than 10% of its assets in debt
securities rated below CCC by S&P or Caa by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust.
The Portfolio is not required to dispose of debt securities whose
credit quality declines at some point after the security is purchased;
however, no more than 25% of the Portfolio's assets will be invested
at any time in securities rated less than CCC by S&P or Caa by Moody's
or, if unrated, of comparable quality in the opinion of Bankers Trust.
S&P's lowest ratings for bonds are Cl, which is reserved for income
bonds on which no interest is being paid and D, which is reserved for
debt in default and in respect of which payment of interest or
repayment of principal is in arrears. Moody's lowest rating is C,
which is applied to bonds which have extremely poor prospects for ever
attaining any real investment standing. Other than as set forth above,
there is no restriction on the percentage of the Portfolio's assets
which may be invested in bonds of a particular rating.
INVESTMENT COMPANY SECURITIES. Securities of other investment
companies may be acquired by each Portfolio to the extent permitted
under the 1940 Act, that is, each Portfolio may invest a maximum of up
to 10% of its total assets in securities of other investment companies
so long as not more than 3% of the total outstanding voting stock of
any one investment company is held by a Portfolio. In addition, not
more than 5% of each Portfolio's total assets may be invested in the
securities of any one investment company. A Portfolio may be permitted
to exceed these limitations by an exemptive order of the SEC. It
should be noted that investment companies incur certain expenses such
as management, custodian, and transfer agency fees, and, therefore,
any investment by a Portfolio in shares of other investment companies
would be subject to such duplicate expenses.
ADDITIONAL INVESTMENT LIMITATIONS. As diversified funds, no more than
5% of the respective assets of Latin American Equity Portfolio, Small
Cap Portfolio or Pacific Basin Equity Portfolio may be invested in the
securities of one issuer (other than U.S. government securities),
except that up to 25% of a Portfolio's assets may be invested without
regard to this limitation. A Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These
are fundamental investment policies of each Portfolio which may not be
changed without investor approval. No more than 15% of a Portfolio's
net assets maybe invested in illiquid or not readily marketable
securities (including repurchase agreements and time deposits with
remaining maturities of more than seven calendar days). Also, no more
than 10% of a Portfolio's net assets may be invested in securities
restricted as to transfer or re-sale. Additional investment policies
of the Portfolios are contained in Part B.
RISK OF INVESTING IN FOREIGN SECURITIES. Investors should realize that
investing in securities of foreign issuers involves considerations not
typically associated with investing in securities of companies
organized and operated in the United States. Investors should realize
that the value of the Portfolio's investments may be adversely
affected by changes in political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition of (or
change in) exchange control or tax regulations in foreign countries.
In addition, changes in government administrations or economic or
monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could
favorably or unfavorably affect the Portfolio's operations.
Furthermore, the economies of individual foreign nations may differ
from the U.S. economy, whether favorably or unfavorably, in areas such
as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is
publicly available with respect to foreign issuers than is available
with respect to U.S. companies. Most foreign companies are also not
subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. Any foreign investments
made by the Portfolio must be made in compliance with U.S. and foreign
currency restrictions and tax laws restricting the amounts and types
of foreign investments.
RISKS OF INVESTING IN EMERGING MARKETS. Because foreign securities
generally are denominated and pay dividends or interest in foreign
currencies, and the Portfolio holds various foreign currencies from
time to time, the value of the net assets of the Portfolio as measured
in U.S. Dollars will be affected favorable or unfavorably by changes
in exchange rates. In order to protect against uncertainty in the
level of future foreign currency exchange rates, the Portfolio is
authorized to enter in certain foreign current exchange transactions.
Furthermore, the Portfolio's foreign investments may be less liquid
and their prices may be more volatile than comparable investments in
securities of U.S. companies. The settlement periods for foreign
securities, which are often longer than those for securities of U.S.
issuers, may affect portfolio liquidity. Finally, there is generally
less government supervision and regulation of securities exchanges,
brokers and issuers in foreign countries than in the United States.
The Portfolio will invest in the securities of issuers based in some
of the world's underdeveloped emerging markets, including (in the case
of Global High Yield Securities Portfolio) those in Eastern Europe.
Investment in securities of issuers based in underdeveloped countries
entails all of the risks of investing in securities of foreign issuers
outlined in this section to a heightened degree. These heightened
risks include: (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and
a low or nonexistent volume of trading, resulting in lack of liquidity
and in price volatility; (iii) certain national policies which may
restrict the Portfolio's investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to
relevant national interests; and (iv) in the case of Eastern Europe,
the absence of developed capital market and legal structures governing
private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be
slowed or reversed by unanticipated events.
So long as the Communist Party continues to exercise a significant or,
in some countries, dominant role in Eastern European countries,
investments in such countries will involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of
a number of Eastern European countries expropriated large amounts of
private property in the past, in many cases without adequate
compensation, and there may be no assurance that such expropriation
will not occur in the future. In the event of such expropriation, the
Portfolio could lose a substantial portion of any investments it has
made in the affected countries. Further, no accounting standards exist
in Eastern European countries. Finally, even though certain Easter
European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may
be adverse to investors.
In addition to brokerage commissions, custodial services and other
costs relating to investment in emerging markets are generally more
expensive than in the United States. Such markets have been unable to
keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of a Portfolio
to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in
the value of the security, or if the Portfolio has entered into a
contract to sell the security, could result in possible liability to
the purchaser.
RISK FACTORS-GLOBAL HIGH YIELD SECURITIES PORTFOLIO. Under normal
circumstances, a majority of the Portfolio's assets will be invested
in fixed income securities offering high current income. Such high
yield, fixed income securities are ordinarily in the lower rating
categories of recognized rating agencies or will be non-rated and of
equivalent quality in the opinion of Bankers Trust. They are commonly
known as "junk bonds." The market value for such securities tends to
be less sensitive to changes in prevailing interest rates than
higher-rated securities but more sensitive to individual corporate
developments than higher-rated securities. Such lower-rated securities
also tend to be more sensitive to economic conditions than are
higher-rated securities. Accordingly, these securities are considered
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities
in the higher-rated categories. Even securities rated BBB or Baa by
S&P and Moody's, respectively, possess some speculative
characteristics. There are risks involved in applying credit ratings
as a method for evaluating high yield obligations in that credit
ratings evaluate the safety of principal and interest payments, not
market value risk. In addition, credit rating agencies may not change
credit ratings on a timely basis to reflect changes in economic or
company conditions that affect a security's market value. The
Portfolio will rely on Bankers Trust's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this
evaluation, Bankers Trust will take into consideration, among other
things, the issuer's ability to cover interest and fixed charges,
factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of
the issuer's management and regulatory matters.
The Portfolio is authorized to invest in high risk, lower quality debt
securities without limit. Investments in lower-rated long-term.
obligations, including securities rated from BB to D by S&P or Ba to C
by Moody's or, if unrated of comparable quality in the opinion of
Bankers Trust, involve special risks as compared with investments in
higher rated debt obligations, including greater sensitivity to
general economic downturns and significant increases in interest
rates, greater market price volatility, and less liquid secondary
trading markets. Regardless of rating levels, all debt securities
considered for purchase (whether rated or unrated) will be carefully
analyzed by Bankers Trust to insure, to the extent possible, that the
planned investment is sound. The Portfolio may, from time to time,
purchase defaulted debt securities if, in the opinion of Bankers
Trust, the issuer may resume interest payments in the near future. The
Portfolio will not invest more than 10% of its total assets (at the
time of purchase) in defaulted debt securities, which may be illiquid.
The risk of loss due to default by the issuer is significantly greater
for the holders of high yield securities because such securities are
generally unsecured and are often subordinated to other obligations of
the issuer. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of high yield
securities may experience financial stress and may not have sufficient
revenues to meet their interest payment obligations. An issuer's
ability to service its debt obligations may also be adversely affected
by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability or additional
financing.
Factors adversely affecting the market value of high yield and other
securities will adversely affect the Portfolio's net asset value. In
addition, the Portfolio may incur additional expenses to the extent it
is required to seek recovery upon a default in the payment of
principal of or interest on its portfolio holdings.
In addition to brokerage commissions, custodial services and other
costs relating to investment in emerging markets are generally more
expensive than in the United States. Such markets have been unable to
keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of the Portfolio
to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in
the value of the security or, if the Portfolio has entered into a
contract to sell the security, could result in possible liability to
the purchaser.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995, were 207%, and 169%, respectively.
Because a higher turnover rate increases transaction costs and may
increase taxable capital gains, Bankers Trust carefully weighs the
anticipate benefits of short-term investment against these
consequences.
RISK FACTORS-LATIN AMERICAN EQUITY PORTFOLIO. Governments of many
Latin American countries have exercised and continue to exercise
substantial influence over many aspects of the private sector through
the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the
future could have effect on economic conditions which may adversely
affect prices of certain portfolio securities. Expropriation,
confiscatory taxation, nationalization, political, economic or social
instability or other similar developments, such a military coups, have
occurred in the past and could also adversely affect the Portfolio's
investments in this region.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared
moratoria on the payment of principal and/or interest on outstanding
debt. Investment in sovereign debt can involve a high degree of risk.
In recent years, there have been significant improvements in some
Latin American economies; however, others continue to experience
economic problems, including high inflation rates and high interest
rates. The emergence of Latin American economies and securities
markets will require economic and fiscal discipline, as well as stable
political and social conditions. Recovery may also be influenced by
international economic conditions, particularly those in the United
States, by world prices for oil and other commodities, and
international trade agreements such as the North American Free Trade
Agreement. Because Latin American securities generally are denominated
and pay dividends or interest in currencies of Latin American
countries, and the Portfolio holds various foreign currencies from
time to time, the value of the net assets of the Portfolio as measured
in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates, the Portfolio is authorized to enter into certain
foreign currency exchange transactions.
ADRs, GDRs and EDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be
converted. Ownership of unsponsored ADRs, GDRs and EDRs may not
entitle the Portfolio to financial or other reports from the issuer,
to which it would be entitled as the owner of sponsored ADRs, GDRs and
EDRs. ADRs, GDRs and EDRs also involve the risks of other investments
in foreign securities, as discussed above.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio holds various
foreign currencies from time to time, the value of the net assets of
the Portfolio as measured in U.S. dollars will be affected favorable
or unfavorably by changes in exchange rates. In order to protect
against uncertainty in the level of future foreign currency exchange
rates, the Portfolio is authorized to enter in certain foreign current
exchange transactions. Furthermore, the Portfolio's foreign
investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The
settlement periods for foreign securities, which are often longer than
those for securities of U.S. issuers, may affect portfolio liquidity.
Finally, there is generally less government supervision and regulation
of securities exchanges, brokers and issuers in foreign countries than
in the United States.
In addition to brokerage commissions, custodial services and other
costs relating to investments in emerging markets are generally more
expensive than in the United States. Such markets have been unable to
keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of the Portfolio
to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in
the value of the security or, if the Portfolio has entered into a
contract to sell the security, could result in possible liability to
the purchaser.
The Portfolio is authorized to invest up to 35% of its total assets in
medium quality or high risk, lower quality debt securities that are
rated between BBB and as low as C by S&P, and between Baa and as low
as C by Moody's or, if unrated, of comparable quality in the opinion
of Bankers Trust. As an operating policy, which may be changed by the
Board of Trustees of the Trust, the Portfolio will not invest more
than 10% of its total assets in debt securities rated BBB or lower by
S&P or Baa or lower by Moody's. The Board may consider a change in
this operating policy it in its judgment, economic conditions change
such that a higher level of investment in high risk lower quality debt
securities would be consistent with the interests of the Portfolio and
its investors. High risk lower quality debt securities, ("junk bonds")
are regarded on balance, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and may be in default.
Unrated debt securities are not necessarily of lower quality than
rated securities but they may not be attractive to as many buyers.
Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by
Bankers Trust to insure, to the extent possible, that the planned
investment is sound. The Portfolio may, from time to time, purchase
defaulted debt securities if, in the opinion of Bankers Trust, the
issuer may resume interest payments in the near future. As an
operating policy, the Portfolio will not invest more than 10% of its
total assets (at the time of purchase) in defaulted debt securities,
which may be illiquid.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995 were 171%, and 161%, respectively.
Because a higher turnover rate increases transaction costs and may
increase taxable capital gains, Bankers Trust carefully weighs the
anticipate benefits of short-term investment against these
consequences.
RISK FACTORS-SMALL CAP PORTFOLIO. By itself the Portfolio does not
constitute a balanced investment plan; the Portfolio seeks to provide
long-term capital growth, with the production of any current income
being incidental to this objective, by investments primarily in
growth-oriented common stocks of domestic corporations and, to a
limited extent, foreign corporations. The Portfolio is designed for
those investors primarily interested in capital growth from
investments in smaller-sized growth companies. In view of the
long-term capital growth objective of the Portfolio and the smaller
size of the companies, the risks of investment in the Portfolio may be
greater than the general equity markets, and changes in domestic and
foreign interest rates may also affect the value of the Portfolio's
investments, and rising interest rates can be expected to reduce the
Portfolio's net asset value. A description of a number of investments
and investment techniques available to the Portfolio, including
foreign investments and the use of options and futures, is found under
"Additional Information" as well as certain risks associated with
these investments and techniques.
In seeking its investment objectives, the Portfolio may invest in
securities of foreign issuers. Foreign securities may involve a higher
degree of risk and may be less liquid or more volatile than domestic
investments. Foreign securities usually are denominated in foreign
currencies, which means their value will be affected by changes in the
strength of foreign currencies relative to the U.S. dollar as well as
the other factors that affect security prices. Foreign companies may
not be subject to accounting standards or governmental supervision
comparable to U.S. companies, and there often is less publicly
available information about their operations. Generally, there is less
governmental regulation of foreign securities markets, and security
trading practices abroad may offer less protection to investors such
as the Portfolio. The value of such investments may be adversely
affected by changes in political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition of (or
change in) exchange control or tax regulations in those foreign
countries. Additional risks of foreign securities include settlement
delays and costs, difficulties in obtaining and enforcing judgments,
and taxation of dividends at the source of payment. The Portfolio will
not invest more than 5% of the value of its total assets in the
securities of issuers based in developing countries, including Eastern
Europe.
PORTFOLIO TURNOVER. The Portfolio intends to manage its holdings
actively to pursue its investment objective. Since the Portfolio has a
long-term investment perspective, it does not intend to respond to
short-term market fluctuations or to acquire securities for the
purpose of short-term trading; however, it may take advantage of
short-term trading opportunities that are consistent with its
objective. The Portfolio's turnover rates for the fiscal years ended
September 30, 1996, and 1995, were 159%, and 161%, respectively.
Higher portfolio turnover rates result in higher brokerage costs and
in possible adverse tax consequences.
RISK FACTORS-PACIFIC BASIN EQUITY PORTFOLIO. The Portfolio may invest
in the securities of issuers based in underdeveloped countries,
including those in the Pacific Basin. Investment in securities of
issuers based in underdeveloped countries entails all of the risks of
investing in securities of foreign issuers outlined in this section to
a heightened degree.
