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
----
Amendment No. 22 .............................................. X
---- ----
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
<PAGE>
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 Global High
Yield Securities Portfolio, Latin American Equity Portfolio, Small Cap
Portfolio, Pacific Basin Equity Portfolio, International Bond
Portfolio, and European Equity Portfolio.
<PAGE>
7
BT INVESTMENT PORTFOLIOS
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.
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.
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.
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.
Investments in the Portfolios are neither insured nor guaranteed by
the U.S. government. Investments in the Portfolios are not deposits or
obligations of, or guaranteed or endorsed by, Bankers Trust Company
("Bankers Trust") or the Portfolios, and are not federally insured by
the Federal Deposit Insurance Corporation the Federal Reserve Board or
any other agency, and are subject to investment risk, including the
possible loss of principal amount invested.
Additional information about the investment policies of each Portfolio
appears in Part B of this Registration Statement. There can be no
assurance that the investment objectives of the Portfolios will be
achieved. The Registrant incorporates by reference information
concerning the Portfolios' investment objectives and policies and risk
factors associated with investments in the Portfolios from the
sections entitled "Investment Objectives and Policies," "Risk Factors:
Matching the Fund to Your Investment Needs," "Special Information
Concerning Master-Feeder Fund Structure," "Securities and Investment
Practices," "Additional Information," and "Appendix" in Global High
Yield Securities Fund's, Latin American Equity Fund's, Small Cap
Fund's, and Pacific Basin Equity Fund's (the "Feeder Funds")
prospectus ( the "Feeder Funds' Prospectus") . Further information
about the risk factors associated with investments in each Portfolio
is incorporated herein by reference from the section entitled
"Appendix" in the Feeder Funds' Statement of Additional Information
(the "Feeder Funds' SAI").
ITEM 5. MANAGEMENT OF THE FUND
Registrant incorporates by reference information concerning the
management of the Portfolios from the sections entitled "Summary of
Fund Expenses" and "Management of the Trust and Portfolios" in the
Feeder Funds' Prospectus.
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.
Registrant incorporates by reference additional information concerning
each Portfolio's capital stock from the sections entitled "Net Asset
Value," "Purchase and Redemption of Shares," and "Dividends,
Distributions and Taxes" in the Feeder Funds' Prospectus.
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 Services, Inc. ("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.
Registrant incorporates by reference information concerning the
computation of net asset value and valuation of each Portfolio's
assets from the sections entitled "Net Asset Value" and "Purchase and
Redemption of Shares" in the Feeder Funds' Prospectus.
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.
BT INVESTMENT PORTFOLIOS
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...........................17
Control Persons and Principal Holders of Securities ...17
Investment Advisory and Other Services.................17
Brokerage Allocation and Other Practices...............19
Capital Stock and Other Securities.....................20
Purchase, Redemption and Pricing of Securities.........21
Tax Status.............................................21
Underwriters...........................................22
Calculation of Performance Data........................22
Financial Statements...................................22
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 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 the International Bond Portfolio and the European
Equity Portfolio (each a "Portfolio and together the "Portfolios") may
invest, the investment policies and portfolio strategies that these
Portfolio's may utilize and certain risks attendant to those
investments, policies and strategies. Registrant incorporates by
reference information concerning the investment policies and
limitations of the Global High Yield Securities Portfolio, Latin
American Equity Portfolio, Small Cap Portfolio and Pacific Basin
Portfolio (each a "Master Portfolio and together the "Master
Portfolios") from the section entitled "Investment Objectives Policies
and Restrictions" in the Statement of Additional Information for
Global High Yield Securities Fund, Latin American Equity Fund, Small
Cap Fund, and Pacific Basin Fund (the "Feeder Funds' SAI").
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 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.
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 Portfolios 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.
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.
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.
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 European Equity 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 the 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 the 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.
The 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 the 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.
The 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.
The 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
European Equity 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 Portfolios 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 Portfolios 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;
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 Portfolios 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 a
Portfolio is registered.
ITEM 14. MANAGEMENT OF THE FUND.
Registrant Incorporates by reference information concerning the
management of the Master Portfolios from the section entitled
"Management of the Trust and Portfolios" in the Feeder Funds' SAI.
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.
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.
Registrant incorporates by reference information concerning the
investment advisory and other services provided for or on behalf of
the Master Portfolios from the section entitled "Management of the
Trust and Portfolios" in the Feeder Funds' SAI.
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.
As of the fiscal year ended September 30, 1996, the Portfolios 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.
As of the fiscal year ended September 30, 1996, the Portfolios 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.
Registrant incorporates by reference information concerning the
brokerage allocation and other practices of the Master Portfolios from
the section entitled "Investment Objectives, Policies and
Restrictions--Portfolio Transactions and Brokerage Commissions" in the
Feeder Funds' SAI.
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.
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 and
the Master Portfolios. No series of the Trust has any preference over
any other series. Investors in the Portfolios or Master Portfolios are
entitled to participate pro rata in distributions of taxable income,
loss, gain and credit of the Portfolios and Master Portfolios. Upon
liquidation or dissolution of the Portfolios or Master Portfolios,
investors are entitled to share pro rata in the net assets of the
Portfolios or Master Portfolios available for distribution to
investors. Investments in the Portfolios or Master Portfolios have no
preference, preemptive, conversion or similar rights and are fully
paid and nonassessable, except as set forth below. Investments in the
Portfolios or Master Portfolios may not be transferred.
Each investor in the Portfolios or Master Portfolios is entitled to a
vote in proportion to the amount of its investment. The Portfolios and
Master 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 Master 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 and
Master 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 and Master 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' and Master Portfolios' investors (with the vote of each
being in proportion to its percentage of the beneficial interests in a
Portfolio or Master 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 and
Master Portfolio) will be sufficient. A Portfolio or Master 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 Master 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 Master Portfolios or any other series of the Trust are
not binding upon the Trustees individually but only upon the property
of the Portfolios or Master 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 Item 4,
"General Description of Registrant," Item 7, "Purchase of Securities
Being Offered" and Item 8, "Redemption or Repurchase" in Part A of
this Registration Statement.
Registrant incorporates by reference information concerning the method
followed by each Master Portfolio in determining its net asset value
and the timing of such determinations from the section entitled
"Valuation of Securities; Redemptions and Purchases in Kind" in the
Feeder Funds SAI.
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, Martin Luther King 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.
Registrant incorporates by reference information concerning the
taxation of the Master Portfolios from the section entitled "Taxation"
in the Feeder Funds SAI.
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 in the Portfolios and Master Portfolios. All investors
are advised to consult their own tax advisors as to the tax
consequences of an investment in the Portfolios or Master
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 Services, Inc., 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 and each Master Portfolio.
ITEM 22. CALCULATION OF FUND PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
Each Master Portfolio's financial statements are hereby incorporated
by reference to the BT Investment Funds' combined Annual Report dated
September 30, 1996 (File Nos. 33-07404 and 811-4760) and have been
included in reliance upon the report of Coopers & Lybrand, independent
certified public accountants, as experts in accounting and
auditing.
<PAGE>
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)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
<S> <C> <C>
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
(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)
</TABLE>
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
22nd 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 18th day of
July, 1997.
BT INVESTMENT PORTFOLIOS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
July 18, 1997
<PAGE>
