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THE ONE GROUP(R) INVESTMENT TRUST
THE ONE GROUP(R) INVESTMENT TRUST BOND FUND
THE ONE GROUP(R) INVESTMENT TRUST VALUE GROWTH FUND
THE ONE GROUP(R) INVESTMENT TRUST MID CAP OPPORTUNITIES FUND
THE ONE GROUP(R) INVESTMENT TRUST MID CAP VALUE FUND
Prospectus
January 14, 1999
This prospectus describes four mutual funds (the "Funds") with a
variety of investment objectives, including capital appreciation, current
income, long-term capital growth and growth of income, and total return. The
shares of the Funds are sold to certain separate accounts to fund variable
annuity and variable life contracts issued by life insurance companies. The
information in this prospectus is important. Please read it carefully before you
invest, and save it for future reference.
PLEASE REMEMBER THAT SHARES OF THE FUNDS: - ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED BY BANK ONE CORPORATION OR ITS AFFILIATES; - ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY FEDERAL OR
STATE GOVERNMENTAL AGENCY; - INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
A BRIEF PREVIEW OF THE FUNDS
ABOUT THE FUNDS
The One Group(R) Investment Trust Bond Fund
The One Group(R) Investment Trust Value Growth Fund
The One Group(R) Investment Trust Mid Cap Opportunities FunD
The One Group(R) Investment Trust Mid Cap Value Fund
MORE ABOUT THE FUNDS
Portfolio Quality
Illiquid Investments
Special Risk Considerations
Shareholder Rights
Questions
Share Redemption
Net Asset Value
Dividends
Tax Status
ORGANIZATION AND MANAGEMENT OF THE FUNDS The Funds The Board of Trustees The
Advisor The Administrator The Transfer Agent and Dividend Paying Agent The
Custodian and the Sub-Custodian Expenses of the Funds Year 2000
DETAILS ABOUT THE FUNDS' INVESTMENT PRACTICES AND
POLICIES
Investment Practices
Investment Risks
Investment Policies
Temporary Defensive Position
ADDITIONAL INFORMATION
Performance
APPENDIX: DESCRIPTION OF RATINGS
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT
OF ADDITIONAL INFORMATION AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ONE
GROUP INVESTMENT TRUST.
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A BRIEF PREVIEW OF THE FUNDS
WHAT ARE THE GOALS OF THE ONE GROUP INVESTMENT TRUST FUNDS?
The Funds are designed for a variety of investment objectives, including capital
appreciation, current income, long-term capital growth and growth of income, and
total return. Each Fund pursues a different objective and involves different
risks. Please read about each Fund before investing.
WHAT ARE THE FUNDS' INVESTMENT STRATEGIES?
The Bond Fund (the "Bond Fund") will invest in intermediate and long-term debt
securities including U.S. Government obligations, corporate obligations, foreign
government obligations, and mortgage-backed securities. The Value Growth Fund,
the Mid Cap Opportunities Fund, and the Mid Cap Value Fund (collectively, the
"Equity Funds") will invest in a variety of equity securities, including common
stocks. The Equity Funds also may invest in debt securities and preferred stocks
which are convertible into common stock. The Funds may invest in securities of
foreign issuers and lend their securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUNDS?
The Bond Fund invests in fixed-income investments that are subject to market
fluctuations as a result of changes in interest rates. As a result, the value of
investments in the Bond Fund may decrease during periods of rising interest
rates and increase during periods of declining interest rates. In addition, the
Bond Fund invests in mortgage-related securities which have significantly
greater price and yield volatility than traditional fixed-income securities.
Fixed income investments (other than obligations of the U.S. Treasury) are also
subject to credit risk -- the risk that the issuer will be unable to meet its
repayment obligation. The Equity Funds invest in equity securities that are more
volatile and carry more risk than some other forms of investments. These risks
include "stock market risk" meaning that stock prices in general may decline
over short or extended periods of time. All of the Funds may invest in
derivative securities and foreign securities. These securities may expose the
Funds to risks that are different from investments in traditional securities or
U.S. securities, respectively. Please note that an investment in the Funds is
not a deposit of BANK ONE CORPORATION or its affiliates and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. For more information about risks, please read "More About the Funds" and
"Investment Risks."
WHO MANAGES THE FUNDS?
Banc One Investment Advisors Corporation ("Banc One Investment Advisors"), an
indirect subsidiary of BANK ONE CORPORATION, serves as the advisor of the Funds.
Banc One Investment Advisors is paid a fee for its services. A more detailed
discussion regarding Banc One Investment Advisors, its services and compensation
can be found in the Prospectus under the headings "The Advisor."
HOW WILL SHARES BE PURCHASED AND REDEEMED?
Shares of the Funds will be purchased by separate accounts of insurance
companies ("Insurance Contracts") to fund variable annuity and variable life
contracts owned by you and other policy holders. For information concerning the
purchase and redemption of shares by Insurance Contracts, refer to the
literature that you received from your insurance agent.
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ABOUT THE FUNDS
THE ONE GROUP(R) INVESTMENT TRUST BOND FUND
INVESTMENT OBJECTIVE
The Fund seeks to maximize total return by investing primarily in a diversified
portfolio of intermediate and long-term debt securities.
INVESTMENT STRATEGY
The Fund invests in all types of debt securities rated as investment grade, as
well as convertible securities, preferred stock, and loan participations. The
Fund's weighted average maturity will normally range between four and twelve
years, although the Fund may shorten its weighted average maturity for temporary
defensive purposes.
PORTFOLIO SECURITIES
The Fund invests at least 65% of its total assets in debt securities of all
types with intermediate to long maturities. As a matter of fundamental policy,
at least 65% of the Fund's total assets will consist of bonds. The Fund also
purchases taxable or tax-exempt municipal securities. For a list of the types of
securities in which the Fund may invest, please read "Investment Practices."
RISK CONSIDERATIONS
The Fund may invest in debt securities that are rated in the lowest investment
grade category. Such investments are considered to have speculative
characteristics.
The Fund invests in fixed-income securities. The value of these securities will
change in response to interest rate changes, economic conditions and other
factors. This is especially true to the extent the Fund invests in debt
securities in the lowest investment grade category. The Fund also invests in
mortgage-related securities which may have greater price and yield volatility
than traditional fixed income securities. Before you invest, please read "More
About the Funds" and "Investment Risks."
FUND MANAGEMENT
The Fund is managed by a team of portfolio managers, research analysts and fixed
income traders. The team works together to establish general duration and sector
strategies for the Fund. Each team member makes recommendations about securities
in the Fund. The research analysts and trading personnel provide individual
security and sector recommendations, while the portfolio managers select and
allocate individual securities in a manner designed to meet the investment
objectives of the Fund.
This section would normally include Financial Highlights for the Fund. Because
the Fund will not commence operations until after December 31, 1998, there are
no Financial Highlights for the Fund.
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THE ONE GROUP(R) INVESTMENT TRUST VALUE GROWTH FUND
INVESTMENT OBJECTIVE
The Fund seeks long term capital growth and growth of income with a secondary
objective of providing a moderate level of current income.
INVESTMENT STRATEGY
The Fund invests primarily in common stocks of overlooked or undervalued
companies that have the potential for earnings growth over time. The Fund uses a
multi-style approach, meaning that it may invest across varied capitalization
levels targeting both value and growth oriented companies. Because the Fund
seeks return over the long term, Banc One Investment Advisors will not attempt
to time the market.
PORTFOLIO SECURITIES
The Fund normally invests at least 65% of its total assets in equity securities
described above. Up to 35% of its total assets may be invested in U.S.
Government Securities, other investment grade fixed income securities, cash, and
cash equivalents. For a list of the types of securities in which the Fund may
invest, please read "Investment Practices."
RISK CONSIDERATIONS
The Fund invests in equity securities which may increase or decrease in value.
As a result, your investment in the Fund may increase or decrease in value. The
Fund also may invest in fixed income securities. The value of these securities
will change in response to interest rate changes and other factors. This is
especially true to the extent that the Fund invests in debt securities with
speculative characteristics. Before you invest, please read "More About the
Funds" and "Investment Risks."
FUND MANAGEMENT
The Fund is managed by a team of portfolio managers, research analysts, and
other investment management professionals. Each team member makes
recommendations about the securities in the Fund. The research analysts provide
in-depth industry analysis and recommendations, while the portfolio managers
determine strategy, industry weightings, Fund holdings, and cash positions.
This section would normally include Financial Highlights for the Fund. Because
the Fund will not commence operations until after December 31, 1998, there are
no Financial Highlights for the Fund.
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THE ONE GROUP(R) INVESTMENT TRUST MID CAP OPPORTUNITIES FUND
INVESTMENT OBJECTIVE
The Fund seeks long-term capital growth by investing primarily in equity
securities of companies with intermediate capitalizations.
INVESTMENT STRATEGY
The Fund invests primarily in equity securities of companies with market
capitalizations of $500 million to $5 billion. The Fund intends to invest in
companies of this size with strong growth potential, stable market share, and an
ability to quickly respond to new business opportunities.