These heightened risks include: (i) greater risks of expropriation,
confiscatory taxation, nationalization, and less social, political and
economic stability; (ii) the smaller size of the market for such
securities and a low or non-existent volume of trading, resulting in
lack of liquidity and in price volatility; (iii) certain national
policies which may restrict the Portfolio's investment opportunities
including restrictions on investing in issuers or industries deemed
sensitive to relevant national interest; and (iv) in the case of
Eastern Europe, the absence of developed capital market and legal
structures governing private of foreign investment and private
property and the possibility that recent favorable economic and
political developments could be slowed or reversed by unanticipated
events. The Portfolio will not invest more than 5% of the value of its
total assets in securities of issuers based in Eastern Europe.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio holds various
foreign currencies from time to time, the value of the net assets of
the Portfolio as measured in U.S. dollars will be affected favorably
or unfavorably by changes in exchange rates. Generally, the
Portfolio's currency exchange transactions will be conducted on a spot
(i.e., cash) basis at the spot rate prevailing in the currency
exchange market. The cost of the Portfolio's currency exchange
transactions will generally be the difference between the bid and
offer spot rate of the currency being purchased or sold. In order to
protect against uncertainty in the level of future foreign currency
exchange rates, the Portfolio is authorized to enter into certain
foreign currency transactions.
See "Additional Information."
In addition, while the volume of the transactions effected of foreign
stock exchanges has increased in recent years, in most cases it
remains appreciably below that of the New York Stock Exchange Inc.
(the "NYSE"). Accordingly, the Portfolio's foreign investments may be
less liquid and their prices may be more volatile than comparable
investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity.
In buying and selling securities on foreign exchanges, the Portfolio
normally pays fixed commissions that are generally higher than the
negotiated commissions charged in the United States. In addition,
there is generally less government supervision and regulation of
securities exchange, brokers and issuers in foreign countries than in
the United States. Bankers Trust intends to manage the Portfolio
actively in pursuit of its investment objective. However, the annual
portfolio turnover rate of the Portfolio is generally not expected to
exceed 100%. The Portfolio does not expect to trade in securities for
short-term profits but, when circumstances warrant, securities may be
sold without regard to the length of time held.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio holds various
foreign currencies from time to time, the value of the net assets of
the Portfolio as measured in U.S. dollars will be affected favorably
or unfavorably by changes in exchange rates. In order to protect
against uncertainty in the level of future foreign currency exchange
rates, the Portfolio is authorized to enter into certain foreign
currency exchange transactions. See "Additional Information."
Furthermore, the Portfolio's foreign investments may be less liquid
and their prices may be more volatile than comparable investments in
securities of U.S. companies. The settlement periods for foreign
securities, which are often longer than those for securities of U.S.
issuers, may affect portfolio liquidity. Finally, there is generally
less government supervision and regulation of securities exchanges,
brokers and issuers in foreign countries than in the United States.
In addition to brokerage commissions, custodial services and other
costs relating to investment in emerging markets are generally more
expensive than in the United States. Such markets have been unable to
keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. The inability of the Portfolio
to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in
the value of the security or, if the Portfolio has entered into a
contract to sell the security, could result in possible liability to
the purchaser.
Futures contracts and related option transactions are discussed under
"Additional Information." Successful use of futures contracts and
related options is subject to special risk considerations. A liquid
secondary market for any futures or options contract may not be
available when a futures or options position is sought to be closed.
In addition, there may be an imperfect correlation between movements
in the securities or foreign currency on which the futures or options
contract is based and movements in the securities or currency of the
Portfolio. Successful use of futures or options contracts is further
dependent on Bankers Trust's ability to correctly predict movements in
the securities or foreign currency markets and no assurance can be
given that its judgment will be correct. Successful use of options on
securities or stock indices is subject to similar risk considerations.
In addition, by writing covered call options, the Portfolio gives up
the opportunity, which the option is in effect, to profit from any
price increase in the underlying securities above the option exercise
price.
See "FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING CHINA AND CHINA
REGION" in Part B for more risk information.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995, were 118%, and 104%, respectively.
Because a higher turnover rate increases transaction costs and may
increase taxable capital gains, Bankers Trust carefully weighs the
anticipate benefits of short-term investment against these
consequences.
ITEM 5. MANAGEMENT OF THE FUND
The Board of Trustees of the Portfolios provides broad supervision
over the affairs of the Portfolios. A majority of the Portfolios'
Trustees are not affiliated with the Adviser. As the administrator
(the "Administrator"), Bankers Trust supervises the overall
administration of the Portfolios. The Portfolios' fund accountant,
transfer agent and custodian is also Bankers Trust.
Bankers Trust, a New York banking corporation with principal offices
at 280 Park Avenue, New York, New York 10017, is a wholly-owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust
conducts a variety of general banking and trust activities and is a
major wholesale supplier of financial services to the international
and domestic institutional markets. As of June 30, 1996, Bankers Trust
New York Corporation was the seventh largest bank holding company in
the United States with total assets of approximately $115 billion.
Bankers Trust is a worldwide merchant bank dedicated to servicing the
needs of corporations, governments, financial institutions and private
clients through a global network of over 120 offices in more than 40
countries. Investment management is a core business of Bankers Trust,
built on a tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's investment management
capability is unique due to its leadership positions in both active
and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust is one of the
nation's largest and most experienced investment managers, with
approximately $215 billion in assets under management.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the
past, these clients have been serviced through separate account and
commingled fund structures. Bankers Trust's officers have had
extensive experience in managing investment portfolios having
objectives similar to that of the Portfolios. Bankers Trust has been
advised by its counsel that, in counsel's opinion, Bankers Trust
currently may perform the services for the Portfolios described in
this Registration Statement without violation of the Glass-Steagall
Act or other applicable banking laws or regulations.
Bankers Trust, subject to the supervision and direction of the Board
of Trustees of the Portfolio, manages the Portfolios in accordance
with the Portfolios' investment objectives and stated investment
policies, makes investment decisions for each Portfolio, places orders
to purchase and sell securities and other financial instruments on
behalf of the Portfolios and employs professional investment managers
and securities analysts who provide research services to the
Portfolios. All orders for investment transactions on behalf of the
Portfolios are placed by Bankers Trust with broker-dealers and other
financial intermediaries that it selects, including those affiliated
with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolios
only if Bankers Trust believes that the affiliate's charge for the
transaction does not exceed usual and customary levels. The Portfolios
will not invest in obligations for which Bankers Trust or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolios
may, however, invest in the obligations of correspondents and
customers of Bankers Trust.
Under its investment advisory agreement with the Trust, Bankers Trust
receives a fee from the Portfolios computed daily and paid monthly at
the following annual rates: Global High Yield Securities Portfolio --
0.80% of the average daily net assets of the Portfolio; Latin American
Equity Portfolio -- 1.00% of the average daily net assets of the
Portfolio; Small Cap Portfolio -- 0.65% of the average daily net
assets of the Portfolio; and Pacific Basin Equity Portfolio -- 0.75%
of the average daily net assets of the Portfolio.
Bankers Trust has entered into a sub-investment advisory agreement
(the "Sub-Advisory Agreement") with BT Fund Managers International
Limited ("BT Fund Managers International") a wholly owned subsidiary
of Bankers Trust Australia Limited ("BTAL") in Sydney. BTAL is a
wholly owned subsidiary of Bankers Trust New York Corporation. Under
the Sub-Advisory Agreement, Bankers Trust may receive investment
advice and research services with respect to companies based in the
Pacific Basin and may grant BT Fund Managers International investment
management authority as well as the authority to buy and sell
securities if Bankers Trust believes it would be beneficial to the
Pacific Basin Portfolio. Under the Sub-Advisory Agreement, BT Fund
Managers International receives a fee for providing investment advice
and research services from Bankers Trust computed daily and paid
monthly at the annual rate of 0.60% of the average daily assets of the
Portfolio.
BTAL, which was granted a banking license in 1986, is the parent of
Bankers Trust Australia Group which has offices is Sydney, Melbourne,
Perth, Brisbane, Adelaide, London and Hong Kong. A representative
office of Bankers Trust Company was opened in Australia in 1966 and
Australian merchant banking operations commences in 1969. A related
organization, Bankers Trust New Zealand Limited, was established in
1986. Although BTAL has not previously served as investment adviser
for a registered investment company, BTAL provides investment services
for a range of clients.
David A. Reiss, Managing Director of Bankers Trust and Stephen C.
Freidheim, Managing Director of Bankers Trust are responsible for the
day-to-day management of the Global High Yield Securities Portfolio.
Mr. Reiss has been employed by Bankers Trust since March, 1994 and has
managed the Portfolios assets since March, 1994. From September, 1989
to March, 1994, Mr. Reiss was a Portfolio Manager at Kidder Peabody
Asset Management. Prior to September, 1989, he was an associate in
Mortgage Research at Goldman, Sachs & Co. Mr. Freidheim has been
employed by Bankers Trust since August, 1993 and has managed the
Portfolio's assets since December 1993. From July, 1990 to July, 1993
he was a Senior Vice President and Director of Research and Trading at
Nomura Securities International. Mr. Freidheim was also on the Board
of Directors of Nomura Corporate Research and Asset Management. Prior
to July, 1990, he was Director of Research at Kidder, Peabody High
Yield Asset Management.
Mary P. Dugan, CFA, Vice President of Bankers Trust, and Mr.
Timothy Woods, CFA, Vice President of Bankers Trust, share senior
portfolio management responsibilities of the Small Cap Portfolio. Ms.
Dugan joined Bankers Trust in 1994. She has thirteen years of
investment analysis experience. Previously, she worked at Fred Alger
Management, Dean Witter, Integrated Resources and Equitable Investment
Management Corporation. Mr. Woods joined Bankers Trust in 1992. He has
twelve years of investment and financial experience. Previously, he
worked at Prudential Securities, Chase Manhattan Bank and Bank of
Boston.
Paul Durham, Vice President of BTAL, is responsible for the
day-to-day management of the Pacific Basin Equity Portfolio. Mr.
Durham has been employed by Bankers Trust since January, 1988 and has
managed the Portfolio's assets since November 1993.
Michael Levy is responsible for the day-to-day management of the Latin
American Equity Portfolio. He also heads the international active
equity team, which is responsible for the day to day management of the
Portfolio. Mr. Levy has been the head of this team since joining
Bankers Trust in March, 1993, and is a Managing Director and
International Equity Strategist of Bankers Trust. Prior to joining
Bankers Trust, Mr. Levy was an investment banker and an equity analyst
with Oppenheimer & Company. He has twenty-four years of business
experience, of which fourteen years have been in the investment
industry. Mr. Levy has managed the Portfolio's assets since May,
1997.
Under an administration and services agreement with the Trust, Bankers
Trust calculates the value of the assets of each Portfolio and
generally assists the Board of Trustees of the Portfolios in all
aspects of the administration and operation of the Portfolios. The
administration and services agreement provides for the Portfolios to
pay the Administrator a fee computed daily and paid monthly at the
annual rate of 0.10% of the average daily net assets of each
Portfolio.
Under the administration and services agreement, the Administrator may
delegate one or more of its responsibilities to others at its expense.
Each Portfolio bears its own expenses. Operating expenses for the
Portfolios generally consist of all costs not specifically borne by
Bankers Trust or Edgewood Services, Inc. ("Edgewood"), the Trust's
placement agent and sub-administrator, including investment advisory
and administration and service fees, fees for necessary professional
services, amortization of organizational expenses, the costs
associated with regulatory compliance and maintaining legal existence
and investor relations.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Trust was organized as a trust under the laws of the State of New
York. Under the Declaration of Trust, the Trustees are authorized to
issue beneficial interests in separate series of the Trust. Each
investor is entitled to a vote in proportion to the amount of its
investment in each Portfolio. Investments in the Portfolios may not be
transferred, but an investor may withdraw all or any portion of his
investment at any time at net asset value. Investors in the Portfolios
(e.g., investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all
obligations of each Portfolio. However, the risk of an investor in the
Portfolios incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance existed
and each Portfolio itself was unable to meet its obligations.
The Trust reserves the right to create and issue a number of series,
in which case investments in each series would participate equally in
earnings and assets of the particular series. Currently, the Trust has
fifteen series: Asset Management Portfolio II, Asset Management
Portfolio III, Liquid Asses Portfolio, Pacific Basin Equity Portfolio,
Latin American Equity Portfolio, Global High Yield Portfolio, EAFE
Equity Index Portfolio, Small Cap Portfolio, Small Cap Index
Portfolio, Equity 500 Equal Weighted Index Portfolio, U.S. Bond Index
Portfolio, International Bond Portfolio, European Equity Portfolio, BT
RetirementPlus Portfolio, and 100% Treasury Portfolio.
Investments in the Portfolios have no pre-emptive or conversion rights
and are fully paid and non-assessable, except as set forth below. The
Trust is not required and has no current intention to hold annual
meetings of investors, but the Trust will hold special meetings of
investors when in the judgment of the Trustees it is necessary or
desirable to submit matters for an investor vote. Changes in
fundamental policies will be submitted to investors for approval.
Investors have under certain circumstances (e.g. upon application and
submission of certain specified documents to the Trustees by a
specified percentage of the aggregate value of the Trust's outstanding
interests) the right to communicate with other investors in connection
with requesting a meeting of investors for the purpose of removing one
or more Trustees. Investors also have the right to remove one or more
Trustees without a meeting by a declaration in writing by a specified
number of investors. Upon liquidation of a Portfolio, investors would
be entitled to share pro rata in the net assets of the Portfolio
available for distribution to investors.
The net asset value of each Portfolio is determined each day on which
the NYSE is open for trading ("Fund Business Day") (and on such other
days as are deemed necessary in order to comply with Rule 22c-1 under
the 1940 Act). This determination is made as of the close of regular
trading on the NYSE which is currently 4:00 p.m., Eastern time (the
"Valuation Time").
Each investor in the Portfolios may add to or reduce its investment in
each Portfolio on each Fund Business Day. At each Valuation Time on
each such business day, the value of each investor's beneficial
interest in each Portfolio will be determined by multiplying the net
asset value of a Portfolio by the percentage, effective for that day,
that represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to
be effected on that day, will then be effected. The investor's
percentage of the aggregate beneficial interests in each 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
each Portfolio as of the Valuation Time, on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from
the investor's investment in each Portfolio effected on such day, and
(ii) the denominator of which is the aggregate net asset value of each
Portfolio as of the Valuation Time, on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals from
the aggregate investments in each Portfolio by all investors in each
Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in each Portfolio as of
the Valuation Time, on the following business day of each Portfolio.
The net income of each Portfolio shall consist of (i) all income
accrued, less the amortization of any premium, on the assets of each
Portfolio, less (ii) all actual and accrued expenses of each Portfolio
determined in accordance with generally accepted accounting principles
("Net Income"). Interest income includes discount earned (including
both original issue and market discount) on discount paper accrued
ratably to the date of maturity and any net realized gains or losses
on the assets of the Portfolio. All the Net Income of each Portfolio
is allocated pro rata among the investors in each Portfolio. The Net
Income is accrued daily and distributed monthly to the investors in
each Portfolio.
Under the anticipated method of operation of the Portfolios, the
Portfolios will not be subject to any income tax. However, each
investor in the Portfolios will be taxable on its share (as determined
in accordance with the governing instruments of the Portfolio) of the
Portfolios' ordinary income and capital gain in determining its income
tax liability. The determination of such share will be made in
accordance with the Code.
It is intended that the Portfolios' assets, income and distributions
will be managed in such a way that an investor in the Portfolios will
be able to satisfy the requirements of Subchapter M of the Code,
assuming that the investor invested all of its assets in the
Portfolios.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED
Beneficial interests in the Portfolios are issued solely in
private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act. See
"General
Description of Registrant" above.
An investment in the Portfolios may be made without a sales charge.
All investments are made at the net asset value next determined if an
order is received by the Portfolios by the designated cutoff time for
each accredited investor. The net asset value of each Portfolio is
determined on each Fund Business Day. Each Portfolio's portfolio
securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method which the Board
of Trustees believes accurately reflects fair value.
There is no minimum initial or subsequent investment in the
Portfolios. However, because each Portfolio intends to be as fully
invested at all times as is reasonably practicable in order to enhance
the yield on its assets, investments must be made in federal funds
(i.e., monies credited to the account of the Trust's custodian bank by
a Federal Reserve Bank).
The Trust and Edgewood reserve the right to cease accepting
investments in the Portfolios at any time or to reject any investment
order.
The placement agent for the Portfolios is Edgewood. The principal
business address of Edgewood is Clearing Operations, P.O. Box 897,
Pittsburgh, Pennsylvania, 15230-0897. Edgewood receives no additional
compensation for serving as the placement agent for the Portfolios.
ITEM 8. REDEMPTION OR PURCHASE.
An investor in the Portfolios may withdraw all or any portion of its
investment at the net asset value next determined if a withdrawal
request in proper form is furnished by the investor to the Portfolios
by the designated cutoff time for each accredited investor. The
proceeds of a withdrawal will be paid by the Portfolios in federal
funds normally on the Fund Business Day the withdrawal is effected,
but in any event within seven calendar days following receipt of the
request. The Portfolios reserve the right to pay redemptions in kind.
Investments in the Portfolios may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds
postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on such Exchange is restricted, or,
to the extent otherwise permitted by the 1940 Act, if an emergency
exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
ADDITIONAL INFORMATION.
DERIVATIVES. The Portfolios may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a
traditional security, asset, or market index. Some "derivatives" such
as mortgage-related and other asset-backed securities are in many
respects like any other investment, although they may be more volatile
or less liquid than more traditional debt securities. There are, in
fact, many different types of derivatives and many different ways to
use them. There are a range of risks associated with those uses.
Futures and options are commonly used for traditional hedging purposes
to attempt to protect a fund from exposure to changing interest rates,
securities prices, or currency exchange rates and for cash management
purposes as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities.
However, some derivatives are used for leverage, which tends to
magnify the effects of an instrument's price changes as market
conditions change. Leverage involves the use of a small amount of
money to control a large amount of financial assets, and can in some
circumstances, lead to significant losses. The Adviser will use
derivatives only in circumstances where the Adviser believes they
offer the most economic means of improving the risk/reward profile of
the Portfolio. Derivatives will not be used in increase portfolio risk
above the level that could be achieved using only traditional
investment securities or to acquire exposure to changes in the value
of assets or indices that by themselves would not be purchased for the
Portfolio. The use of derivatives for non-hedging purposes may be
considered speculative. A description of the derivatives a Portfolio
may use and some of their associated risks follows.
ADRs, GDRs and EDRs. The Portfolios may invest in securities of
foreign issuers directly or in the form of ADRs, GDRs, EDRs or other
similar securities representing securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as
the securities they represent. Designed for U.S., Global and European
securities markets, respectively, ADRs, GDRs and EDRs are alternatives
to the purchase of the underlying securities in their national markets
and currencies. ADRs, GDRs and EDRs are subject to the same risks as
the foreign to which they relate.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolios may
purchase securities on a when-issued or delayed delivery basis.
Delivery of and payment for these securities may take place as long as
a month or more after the date of the purchase commitment. The value
of these securities is subject to market fluctuation during this
period and no income accrues to the Portfolio until settlement takes
place. The Portfolios maintain with the Custodian a segregated account
containing high grade liquid securities in an amount at least equal to
these commitments. When entering into a when-issued or delayed
delivery transaction, the Portfolios will rely on the other party to
consummate the transaction; if the other party fails to do so, a
Portfolio may be disadvantaged.
RULE 144A SECURITIES. The Portfolios may purchase securities in the
United State that are not registered for sale under Federal securities
laws but which can be resold to institutions under the SEC's Rule
144A. Provided that a dealer or institutional trading market in such
securities exists, these restricted securities are treated as exempt
from the Portfolio's 10% limit on illiquid securities. Under the
supervision of the Board of Trustees, Bankers Trust determines the
liquidity of restricted securities and, through reports from Bankers
Trust, the Board will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to
predict how these markets will develop. If institutional trading in
restricted securities were to decline, the liquidity of the Portfolio
could be adversely affected. No more than 10% of a Portfolio's assets
may be invested in securities restricted as to transfer or re-sale,
including Rule 144A securities.
SECURITIES LENDING. Each Portfolio is permitted to lend up to 30% of
the total value of its securities. These loans must be secured
continuously by cash or equivalent collateral or by a letter of credit
at least equal to the market value of the securities loaned plus
accrued income. By lending its securities, the Portfolios can increase
their income by continuing to receive income on the loaned securities
as well as by the opportunity to receive interest on the collateral.
Any gain or loss in the market price of the borrowed securities which
occurs during the term of the loan inures to a Portfolio and its
investors. In lending securities to brokers, dealers and other
organizations, the Portfolio is subject to risk which, like those
associated with other extensions of credit, include delays in recover
and possible loss of rights in the collateral should the borrower fail
financially.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolios buy and
sell securities denominated in currencies other than the U.S. dollar
and receives interest, dividends and sale proceeds in currencies other
than the U.S. dollar, a Portfolio 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. A Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market or uses forward contracts to
purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank
market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded
at a net price without commission. The Portfolios maintain with its
custodian a segregated account of high grade liquid assets in an
amount at least equal to its obligations under each forward foreign
currency exchange contract. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Portfolios may enter into foreign currency hedging transactions in
an attempt to protect against changes in foreign currency exchange
rates between the trade and settlement dates of specific securities
transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated investment
position. Since consideration of the prospect for currency parities
will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency
hedging transactions with respect to security transactions. However,
Bankers Trust believes that it is important to have the flexibility to
enter into foreign currency hedging transactions when it determines
that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities
in foreign currencies will change as a consequence of market movements
in the value of such securities between the date the forward contract
is entered into and the date it matures, The projection of currency
market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Portfolios may write covered put
and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the
dollar value of portfolio securities and against increases in the
dollar cost of securities to be acquired. The Portfolios may use
options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in
exchange rates for a different, but related currency. As with other
types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the
premium received, and a Portfolio could be required to purchase or
sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be
used to hedge against fluctuations in exchange rates although, in the
event of exchange rate movements adverse to a Portfolio's position, it
may forfeit the entire amount of the premium plus related transaction
costs. In addition, a Portfolio may purchase call options on currency
when the Adviser anticipates that the currency will appreciate in
value.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular
time. If a Portfolio is unable to effect a closing purchase
transaction with respect to covered options it has written, the
Portfolio will not be able to sell the underlying currency or dispose
of assets held in a segregated account until the options expire or are
exercised. Similarly, if a Portfolio is unable to effect a closing
sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will
incur transaction costs upon the purchase or sale of underlying
currency. The Portfolios pay brokerage commissions or spreads in
connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and
credit risks which may not be present in the case of exchange-traded
currency options. A Portfolio's ability to terminate over-the-counter
options ("OTC Options") will be more limited than with exchange-traded
options. It is also possible that broker-dealers participating in OTC
Options transactions will not fulfill their obligations. Until such
time as the staff of the SEC changes its position, the Portfolio will
treat purchased OTC Options and assets used to cover written OTC
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.
OPTIONS ON FOREIGN BOND INDICES. The Portfolios may purchase and write
put and call options on foreign indices listed on domestic and foreign
Exchanges. A bond index fluctuates with changes in the market values
of the bonds included in the index.
Options on bond indices are generally similar to options on securities
except that the delivery requirements are different. Instead of giving
the right to take or make delivery of securities at a specified price,
an option on a bond index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will depend upon the
closing level of a bond index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. The amount of cash received
will be equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars or a
foreign currency, as the case may be, times a specified multiple. The
writer of the option is obligated, in return for the premium received,
to make delivery of this amount. The writer may offset its position in
index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
To the extent permitted by U.S. federal or state securities laws, the
Portfolios may invest in options on foreign bond indices in lieu of
direct investment in foreign bonds. The Portfolios may also use
foreign bond index options for hedging purposes.
Because the value of a bond option depends upon movements in the level
of the index rather than the price of a particular bond, whether the
Portfolio will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of bond prices
in the securities market generally, rather than movements in the price
of a particular security. Accordingly, successful use by the
Portfolios of options on bond indices will be subject to Bankers
Trust's ability to predict correctly movements in the direction of the
corresponding bond market generally. This requires different skills
and techniques than predicting changes in the price of individual
bonds.
FUTURES CONTRACTS ON FOREIGN BOND INDICES. The Portfolios may enter
into contracts providing for the making and acceptance of a cash
settlement based upon changes in the value of an index of foreign
bonds ("Futures Contracts"). This investment technique is designed
only to hedge against anticipated future change in general market
prices which otherwise might either adversely affect the value of
securities held by a Portfolio or adversely affect the prices of
securities which are intended to be purchased at a later date for a
Portfolio. A Futures Contract may also be entered into to close out or
offset an existing futures position.
In general, each transaction in Futures Contracts involves the
establishment of a position which will move in a direction opposite to
that of the investment being hedged. If these hedging transactions are
successful, the futures positions taken for a Portfolio will rise in
value by an amount which approximately offsets the decline in value of
the portion of a Portfolio's investments that are being hedged. Should
general market prices move in an unexpected manner, the full
anticipated benefits of Futures Contracts may not be achieved or a
loss may be realized.
Although Futures Contracts would be entered into for hedging purposes
only, such transactions do involve certain risks. These risks could
include a lack of correlation between the Futures Contract and the
foreign bond market being hedged, a potential lack of liquidity in the
secondary market and incorrect assessments of market trends which may
result in poorer overall performance than if a Futures Contract had
not been entered into.
Brokerage costs will be incurred and "margin" will be required to be
posted and maintained as a good faith deposit against performance of
obligations under Futures Contracts written for a Portfolio. The
Portfolios may not purchase or sell a Futures Contract if immediately
thereafter its margin deposits on its outstanding Futures Contracts
would exceed 5% of the market value of a Portfolio's total assets.
Options on Futures Contracts. The Portfolios may invest in options on such
futures contracts for similar purposes.
A Portfolio will write and purchase put and call options only to the
extent permitted by the policies of state securities authorities in
states where shares of a Portfolio are qualified for offer and sale.
ASSET COVERAGE. To assure that the Portfolios use of futures and
related options, as well as when-issued and delayed delivery
securities and foreign currency exchange transactions, are not used to
achieve investment leverage, the Portfolios will cover such
transactions, as required under the applicable interpretations of the
SEC, either by owning the underlying securities or by establishing a
segregated account with the Portfolio's custodian containing high
grade liquid debt securities in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments
or contracts.
There can be no assurance that the use of these portfolio strategies
will be successful.
<PAGE>
APPENDIX
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA - Bonds 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 risks
appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such,
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both (good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classification from Aa through B in its corporate bond system.
The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
D rating will also be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted A-1+.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
DESCRIPTION OF FITCH INVESTORS SERVICES, INC. COMMERCIAL PAPER RATINGS:
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than the
strongest issue.
DESCRIPTION OF DUFF AND PHELPS' COMMERCIAL PAPER RATINGS:
Duff 1+--Highest certainty of timely payment. Short term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk free
U.S.
Treasury short term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
DESCRIPTION OF ICBA'S LONG-TERM RATINGS:
AAA--Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA--Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business economic or
financial conditions may increase investment risk albeit not very
significantly.
A--Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB--Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
BB--Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B--Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC--Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC--Obligations which are highly speculative or which have a high risk
of default.
C--Obligations which are currently in default.
Notes: "+" or "-" may be appended to a rating to denote relative status within
major rating categories.
Ratings of BB and below are assigned where it is considered that
speculative characteristics are present.
DESCRIPTION OF ICBA'S SHORT-TERM RATINGS:
A1+--Obligations supported by the highest capacity for timely
repayment.
A1--Obligations supported by a strong capacity for timely repayment.
A2--Obligations supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
A3--Obligations supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in
higher categories.
B--Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial
conditions.
C--Obligations for which there is an inadequate capacity to ensure
timely repayment.
D--Obligations which have a high risk of default or which are
currently in default.
DESCRIPTION OF THOMSON BANKWATCH SHORT-TERM RATINGS:
TBW-1--The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2--The second-highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1".
TBW-3--The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal
and external) than those with higher ratings, the capacity to service
principal and interest in a timely fashion is considered adequate.
TBW-4--The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
DESCRIPTION OF THOMSON BANKWATCH LONG-TERM RATINGS:
AAA--The highest category; indicates that the ability to repay
principal and interest on a timely basis is extremely high.
AA--The second-highest category; indicates a very strong ability to
repay principal and interest on a timely basis, with limited
incremental risk compared to issues rated in the highest category.
A--The third-highest category; indicates the ability to repay
principal and interest is strong. Issues rated "a" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB--The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are,
however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
NON-INVESTMENT GRADE (issues regarded as having speculative
characteristics in the likelihood of timely repayment of principal and
interest.)
BB--While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated
issues. However, there are significant uncertainties that could affect
the ability to adequately service debt obligations.
B--Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
development could well negatively affect the payment of interest and
principal on a timely basis.
CCC--Issues rated "CCC" clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
CC--"CC" is applied to issues that are subordinate to other
obligations rated "CCC" and are afforded less protection in the event
of bankruptcy or reorganization.
D--Default
These long-term debt ratings can also be applied to local currency
debt. In such cases the ratings defined above will be preceded by the
designation "local currency".
RATINGS IN THE LONG-TERM DEBT CATEGORIES MAY INCLUDE A PLUS (+) OR
MINUS (-) DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE
CATEGORY THE ISSUE IS PLACED.
BT INVESTMENT PORTFOLIOS
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GLOBAL HIGH YIELD SECURITIES PORTFOLIO
LATIN AMERICAN EQUITY PORTFOLIO
SMALL CAP PORTFOLIO
PACIFIC BASIN EQUITY PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History..................................1
Investment Objectives and Policies...............................1
Management of the Portfolios.....................................18
Control Persons and Principal Holders of Securities .............19
Investment Advisory and Other Services...........................20
Brokerage Allocation and Other Practices.........................22
Capital Stock and Other Securities...............................23
Purchase, Redemption and Pricing of Securities...................24
Tax Status.......................................................24
Underwriters.....................................................25
Calculation of Performance Data..................................25
Financial Statements.............................................25
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
Part A contains additional information about the investment objectives
and policies of Global High Yield Securities Portfolio, Latin American
Equity Portfolio, Small Cap Portfolio, Pacific Basin Equity Portfolio,
European Equity Portfolio and International Bond Portfolio (each a
"Portfolio", collectively, the "Portfolios"). This Part B should only
be read in conjunction with Part A. This section contains supplemental
information concerning the types of securities and other instruments
in which each Portfolio may invest, the investment policies and
portfolio strategies that each Portfolio may utilize and certain risks
attendant to those investments, policies and strategies.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of
deposit are receipts issued by a depository institution in exchange
for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date
specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity. Bankers' acceptances typically
arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by
the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
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 a letter agreement between a commercial paper issuer
and an institutional lender pursuant to which the lender may determine
to invest varying amounts.