PORTFOLIO SECURITIES
The Fund normally invests at least 65% of its total assets in common and
preferred stock, rights, warrants, convertible securities, and other equity
securities. While the Fund invests primarily in securities of U.S. companies, up
to 25% of its total assets may be invested in equity securities of foreign
issuers. Up to 20% of the Fund's total assets may be invested in U.S. Government
Securities, other investment grade fixed income securities, cash and cash
equivalents. For a list of the types of securities in which the Fund may invest,
please read "Investment Practices."
RISK CONSIDERATIONS
The Fund invests in equity securities which may increase or decrease in value.
As a result, your investment in the Fund may increase or decrease in value.
Before you invest, please read "More About the Funds" and "Investment Risks."
FUND MANAGEMENT
The Fund is managed by a team of portfolio managers, research analysts, and
other investment management professionals. Each team member makes
recommendations about the securities in the Fund. The research analysts provide
in-depth industry analysis and recommendations, while the portfolio managers
determine strategy, industry weightings, Fund holdings, and cash positions.
This section would normally include Financial Highlights for the Fund. Because
the Fund will not commence operations until after December 31, 1998, there are
no Financial Highlights for the Fund.
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THE ONE GROUP(R) INVESTMENT TRUST MID CAP VALUE FUND
INVESTMENT OBJECTIVE
The Fund seeks capital appreciation with the secondary goal of achieving current
income by investing primarily in equity securities.
INVESTMENT STRATEGY
The Fund primarily invests in the equity securities of companies with
below-market average price-to-earnings and price-to-book value ratios and with
market capitalizations of $500 million to $5 billion. In choosing investments,
the Fund considers the issuer's soundness and earnings prospects. If Banc One
Investment Advisors determines that a company's fundamentals are declining or
that the company's ability to pay dividends has been impaired, it likely will
eliminate the Fund's holding of the company's stock.
PORTFOLIO SECURITIES
The Fund normally invests at least 80% of its total assets in equity securities,
including common stocks, debt securities, and preferred stocks that are
convertible into common stocks. A portion of the Fund's assets will be held in
cash equivalents. For a list of the types of securities in which the Fund may
invest, please read "Investment Practices."
RISK CONSIDERATIONS
The Fund invests in equity securities which may increase or decrease in value.
Therefore, the value of your investment in the Fund may increase or decrease in
value. Before you invest, please read "More About the Funds" and "Investment
Practices."
FUND MANAGEMENT
The Fund is managed by a team of portfolio managers, research analysts, and
other investment management professionals. Each team member makes
recommendations about the securities in the Fund. The research analysts provide
in-depth industry analysis and recommendations, while the portfolio managers
determine strategy, industry weightings, Fund holdings, and cash positions.
This section would normally include Financial Highlights for the Fund. Because
the Fund will not commence operations until after December 31, 1998, there are
no Financial Highlights for the Fund.
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MORE ABOUT THE FUNDS
WHEN THE PROSPECTUS REFERS TO "BONDS," WHAT TYPES OF INVESTMENTS ARE INCLUDED?
"Bonds" include debt instruments with a remaining maturity of one year or more
issued by the U.S. Treasury, U.S. Government and its agencies and
instrumentalities, corporations, municipalities, securities issued or guaranteed
by foreign governments, their agencies or instrumentalities, securities issued
by domestic and supranational banks, mortgage-related securities, asset-backed
securities, stripped government securities and zero coupon obligations.
PORTFOLIO QUALITY
The Funds only purchase securities that meet certain rating criteria.
Bond Fund. The Bond Fund may purchase corporate and municipal bonds that are
rated in ANY one of the four investment grade categories. Bonds in the lowest
investment grade category may be riskier than higher rated bonds. Short-term
corporate obligations such as commercial paper notes and variable demand
obligations must be rated in one of the two highest investment grade categories
at the time of investment.
Equity Funds.
- - Municipal securities and short-term corporate obligations, such as
commercial paper, notes and variable rate demand obligations, must be
rated in one of the two highest investment grade categories at the time
of investment.
- - Corporate bonds generally will be rated in one of the three highest
investment grade categories. Banc One Investment Advisors reserves the
right to invest in corporate bonds which present attractive
opportunities and are rated in the lowest investment grade category.
These corporate bonds may be riskier than higher rated bonds.
- - The Mid Cap Opportunities Fund may invest up to 5% of its net assets in
lower rated convertible securities.
If the securities are unrated, Banc One Investment Advisors must determine that
they are of comparable quality to rated securities. Banc One Investment Advisors
will look at a security's rating at the time of investment. For more information
about ratings, please see "Description of Ratings" in the Appendix.
ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in illiquid investments. A
security is illiquid if it cannot be sold at approximately the value assessed by
the Fund within seven (7) days. Banc One Investment Advisors will follow
guidelines adopted by The One Group Investment Trust Board of Trustees in
determining whether an investment is illiquid.
SPECIAL RISK CONSIDERATIONS
Derivatives: Some of the Funds invest in securities that are considered to be
"derivatives." Derivatives are securities that derive their value from the
performance of underlying assets or securities. These include:
- - options, futures contracts, and options on futures contracts
- - warrants
- - mortgage-backed securities, including collateralized mortgage
obligations and Real Estate Mortgage Investment Conduits (CMOs and
REMICs) and stripped mortgage-backed securities (IOs and POs)
- - asset-backed securities
- - swap, cap and floor transactions
- - new financial products
- - structured instruments
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These securities may be more volatile than other investments. Derivatives
present, to varying degrees, market, credit, leverage, liquidity, and management
risks. For a more detailed discussion of these risks, please read "Investment
Risks." A Fund's use of derivatives may cause the Fund to recognize higher
amounts of short-term capital gains (generally taxed at ordinary income tax
rates) than it would if the Fund did not use such instruments.
Fixed Income Securities: Investments in fixed income securities (for example,
bonds) will increase or decrease in value based on changes in interest rates. If
rates increase, the value of a Fund's investments generally declines. On the
other hand, if rates fall, the value of the investments generally increases. The
value of your investment in a Fund will increase and decrease as the value of a
Fund's investments increase and decrease. While securities with longer duration
and maturities tend to produce higher yields, they also are subject to greater
fluctuations in value when interest rates change. Usually changes in the value
of fixed income securities will not affect cash income generated, but may affect
the value of your investment.
Lower Rated Securities: Securities in the lowest investment grade category are
considered to have speculative characteristics. Changes in economic conditions
or other circumstances may have a greater effect on the ability of issuers of
these securities to make principal and interest payments than they do on issuers
of higher grade securities. The Mid Cap Opportunities Fund may invest up to 5%
of its net assets in lower rated convertible securities. Such securities are
speculative and may be classified as "junk bonds." A more detailed description
of the risks associated with these securities is contained in the Statement of
Additional Information.
Small Capitalization Companies: Investments in smaller, newer companies may be
riskier than investments in larger, more established companies. These companies
may be more vulnerable to changes in economic conditions, specific industry
conditions, market fluctuations, and other factors effecting the profitability
of other companies. Because economic events may have a greater impact on smaller
companies, there may be a greater and more frequent fluctuation in their stock
price. This may cause frequent and unexpected increases or decreases in the
value of your investment.
Foreign Securities: Investments in foreign securities involve risks different
from investments in U.S. securities. For more details, see "Investment
Practices" and "Investment Risks."
SHAREHOLDER RIGHTS
Shares of the Funds are sold at net asset value to separate accounts of
insurance companies ("Insurance Contracts") to fund variable annuity and
variable life contracts. You and other policy holders will not own shares of the
Fund directly. Rather, all shares will be held by Insurance Companies for your
benefit and the benefit of other policy holders. The interests of different
Insurance Contracts are not always the same and material, irreconcilable
conflicts may arise. The Board of Trustees will monitor events for such
conflicts and, should they arise, will determine what action, if any, should be
taken. All investments in the Funds are credited to the shareholder's account in
the form of full or fractional shares of the designated Fund. The Funds do not
issue share certificates. Initial and subsequent purchase payments allocated to
a specific Fund are subject to any limits set by your Insurance Contract.
Under current practices, the Insurance Contracts will solicit voting
instructions from policy holders with respect to any matters that are presented
to a vote of shareholders. Each Fund votes separately on matters relating solely
to that Fund or which affect that Fund differently. However, all shareholders
will have equal voting rights on matters that affect all shareholders equally.
The holders of each share shall be entitled to one vote for each share held.
The One Group Investment Trust does not hold Annual Meetings of shareholders but
may hold Special Meetings. Special meetings are held, for example, to elect or
remove Trustees, change a Fund's fundamental investment objectives, or approve
an investment advisory contract.
QUESTIONS
- - Any questions regarding the Funds should be directed to The One Group
Investment Trust, Three Nationwide Plaza, Columbus, Ohio 43215
1-800-860-3946.
- - All questions regarding variable annuities or Qualified Plans should
contact the address indicated in the prospectuses and plan documents
that you received from your insurance agent or plan administrator.
SHARE REDEMPTION
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- - Insurance Contracts may redeem shares to make benefit or surrender
payments to you and other policyholders. Redemptions are processed on
any day on which the Funds are open for business and are effected at
net asset value next determined after the redemption order, in proper
form, is received by the Trust's transfer agent, Nationwide Investors
Services, Inc.