For a description of commercial paper ratings, see the Appendix in
part A.
SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash
inflows through the sale of securities and desirable equity
securities, that are consistent with the Portfolio's investment
objective, which are unavailable in sufficient quantities or at
attractive prices, each Portfolio may invest in short-term instruments
for a limited time pending availability of such portfolio securities.
Short-term instruments consist of foreign or domestic: (i) short-term
obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated AA or higher by Standard & Poor's
Rating Group ("S&P") or Aa or higher by Moody's Investors Services,
Inc. ("Moody's") or, if unrated, of comparable quality in the opinion
of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and
banker's acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer of the issuer's parent must have outstanding
debt rated AA or higher by S&P or Aa or higher by Moody's or
outstanding commercial paper or bank obligations rated A-1 by S&P or
Prime-1 by Moody's; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of Bankers
Trust. These instruments may be denominated in U.S. dollars or in
foreign currencies.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio (except for the
Intermediate Tax Free Portfolio) has the authority to lend portfolio
securities to brokers, dealers and other financial organizations. The
Portfolios will not lend securities to Bankers Trust, Edgewood
Signature or their affiliates. By lending its securities, a Portfolio
can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral
in short-term securities or obtaining yield in the form of interest
paid by the borrower 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. Each Portfolio will adhere to the following
conditions whenever its securities are loaned: (i) the Portfolio must
receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral
whenever the market value of the securities including accrued interest
rises above the level of the collateral; (iii) the Portfolio must be
able to terminate the loan at any time; (iv) the Portfolio must
receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower; provided, however,
that if a material event adversely affecting the investment occurs,
the Board of Trustees must terminate the loan and regain the right to
vote the securities.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS"). The Global High Yield
Securities Portfolio and the Latin American Equity Portfolio may
invest in lower-rated debt securities. While the market for high yield
corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980's brought a dramatic
increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of future performance of the high yield
bond market, 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.
The market for lower-rated debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely
affect the prices at which the former are sold. If market quotations
are not available, lower- rated debt securities will be valued in
accordance with procedures established by the Board of Trustees,
including the use of outside pricing services. Judgment plays a
greater role in valuing high yield corporate debt securities than is
the case for securities for which more external sources for quotations
and last sale information is available. Adverse publicity and changing
investor perception may affect the ability of outside pricing services
to value lower- rated debt securities and Global High Yield Securities
Portfolio's ability to dispose of these securities.
Since the risk of default is higher for lower-rated debt securities,
the investment adviser's research and credit analysis are an
especially important part of managing securities of this type held by
the Portfolio. In considering investments for the Portfolio, Bankers
Trust Company ("Bankers Trust"), each Portfolio's investment adviser
(the "Adviser") will attempt to identify those issuers of high
yielding debt securities whose financial conditions are adequate to
meet future obligations, have improved or are expected to improve in
the future. Bankers Trust's analysis focuses on relative values based
on such factors as interest on dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of the
issuer.
Global High Yield Securities Portfolio may choose, at its expense or
in conjunction with others, to pursue litigation or otherwise exercise
its rights as a security holder to seek to protect the interest of
security holders if it determines this to be in the best interest of
security holders.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended (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 resulting 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 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 of resales of certain
securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. (the "NASD").
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Board of Trustees.
In reaching liquidity decisions, the Adviser 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).
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE.
The Global High Yield Securities Portfolio, European Equity Portfolio
and International Bond Portfolio may invest in foreign securities
issued by Eastern European countries. Investments in companies
domiciled in Eastern European countries may be subject to potentially
greater risks than those of other foreign issuers. These risks
include: (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such
securities and the low volume of trading, which result in less
liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Portfolios' investment opportunities,
including restrictions on investment in issuers or industries deemed
sensitive to national interests; (iv) foreign taxation; (v) the
absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy;
and (vii) the possibility that recent favorable economic developments
in Eastern Europe may be slowed or reversed by unanticipated political
or social events in such countries, or in the Commonwealth of
Independent States (formerly the Union of Soviet Socialist Republics).
The economic situation remains difficult for Eastern European
countries in transition from central planning, following what has
already been a sizable decline in output. The contraction now appears
to be bottoming out in parts of Eastern Europe, where some countries
are projected to register positive growth in 1995. Following three
successive years of output declines, there are preliminary indications
of a turnaround in the former Czech and Slovak Federal Republic,
Hungary and Poland; growth in private sector activity and strong
exports now appear to have contained the fall in output. A number of
their governments, including those of Hungary and Poland, are
currently implementing or considering reforms directed at political
and economic liberalization, including efforts to foster multi-party
political systems, decentralize economic planning, and a move toward
free-market economies. But key aspects of the reform and stabilization
efforts have not yet been fully implemented, and there remain risks of
policy slippage. At present, no Eastern European country has a
developed stock market, but Poland, Hungary and the Czech Republic
have small securities markets in operation.
In many other countries of the region, output losses have been even
larger. These declines reflect the adjustment difficulties during the
early stages of the transition, high rates of inflation, the
compression of imports, disruption in trade among the countries of the
former Soviet Union, and uncertainties about the reform process
itself. Large-scale subsidies are delaying industrial restructuring
and are exacerbating the fiscal situation. A reversal of these adverse
factors is not anticipated in the near term, and output is expected to
decline further in most of these countries. In the Russian Federation
and most other countries of the former Soviet Union, economic
conditions are of particular concern because of economic instability
due to political unrest and armed conflicts in many regions. Further,
no accounting standards exist in Eastern European countries. Although
certain Eastern European currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market
values and may be adverse to each Fund's shareholders.
BRADY BONDS. The Latin American Equity Portfolio and Global High Yield
Securities Portfolio may invest in "Brady bonds," which have been
issued by the governments of Argentina, Costa Rica, Mexico, Nigeria,
Uruguay and Venezuela. Most Brady bonds are currently rated below BBB
by S&P or Baa by Moody's.
The Brady Plan was conceived by the U.S. Treasury in the 1980's in an
attempt to produce a debt restructuring program which would enable a
debt country to (i) reduce the absolute level of debt of its creditor
banks, and (ii) reschedule its external debt repayments, based upon
its ability to service such debts by persuading its creditor banks to
accept a debt write-off by offering them a selection of options, each
of which represented an attractive substitute for the nonperforming
debt. Although it was envisaged that each debtor country would agree
to a unique package of options with its creditor banks, the plan was
that these options would be based upon the following:(i) a discount
bond carrying a market rate of interest (whether fixed or floating),
with principal collateralized by the debtor country with cash or
securities in an amount equal to at least one year of rolling
interest; (ii) a par bond carrying a low rate of interest (whether
fixed or floating), collateralized in the same way as in (i) above;
and (iii) retention of existing debt (thereby avoiding a debt
write-off) coupled with an advance of new money or subscription of new
bonds.
The Latin American Equity Portfolio and Global High Yield Securities
Portfolio may invest in either collateralized or uncollateralized
Brady bonds. U.S. dollar-denominated, collateralized Brady bonds,
which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds. Interest payments on such
bonds generally are collateralized by cash or securities in an amount
that in the case of fixed rate bonds, is equal to at least one year of
rolling interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at
regular intervals thereafter.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING LATIN AMERICA.
Investing in securities of Latin American issuers may entail risks
relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on
foreign investment and on repatriation of capital invested. In the
event of expropriation, nationalization or other confiscation by any
country, the Latin American Equity Fund could lose its entire
investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major
securities markets in the U.S. disclosure and regulatory standards are
in many respects less stringent than U.S. standards. Furthermore,
there is a lower level of monitoring and regulation of the markets and
the activities of investors in such markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to
volume of trading in the securities of U.S. issuers could cause prices
to be erratic for reasons apart from factors that affect the soundness
and competitiveness of the securities issuers. For example, limited
market size may cause prices to be unduly influenced by traders who
control large positions. Adverse publicity and investors' perceptions,
whether or not based on in-depth fundamental analysis, may decrease
the value and liquidity of portfolio securities.
The economies of Latin American countries may be predominantly based
in only a few industries, may be highly vulnerable to changes in local
or global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates; and (v) securities of issuers located
in Latin America may have limited marketability and may be subject to
more abrupt or erratic price movements.
The Latin American Equity Portfolio invests in securities denominated
in currencies of Latin American countries. Accordingly, changes in the
value of these currencies against the U.S. dollar will result in
corresponding changes in the U.S. dollar value of the Portfolio's
assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain Latin American countries may restrict the free
conversion of their currencies into other currencies. Further, certain
Latin American currencies may not be internationally traded. Certain
of these currencies have experienced a steep devaluation relative to
the U.S. dollar.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, the rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position. Certain Latin American countries have experienced
high levels of inflation which can have a debilitating effect on an
economy. Furthermore, certain Latin American countries may impose
withholding taxes on dividends payable to the Portfolio at a higher
rate than those imposed by other foreign countries.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared
moratoria on the payment of principal and/or interest on outstanding
debt. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when
due in accordance with the terms of such debt. A governmental entity's
willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the
governmental entity's policy towards the International Monetary Fund,
and the political constraints to which a governmental entity may be
subject. governmental entities may also be dependent on expected
disbursements from foreign governments, multilateral agencies and
others abroad to reduce principal and interest arrearage on their
debt. The commitment on the part of these governments, agencies and
others to make such disbursements may be conditioned on a governmental
entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt.
Holders of sovereign debt, including the Portfolio, may be requested
to participate in the rescheduling of such debt and to extend further
loans to governmental entities. There is no bankruptcy proceeding by
which defaulted sovereign debt may be collected in whole or in part.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and
agriculture. The region has a large population (roughly 300 million)
representing a large domestic market. Economic growth was strong in
the 1960's and 1970's, but slowed dramatically (and in some instances
was negative) in the 1980's as a result of poor economic policies,
higher international interest rates, and the denial of access to new
foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of
real growth in Gross Domestic Product ("GDP") than they have in the
past, other Latin American countries continue to experience
significant problems, including high inflation rates and high interest
rates. Capital flight has proven a persistent problem and external
debt has been forcibly rescheduled. Political turmoil, high inflation,
capital repatriation restrictions and nationalization have further
exacerbated conditions.
Large budget deficits and a high level of state ownership in many
productive and service areas have given way to balanced budgets and
privatization in Mexico, Brazil, Chile and Argentina. Changes in
political leadership have encouraged the implementation of market
oriented economic policies such as balanced budgets. Privatization
trade reform and monetary reform have been among the steps taken to
modernize the Latin American economies and to regenerate growth in the
region. However, governments of many Latin American countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in those countries. As a
result, government actions in the future could have a significant
effect on economic conditions which may adversely affect prices of
certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other
similar developments, such as military coups, have occurred in the
past and could also adversely affect the Portfolio's investments in
this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and
monetary reform are among the recent steps taken to renew economic
growth. External debt is being restructured and flight capital
(domestic capital that has left the home country) has begun to return.
Inflation control efforts have also been implemented. Free Trade Zones
are being discussed in various areas around the region, the most
notable being a free trade zone between Mexico and the U.S. Various
trade agreements have also been formed within the region such as the
Andean Pact, Mercosur and the North American Free Trade Agreement
(NAFTA). The largest of these is NAFTA, which was implemented on
January 1, 1994. Latin American equity markets can be extremely
volatile and in the past have shown little correlation with the U.S.
market. Currencies are typically weak, but most are now relatively
free floating, and it is not unusual for the currencies to undergo
wide fluctuations in value over short periods of time due to changes
in the market.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING THE PACIFIC BASIN.
Many Asian countries may be subject to a greater degree of social,
political and economic instability than is the case in the United
States and European countries. Such instability may result from (i)
authoritarian governments or military involvement in political and
economic decision-making; (ii) popular unrest associated with demands
for improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent
upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European
Community. The enactment by the United States or other principal
trading partners of protectionist trade legislation, reduction of
foreign investment in the local economies and general declines in the
international securities markets could have a significant adverse
effect upon the securities markets of the Asian countries.
Thailand has been transformed into one of the fastest growing stock
markets in the world. On February 23, 1991, the military staged its
17th coup since the overthrow of the absolute monarchy in 1932. The
newly appointed government quickly focused on the economy and enacted
major tax revisions, slashing personal income tax and reducing taxes
on imports. Most significantly, it pushed through a 7% value added
tax. Released from political consideration by the coup, the Bank of
Thailand was finally able to implement a monetary tightening. As a
result, interest rates rose and GDP declined to 7.7% from 10% the
previous year. The government continues to move ahead with new
projects - especially telecommunications, roads and port facilities -
needed to refurbish the country's overtaxed infrastructure.
Nonetheless, political unrest coupled with the shooting of
antigovernment demonstrators in May 1992 has caused many international
businesses to question Thailand's political stability.
Hong Kong's impending return to Chinese dominion in 1997 has not
initially had a positive effect on its economic growth which was
vigorous in the 1980's. However, authorities in Beijing have agreed to
maintain a capitalist system for 50 years that, along with Hong Kong's
economic growth, continued to further strong stock market returns. In
preparation for 1997, Hong Kong has to develop trade with China, where
it is the largest foreign investor, while also maintaining its
long-standing export relationship with the United States. Spending on
infrastructure improvements is a significant priority of the colonial
government while the private sector continues to diversify abroad
based on its position as an established international trade center in
the Far East.
In terms of GDP, industrial standards and level of education, South
Korea is second only to Japan in Asia. It enjoys the benefits of a
diversified economy with well developed sectors in electronics,
automotive, textiles and shoe manufacturing, steel and shipbuilding
among others. The driving force behind the economy's dynamic growth
has been the planned development of an export-oriented economy in a
vigorously entrepreneurial society. Real GDP grew about 7.5% in 1991.
Labor unrest was noticeably calmer, unemployment averaged a low of
2.3%, and investment was strong. Inflation rates, however, are
beginning to challenge South Korea's strong economic performance. In
addition, the international situation between South and North Korea
continues to improve. Both Koreas joined the United Nations separately
in late 1991, creating another forum for negotiation and joint
cooperation.
Indonesia is a mixed economy with many socialist institutions and
central planning, but has recently placed emphasis on deregulation and
private enterprise. Like Thailand, Indonesia has extensive natural
wealth, yet with a large and rapidly increasingly population, it
remains a poor country. Agriculture, including forestry and fishing,
is an important sector, accounting for 21% of GDP and over 50% of the
labor force. Once the world's largest rice importer, Indonesia is now
nearly self-sufficient.
The Malaysian economy continued to perform well, growing at an average
annual rate of 9% from 1987 through 1991. This placed Malaysia as one
of the fastest growing economies in the Asian-Pacific region. Malaysia
has become the world's third-largest producer of semiconductor devices
(after the US and Japan) and the world's largest exporter of
semiconductor devices. More remarkable is the country's ability to
achieve rapid economic growth with relative price stability (2%
inflation over the past five years) as the government followed prudent
fiscal/monetary policies. Malaysia's high export dependence level
leaves it vulnerable to a recession in the OECD countries or a fall in
world commodity prices.
Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links
derived from its entrepot history. During the 1970's and early 1980's,
the economy expanded rapidly, achieving an average annual growth rate
of 9%. Per capita GDP is among the highest in Asia. Singapore holds a
position as a major oil refining and services center.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING CHINA AND CHINA
REGION. China's economic reform plan was designed to bring in foreign
investment capital and technological skills. The result has been a
move towards a more mixed economy away from the previous centrally
planned economy. The process of devolving responsibility for all
aspects of enterprise to local management and authorities continues,
even though the system of socialism with Chinese characteristics
involves considerable influence by the central government on
production and marketing.
In order to attract foreign investment, China has since 1978
designated certain areas of the country where overseas investors can
receive special investment incentives and tax concessions. There are
five Special Economic Zones (Shenzhen, Shantou and Zhuhai in Guangdong
Province, Xiamen in Fujian Province and Hainan Island, which itself is
a province). Fourteen coastal cities have been designated as "open
cities" and certain Open Economic Zones have been established in
coastal areas. Shanghai has established the Pudong New Area.
Twenty-seven High and New Technology Industrial Development Zones have
been approved where preferential treatment is given to enterprises
which are confirmed as technology intensive.
China has had for many centuries a well deserved reputation for being
closed to foreigners, with trade with the outside world being carried
on under terms of extreme restriction and under central control. Such
conditions were maintained in the first thirty years of the Communist
regime which began in 1949; however, there have been several stages of
evolution, from the institution of an industrialization program in the
1950s to a modernization policy commencing in 1978 which combined
economic development with the beginnings of opening the country.
The securities markets in the China region are substantially smaller,
less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many Chinese issuers
may be held by a limited number of persons and financial institutions,
which may limit the number of shares available for investment by the
Portfolio. Similarly, volume and liquidity in the bond markets in
China are less than in the United States and, at times, price
volatility can be greater than in the United States. A limited number
of issuers in Chinese securities markets may represent a
disproportionately large percentage of market capitalization and
trading value. The limited liquidity of securities markets in China
may also affect the Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly,
during periods of rising securities prices in the more illiquid
Chinese securities markets, the Portfolio's ability to participate
fully in such price increases may be limited by its investment policy
of investing not more than 15% of its net assets in illiquid
securities. Conversely, the Portfolio's inability to dispose fully and
promptly of positions in declining markets will cause the Portfolio's
net asset value to decline as the value of the unsold positions is
marked to lower prices. In addition, the Chinese securities markets
are susceptible to being influenced by large investors trading
significant blocks of securities.
The Chinese, Hong Kong and Taiwan stock markets are undergoing a
period of growth and change which may result in trading volatility and
difficulties in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations.
China governmental actions can have a significant effect on the
economic conditions in China, which could adversely affect the value
and liquidity of the Portfolio's investments. Although the Chinese
government has recently begun to institute economic reform policies,
there can be no assurances that it will continue to pursue such
policies or, if it does, that such policies will succeed.
The securities industry in China is not well developed. China has no
securities laws of nationwide applicability. The municipal securities
regulations adopted by Shanghai and Shenzhen municipalities are very
new, as are their respective securities exchanges and other
self-regulatory organizations. In addition, Chinese stockbrokers and
other intermediaries may not perform as well as their counterparts in
the United States and other more developed securities markets. The
prices at which the Portfolio may acquire investments may be affected
by trading by persons with material non-public information and by
securities transactions by brokers in anticipation of transactions by
the Portfolio in particular securities.
China does not have a comprehensive system of laws, although
substantial changes have occurred in this regard in recent years. The
corporate form of organization has only recently been permitted in
China and national regulations governing corporations were introduced
only in May, 1992. Prior to the introduction of such regulations,
Shanghai had adopted a set of corporate regulations applicable to
corporations located or listed in Shanghai, and the relationship
between the two sets of regulations is not clear. Consequently, until
a firmer legal basis is provided, even such fundamental corporate law
tenets as the limited liability status of Chinese issuers and their
authority to issue shares remain open to question. Laws regarding
fiduciary duties of officers and directors and the protection of
shareholders are not well developed. China's judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation.
Even where adequate law exists in China, it may be impossible to
obtain swift and equitable enforcement of such law, or to obtain
enforcement of the judgment by a court of another jurisdiction. The
bankruptcy laws pertaining to state enterprises have rarely been used
and are untried in regard to an enterprise with foreign shareholders,
and there can be no assurance that such shareholders, including the
Portfolio, would be able to realize the value of the assets of the
enterprise or receive payment in convertible currency. As the Chinese
legal system develops, the promulgation of new laws, changes to
existing laws and the preemption of local laws by national laws may
adversely affect foreign investors, including the Portfolio. The
uncertainties faced by foreign investors in China are exacerbated by
the fact that many laws, regulations and decrees of China are not
publicly available, but merely circulated internally.
Exports continue to rise strongly, although China remains vulnerable
to United States economic conditions and possible trade sanctions,
unless it liberalizes current import restrictions and improves its
human rights record. However, imports are also expected to rise and
may outstrip exports in terms of growth rates.
There are currently two officially recognized securities exchanges in
China -- The Shanghai Securities Exchange which opened in December
1990 and The Shenzhen Stock Exchange which opened in July 1991. Shares
traded on these Exchanges are two types -- "A" shares which can be
traded only by Chinese investors and "B" shares which can be traded
only by individuals and corporations not resident in China.
In Shanghai, all "B" shares are denominated in Chinese renminbi
("RMB"), but all transactions in "B" shares must be settled in U.S.
dollars, and all distributions made on "B" shares are payable in U.S.
dollars, the exchange rate being the weighted average exchange rate
for the U.S. dollar as published by the Shanghai Foreign Exchange
Adjustment Centre.
In Shenzhen, the purchase and sale prices for "B" shares are quoted in
Hong Kong dollars. Dividends and other lawful revenue derived from "B"
shares are calculated in RMB but payable in Hong Kong dollars, the
rate of exchange being the average rate published by Shenzhen Foreign
Exchange Adjustment Centre.
There are no foreign exchange restrictions on the repatriation of
gains made on or income derived from "B" shares, subject to the
payment of taxes imposed by China thereon.
Company law relating to companies limited by shares and regulations
regarding the issuing of shares by equity joint ventures have not yet
been developed on a national basis. The Shenzhen municipality issued
regulations in 1992 relating to joint stock companies, and the
Shanghai municipality has a draft joint stock company law under
review. Regulations governing the trading of securities on both the
Shenzhen and the Shanghai stock exchanges have been issued by each
municipality; there is no national securities legislation as yet.
Economies of countries in the China region may differ favorably or
unfavorably from the U.S. economy in such respects as rate of growth
of gross domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. As an
export-driven economy, the economy of China is affected by
developments in the economies of its principal trading partners.
Revocation by the United States of China's "Most Favored Nation"
trading status, which the U.S. President and Congress reconsider
annually, would adversely affect the trade and economic development of
China and Hong Kong. Hong Kong and Taiwan have limited natural
resources, resulting in dependence on foreign sources for certain raw
materials and economic vulnerability to global fluctuations of price
and supply.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
GENERAL. The successful use of such instruments draws upon the
Adviser's skill and experience with respect to such instruments and
usually depends on the Adviser's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or
exchange rates move in an unexpected manner, a Portfolio 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 Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities,
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 Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts
trade on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. A Portfolio may enter
into futures contracts which are based on debt securities that are
backed by the full faith and credit of the U.S. government, such as
long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified
pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. A Portfolio may also enter into futures contracts which are
based on bonds issued by entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit would be
approximately 1 1/2% to 5% of a contract's face value. Daily
thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would
provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that
specified in the contract. In some (but not many) cases, securities
called for by a futures contract may not have been issued when the
contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or
take delivery of the securities. The offsetting of a contractual
obligation is accomplished by buying (or selling, as the case may be)
on a commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or
take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from fluctuations
in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currencies. For example, if
interest rates were expected to increase, the Portfolio might enter
into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the
debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would
increase at approximately the same rate, thereby keeping the net asset
value of the Portfolio from declining as much as it otherwise would
have. The Portfolio could accomplish similar results by selling debt
securities and investing in bonds with short maturities when interest
rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to attempt to hedge against
anticipated purchases of debt securities at higher prices. Since the
fluctuations in the value of futures contracts should be similar to
those of debt securities, a Portfolio could take advantage of the
anticipated rise in the value of debt securities without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt
securities on the cash market. To the extent a Portfolio enters into
futures contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with respect
to such futures contracts will consist of cash, cash equivalents or
high quality liquid debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market,
due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject
to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close
futures contracts through offsetting transactions which could distort
the normal relationship between the cash and futures markets. Second,
the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in
the futures market could be reduced, thus producing distortion. Third,
from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators
in the futures market may cause temporary price distortions. Due to
the possibility of distortion, a correct forecast of general interest
rate trends by the Adviser may still not result in a successful
transaction.
In addition, futures contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Portfolios, if
the Adviser's investment judgment about the general direction of
interest rates is incorrect, a Portfolio's overall performance would
be poorer than if it had not entered into any such contract. For
example, if a Portfolio has hedged against the possibility of an
increase in interest rates which would adversely affect the price of
debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the
increased value of its debt securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in
such situations, if a Portfolio has insufficient cash, it may have to
sell debt securities from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be,
at increased prices which reflect the rising market. A Portfolio may
have to sell securities at a time when it may be disadvantageous to do
so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio 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 Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign
currency which is deliverable upon exercise of the futures contract.
If the futures price at expiration of the option is below the exercise
price, a Portfolio will retain the full amount of the option premium
which provides a partial hedge against any decline that may have
occurred in the Portfolio's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures
price at expiration of the option is higher than the exercise price,
the Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of
securities which the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio will
incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its
futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio
securities. For example, a Portfolio may purchase a put option on a
futures contract to hedge its portfolio against the risk of rising
interest rates.
The amount of risk a Portfolio assumes when it purchases an option on
a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in
the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted a further
restriction that the Portfolio will not enter into any futures
contracts or options on futures contracts if immediately thereafter
the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures
contracts owned by the Portfolio (other than those entered into for
bona fide hedging purposes) would exceed 5% of the market value of the
total assets of the Portfolio.
OPTIONS ON FOREIGN CURRENCIES. Each 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 Portfolio may purchase put options on the foreign currency. If the
value of the currency does decline, a Portfolio will have the right to
sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Portfolio may purchase
call options thereon. The purchase of such options could offset, at
least partially, the effects of the adverse movements in exchange
rates. As in the case of other types of options, however, the benefit
to the Portfolio deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain
losses on transactions in foreign currency options which would require
it to forego a portion or all of the benefits of advantageous changes
in such rates.
Each Portfolio may write options on foreign currencies for the same
types of hedging purposes. For example, where a Portfolio anticipates
a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the options will
most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired,
the Portfolio could write a put option on the relevant currency which,
if rates move in the manner projected, will expire unexercised and
allow the Portfolio to hedge such increased cost up to the amount of
the premium. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the
Portfolio also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Each Portfolio intends to write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio
is "covered" if the Portfolio owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for
additional cash consideration held in a segregated account by its
Custodian) upon conversion or exchange of other foreign currency held
in its portfolio. A call option is also covered if the Portfolio has a
call on the same foreign currency and in the same principal amount as
the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference
is maintained by the Portfolio in cash, U.S. government securities and
other high quality liquid debt securities in a segregated account with
its custodian.
Each Portfolio also intends to write call options on foreign
currencies that are not covered for cross-hedging purposes. A call
option on a foreign currency is for cross-hedging purposes if it is
not covered, but is designed to provide a hedge against a decline in
the U.S. dollar value of a security which the Portfolio owns or has
the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate.
In such circumstances, the Portfolio collateralizes the option by
maintaining in a segregated account with its custodian, cash or U.S.
government securities or other high quality liquid debt securities in
an amount not less than the value of the underlying foreign currency
in U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS
AND OPTIONS ON FOREIGN CURRENCIES.
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on
certain national securities exchanges such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option
cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting a Portfolio to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of
the foreign currency market, possible intervention by governmental
authorities and the effects of other political and economic events. In
addition, exchange-traded options on foreign currencies involve
certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made
exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and
credit risks which may not be present in the case of exchange-traded
currency options. A Portfolio's ability to terminate over-the-counter
options will be more limited than with exchange-traded options. It is
also possible that broker-dealers participating in over-the-counter
options transactions will not fulfill their obligations. Until such
time as the staff of the SEC changes its position, each Portfolio will
treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect
to options written with primary dealers in U.S. government securities
pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount of illiquid securities may be calculated
with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely
affected by: (i) other complex foreign political and economic factors;
(ii) lesser availability than in the United States of data on which to
make trading decisions; (iii) delays in the Portfolio's ability to act
upon economic events occurring in foreign markets during nonbusiness
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. With the exception of International Bond
Portfolio, each Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered
options") in an attempt to increase income. However, the Portfolio may
forgo the benefits of appreciation on securities sold or may pay more
than the market price on securities acquired pursuant to call and put
options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") by exercising the
option at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in an amount equal to
the premium received for writing the option. If the option is
exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at
the exercise price. By writing a covered call option, the Portfolio
forgoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an
increase in the market value of the underlying security above the
exercise price.
When a Portfolio writes a covered put option, it gives the purchaser
of the option the right to sell the underlying security to the
Portfolio at the specified exercise price at any time during the
option period. If the option expires unexercised, the Portfolio will
realize income in the amount of the premium received for writing the
option. If the put option is exercised, a decision over which the
Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a
covered put option, the Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the
underlying security below the exercise price. The Portfolio will only
write put options involving securities for which a determination is
made at the time the option is written that the Portfolio wishes to
acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is
called a "closing purchase transaction." The Portfolio will realize a
profit or loss for a closing purchase transaction if the amount paid
to purchase an option is less or more, as the case may be, than the
amount received from the sale thereof. To close out a position as a
purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot
effect a closing purchase transaction, it may be forced to incur
brokerage commissions or dealer spreads in selling securities it
receives or it may be forced to hold underlying securities until an
option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to
market to reflect the current market value of the option written. The
current market value of a traded option is the last sale price or, in
the absence of a sale, the mean between the closing bid and asked
price. If an option expires on its stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was
sold), and the deferred credit related to such option will be
eliminated. If a call option is exercised, the Portfolio will realize
a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally
received. The writing of covered call options may be deemed to involve
the pledge of the securities against which the option is being
written. Securities against which call options are written will be
segregated on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call
option in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio,
in exchange for the premium paid, to purchase a security at a
specified price during the option period. The Portfolio would
ordinarily have a gain if the value of the securities increased above
the exercise price sufficiently to cover the premium and would have a
loss if the value of the securities remained at or below the exercise
price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio
("protective puts") or securities of the type in which it is permitted
to invest. The purchase of a put option would entitle the Portfolio,
in exchange for the premium paid, to sell a security, which may or may
not be held in the Portfolio's portfolio, at a specified price during
the option period. The purchase of protective puts is designed merely
to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by
the Portfolio for the purpose of affirmatively benefiting from a
decline in the price of securities which the Portfolio does not own.
The Portfolio would ordinarily recognize a gain if the value of the
securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities
remained at or above the exercise price. Gains and losses on the
purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio
securities.