- - The Funds are open for business (each, a "Business Day") other than
weekends and the following holidays: New Years Day, Martin Luther King,
Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas.
NET ASSET VALUE
- - The net asset value ("NAV") per share for each Fund is determined as of
the close of regular trading on the New York Stock Exchange (usually 4
P.M. Eastern Time), on each Business Day.
- - The NAV per share is calculated by adding the value of all securities
and other assets of a Fund, deducting its liabilities, and dividing by
the number of shares of the Fund that are outstanding.
DIVIDENDS
- - All dividends are distributed to the Insurance Contracts on a quarterly
basis and will be automatically reinvested in Fund shares.
- - Dividends are not taxable as current income to Insurance Contract
holders.
TAX STATUS
Each Fund is treated as a separate entity for Federal income tax purposes and is
not combined with the other Funds. Each Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and meet all other requirements necessary for it to be
relieved of Federal taxes on that part of its net investment income and net
capital gains distributed to its shareholders. Each Fund intends to distribute
all of its net investment income and net capital gains to its shareholders on a
current basis.
For a discussion of the tax consequences of variable annuity contracts, refer to
the prospectus of the Separate Accounts that fund variable annuity and variable
life contracts. Variable annuity contracts purchased through insurance company
separate accounts provide for the accumulation of all earnings from interest,
dividends, and capital appreciation without current federal income tax liability
for the owner. Depending on the variable annuity contract, distributions from
the contract may be subject to ordinary income tax and, in addition, on
distributions before age 59 1/2, a 10% penalty tax. Only the portion of a
distribution attributable to income on the investment in the contract is subject
to Federal income tax. Investors should consult with competent tax advisors for
a more complete discussion of possible tax consequences in a particular
situation.
Section 817(h) of the Code provides that investments of a separate account
underlying a variable annuity contract (or the investments of a mutual fund, the
shares of which are owned by the variable annuity separate account) must be
"adequately diversified" in order for the annuity contract to be treated as an
annuity for tax purposes. The Treasury Department has issued regulations
prescribing these diversification requirements. Each Fund intends to comply with
these requirements. If a Separate Account underlying a variable annuity contract
were not adequately diversified, the owner of such variable annuity contract
would be immediately subject to tax on the earnings allocable to the contract.
Additional information about the tax status of the Funds is provided in the
Statement of Additional Information.
ORGANIZATION AND MANAGEMENT OF THE FUNDS
THE FUNDS
Each Fund is a series of The One Group Investment Trust, an open-end management
investment company. The One Group Investment Trust consists of nine separate
Funds. Four of the Funds are described in this prospectus; the other Funds are
described in a separate prospectus. Each Fund described in this prospectus is
diversified. Each Fund is supervised by the Board of Trustees.
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THE BOARD OF TRUSTEES
The Trustees oversee the management and administration of the Funds. The
Trustees are responsible for making major decisions about each Fund's investment
objectives and policies, but delegate the day-to-day administration of the Funds
to the officers of the Trust.
THE ADVISOR
Banc One Investment Advisors makes the day-to-day investment decisions for the
Funds and continuously reviews, supervises and administers each Fund's
investment program. Banc One Investment Advisors discharges its responsibilities
subject to the supervision of, and policies established by, the Trustees of The
One Group Investment Trust.
Banc One Investment Advisors has served as investment advisor to the Trust since
its inception. In addition, Banc One Investment Advisors serves as investment
advisor to other mutual funds and individual, corporate, charitable, and
retirement accounts. As of June 30, 1998, Banc One Investment Advisors, an
indirect wholly-owned subsidiary of BANK ONE CORPORATION, managed over $59
billion in assets.
Banc One Investment Advisors is entitled to a fee, which is calculated daily and
paid monthly, at the following annual percentages of the average daily net
assets of each Fund: 0.60% for the Bond Fund, 0.74% for the Value Growth Fund,
0.74% for the Mid Cap Opportunities Fund, and 0.74% for the Mid Cap Value Fund.
Banc One Investment Advisors has voluntarily agreed to waive all or part of its
fees in order to limit the Funds' total operating expenses on an annual basis to
not more than 0.75% of the average daily net assets of the Bond Fund, not more
than 0.95% of the average daily net assets of the Value Growth Fund, not more
than 0.95% of the average daily net assets of the Mid Cap Opportunities Fund,
and not more than 0.95% of the average daily net assets of the Mid Cap Value
Fund. These fee waivers are voluntary and may be terminated at any time.
THE ADMINISTRATOR
Nationwide Advisory Services, Inc. (the "Administrator"), a wholly owned
subsidiary of Nationwide Life Insurance Company, which in turn is a wholly owned
subsidiary of Nationwide Financial Services, Inc., a holding company of the
Nationwide Insurance Enterprise, serves as the Funds' administrator. The
Administrator is responsible for providing administrative services including
regulatory reporting, all necessary office space, equipment, facilities and the
services of executive and clerical personnel for administering the affairs of
the Funds.
For these services, the Administrator receives a fee based on average net
assets. For all the Funds of the Trust (except the Equity Index which is
described in a separate Prospectus), the fee is computed on a daily basis at
annual rates equal to the following percentages of the average net assets of the
Trust (less the assets of the Equity Index Fund): 0.24% of the Trust's average
net assets up to $250 million and 0.14% of the Trust's average net assets that
are greater than $250 million. The Administrator's fees are calculated daily and
paid monthly.
THE TRANSFER AND DIVIDEND PAYING AGENT
Nationwide Investors Services, Inc., a wholly owned subsidiary of the
Administrator, acts as the transfer agent and dividend paying agent for the
Trust and in doing so performs certain bookkeeping, data processing and
administrative services.
THE CUSTODIAN AND THE SUB-CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8528, Boston, MA 02266-8528 acts
as Custodian. As the Funds' custodian, State Street holds the Funds' assets,
settles all portfolio trades and assists in calculating the Funds' NAV. Bank One
Trust Company, N.A. serves as sub-custodian in connection with the Funds'
securities lending activities under an agreement with State Street Bank and
Trust Company. Bank One Trust Company, N.A. is paid a fee by the Funds for this
service.
EXPENSES OF THE FUNDS
Each Fund bears all expenses of its operations other than those incurred by Banc
One Investment Advisors and the Administrator under their respective Advisory
Agreement and Administration Agreement with the Funds. In particular, the Funds
pay: investment advisory fees, custodian fees and expenses, legal, accounting
and auditing fees, brokerage fees, interest and taxes, registration fees and
expenses, expenses of the Transfer and Dividend Paying Agent, the compensation
and expenses of Trustees who are not otherwise affiliated with the Trust, Banc
One Investment Advisors or any of its affiliates, expenses of printing and
mailing reports and notices and proxy material to beneficial shareholders of the
Trust, and any extraordinary expenses. The Equity Index Fund also pays all
expenses incurred in valuing portfolio securities. Expenses incurred jointly by
the Funds are
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allocated among the Funds in a manner determined by the Trustees to be fair and
equitable. The organizational expenses of each of the Funds listed in this
Prospectus will be paid by the Funds.
YEAR 2000
Preparing for the Year 2000 is a high priority for the Funds. Both the
Administrator and Banc One Investment Advisors have formed dedicated teams to
help them successfully achieve Year 2000 compliance. In addition, these teams
are responsible for assessing the readiness of all other service providers to
the Funds. Year 2000 remediation efforts are directed toward both information
technology and non-information technology systems. Non-information technology
systems include elevators, photocopy machines, and facsimile machines, and
should have no significant impact on the delivery of services to Funds.
Banc One Investment Advisors has identified information technology systems and
interfaces that provide service and support to the Funds. Many, if not all, of
the systems are owned or operated by third party servicers (for example, The One
Group Investment Trust's Custodian). Consequently, remediation efforts must be
made by those servicers. Banc One Investment Advisors and the Administrator
have, and will continue to, monitor the remediation progress of the service
providers. This process involves documentation, on-site visits, and review of
remediation plans and test results. Neither the Funds nor their shareholders
will bear any of the direct remediation expenses.
Neither the Administrator nor Banc One Investment Advisors currently anticipate
that the move to Year 2000 will have a material impact on their ability to
continue to provide the Funds with service at current levels. Likewise, The One
Group Investment Trust currently anticipates that the move to Year 2000 will not
have a material impact on its operations.
DETAILS ABOUT THE FUNDS' INVESTMENT PRACTICES AND POLICIES
INVESTMENT PRACTICES
The Funds invest in a variety of securities and employ a number of investment
techniques. Each security and technique involves certain risks. What follows is
a list of the securities and techniques utilized by the Funds, as well as the
risks inherent in their use. Equity securities are subject mainly to market
risk. Fixed income securities are primarily influenced by market, credit and
prepayment risks, although certain securities may be subject to additional
risks. For a more complete discussion, see the Statement of Additional
Information. Following the table is a more complete discussion of risk.
FUND NAME FUND CODE
--------- ---------
The One Group Investment Trust Bond Fund 1
The One Group Investment Trust Value Growth Fund 2
The One Group Investment Trust Mid Cap Opportunities Fund 3
The One Group Investment Trust Mid Cap Value Fund 4
<TABLE>
<CAPTION>
INSTRUMENT FUND CODE RISK TYPE
- ---------- --------- ---------
<S> <C> <C>
U.S. Treasury Obligations: Bills, notes, 1-4 Market
bonds, STRIPS, and CUBES.