Each Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The
Portfolio's activities in options may also be restricted by the
requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying securities markets that cannot be reflected in the option
markets. It is impossible to predict the volume of trading that may
exist in such options, and there can be no assurance that viable
exchange markets will develop or continue.
A Portfolio 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 Portfolio 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 Adviser will monitor the creditworthiness of dealers
with whom the Portfolio enters into such options transactions under
the general supervision of the Board of Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities,
each Portfolio, with the exception of International Bond Portfolio,
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."
The International Bond Portfolio, the European Equity Portfolio and
the Pacific Basin Equity Portfolio may, to the extent allowed by
Federal and state securities laws, invest in securities indices
instead of investing directly in individual foreign 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 Portfolio generally will only purchase or write
such an option if the Adviser believes 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 Portfolio will
not purchase such options unless the Adviser believes 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 a Portfolio's portfolio 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 Adviser may be
forced to liquidate portfolio securities to meet settlement
obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because each Portfolio
buys and sells securities denominated in currencies other than the
U.S. dollar and receives interest, dividends and sale proceeds in
currencies other than the U.S. dollar, each Portfolio 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. A Portfolio either enters into
these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or uses forward
contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank
market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded
at a net price without commission. Each Portfolio maintains with its
custodian a segregated account of high grade liquid assets in an
amount at least equal to its obligations under each forward foreign
currency exchange contract. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
Each Portfolio 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. Since consideration of the prospect for currency parities
will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however,
Bankers Trust believes that it is important to have the flexibility to
enter into foreign currency hedging transactions when it determines
that the transactions would be in the Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities
in foreign currencies will change as a consequence of market movements
in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts.
In such event the Portfolio's ability to utilize forward contracts in
the manner set forth in the Prospectus may be restricted. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not
eliminate fluctuations in the underlying U.S. dollar equivalent value
of the prices of or rates of return on a Portfolio's foreign currency
denominated portfolio securities and the use of such techniques will
subject a Portfolio to certain risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not
be precise. In addition, a Portfolio may not always be able to enter
into foreign currency forward contracts at attractive prices and this
will limit the Portfolio's ability to use such contract to hedge or
cross-hedge its assets. Also, with regard to a Portfolio's use of
cross-hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may
exist between movements in the exchange rates of the foreign
currencies underlying a Portfolio's cross- hedges and the movements in
the exchange rates of the foreign currencies in which the Portfolio's
assets that are the subject of such cross-hedges are denominated.
RATING SERVICES. The ratings of Moody's and S&P 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, Bankers Trust also makes its own evaluation of these
securities, subject to review by the Board of Trustees of the Trust.
After purchase by a Portfolio, an obligation may cease to be rated or
its rating may be reduced below the minimum required for purchase by
the Portfolio. Neither event would require either Portfolio to
eliminate the obligation from its portfolio, but Bankers Trust will
consider such an event in its determination of whether a Portfolio
should continue to hold the obligation. A description of the ratings
categories of Moody's and S&P is set forth below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with
respect to each Portfolio as fundamental policies. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), a
"fundamental" policy may not be changed without the vote of a
"majority of the outstanding voting securities" of a Portfolio, which
is defined in the 1940 Act as the lesser of (a) 67% or more of the
securities present at a meeting if the holders of more than 50% of the
outstanding securities are present or represented by proxy, or (b)
more than 50% of the outstanding securities. The percentage
limitations contained in the restrictions listed below apply at the
time of the purchase of the securities.
As a matter of fundamental policy, a Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the
Portfolio, except that in an amount not to exceed 1/3 of the
current value of the Portfolio's net assets, it may borrow
money as a temporary measure for extraordinary or emergency
purposes and enter into reverse repurchase agreements or
dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings (it is intended that money would be
borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests while
effecting an orderly liquidation of portfolio securities or
to maintain liquidity in the event of an unanticipated
failure to complete a portfolio security transaction or other
similar situations) 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; for additional related
restrictions, see clause (i) under the caption "Additional
Restrictions" below. (As an operating policy, the Portfolios
may not engage in dollar roll transactions);
2. Underwrite securities issued by other persons except insofar
as the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in selling a
portfolio security;
3. Make loans to other persons except (a) through the lending
of the Portfolio's portfolio securities and provided that any
such loans not exceed 30% of the Portfolio'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 a portion of an issue of debt securities of
types distributed publicly or privately (under current
regulations, the Portfolio's fundamental policy with respect
to 20% risk weighing for financial institutions prevent the
(Fund) from engaging in securities lending);
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 may hold and sell, for its portfolio,
real estate acquired as a result of the Portfolio's ownership
of securities);
5. Concentrate its investments in any particular industry
(excluding U.S. government securities), but if it is deemed
appropriate for the achievement of the Portfolio's investment
objective, up to 25% of its total assets may be invested in
any one industry;
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.
As an operating policy the Portfolios will not invest in
another open-end registered investment company.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and policies
the Portfolios will not as a matter of operating policy:
(i) borrow money (including through reverse repurchase or
forward roll transactions) for any purpose in excess of 5% of
the Portfolio's total assets (taken at cost), except that the
Portfolio may borrow for temporary or emergency purposes up
to 1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in
excess of 10% of the Portfolio's total assets (taken at
market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase
agreements 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) sell securities it does not own such that the dollar
amount of such short sales at any one time exceeds 25% of the
net equity of the Portfolio, and the value of securities of
any one issuer in which the Portfolio is short exceeds the
lesser of 2.0% of the value of the Portfolio's net assets or
2.0% of the securities of any class of any U.S. issuer and,
provided that short sales may be made only in those
securities which are fully listed on a national securities
exchange or a foreign exchange (This provision does not
include the sale of securities of the Portfolio
contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold, i.e., short
sales against the box.) (the Portfolios have no current
intention to engage in short selling);
(v) invest for the purpose of exercising control or management of
another company;
(vi) purchase securities issued by any 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 if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio's total assets
(taken at the greater of cost or market value) to be invested
in the securities of such issuers; (b) more than 5% of the
Portfolio'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; provided
further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any
securities of any open-end investment company unless (1) the
Portfolio' investment adviser waives the investment advisory
fee with respect to assets invested in other open-end
investment companies and (2) the Portfolio incurs no sales
charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's total assets
(taken at the greater of cost or market value) in securities
(excluding Rule 144A securities) that are restricted as to
resale under the 1933 Act;
(viii) invest more than 15% of the Portfolio's total assets
(taken at the greater of cost or market value) in (a)
securities (including Rule 144A securities) that are
restricted as to resale under the 1933 Act, and (b)
securities that are issued by issuers which (including
predecessors) have been in operation less than three years
(other than U.S. government securities), provided, however,
that no more than 5% of the Portfolio's total assets are
invested in securities issued by issuers which (including
predecessors) have been in operation less than three years;
(ix) with the exception of the Global High Yield Securities
Portfolio with respect to 75% of the Portfolio's total
assets, purchase securities of any issuer if such purchase at
the time thereof would cause the Portfolio to hold more than
10% of any class of securities of such issuer, for which
purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(x) with the exception of the Global High Yield Securities
Portfolio with respect to 75% of its assets, invest more than 5% of
its total assets in the securities (excluding U.S. government
securities) of any one issuer;
(xi) invest in securities issued by an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio (Trust), or is an officer
or director of the Adviser, if after the purchase of the
securities of such issuer for the Portfolio 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;
(xii) invest in warrants (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the
time of purchase) if, as a result, the investments (valued at
the lower of cost or market) would exceed 5% of the value of
the Portfolio's net assets or if, as a result, more than 2%
of the Portfolio's net assets would be invested in warrants
not listed on a recognized United States or foreign stock
exchange, to the extent permitted by applicable state
securities laws;
(xiii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the
put or call is within the investment policies of the
Portfolio and the option is issued by the Options Clearing
Corporation, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the
obligations underlying the puts determined as of the date the
options are sold shall not exceed 5% of the Portfolio's net
assets; (c) the securities subject to the exercise of the
call written by the Portfolio must be owned by the Portfolio
at the time the call is sold and must continue to be owned by
the Portfolio until the call has been exercised, has lapsed,
or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the
Portfolio's obligation to deliver securities pursuant to the
call it has sold; and (d) at the time a put is written, the
Portfolio establishes a segregated account with its custodian
consisting of cash or short-term U.S. government securities
equal in value to the amount the Portfolio will be obligated
to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the
portfolio has purchased a closing put, which is a put of the
same series as the one previously written); and
(xiv) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial
futures or options on financial futures unless such options
are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities
association or are listed on a national securities or
commodities exchange, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all
such options which are held at any time do not exceed 20% of
the Portfolio's total net assets; and (c) the aggregate
margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Portfolio's
total assets.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in
net or total assets, in the securities rating of the investment, or
any other later change.
The Portfolio will comply with the permitted investments and
investment limitations in the securities laws and regulations of all
states in which any registered investment company investing in the
Portfolio is registered.
ITEM 14. MANAGEMENT OF THE FUND.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have
varied during that period. Unless otherwise indicated below, the
address of each officer is Clearing Operations, P.O. Box 897,
Pittsburgh, Pennsylvania 15230-0897.
TRUSTEES
CHARLES P. BIGGAR (Birthdate: October 13, 1930)-- Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler,
Hill Richards Inc.; formerly Vice President of International Business
Machines and President of the National Services and the Field
Engineering Divisions of IBM. His address is 12 Hitching Post Lane,
Chappaqua, New York 10514.
S. LELAND DILL (Birthdate: March 28, 1930) -- Trustee; Retired;
Director, Coutts Group; Coutts (U.S.A.) International; Coutts Trust
Holdings Ltd.; Director, Zweig Series Trust; formerly Partner of KPMG
Peat Marwick; Director, Vinters International Company Inc.; General
Partner of Pemco (an investment company registered under the 1940
Act). His address is 5070 North Ocean Drive, Singer Island, Florida
33404.
PHILIP SAUNDERS, JR. (Birthdate: October 11, 1935) -- Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of
Financial Industry Consulting, Wolf & Company; President, John Hancock
Home Mortgage Corporation; and Senior Vice President of Treasury and
Financial Services, John Hancock Mutual Life Insurance Company, Inc.
His address is 445 Glen Road, Weston, Massachusetts 02193.
PHILIP W. COOLIDGE* (Birthdate: September 2, 1951) -- President
and Trustee; Chairman, Chief Executive Officer and President,
Signature Financial Group, Inc. ("SFG") (since December, 1988) and
Signature Broker-Dealer Services, Inc. ("Signature") (since April,
1989). His address is 6 St. James Avenue,
Boston, Massachusetts 02116.
OFFICERS
RONALD M. PETNUCH (Birthdate: February 27, 1960) -- President and
Treasurer; Senior Vice President, Federated Services Company ("FSC");
formerly, Director of Proprietary Client Services, Federated
Administrative Services ("FAS"), and Associate Corporate Counsel,
Federated Investors ("FI").
CHARLES L. DAVIS, JR. (Birthdate: March 23, 1960)-- Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (Birthdate: April 22, 1950) -- Secretary; Corporate Counsel, FI.
Messrs. Coolidge, Petnuch, Davis, and Neuman also hold similar
positions for other investment companies for which Signature or
Edgewood, respectively, or an affiliate serves as the principal
underwriter.
*Indicates an "interested person (as defined by the 1940 Act) of the Trust.
<PAGE>
TRUSTEES COMPENSATION TABLE
Trustees of the Portfolio received the following remuneration from the
Portfolios for the year ended December 31, 1995:
Name, Aggregate Total
Position With Compensation Compensation From
Trust/Portfolio From Portfolio Fund Complex*
- ----------------------------------------------------
Philip W. Coolidge none none
Trustee of Trust
and Portfolio
Charles P. Biggar none none
Trustee of Portfolio
S. Leland Dill none $23,000
Trustee of Portfolio
Philip Saunders, Jr. none $23,000
Trustee of the Portfolio
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional
Funds, BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity
Portfolio, Utility Portfolio, Short Intermediate US Government
Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital
Appreciation Portfolio.
For the fiscal year ended September 30, 1996, Global High Yield
Securities Portfolio accrued Trustees fees equal to $2,638, Latin
American Equity Portfolio accrued Trustees fees equal to $2,904, Small
Cap Portfolio accrued Trustees fees equal to $2,718 and Pacific Basin
Equity Portfolio accrued Trustees fees equal to $2,654.
As of the fiscal year ended September 30, 1996, European Equity
Portfolio and International Bond Portfolio had not commenced
investment operations and did not accrue Trustees fees.
Bankers Trust reimbursed the Portfolios for a portion of their
Trustees fees for the period above. See "Investment Advisory and Other
Services" and below.
The Portfolios' Declaration of Trust provides that it 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 Portfolio, unless, as to liability to the
Portfolio or the investors in the Portfolio, 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 Portfolios. 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.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 31, 1996, Global High Yield Securities Fund, Latin
American Equity Fund, Small Cap Fund and Pacific Basin Equity Fund
(each a "Fund"), each a series of shares of BT Investment Funds, each
owned approximately 100% of the value of the outstanding interests in
the Global High Yield Securities Portfolio, Latin American Equity
Portfolio, Small Cap Portfolio and Pacific Basin Equity Portfolio,
respectively. As of the same date, Global High Yield Securities Fund,
a series of shares of The Leadership Trust, did not own any
outstanding interests in Global High Yield Securities Portfolio.
Because each Fund controls the corresponding Portfolio, it may take
actions without the approval of any other investor in the Portfolios
or any other series of the Trust, as the case may be.
Each Fund has informed the Trust that whenever it is requested to vote
on matters pertaining to the fundamental policies of each Portfolio,
the Fund will hold a meeting of shareholders and will cast its votes
as instructed by the Fund's shareholders. It is anticipated that other
registered investment companies investing in the Portfolios will
follow the same or a similar practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
The Adviser manages the assets of the Portfolios pursuant to an
investment advisory agreement (the "Advisory Agreement"). Subject to
such policies as the Board of Trustees of the Trust may determine, the
Adviser makes investment decisions for each Portfolio. Bankers Trust
will: (i) act in strict conformity with the Trust's Declaration of
Trust, the 1940 Act and the Investment Advisors Act of 1940, as the
same may from time to time be amended; (ii) manage each Portfolio in
accordance with each Portfolio's investment objectives, restrictions
and policies as stated herein; (iii) make investment decisions for
each Portfolio; and (iv) place purchase and sale orders for securities
and other financial instruments on behalf of each Portfolio.
The Adviser furnishes at its own expense all services, facilities and
personnel necessary in connection with managing each Portfolio's
investments and effecting securities transactions for each Portfolio.
The Advisory Agreement will continue in effect if such continuance is
specifically approved at least annually by the Board of Trustees or by
a majority vote of the investors in each Portfolio (with the vote of
each being in proportion to the amount of its investment), and, in
either case, by a majority of the Trust's Trustees who are not parties
to the Advisory Agreement or interested persons of any such party, at
a meeting called for the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable with respect to each Portfolio
without penalty on 60 days' written notice by each Portfolio when
authorized either by majority vote of the investors in each Portfolio
(with the vote of each being in proportion to the amount of its
investment), or by a vote of a majority of the Trust's Board of
Trustees, or by the Adviser, and will automatically terminate in the
event of its assignment. The Advisory Agreement provides that neither
the Adviser not its 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 Portfolio, except for willful misfeasance, bad
faith or gross negligence or of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
For the fiscal years ended September 30, 1996, 1995, and the period
from October 25, 1993 (commencement of operations) through September
30, 1994, Bankers Trust earned $151,004, $173,145 and $102,872,
respectively, in compensation for investment advisory services
provided to Latin American Equity Portfolio. During the same periods,
Bankers Trust reimbursed $46,928, $138,351 and $81,307, respectively,
to that Portfolio to cover expenses.
For the fiscal years ended September 30, 1996, 1995, and the period
from November 1, 1993 (commencement of operations) through September
30, 1994, Bankers Trust earned $211,122, $173,591 and $116,020,
respectively, in compensation for investment advisory services
provided to Pacific Basin Equity Portfolio. During the same periods,
Bankers Trust reimbursed $30,450, $47,338 and $40,461, respectively,
to that Portfolio to cover expenses.
For the fiscal years ended September 30, 1996, 1995, and the period
from December 14, 1993 (commencement of operations) through September
30, 1994, Bankers Trust earned $156,634, $141,692 and $66,073,
respectively, in compensation for investment advisory services
provided to Global High Yield Securities Portfolio. During the same
periods, Bankers Trust reimbursed $86,070, $78,840 and $48,741,
respectively, to that Portfolio to cover expenses.
For the fiscal years ended September 30, 1996, 1995, and the period
from October 21, 1993 (commencement of operations) through September
30, 1994, Bankers Trust earned $1,293,449, $389,015 and $69,420,
respectively, in compensation for investment advisory services
provided to Small Cap Portfolio. During the same periods, Bankers
Trust reimbursed $331,176, $111,862 and $41,110, respectively, to that
Portfolio to cover expenses.
As of the fiscal year ended September 30, 1996, European Equity
Portfolio and International Bond Portfolio had not commenced
investment operations and did not accrue investment advisory fees.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased
on behalf of the Portfolios, including outstanding loans to such
issuers which could be repaid in whole or in part with the proceeds of
securities so purchased. Such affiliates deal, trade and invest for
their own accounts in such obligations and are among the leading
dealers of various types of such obligations. Bankers Trust has
informed the Portfolios that, in making its investment decisions, it
does not obtain or use material inside information in its possession
or in the possession of any of its affiliates. In making investment
recommendations for the Portfolios, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed for
purchase or sale by a Portfolio is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and, in dealing with its
customers, Bankers Trust, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such
customers are held by any fund managed by Bankers Trust or any such
affiliate.
Bankers Trust has entered into a sub-investment advisory agreement
(the "Sub-Advisory Agreement") with BT Fund Managers International
Limited ("BT Fund Managers International") a wholly owned subsidiary
of Bankers Trust Australia Limited ("BTAL") in Sydney. BTAL is a
wholly owned subsidiary of Bankers Trust New York Corporation. Under
the Sub-Advisory Agreement, Bankers Trust may receive investment
advice and research services with respect to companies based in the
Pacific Basin and may grant BT Fund Managers International investment
management authority as well as the authority to buy and sell
securities if Bankers Trust believes it would be beneficial to Pacific
Basin Equity Portfolio.
BTAL, which was granted a banking license in 1986, is the parent of
Bankers Trust Australia Group which has offices is Sydney, Melbourne,
Perth, Brisbane, Adelaide, London and Hong Kong. A representative
office of Bankers Trust Company was opened in Australia in 1966 and
Australian merchant banking operations commences in 1969. A related
organization, Bankers Trust New Zealand Limited, was established in
1986. Although BTAL has not previously served as investment adviser
for a registered investment company, BTAL provides investment services
for a range of clients.
Pursuant to an administration and services agreement (the
"Administration Agreement"), Bankers Trust provides administration
services to the Trust. Under the Administration Agreement, Bankers
Trust is obligated on a continuous basis to provide such
administrative services as the Board of Trustees reasonably deems
necessary for the proper administration of the Trust. Bankers Trust
will generally assist in all aspects of the Trust's operations; supply
and maintain the Trust with office facilities, statistical and
research data, data processing services, clerical, accounting,
bookkeeping and recordkeeping services (including without limitation
the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other
agents of the Trust), internal auditing, executive and administrative
services, and stationery and office supplies; prepare reports to
investors; prepare and file tax returns; supply financial information
and supporting data for reports to and filings with the Securities and
Exchange Commission (the "SEC"); supply supporting documentation for
meetings of the Board of Trustees; provide monitoring reports and
assistance regarding compliance with the Trust's Declaration of Trust,
By-Laws, investment objectives and policies and with federal and state
securities laws; arrange for appropriate insurance coverage; calculate
the net asset value, net income and realized capital gains or losses
of the Portfolios; and negotiate arrangements with, and supervise and
coordinate the activities of, agents and others retained by the Trust
to supply services to the Trust and/or the investors in the
Portfolios.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trust
as from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and
Bankers Trust. All such compensation will be paid by Bankers Trust.
Bankers Trust also provides fund accounting, transfer agency and
custodian services to the Trust and the Portfolios, pursuant to the
Administration Agreement.
For the fiscal years ended September 30, 1996, 1995, and the period
from October 25, 1993 (commencement of operations) through September
30, 1994, Bankers Trust received $30,201, $34,629 and $20,574,
respectively, in compensation for administrative and other services
provided to Latin American Equity Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the fiscal
from November 1, 1993 (commencement of operations) through September
30, 1994, Bankers Trust received $70,374, $57,864 and $38,673,
respectively, in compensation for administrative and other services
provided to Pacific Basin Equity Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the period
from December 14, 1993 (commencement of operations) through September
30, 1994, Bankers Trust received $39,158, $35,423 and $16,518,
respectively, in compensation for administrative and other services
provided to Global High Yield Securities Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the fiscal
period from October 21, 1993 (commencement of operations) through
September 30, 1994, Bankers Trust received $198,992, $59,848 and
$10,680, respectively, in compensation for administrative and other
services provided to Small Cap Portfolio.
As of the fiscal year ended September 30, 1996, European Equity
Portfolio and International Bond Portfolio had not commenced
investment operations and did not accrue administrative fees.
Bankers Trust reimbursed each Portfolio for a portion of its
administrative and services fees for the period above. See "Investment
Advisory and Other Services" above.
Coopers & Lybrand L.L.P. are the independent certified public
accountants for the Trust, providing audit services, tax return
preparation, and assistance and consultation with respect to the
preparation of filings with the SEC. The principal business address of
Coopers & Lybrand L.L.P. is 1100 Main, Suite 900, Kansas City,
Missouri 64105.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for each
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions
on portfolio transactions, including options, futures and options on
futures transactions and the purchase and sale of underlying
securities upon the exercise of options. Orders may be directed to any
broker-dealer or futures commission merchant, including to the extent
and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio
securities on behalf of a Portfolio are frequently placed by the
Adviser with the issuer or a primary or secondary market-maker for
these securities on a net basis, without any brokerage commission
being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs
may also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of
underwritten issues may be made which will include an underwriting fee
paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing
orders for the purchase and sale of securities for the Portfolios
taking into account such factors as price, commission (negotiable in
the case of national securities exchange transactions), if any, size
of order, difficulty of execution and skill required of the executing
broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by
the Portfolios to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement
services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, when placing portfolio transactions
for the Portfolios with a broker to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have
charged for effecting the same transaction on account of the receipt
of research, market or statistical information. The term "research,
market or statistical information" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or purchasers or sellers of
securities; and furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of
the NASD and such other policies as the Trust's Trustees may
determine, the Adviser may consider sales of securities of other
investment company clients of Bankers Trust as a factor in the
selection of broker-dealers to execute portfolio transactions. Bankers
Trust will make such allocations if commissions are comparable to
those charged by nonaffiliated, qualified broker-dealers for similar
services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research
information in managing the Portfolios' assets, as well as the assets
of other clients.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or
dealers or groups thereof. In effecting transactions in
over-the-counter securities, orders are placed with the principal
market-makers for the security being traded unless, after exercising
care, it appears that more favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Portfolios and to the
Adviser, it is the opinion of the management of the Portfolios that
such information is only supplementary to the Adviser's own research
effort, since the information must still be analyzed, weighed and
reviewed by the Adviser's staff. Such information may be useful to the
Adviser in providing services to clients other than the Portfolios,
and not all such information is used by the Adviser in connection with
the Portfolios. Conversely, such information provided to the Adviser
by brokers and dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in
providing services to the Portfolios.
In certain instances there may be securities which are suitable for
the Portfolios as well as for one or more of the Adviser's other
clients. Investment decisions for the Portfolios and for the Adviser's
other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or
bought or sold for, other clients. Likewise, a particular security may
be bought for one or more clients when one or more clients are selling
that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment
adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of
the security as far as the Portfolios are concerned. However, it is
believed that the ability of the Portfolio to participate in volume
transactions will produce better executions for the Portfolios.
For the fiscal years ended September 30, 1996, 1995, and the period
from October 25, 1993 (commencement of operations) through September
30, 1994, Latin American Equity Portfolio paid brokerage commissions
in the amount of $164,049, $202,130 and $139,363, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period
from December 14, 1993 (commencement of operations) through September
30, 1994, Global High Yield Securities Portfolio paid brokerage
commissions in the amount of $0, $5,655 and $0, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period
from November 1, 1993 (commencement of operations) through September
30, 1994, Pacific Basin Equity Portfolio paid brokerage commissions in
the amount of $323,958, $192,123 and $139,363, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period
from October 21, 1993 (commencement of operations) through September
30, 1994, Small Cap Portfolio paid brokerage commissions in the amount
of $238,160, $70,603 and $20,835, respectively.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in separate series, such as the Portfolios. No
series of the Trust has any preference over any other series.
Investors in the Portfolios are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of the
Portfolios. Upon liquidation or dissolution of the Portfolios,
investors are entitled to share pro rata in the net assets of the
Portfolios available for distribution to investors. Investments in the
Portfolios have no preference, preemptive, conversion or similar
rights and are fully paid and nonassessable, except as set forth
below. Investments in the Portfolios may not be transferred.
Each investor in the Portfolios is entitled to a vote in proportion to
the amount of its investment. The Portfolios and the other series of
the Trust will all vote together in certain circumstances (e.g.,
election of the Trust's Trustees and auditors, as required by the 1940
Act and the rules thereunder). One or more series of the Trust could
control the outcome of these votes. Investors do not have cumulative
voting rights, and investors holding more than 50% of the aggregate
beneficial interests in the Trust, or in a series as the case may be,
may control the outcome of votes and in such event the other investors
in the Portfolios, or in the series, would not be able to elect any
Trustee. The Trust is not required and has no current intention to
hold annual meetings of investors but the Portfolios will hold special
meetings of investors when in the judgment of the Trust's Trustees it
is necessary or desirable to submit matters for an investor vote. No
material amendment may be made to the Trust's Declaration of Trust
without the affirmative majority vote of investors (with the vote of
each being in proportion to the amount of its investment).
The Trust, with respect to each Portfolio, may enter into a merger or
consolidation, or sell all or substantially all of its assets, if
approved by the vote of two-thirds of the Portfolios' investors (with
the vote of each being in proportion to its percentage of the
beneficial interests in a Portfolio), except that if the Trustees of
the Trust recommend such sale of assets, the approval by vote of a
majority of the investors (with the vote of each being in proportion
to its percentage of the beneficial interests of each Portfolio) will
be sufficient. A Portfolio may also be terminated (i) upon liquidation
and distribution of its assets, if approved by the vote of two-thirds
of its investors (with the vote of each being in proportion to the
amount of its investment), or (ii) by the Trustees of the Trust by
written notice to its investors.
The Trust is organized as a trust under the laws of the State of New
York. Investors in the Portfolios or any other series of the Trust
will be held personally liable for its obligations and liabilities,
subject, however, to indemnification by the Trust in the event that
there is imposed upon an investor a greater portion of the liabilities
and obligations than its proportionate beneficial interest. The
Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its investors,
Trustees, officers, employees and agents covering possible tort and
other liabilities. Thus, the risk of an investor incurring financial
loss on account of investor liability is limited to circumstances in
which both inadequate insurance existed and the Trust itself was
unable to meet its obligations with respect to any series thereof.
The Declaration of Trust further provides that obligations of the
Portfolios or any other series of the Trust are not binding upon the
Trustees individually but only upon the property of the Portfolios or
other series of the Trust, as the case may be, and that the Trustees
will not be liable for any action or failure to act, but nothing in
the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
The Trust reserves the right to create and issue a number of series,
in which case investments in each series would participate equally in
the earnings and assets of the particular series. Investors in each
series would be entitled to vote separately to approve advisory
agreements or changes in investment policy, but investors of all
series may vote together in the election or selection of Trustees,
principal underwriters and accountants. Upon liquidation or
dissolution of any series of the Trust, the investors in that series
would be entitled to share pro rata in the net assets of that series
available for distribution to investors.
ITEM 19. PURCHASE, REDEMPTION, AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in each Portfolio are issued solely in private
placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. See "General
Description of Registrant," "Purchase of Securities Being Offered" and
"Redemption or Repurchase" in Part A.
Each Portfolio determines its net asset value as of 4:00 p.m., Eastern
time, on each day on which the NYSE is open for trading ("Fund
Business Day"), by dividing the value of each Portfolio's net assets
(i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued) by the value of
the investment of the investors in each Portfolio at the time the
determination is made. (As of the date of this Registration Statement,
the NYSE is both open every weekday except for: (a) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day; and
(b) the preceding Friday of the subsequent Monday when one of the
calendar-determined holidays falls on a Saturday or Sunday,
respectively. Purchases and withdrawals will be effected at the time
of determination of net asset value next following the receipt of any
purchase or withdrawal order.
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and
securities for which price quotations are available, will normally be
valued on the basis of market valuations furnished by a pricing
service. Short-term debt obligations and money market securities
maturing in 60 days or less are valued at amortized cost, which
approximates market. Other assets are valued at fair value using
methods determined in good faith by the Board of Trustees.
ITEM 20. TAX STATUS.
The Trust is organized as a trust under New York law. Under the
anticipated method of operation of the Trust, the Portfolios will not
be subject to any income tax. However each investor in the Portfolios
will be taxable on its share (as determined in accordance with the
governing instruments of the Trust) of a Portfolio's ordinary income
and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the
Internal Revenue Code of 1986, as amended (the "Code"), and
regulations promulgated thereunder.
The Trust's taxable year-end is December 31. Although, as described
above, each Portfolio will not be subject to federal income tax, the
Trust will file appropriate income tax returns with respect to each
Portfolio.
It is intended that the assets, income and distributions of the
Portfolios will be managed in such a way that an investor in each
Portfolio will be able to satisfy the requirements of Subchapter M of
the Code, assuming that the investor invested all of its assets in
that Portfolio.
There are certain tax issues that will be relevant to only certain of
the investors, specifically investors that are segregated asset
accounts and investors who contribute assets rather than cash to the
Portfolios. It is intended that such segregated asset accounts will be
able to satisfy diversification requirements applicable to them and
that such contributions of assets will not be taxable provided certain
requirements are met. Such investors are advised to consult their own
tax advisors as to the tax consequences of an investment in the
Portfolios.
FOREIGN SECURITIES. 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 each Portfolio's assets to be invested in various countries
will vary.