Treasury Receipts: TRS, TIGRs, and CATS. 1-4 Market
U.S. Government Agency Securities: Securities 1-4 Market
issued by agencies and instrumentalities of Credit
the U.S. Government. These include Ginnie Mae,
Fannie Mae, and Freddie Mac.
Certificates of Deposit: Negotiable instruments with a stated 1-4 Market
maturity. Credit
Liquidity
Time Deposits: Non-negotiable receipts issued by a bank in 1-4 Liquidity
exchange for the deposit of funds. Credit
Market
Common Stock: Shares of ownership of a company. 2-4 Market
</TABLE>
10
<PAGE> 13
\
<TABLE>
<CAPTION>
INSTRUMENT FUND CODE RISK TYPE
- ---------- --------- ---------
<S> <C> <C>
Repurchase Agreements: The purchase of a security and the 1-4 Credit
simultaneous commitment to return the security to the seller at Market
an agreed upon price on an agreed upon date. This is treated as Liquidity
a loan.
Reverse Repurchase Agreement: The sale of a security and the 1-4 Market
simultaneous commitment to buy the security back at an agreed Leverage
upon price on an agreed upon date. This is treated as a
borrowing by a Fund.
Securities Lending: The lending of up to 33 1/3% of the Fund's total assets. 1-4 Credit
In return the Fund will receive cash, other securities, and/or letters of credit. Market
Leverage
When-Issued Securities and Forward Commitments: Purchase or 1-4 Market
contract to purchase securities at a fixed price for delivery at Leverage
a future date. Liquidity
Investment Company Securities: Shares of other mutual funds, 1-4 Market
including money market funds of The One Group(R) and shares of
other investment companies for which Banc One Investment Advisors serves as
investment advisor or administrator. Banc One Investment Advisors will waive
certain fees when investing in funds for which it serves as investment advisor.
Convertible Securities: Bonds or preferred stock that convert to 1-4 Market
common stock. Credit
Call and Put Options: A call option gives the buyer the right to 1-4 Management
buy, and obligates the seller of the option to sell, a security Liquidity
at a specified price. A put option gives the buyer the right to Credit
sell, and obligates the seller of the option to buy, a security Market
at a specified price. The Funds will sell only covered call and Leverage
secured put options.
Futures and Related Options: A contract providing for the future 1-4 Management
sale and purchase of a specified amount of a specified security, Market
class of securities, or an index at a specified time in the Credit
future and at a specified price. Liquidity
Leverage
Real Estate Investment Trusts ("REITs"): Pooled investment 2-4 Liquidity
vehicles which invest primarily in income producing real estate Management
or real estate related loans or interest. Market
Regulatory
Tax
Pre-payment
Bankers' Acceptances: Bills of exchange or time drafts drawn on 1-4 Credit
and accepted by a commercial bank. Maturities are generally six Liquidity
months or less. Market
Commercial Paper: Secured and unsecured short-term promissory 1-4 Credit
notes issued by corporations and other entities. Maturities Liquidity
generally vary from a few days to nine months. Market
Foreign Securities: Stocks issued by foreign companies, as well 1-4 Market
as commercial paper of foreign issuers and obligations of Political
foreign banks, overseas branches of U.S. banks and supranational Liquidity
entities. The Equity Funds may also invest in American Depository Foreign
Receipts.
Restricted Securities: Securities not registered under the 1-4 Liquidity
Securities Act of 1933, such as privately placed commercial Market
paper and Rule 144A securities.
Variable and Floating Rate Instruments: Obligations with 1-4 Credit
interest rates which are reset daily, weekly, quarterly or some Liquidity
other period and which may be payable to the Fund on demand. Market
Warrants: Securities, typically issued with preferred stock or 2, 3 Market
bonds, that give the holder the right to buy a proportionate Credit
amount of common stock at a specified price.
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
INSTRUMENT FUND CODE RISK TYPE
- ---------- --------- ---------
<S> <C> <C>
Preferred Stock: A class of stock that generally pays a dividend 1-4 Market
at a specified rate and has preference over common stock
in the payment of dividends and in liquidation.
Mortgage-Backed Securities: Debt obligations secured by real 1, 3 Pre-payment
estate loans and pools of loans. These include collateralized Market
mortgage obligations ("CMOs") and Real Estate Mortgage Investment Credit
Conduits ("REMICs").
Corporate Debt Securities: Corporate bonds and non-convertible 1 Market
debt securities. Credit
Demand Features: Securities that are subject to puts and standby Market
commitments to purchase the securities at a fixed price (usually 1 Liquidity
with accrued interest) within a fixed period of time following Management
demand by a Fund.
Asset-Backed Securities: Securities secured by company 1, 3 Pre-payment
receivables, home equity loans, truck and auto loans, leases, Market
credit card receivables and other securities backed by other Credit
types of receivables or other assets.
Mortgage Dollar Rolls: A transaction in which a Fund sells 1, 3 Pre-payment
securities for delivery in a current month and simultaneously Market
contracts with the same party to repurchase similar but not Regulatory
identical securities on a specified future date.
Adjustable Rate Mortgage Loans ("ARMs"): Loans in a mortgage 1 Pre-payment
pool which provide for a fixed initial mortgage interest rate Market
for a specified period of time, after which the rate may be Credit
subject to periodic adjustments. Regulatory
Swaps, Caps and Floors: A Fund may enter into these transactions 1-4 Management
to manage its exposure to changing interest rates and other Credit
factors. Swaps involve an exchange of obligations by two Liquidity
parties. Caps and floors entitle a purchaser to a principal Market
amount from the seller of the cap or floor to the extent
that a specified index exceeds or falls below a predetermined
interest rate or amount.
New Financial Products: New options and futures contracts and 1-4 Management
other financial products continue to be developed and the Funds Credit
may invest in such options, contracts and products. Market
Liquidity
Structured Instruments: Debt securities issued by agencies and 1 Market
instrumentalities of the U.S. government, banks, municipalities, Liquidity
corporations and other businesses whose interest and/or Management
principal payments are indexed to foreign currency exchange Credit
rates, interest rates, or one or more other referenced indices. Foreign
Investment
Municipal Securities: Securities issued by a state or political 1 Market
subdivision to obtain funds for various public purposes. Credit
Municipal securities include private activity bonds and Political
industrial development bonds, as well as General Obligation Tax
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes, Project Notes, other short-term tax-exempt obligations, municipal leases,
and obligations of municipal housing authorities and single family revenue
bonds.
Obligations of Supranational Agencies: Obligations of 3 Credit
supranational agencies who are chartered to promote economic Foreign
development and are supported by various governments Investment
and governmental agencies.
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
INSTRUMENT FUND CODE RISK TYPE
- ---------- --------- ---------
<S> <C> <C>
Zero-Coupon Debt Securities: Bonds and other debt that pay no 1, 3 Credit
interest, but are issued at a discount from their value at Market
maturity. When held to maturity, their entire return equals the Zero Coupon
difference between their issue price and their maturity value.
Standard & Poor's Depository Receipts ("SPDRs"): SPDRs represent 4 Market
ownership in a long-term unit investment trust that holds a portfolio of
common stocks designed to track the price performance and dividend
yield of the S&P 500 Index. A SPDR entitles a holder to receive proportionate
quarterly cash distributions corresponding to the dividends that accrue to the
S&P 500 Index stocks in the underlying portfolio, less trust expenses.
Zero-Fixed-Coupon Debt Securities: Zero coupon debt securities 1 Credit
which convert on a specified date to interest bearing debt Market
securities. Zero Coupon
Stripped Mortgage-Backed Securities: Derivative multi-class 1 Pre-payment
mortgage securities which are usually structured with two Market
classes of shares that receive different proportions of the Credit
interest and principal from a pool of mortgage assets. These Regulatory
include IOs and POs.
Inverse Floating Rate Instruments: Leveraged floating rate debt 1 Market
instruments with interest rates that reset in the opposite Leverage
direction from the market rate of interest to which the inverse Credit
floater is indexed.
Loan Participations and Assignments: Participations in, or 1 Credit
assignments of all or a portion of loans to corporations or to Political
governments, including governments of the less developed Liquidity
countries ("LDC's"). Foreign Investment
Market
Fixed Rate Mortgage Loans: Investments in fixed rate mortgage 1 Credit
loans or mortgage pools which bear simple interest at fixed Pre-payment
annual rates and have original terms ranging from 5 to 40 years. Regulatory
Market
Short-Term Funding Agreements: Investments in short-term funding 1 Credit
agreements issued by banks and highly rated U.S. insurance Liquidity
companies such as Guaranteed Investment Contracts ("GIC's") and Market
Bank Investment Contracts ("BIC's").
</TABLE>
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<PAGE> 16
INVESTMENT RISKS
Below is a more complete discussion of the types of risks inherent in the
securities and investment techniques listed above. Because of these risks, the
value of the securities held by the Funds may fluctuate, as will the value of
your investment in the Funds. Certain investments are more susceptible to these
risks than others.
- - Credit Risk. The risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable to
honor a financial obligation. Credit risk is generally higher for
non-investment grade securities. The price of a security can be
adversely affected prior to actual default as its credit status
deteriorates and the probability of default rises.
- - Leverage Risk. The risk associated with securities or practices that
multiply small index or market movements into large changes in value.
Leverage is often associated with investments in derivatives, but also
may be embedded directly in the characteristics of other securities.
- Hedged. When a derivative (a security whose value is based on
another security or index) is used as a hedge against an
opposite position that the fund also holds, any loss generated
by the derivative should be substantially offset by gains on
the hedged investment, and vice versa. While hedging can
reduce or eliminate losses, it can also reduce or eliminate
gains. Hedges are sometimes subject to imperfect matching
between the derivative and underlying security, and there can
be no assurance that a Fund's hedging transactions will be
effective.
- Speculative. To the extent that a derivative is not used as a
hedge, the Fund is directly exposed to the risks of that
derivative. Gains or losses from speculative positions in a
derivative may be substantially greater than the derivative's
original cost.
- - Liquidity Risk. The risk that certain securities may be difficult or
impossible to sell at the time and the price that would normally
prevail in the market. The seller may have to lower the price, sell
other securities instead or forego an investment opportunity, any of
which could have a negative effect on fund management or performance.
This includes the risk of missing out on an investment opportunity
because the assets necessary to take advantage of it are tied up in
less advantageous investments.
- - Management Risk. The risk that a strategy used by a fund's management
may fail to produce the intended result. This includes the risk that
changes in the value of a hedging instrument will not match those of
the asset being hedged. Incomplete matching can result in unanticipated
risks.
- - Market Risk. The risk that the market value of a security may move up
and down, sometimes rapidly and unpredictably. These fluctuations may
cause a security to be worth less than the price originally paid for
it, or less than it was worth at an earlier time. Market risk may
affect a single issuer, industry, sector of the economy or the market
as a whole. There is also the risk that the current interest rate may
not accurately reflect existing market rates. For fixed income
securities, market risk is largely, but not exclusively, influenced by
changes in interest rates. A rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in
values. Finally, key information about a security or market may be
inaccurate or unavailable. This is particularly relevant to investments
in foreign securities.
- - Political Risk. The risk of losses attributable to unfavorable
governmental or political actions, seizure of foreign deposits, changes
in tax or trade statutes, and governmental collapse and war.
- - Foreign Investment Risk. The risk associated with higher transaction
costs, delayed settlements, currency controls and adverse economic
developments. This also includes the risk that fluctuations in the
exchange rates between the U.S. dollar and foreign currencies may
negatively affect an investment. Adverse changes in exchange rates may
erode or reverse any gains produced by foreign currency denominated
investments and may widen any losses. Exchange rate volatility also my
affect the ability of an issuer to repay U.S. dollar denominated debt,
thereby increasing credit risk.
- - Pre-Payment Risk. The risk that the principal repayment of a security
will occur at an unexpected time, especially that the repayment of a
mortgage or asset-backed security occurs either significantly sooner or
later than expected. Changes in pre-payment rates can result in greater
price and yield volatility. Pre-payments generally accelerate when
interest rates decline. When mortgage and other obligations are
pre-paid, a Fund may have to reinvest in securities with a lower yield.
Further, with early prepayment, a Fund may fail to recover any premium
paid, resulting in an unexpected capital loss.
- - Tax Risk. The risk that the issuer of the securities will fail to
comply with certain requirements of the Internal Revenue Code, which
would cause adverse tax consequences.
14
<PAGE> 17
- - Regulatory Risk. The risk associated with Federal and state laws which
may restrict the remedies that a mortgage lender has when a borrower
defaults on mortgage loans. These laws include restrictions on
foreclosures, redemption rights after foreclosure, Federal and state
bankruptcy and debtor relief laws, restrictions on "due on sale"
clauses, and state usury laws.
- - Zero Coupon Risk. The market prices of securities structured as zero
coupon or pay-in-kind securities are generally affected to a greater
extent by interest rate changes. These securities tend to be more
volatile than securities which pay interest periodically.
INVESTMENT POLICIES
Each Fund's investment objective and the investment policies summarized below
are fundamental. This means that they cannot be changed without the consent of a
majority of the outstanding shares of the Funds. The full text of the
fundamental policies can be found in the Statement of Additional Information.
Each Fund may not:
1. Purchase an issuer's securities if as a result more than 5% of its
total assets would be invested in the securities of that issuer or the
Fund would own more than 10% of the outstanding voting securities of
that issuer. This does not include securities issued or guaranteed by
the United States, its agencies or instrumentalities, and repurchase
agreements involving these securities. This restriction applies with
respect to 75% of a Fund's total assets.
2. Concentrate its investments (invest 25% or more of its total assets) in
the securities of one or more issuers conducting their principal
business in a particular industry or group of industries. This does not
include obligations issued or guaranteed by the U.S. government or its
agencies and instrumentalities and repurchase agreements involving such
securities.
3. Make loans, except that a Fund may (i) purchase or hold debt
instruments in accordance with its investment objective and policies;
(ii) enter into repurchase agreements; and (iii) engage in securities
lending.
Additional investment policies can be found in the Statement of Additional
Information.
TEMPORARY DEFENSIVE POSITION
Bond Fund. For temporary defensive purposes as determined by Banc One Investment
Advisors, the Bond Fund may invest up to 100% of its assets in money market
instruments, and may hold a portion of its assets in cash for liquidity
purposes.
Equity Funds. For temporary defensive purposes as determined by Banc One
Investment Advisors, the Mid Cap Value Fund and the Value Growth Fund may
temporarily invest up to 100% of their total assets in cash and cash
equivalents. The Mid Cap Opportunities Fund may invest up to 20% of its total
assets in cash and cash equivalents. Cash equivalents include:
- - Securities issued by the U.S. Government, its agencies and
instrumentalities
- - Repurchase Agreements (other than equity repurchase agreements)
- - Certificates of Deposit
- - Bankers' Acceptances
- - Commercial Paper (rated in one of the two highest rating categories)
- - Variable Rate Master Demand Notes
- - Bank Money Market Deposit Accounts
While the Funds are engaged in a temporary defensive position, they will not be
pursuing their investment objectives. Therefore, the Funds will pursue a
temporary defensive position only when market conditions warrant.
15
<PAGE> 18
PORTFOLIO TURNOVER
Portfolio turnover may vary greatly from year to year, as well as within a
particular year. Higher portfolio turnover rates will likely result in higher
transaction costs to the Funds. It is estimated that portfolio turnover rate for
the Bond Fund will not exceed 50% and portfolio turnover for each of the Equity
Funds will not exceed 100%. Each Equity Fund may engage in short-term trading,
which involves selling securities for a short time in order to increase the
potential for capital appreciation and/or income of an Equity Fund or to take
advantage of a temporary disparity in the normal price or yield relationship
between two securities or changes in market industry or company conditions or
outlook. Any such trading would increase a Fund's turnover rate and its
transaction costs.
ADDITIONAL INFORMATION
PERFORMANCE
From time to time, each Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. The yield of the Fund refers to the annualized income generated by
an investment in the Fund over a specified 30 day period. The yield is
calculated by assuming that the income generated by the investment during that
period is generated over one year and is shown as a percentage of the
investment.
The total return of a Fund refers to the average compounded rate of return to a
hypothetical investment, for designated time periods (including but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
Yields and total returns contained in advertisements include the effect of
deducting a Fund's expenses, but may not include charges and expenses
attributable to Separate Accounts and Qualified Plans. Since shares may only be
purchased by Separate Accounts and Qualified Plans, contract owners should
carefully review the Separate Account and Qualified Plan documents for
information on fees and expenses. Excluding such fees and expenses from a Fund's
total return quotations has the effect of increasing the performance quoted.
Each Fund's performance may from time to time be compared to other mutual funds
tracked by mutual fund rating services, to broad groups of comparable mutual
funds or to unmanaged indices which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs.
ALL PERFORMANCE INFORMATION AND COMPARATIVE MATERIAL ADVERTISED BY THE FUNDS IS
HISTORICAL IN NATURE AND IS NOT INTENDED TO REPRESENT OR GUARANTEE FUTURE
RESULTS. THE SHARES WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN ORIGINAL COST.
Additional information concerning each Fund's performance appears in the
Statement of Additional Information.
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<PAGE> 19
APPENDIX
DESCRIPTION OF RATINGS
The following is a summary of published ratings by major credit rating agencies.
Credit ratings evaluate only the safety of principal and interest payments, not
the market value risk of lower quality securities. Credit rating agencies may
fail to change credit ratings to reflect subsequent events on a timely basis.
Although Banc One Investment Advisors considers security ratings when making
investment decisions, it also performs its own investment analysis and does not
rely solely on the ratings assigned by credit agencies.
Unrated securities will be treated as non-investment grade securities unless
Banc One Investment Advisors determines that such securities are the equivalent
of investment grade securities. Securities that have received different ratings
from more than one agency are considered investment grade if at least one agency
has rated the security investment grade.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
---------------------------------------
Duff & Phelps Credit Rating Co. ("Duff")
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding and safety is
just below risk-free U.S. Treasury obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
D-2 Good certainty of timely payment. Liquidity facts and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
D-5 Issuer failed to meet scheduled principal and/interest
payments.