If each Portfolio is liable for foreign taxes, and if more than 50% of
the value of each Portfolio's total assets at the close of its taxable
year consists of stocks or securities of foreign corporations, it may
make an election pursuant to which certain foreign taxes paid by it
would be treated as having been paid directly by its investors.
Pursuant to such election, the amount of foreign taxes paid will be
included in the income of each Portfolio's investors, and such
investors (except tax-exempt investors) may, subject to certain
limitations, claim either a credit or deduction for the taxes. Each
such investor will be notified after the close of each Portfolio's
taxable year whether the foreign taxes paid will "pass through" for
that year and, if so, such notification will designate (a) the
investor's portion of the foreign taxes paid to each such country and
(b) the portion which represents income derived from sources within
each such country.
The amount of foreign taxes for which an investor may claim a credit
in any year will generally be subject to a separate limitation for
"passive income," which includes, among other items of income,
dividends, interest and certain foreign currency gains. Because
capital gains realized by each Portfolio on the sale of foreign
securities will be treated as U.S.-source income, the available credit
of foreign taxes paid with respect to such gains may be restricted by
this limitation.
ITEM 21. UNDERWRITERS.
The placement agent for the Trust is Edgewood, which receives no
additional compensation for serving in this capacity. Investment
companies, insurance company separate accounts, common and commingled
trust funds and similar organizations and entities may continuously
invest in each Portfolio.
ITEM 22. CALCULATION OF FUND PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The financial statements for each Portfolio for the fiscal year ended
September 30, 1996, are incorporated herein by reference to the BT
Investment Funds' combined Annual Report dated September 30, 1996
(File No. 811-04760).
PART C OTHER INFORMATION
Responses to Items 24(b)(6), 24(b)(10), 24(b)(11), and 24(b)(12) have
been omitted pursuant to paragraph 4 of Instruction F of the General
Instructions to Form N-1A.
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
Incorporated by reference to: the Annual Report of BT
Investment Funds dated September 30, 1996 pursuant to
Rule 411 under the Securities Act of 1933.
(File Nos. 33-62103 and 811-07347);
(b) EXHIBITS:
(l) Declaration of Trust of the Registrant; 3
(i) Fist Amendment to Declaration of Trust; *
(ii) Second Amendment to Declaration of Trust; *
(iii) Third Amendment to Declaration of Trust; *
(iv) Fourth Amendment to Declaration of Trust; *
(v) Fifth Amendment to Declaration of Trust; *
(vi) Sixth Amendment to Declaration of Trust; *
(vii) Conformed copy of Amendment No. 7 to Declaration of
Trust of BT Investment Portfolios; 7
(viii)Conformed copy of Amendment No. 8 to Declaration of
Trust of BT Investment Portfolios; 10
(2) By-Laws of the Registrant; 3
(3) Not Applicable
(4) Not Applicable
(5) (i) Investment Advisory Agreement between the Registrant
and Bankers Trust Company ("Bankers Trust"); 3
(ii) Sub-Investment Advisory Agreement between Bankers
Trust and BT Fund Managers International Limited; 2
(iii) Schedule of fees under Investment Advisory
Agreement; 4
(6) Not Applicable
(7) Not Applicable
(8) Conformed copy of Custodian Agreement between Bankers Trust
Company and BT Investment Portfolios; 11
- -----------------------------------
* Previously filed.
+ All exhibits have been filed electronically.
2. Incorporated by reference to Amendment No. 3 to Registrant's
Registration Statement as filed with the Commission on
September 20, 1993.
3. Incorporated by reference to Amendment No. 9 to Registrant's
Registration Statement as filed with the Commission on August 1, 1995.
4. Incorporated by reference to Amendment No. 10 to Registrant's
Registration Statement as filed with the Commission on January 1, 1996.
7. Incorporated by reference to Amendment No. 13 to Registrant's
Registration Statement as filed with the Commission on
January 30, 1997.
10. Incorporated by reference to Amendment No. 17 to Registrant's
Registration Statement as filed with the Commission on April 16, 1997.
11. Incorporated by reference to Amendment No. 18 to Registrant's
Registration Statement as filed with the Commission on May 19, 1997.
<PAGE>
(9) Administration and Services Agreement between the
Registrant and Bankers Trust; 1
(i) Conformed Copy of Exclusive Placement Agent
Agreement; 8
(ii) Copy of Exhibit A to Exclusive Placement Agent
Agreement; 8
(10) Not Applicable
(11) Not Applicable
(12) Not Applicable
(13) (i) Investment Representation letters of
initial investors; 1
(ii) Investment Representation Letters of Initial
Investors, EAFE(R) Equity Index Portfolio, U.S. Bond Index Portfolio,
Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio; 4
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedules
(i) Asset Management Portfolio II, Asset Management
Portfolio III; 12
(ii) EAFE(R)Equity Index Portfolio, Small Cap Index
Portfolio; 8
(iii) Liquid Assets Portfolio; 9
(iv) Pacific Basin Equity Portfolio, Latin American Equity
Portfolio, Global High Yield Portfolio, Small Cap Portfolio; 7
(v) BT PreservationPlus Portfolio; Not Applicable
(18) Not Applicable
(19) Conformed copy of Power of Attorney; 8
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
None
- -----------------------------------
+ All exhibits have been filed electronically.
1. Incorporated by reference to the Registrant's registration statement
on Form N-lA ("Registration Statement") as filed with the Commission
on June 7, 1993.
4. Incorporated by reference to Amendment No. 10 to Registrant's
Registration Statement as filed with the Commission on January 1, 1996.
7. Incorporated by reference to Amendment No. 13 to Registrant's
Registration Statement as filed with the Commission on
January 30, 1997.
8. Incorporated by reference to Amendment No. 15 to Registrant's
Registration Statement as filed with the Commission on
February 28, 1997.
9. Incorporated by reference to Amendment No. 15 to Registrant's
Registration Statement as filed with the Commission on March 19, 1997.
12. Incorporated by reference to Amendment No. 20 to Registrant's
Registration Statement as filed with the Commission on July 1, 1997.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS Number of Record Holders
AS OF JUNE 1, 1997
International Bond Portfolio 1
Latin American Equity Portfolio 2
Pacific Basin Equity Portfolio 2
Global High Yield Securities Portfolio 2
Small Cap Portfolio 2
European Equity Portfolio 1
Liquid Assets Portfolio 1
100% Treasury Portfolio 2
Asset Management Portfolio II 1
Asset Management Portfolio III 1
U.S. Bond Index Portfolio 1
Equity 500 Equal Weighted Index Portfolio 1
Small Cap Index Portfolio 1
EAFE(R) Equity Index Portfolio 1
BT Preservation Plus Portfolio 1
ITEM 27. INDEMNIFICATION; 5
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:
Bankers Trust serves as investment adviser to each Portfolio. Bankers
Trust, a New York banking corporation, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety
of commercial banking and trust activities and is a major wholesale
supplier of financial services to the international institutional
market. To the knowledge of the Trust, none of the directors or
officers of Bankers Trust, except those set forth below, is or has
been at anytime during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial nature,
except that certain directors and officers also hold various positions
with and engage in business for Bankers Trust New York Corporation.
Set forth below are the names and principal businesses of the
directors and officers of Bankers Trust who are or during the past two
fiscal years have been engaged in any other business, profession,
vocation or employment of a substantial nature. These persons may be
contacted c/o Bankers Trust Company, 130 Liberty Street, New York, New
York 10006.
George B. Beitzel, International Business Machines Corporation, Old
Orchard Road, Armonk, NY 10504. Director, Bankers Trust Company;
Retired senior vice president and Director, International Business
machines Corporation; Director, Computer Task Group; Director,
Phillips Petroleum Company; Director, Caliber Systems, Inc. (formerly,
Roadway Services Inc.); Director, Rohm and Haas Company; Director, TIG
Holdings; Chairman emeritus of Amherst College; and Chairman of the
Colonial Willimsburg Foundation.
Richard H. Daniel, Bankers Trust Company, 130 Liberty Street, New
York, New York 10006. Vice chairman and chief financial officer,
Bankers Trust Company and Bankers Trust New York Corporation;
Beneficial owner, general partner, Daniel Brothers, Daniel Lingo &
Assoc., Daniel Pelt & Assoc.; Beneficial owner, Rhea C.
Daniel Trust.
5. Incorporated by reference ( to Post-Effective Amendment No. 11 to
Registrant's Registration Statement as filed with the Commission on
January 29, 1996.
<PAGE>
Philip A. Griffiths, Bankers Trust Company, 130 Liberty Street, New
York, New York 10006. Director, Institute for Advanced Study;
Director, Bankers Trust Company; Chairman, Committee on Science,
Engineering and Public Policy of the National Academies of Sciences
and Engineering & the Institute of Medicine; and Chairman and member,
Nominations Committee and Committee on Science and Engineering
Indicators, National Science Board; Trustee, North Carolina School of
Science and Mathematics and the Woodward Academy.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001,
Plano, TX 75301-0001. Chairman Emeritus, J.C. Penney Company, Inc.;
Director, Bankers Trust Company; Director, Exxon Corporation;
Director, Halliburton Company; Director, Warner-Lambert Corporation;
Director, The Williams Companies, Inc.; and Director, National Retail
Federation.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333
New Hampshire Ave., N.W., Washington, DC 20036. Senior Partner, Akin,
Gump, Strauss, Hauer & Feld, LLP; Director, Bankers Trust Company;
Director, American Express Company; Director, Dow-Jones, Inc.;
Director, J.C. Penney Company, Inc.; Director, Revlon Group
Incorporated; Director, Ryder System, Inc.; Director, Sara Lee
Corporation; Director, Union Carbide Corporation; Director, Xerox
Corporation; Trustee, Brookings Institution; Trustee, The Ford
Foundation; and Trustee, Howard University.
David Marshall, 130 Liberty Street, New York, New York 10006. Chief
Information Officer and Executive Vice President, Bankers Trust New
York Corporation; Senior Managing Director, Bankers Trust Company.
Hamish Maxwell, Philip Morris Companies Inc., 120 Park Avenue, New
York, NY 10006. Retired Chairman and Chief Executive Officer, Philip
Morris Companies Inc.; Director, Bankers Trust Company; Director, The
News Corporation Limited; Director, Sola International Inc.; and
Chairman, WWP Group pic.
Frank N. Newman, Bankers Trust Company, 130 Liberty Street, New York,
New York 10006. Chairman of the Board, Chief Executive Officer and
President, Bankers Trust New York Corporation and Bankers Trust
Company; Director, Bankers Trust Company; Director, Dow-Jones, Inc.;
and Director, Carnegie Hall.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Director, Bankers
Trust Company; Director, Boston Scientific Corporation; and Director,
Xerox Corporation.
Russell E. Palmer, The Palmer Group, 3600 Market Street, Suite 530,
Philadelphia, PA 19104. Chairman and Chief Executive Officer of The
Palmer Group; Director, Bankers Trust Company; Director, Allied-Signal
Inc.; Director, Federal Home Loan Mortgage Corporation; Director, GTE
Corporation; Director, The May Department Stores Company; Director,
Safeguard Scientifics, Inc.; and Trustee, University of Pennsylvania.
Donald L. Staheli, Bankers Trust Company, 130 Liberty Street, New
York, New York 10006. Chairman of the Board and Chief Executive
Officer, Continental Grain Company; Director, Bankers Trust Company;
Director, ContiFinancial Corporation; Director, Prudential Life
Insurance Company of America; Director, Fresenius Medical Care, A.g.;
Director, America-China Society; Director, National Committee on
United States-China Relations; Director, New York City Partnership;
Chairman, U.S.-China Business Council; Chairman, Council on Foreign
Relations; Chairman, National Advisor Council of Brigham Young
University's Marriott School of Management; Vice Chairman, The Points
of Light Foundation; and Trustee, American Graduate School of
International Management.
Patricia Carry Stewart, c/o Office of the Secretary, 130 Liberty Street,
New York, NY 10006. Director, Bankers Trust Company; Director,
CVS Corporation; Director, Community Foundation for Palm Beach and
Martin Counties; Trustee Emerita, Cornell University.
George J. Vojta, Bankers Trust Company, 130 Liberty Street, New York,
NY 10006. Vice Chairman, Bankers Trust New York Corporation and
Bankers Trust Company; Director, bankers Trust Company; Director;
Alicorp S.A.; Director; Northwest Airlines; Director, Private Export
Funding Corp.; Director, New York State Banking Board; Director, St.
Lukes-Roosevelt Hospital Center; Partner, New York City Partnership;
and Chairman, Wharton Financial Services Center.
Paul A. Volcker, Bankers Trust Company, 130 Liberty Street, New York,
New York 10006. Director, Bankers Trust Company; Director, American
Stock Exchange; Director, Nestle S.A.; Director, Prudential Insurance
Company; Director, UAL Corporation; Chairman, Group of 30; North
American Chairman, Trilateral Commission; Co-Chairman, Bretton Woods
Committee; Co-Chairman, U.S./Hong Kong Economic Cooperation Committee;
Director, American Council on Germany; Director, Aspen Institute;
Director, Council on Foreign Relations; Director, The Japan Society;
and Trustee, The American Assembly.
Melvin A. Yellin, Bankers Trust Company, 130 Liberty Street, New York,
New York 10006. Senior Managing Director and General Counsel of
Bankers Trust New York Corporation and Bankers Trust Company;
Director, 1136 Tenants Corporation; and Director, ABA Securities
Association.
ITEM 29. PRINCIPAL UNDERWRITERS
a) Edgewood Service, Inc., the placement agent for shares of
the Registrant, also acts as principal underwriter for the following
open-end investment companies: BT Investment Funds, BT Advisor Funds,
BT Pyramid Mutual Funds, BT Institutional Funds, Excelsior
Institutional Trust (formerly, UST Master Funds, Inc.), Excelsior
Tax-Exempt Funds, Inc. (formerly, UST Master Tax-Exempt Funds, Inc.),
Excelsior Institutional Trust, FTI Funds, FundManager Portfolios,
Marketvest Funds, Marketvest Funds, inc. and Old Westbury Funds, Inc.
<TABLE>
<CAPTION>
b)
<S> <C> <C>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
Lawrence Caracciolo Director, President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Arthur L. Cherry Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
J. Christopher Donahue Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ronald M. Petnuch Vice President, President and Treasurer
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas P. Schmitt Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Assistant Secretary
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas J. Ward Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Kenneth W. Pegher, Jr. Treasurer, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
</TABLE>
(c) None
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS:
Registrant: Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Bankers Trust Company: 130 Liberty Street,
(Investment Adviser, Custodian New York, New York 10006.
and Administrator)
Investors Fiduciary Trust Company: 127 West 10th Street,
(Transfer Agent and Dividend Kansas City, MO 64105.
Distribution Agent)
Edgewood Services, Inc.: Clearing Operations, P.O. Box 897,
(Placement Agent Pittsburgh, Pennsylvania 15230-0897.
and Sub-Administrator)
ITEM 31. MANAGEMENT SERVICES:
Not Applicable
ITEM 32. UNDERTAKINGS
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, the Registrant, BT INVESTMENT PORTFOLIOS, has duly caused this
21st amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized in the City of
Pittsburgh and the Commonwealth of Pennsylvania, on the 3rd day of
July, 1997.
BT INVESTMENT PORTFOLIOS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
July 3, 1997