Standard & Poor's Corporation ("S&P")
- -------------------------------------
A-1 Highest category of commercial paper. Capacity to meet
financial commitment is strong. Obligations designated with a
plus sign (+) indicate that capacity to meet financial
commitment is extremely strong.
A-2 Issues somewhat more susceptible to adverse effects of changes
in circumstances and economic conditions than obligations in
higher rating categories. However, the capacity to meet
financial commitments is satisfactory.
A-3 Exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B Regarded as having significant speculative characteristics.
The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C Currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D In payment default. The D rating category is used when
payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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<PAGE> 20
Fitch's IBCA Limited ("Fitch")
- ------------------------------
A1 Highest capacity for timely repayment. Those issues rated A1+
possess a particularly strong credit feature.
A2 Satisfactory capacity for timely repayment although such
capacity may be susceptible to adverse changes in business,
economic or financial conditions.
A3 Adequate capacity for timely repayment, but more susceptible
to adverse changes business, economic or financial conditions
than for obligations in higher categories.
B Capacity for timely repayment is susceptible to adverse
changes in business, economic or financial conditions.
C High risk of default or which are currently in default.
Moody's Investors Service ("Moody's")
- -------------------------------------
Prime-1 Superior ability for repayment.
Prime-2 Strong ability for repayment.
Prime-3 Acceptable ability for repayment. The effect of industry
characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements
and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime Does not fall within any of the Prime rating categories.
DESCRIPTION OF BANK RATINGS
---------------------------
Moody's
- -------
These ratings represent Moody's opinion of a bank's intrinsic safety and
soundness.
A These banks possess exceptional intrinsic financial strength. Typically
they will be major financial institutions with highly valuable and
defensible business franchises, strong financial fundamentals, and a
very attractive and stable operating environment.
B These banks possess strong intrinsic financial strength. Typically,
they will be important institutions with valuable and defensible
business franchises, good financial fundamentals, and an attractive and
stable operating environment.
C These banks possess good intrinsic financial strength. Typically, they
will be institutions with valuable and defensible business franchises.
These banks will demonstrate either acceptable financial fundamentals
within a stable operating environment, or better than average financial
fundamentals within an unstable operating environment.
D These banks possess adequate financial strength, but may be limited by
one or more of the following factors: a vulnerable or developing
business franchise; weak financial fundamentals; or an unstable
operating environment.
E These banks possess very weak intrinsic financial strength, require
periodic outside support or suggest an eventual need for outside
assistance. Such institutions may be limited by one or more of the
following factors: a business franchise of questionable value;
financial fundamentals that are seriously deficient in one or more
respects; or a highly unstable operating environment.
DESCRIPTION OF TAXABLE BOND RATINGS
-----------------------------------
S&P
- ---
S&P's credit rating is a current opinion of an obligor's overall financial
capacity (its creditworthiness) to pay its financial obligation.
AAA The highest rating assigned by S&P. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
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<PAGE> 21
AA The obligor's capacity to meet its financial commitments on the
obligation is very strong.
A The obligation is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on
the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB Less vulnerable to nonpayment than other speculative issues. However,
such issues face major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B More vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions
will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC Currently vulnerable to nonpayment, and dependent upon favorable
business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
CC Currently highly vulnerable to nonpayment.
C Used to cover a situation where a bankruptcy petition has been filed or
similar action has been taken, but payments on this obligation are
being continued.
D In payment default. Used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. Also used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.
Moody's
- -------
Investment Grade
Aaa Best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected
by a large, or an exceptionally stable, margin and principal is secure.
Aa High quality by all standards. Margins of protection may not be as
large as in Aaa securities, fluctuation of protective elements may be
greater, or there may be other elements present that make the long-term
risks appear somewhat larger than in Aaa securities.
A These bonds possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
Baa These bonds are considered medium-grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Non-Investment Grade
Ba These bonds have speculative elements; their future cannot be
considered as well assured. The protection of interest and principal
payments may be very moderate and thereby not well safeguarded during
good and bad times over the future.
B These bonds lack the characteristics of a desirable investment (i.e.,
potentially low assurance of timely interest and principal payments or
maintenance of other contract terms over any long period of time may be
small).
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<PAGE> 22
Caa Bonds in this category have poor standing and may be in default. These
bonds carry an element of danger with respect to principal and interest
payments.
Ca Speculative to a high degree and could be in default or have other
marked shortcomings. C is the lowest rating.
Fitch
- -----
Investment Grade
AAA Highest rating category. The obligor's capacity for timely repayment of
principal and interest is extremely strong.
AA The obligor's capacity for timely repayment is very strong.
A Bonds and preferred stock considered to be investment grade and of high
credit quality. The obligor's ability for timely repayment is strong.
However, adverse changes in business, economic, or financial conditions
are more likely to affect the capacity for timely repayment than
obligations in higher rated categories.
BBB The obligor's capacity for timely repayment of principal and interest
is adequate. However, adverse changes in business, economic or
financial conditions and circumstances, are more likely to affect the
capacity for timely repayment than for obligations in higher rated
categories.
B The Obligor's capacity for timely repayment of principal and interest
is uncertain. Timely repayment of principal and interest is not
sufficiently protected against adverse changes in business, economic or
financial conditions and these obligations are far more speculative
than those in higher rated categories.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic, or financial conditions and these
obligations are far more speculative than those in higher rated
categories.
CC Obligations which are highly speculative or which have a high risk of
default.
C Obligations which are currently in default.
DESCRIPTION OF INSURANCE RATINGS
--------------------------------
Moody's
- -------
These ratings represent Moody's opinions of the ability of insurance companies
to pay punctually senior policyholder claims and obligations.
Aaa Insurance companies rated in this category offer exceptional financial
security. While the financial strength of these companies is likely to
change, such changes as can be visualized are most unlikely to impair
their fundamentally strong position.
Aa These insurance companies offer excellent financial security. Together
with the Aaa group, they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because
long-term risks appear somewhat larger.
A Insurance companies rated in this category offer good financial
security. However, elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Insurance companies rated in this category offer adequate financial
security. However, certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
BA Insurance companies rated in this category offer questionable financial
security. Often the ability of these companies to meet policyholder
obligations may be very moderate and thereby not well safeguarded in
the future.
B Insurance companies rated in this company offer poor financial
security. Assurance of punctual payment of policyholder obligations
over any long period of time is small.
20
<PAGE> 23
Caa Insurance companies rated in this category offer very poor financial
security. They may be in default on their policyholder obligations or
there may be present elements of danger with respect to punctual
payment of policyholder obligations and claims.
Ca Insurance companies rated in this category offer extremely poor
financial security. Such companies are often in default on their
policyholder obligations or have other marked shortcomings.
C Insurance companies rated in this category are the lowest rated class
of insurance company and can be regarded as having extremely poor
prospects of ever offering financial security.
S & P
- -----
An insurer rated `BBB' or higher is regarded as having financial security
characteristics that outweigh any vulnerabilities, and is highly likely to have
the ability to meet financial commitments.
AAA EXTREMELY STRONG financial security characteristics. `AAA' is the
highest Insurer Financial Strength Rating assigned by Standard &
Poor's.
AA VERY STRONG financial security characteristics, differing only slightly
from those rated higher.
A STRONG financial security characteristics, but Is somewhat more likely
to be affected by adverse business conditions than are insurers with
higher ratings.
BBB GOOD financial security characteristics, but is more likely to be
affected by adverse business conditions than are higher rated insurers.
An insurer rated `BB' or lower is regarded as having vulnerable characteristics
that may outweigh its strength. `BB' indicates the least degree of vulnerability
within the range; `CC' the highest.
BB MARGINAL financial security characteristics. Positive attributes exist,
but adverse business conditions could lead to insufficient ability to
meet financial commitments.
B WEAK financial security characteristics. Adverse business conditions
will likely impair its ability to meet financial commitments.
CCC VERY WEAK financial security characteristics, and is dependent on
favorable business conditions to meet financial commitments.
CC EXTREMELY WEAK financial security characteristics and is likely not to
meet some of its financial commitments.
R An insurer rated `R' has experienced a REGULATORY ACTION regarding
solvency. The rating does not apply to insurers subject only to
nonfinancial actions such as market conduct violations.
NR NOT RATED, which implies no opinion about the insurer's financial
security.
Plus (+) or minus (-)
Following ratings from `AA' to `CCC' show relative standing within the major
rating categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
-------------------------------------
Moody's
- -------
MIG1 & VMIG1 Short-term municipal securities rated MIG1 or VMIG1 are of
the best quality. They have strong protection from
established cash flows, superior liquidity support or
demonstrated broad-based access to the market for
refinancing.
MIG2 & VMIG2 These Short-term municipal securities rated are of high
quality. Margins of protection are ample although not so
large as in the preceding group.
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<PAGE> 24
MIG3 & VMIG3 Favorable quality. All security elements are accounted
for, but the undeniable strength of the preceding grades
is lacking. Liquidity and cash flow protection may be
narrow and marketing access for refinancing is likely to
be less well established.
MIG4 & VMIG4 This denotes adequate quality protection commonly regarded
as required of an investment security is present and
although not distinctly or predominantly speculative,
there is a specific risk.
SG This denotes speculative quality. Our instruments in this
category each margins of protection.
S&P
- ---
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
SP-1 Strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF PREFERRED STOCK RATINGS
--------------------------------------
Moody's
- -------
aaa Top-quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within the
universe of preferred stocks.
aa High-grade preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will remain
relatively well maintained in the foreseeable future.
a Upper-medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification, earnings
and asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa Medium-grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba Considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty
of position characterizes preferred stocks in this class.
b Lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any
long period of time may be small.
caa Likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payments.
ca Speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payments.
c Lowest rated class of preferred or preference stock. Issues so rated
can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
22
<PAGE> 25
S&P
- ---
S&P's preferred stock rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock dividends and any applicable sinking fund
obligations.
AAA Highest rating. This rating indicates an extremely strong capacity to
pay the preferred stock obligations.
AA High-quality, fixed-income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as for
issues rated "AAA."
A Backed by a sound capacity to pay the preferred stock obligations,
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB Backed by an adequate capacity to pay the preferred stock obligations.
Whereas the issuer normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock
in this category than for issues in the "A" category.
BB,BB, B
CCC Regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. BB indicates the
lowest degree of speculation and CCC the highest. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC In arrears on dividends or sinking fund payments, but that is currently
paying.
C Nonpaying issue.
D Nonpaying issue with the issuer in default on debt instruments.
N.R. No rating has been requested, insufficient information on which to base
a rating, or Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Plus (+) or minus (-)
To provide more detailed indications of preferred stock quality, ratings from AA
to CCC may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
DESCRIPTION OF MUNICIPAL BOND RATINGS
-------------------------------------
(INCLUDING FOREIGN, MORTGAGE AND ASSET-BACKED SECURITIES)
S&P
INVESTMENT GRADE
AAA The highest rating. The rating indicates an extremely strong
capacity to meet its financial commitment.
AA Differs from AAA issues only in a small degree. The obligor's
capacity to meet its financial commitment is very strong.
A These bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than debt in higher rated categories. However, capacity to
meet its financial commitment on the obligation is still
strong.
BBB Exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to meet its financial
commitment on the obligations.
23
<PAGE> 26
SPECULATIVE GRADE
BB Less vulnerable to non-payment than other speculative issues.
However, these bonds face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet financial
commitment on the obligations.
B More vulnerable to non-payment than obligations rated BB, but
currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial or economic
conditions will likely impair capacity or willingness to meet
its financial commitment on the obligation.
CCC Currently vulnerable to non-payment, and is dependent upon
favorable business, financial, and economic conditions to meet
its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, they are
not likely to have the capacity to meet its financial
commitment on the obligation.
CC Currently highly vulnerable to non-payment.
C This rating may be used to cover a situation where a
bankruptcy petition has been filed, or similar action has been
taken, but payments on this obligation are being continued.
D Bonds in payment default.
Ratings from AA to CCC may be modified by a plus (+) or minus (-) to show
relative standing within the major rating categories.
MOODY'S
INVESTMENT GRADE
Aaa Best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edged." Interest
payments are protected by a large, or an exceptionally stable,
margin and principal is secure.
Aa High quality by all standards. Margins of protection may not
be as large as in Aaa securities, fluctuation of protective
elements may be greater, or there may be other elements
present that make the long-term risks appear somewhat larger
than in Aaa securities.
A These bonds possess many favorable investment attributes and
are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa These bonds are considered medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
NON-INVESTMENT GRADE
Ba These bonds have speculative elements; their future cannot be
considered as well assured. The protection of interest and
principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future.
B These bonds lack the characteristics of a desirable investment
(i.e., potentially low assurance of timely interest and
principal payments or maintenance of other contract terms over
any long period of time may be small).
Caa Bonds in this category have poor standing and may be in
default. These bonds carry an element of danger with respect
to principal and interest payments.
Ca Speculative to a high degree and could be in default or have
other marked shortcomings. Ca is the lowest rating.
24
<PAGE> 27
DESCRIPTION OF SHORT-TERM DEBT RATINGS
--------------------------------------
Thompson Bank Watch, Inc. ("TBW") assigns ratings to specific debt instruments
with original maturities of one year or less. The TBW Short-Term ratings
specifically assess the likelihood of an untimely payment of principal and
interest.
TBW-1 Very high degree of likelihood that principal and interest
will be paid on a timely basis.
TBW-2 While degree of safety regarding timely repayment of principal
and interest is strong, the relative degree is not as high as
for issues rated TBW-1.
TBW-3 Lowest investment grade category. While more susceptible to
adverse developments than obligations with higher ratings,
capacity to service principal and interest in a timely fashion
is considered adequate.
TBW-4 Non-investment grade and, therefore, speculative.
25
<PAGE> 28
INVESTMENT ADVISOR
Banc One Investment Advisors Corporation
1111 Polaris Parkway
P.O. Box 710211
Columbus, OH 43271-0211
ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, OH 43216
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8528
Boston, MA 02266-8528
LEGAL COUNSEL
Ropes & Gray
One Franklin Square
1301 K Street, N.W.
Suite 800 East
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Broad Street
Columbus, OH 43215
THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE DETAILED INFORMATION ABOUT
THE FUNDS. THE CURRENT STATEMENT OF ADDITIONAL INFORMATION HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, AND IS AVAILABLE WITHOUT CHARGE BY
CALLING 1-800-860-3946 OR BY WRITING TO THE THE ONE GROUP(R) INVESTMENT TRUST AT
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43216. THE STATEMENT OF ADDITIONAL
INFORMATION IS INCORPORATED INTO THIS PROSPECTUS BY REFERENCE. THE SEC MAINTAINS
A WEB SITE (WWW.SEC.GOV) THAT CONTAINS THE STATEMENT OF ADDITIONAL INFORMATION,
MATERIALS INCORPORATED BY REFERENCE AND OTHER INFORMATION REGARDING THE ONE
GROUP INVESTMENT TRUST.
<PAGE> 29
STATEMENT OF ADDITIONAL INFORMATION
THE ONE GROUP(R) INVESTMENT TRUST
THE ONE GROUP INVESTMENT TRUST BOND FUND (THE "BOND FUND")
THE ONE GROUP INVESTMENT TRUST VALUE GROWTH FUND
(THE "VALUE GROWTH FUND")
THE ONE GROUP INVESTMENT TRUST MID CAP OPPORTUNITIES FUND
(THE "MID CAP OPPORTUNITIES FUND")
THE ONE GROUP INVESTMENT TRUST MID CAP VALUE FUND
(THE "MID CAP VALUE FUND")
(EACH A "FUND," AND COLLECTIVELY THE "FUNDS")
JANUARY 14, 1999
This Statement of Additional Information is not a Prospectus, but supplements
and should be read in conjunction with the Prospectus dated January 14, 1999
relating to the Bond Fund, the Value Growth Fund, the Mid Cap Opportunities
Fund, and the Mid Cap Value Fund (the "PROSPECTUS"). This Statement of
Additional Information is incorporated in its entirety into the Prospectus for
the Bond Fund, the Value Growth Fund, the Mid Cap Opportunities Fund, and the
Mid Cap Value Fund. A copy of the Prospectus may be obtained by writing to The
One Group Investment Trust (the "TRUST") at One Nationwide Plaza, Columbus, Ohio
43215 or by calling toll free at 1-800-860-3946.
<PAGE> 30
TABLE OF CONTENTS
PAGE
THE TRUST....................................................................1
INVESTMENT OBJECTIVES AND POLICIES...........................................2
Additional Information on Fund Instruments................................2
Asset-Backed Securities...............................................2
Bank Obligations......................................................2
Commercial Paper......................................................2
Common Stock..........................................................3
Convertible Securities................................................3
Demand Features.......................................................3
Foreign Investments...................................................3
Limitations on the Use of Foreign Investments.......................4
Foreign Currency Transactions.........................................3
Forward Foreign Currency Exchange Contracts.........................4
Foreign Currency Futures Contracts..................................6
Foreign Currency Options............................................7
Foreign Currency Conversion.........................................8
Risk Factors in Hedging Transactions................................8
Futures and Options Trading...........................................8
Futures Contracts...................................................8
Limitations on the Use of Futures Contracts.........................9
Risk Factors in Futures Transactions...............................10
Options Contracts..................................................11
Writing (Selling) Covered Calls....................................12
Purchasing Call Options............................................13
Purchasing Put Options.............................................13
Secured Puts.......................................................13
Straddles and Spreads..............................................13
Risk Factors in Options Transactions...............................14
Limitations on the Use of Options..................................14
Government Securities................................................14
High Yield/High Risk Securities/Junk Bonds...........................15
Investment Company Securities........................................15
Loan Participations and Assignments..................................15
Mortgage-Related Securities..........................................16
Mortgage-Backed Securities (CMOs and REMICs).......................16
Mortgage Dollar Rolls..............................................18
Stripped Mortgage Backed Securities................................18
Adjustable Rate Mortgage Loans.....................................18
Risk Factors of Mortgage-Related Securities........................19
Municipal Securities.................................................20
Risk Factors in Municipal Securities...............................22
PERCs................................................................23
Preferred Stock......................................................23
Real Estate Investment Trusts ("REITs")..............................23
Repurchase Agreements................................................24
Reverse Repurchase Agreements........................................24
Restricted Securities................................................25
Securities Lending...................................................26
Short-term Funding Agreements........................................26
SPDRs................................................................26
Structured Instruments...............................................27
Swaps, Caps and Floors...............................................27
Treasury Receipts....................................................29
U.S. Treasury Obligations............................................29
Variable and Floating Rate Instruments...............................29
Limitations on the Use of Variable and Floating Rate Notes...........30
Warrants.............................................................30
ii
<PAGE> 31
When-Issued Securities and Forward Commitments...................... 30
Investment Restrictions.................................................31
Portfolio Turnover......................................................32
Additional Tax Information Concerning All Funds.........................32
VALUATION...................................................................33
Valuation of the Funds......................................................33
ADDITIONAL INFORMATION REGARDING THE
CALCULATION OF PER SHARE NET ASSET VALUE................................34
Additional Purchase and Redemption Information..............................34
MANAGEMENT OF THE TRUST.....................................................34
Trustees & Officers..................................................34
Investment Advisor...................................................37
Glass-Steagall Act...................................................38
Portfolio Transactions...............................................39
Administrator........................................................40
Custodian and Transfer Agent.........................................40
Experts .............................................................41
ADDITIONAL INFORMATION......................................................41
Description of Shares................................................41
Shareholder and Trustee Liability....................................42
Shareholders.........................................................42
Calculation of Performance Data......................................42
Miscellaneous........................................................44
iii
<PAGE> 32
THE TRUST
The One Group Investment Trust (the "TRUST") is an open-end management
investment company. The Trust consists of nine series of units of beneficial
interest ("SHARES") each representing interests in one of nine separate
investment portfolios. This Statement of Additional Information contains
information relating to the Bond Fund, the Value Growth Fund, the Mid Cap
Opportunities Fund, and the Mid Cap Value Fund. (The Value Growth Fund, the Mid
Cap Opportunities Fund, and the Mid Cap Value Fund are referred to collectively
as the "EQUITY FUNDS"). The Funds are diversified, as defined under the
Investment Company Act of 1940, as amended, (the "1940 ACT").
Information regarding the Government Bond Fund, the Asset Allocation
Fund, the Growth Opportunities Fund, the Large Company Growth Fund, and the
Equity Index Fund is contained in a separate prospectus and a separate Statement
of Additional Information dated May 1, 1998 and which may be obtained by writing
to the Trust at One Nationwide Plaza, Columbus, Ohio 43215 or by calling toll
free at 1-800-860-3946.
Much of the information contained herein expands upon subjects discussed
in the Prospectuses for the respective Funds. No investment in a Fund should be
made without first reading that Fund's Prospectus.
1
<PAGE> 33
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement each Fund's investment objective and
policies as set forth in the Prospectus. "Details about the Funds" in the
Prospectus provides information about each Fund's specific investment practices.
ADDITIONAL INFORMATION ON FUND INSTRUMENTS
ASSET-BACKED SECURITIES
Asset-backed securities consist of securities secured by company
receivables, home equity loans, truck and auto loans, leases, credit card
receivables and other securities backed by other types of receivables or other
assets. These securities are generally pass-through securities, which means that
principal and interest payments on the underlying securities (less servicing
fees) are passed through to shareholders on a pro rata basis. These securities
involve prepayment risk, which is the risk that the underlying debt may be
refinanced or paid off prior to their maturities during periods of declining
interest rates. In that case, a Fund manager may have to reinvest the proceeds
from the securities at a lower rate. Potential market gains on a security
subject to prepayment risk may be more limited than potential market gains on a
comparable security that is not subject to prepayment risk. Under certain
prepayment rate scenarios, a Fund may fail to recoup any premium paid on
asset-backed securities.
BANK OBLIGATIONS
Bank obligations consist of bankers' acceptances, certificates of
deposit, and demand and time deposits.
BANKERS' ACCEPTANCES are negotiable drafts or bills of exchange typically
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Bankers' acceptances
invested in by the Funds will be those guaranteed by domestic and foreign banks
and savings and loan associations having, at the time of investment, total
assets in excess of $1 billion (as of the date of their most recently published
financial statements).
CERTIFICATES OF DEPOSIT are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit will be
those of domestic and foreign branches of U.S. commercial banks which are
members of the Federal Reserve System or the deposits of which are insured by
the Federal Deposit Insurance Corporation, and in certificates of deposit of
domestic savings and loan associations the deposits of which are insured by the
Federal Deposit Insurance Corporation if, at the time of purchase, such
institutions have total assets in excess of $1 billion (as of the date of their
most recently published financial statements). Certificates of deposit may also
include those issued by foreign banks outside the United States with total
assets at the time of purchase in excess of the equivalent of $1 billion. The
Funds may also invest in Eurodollar certificates of deposit, which are U.S.
dollar-denominated certificates of deposit issued by branches of foreign and
domestic banks located outside the United States, and Yankee certificates of
deposit, which are certificates of deposit issued by a U.S. branch of a foreign
bank denominated in U.S. dollars and held in the United States. The Funds may
also invest in obligations (including banker's acceptances and certificates of
deposit) denominated in foreign currencies (see "Foreign Investments" herein).
DEMAND DEPOSITS are funds deposited in a commercial bank or a savings and
loan association which, without prior notice to the bank, may be withdrawn
generally by negotiable draft. Time and demand deposits will be maintained only
at banks or savings and loan associations from which a Fund could purchase
certificates of deposit. TIME DEPOSITS are interest-bearing non-negotiable
deposits at a bank or a savings and loan association that have a specific
maturity date. A time deposit earns a specific rate of interest over a definite
period of time. Time deposits cannot be traded on the secondary market and those
exceeding seven days and with a withdrawal penalty are considered to be
illiquid.
COMMERCIAL PAPER
Commercial paper consists of promissory notes issued by corporations.
Although such notes are generally unsecured, the Funds may also purchase secured
commercial paper. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of
2
<PAGE> 34
less than nine months and fixed rates of return. The Funds only purchase
commercial paper that meet the following criteria.
Bond Fund. The Bond Fund may purchase commercial paper consisting of
issues rated at the time of purchase in the highest or second highest
rating category by at least one Nationally Recognized Statistical Rating
Organization ("NRSRO") (such as A-2 or better by Standard & Poor's
Corporation ("S&P"), Aa or better by Moody's Investors Service, Inc.
("MOODY'S") or A2 or better by Fitch IBCA ("FITCH")) or if unrated,
determined by Banc One Investment Advisors Corporation ("BANC ONE
INVESTMENT ADVISORS") to be of comparable quality.
Equity Funds. The Equity Funds may purchase commercial paper consisting
of issues rated at the time of purchase in the highest or second highest
rating category by at least one NRSRO (such as A-2 or better by S&P, P-2
or better by Moody's or F-2 or better by Fitch) or if unrated, determined
by Banc One Investment Advisors to be of comparable quality.
COMMON STOCK
Common stock represents a share of ownership in a company and usually
carries voting rights and earns dividends. Unlike preferred stock, dividends on
common stock are not fixed but are declared at the discretion of the issuer's
board of directors.
CONVERTIBLE SECURITIES
Convertible securities have characteristics similar to both fixed income
and equity securities. Convertible securities may be issued as bonds or
preferred stock. Because of the conversion feature, the market value of
convertible securities tends to move together with the market value of the
underlying stock. As a result, the Funds' selection of convertible securities is
based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer, and any
call provisions.
DEMAND FEATURES
The Bond Fund may acquire securities that are subject to puts and standby
commitments ("DEMAND FEATURES") to purchase the securities at their principal
amount (usually with accrued interest) within a fixed period (usually seven
days) following a demand by the Fund. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities or by another
third party, and may not be transferred separately from the underlying security.
The underlying securities subject to a put may be sold at any time at market
rates. The Fund expects that it will acquire puts only where the puts are
available without the payment of any direct or indirect consideration. However,
if advisable or necessary, a premium may be paid for put features. A premium
paid will have the effect of reducing the yield otherwise payable on the
underlying security.
Under a "STAND-BY COMMITMENT," a dealer would agree to purchase, at the
Fund's option, specified municipal securities at a specified price. The Fund
will acquire these commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes. Stand-by
commitments may also be referred to as put options. The Fund will generally
limit its investments in stand-by commitments to 25% of its total assets.
The purpose of engaging in transactions involving puts is to maintain
flexibility and liquidity to permit the Fund to meet redemption requests and
remain as fully invested as possible.
FOREIGN INVESTMENTS
The Funds may invest in certain obligations or securities of foreign
issuers. Possible investments include equity securities of foreign entities,
obligations of foreign branches of U.S. banks and of foreign banks, including,
without limitation, Eurodollar Certificates of Deposit, Eurodollar Time
Deposits, Eurodollar Banker's Acceptances, Canadian Time Deposits and Yankee
Certificates of Deposits, and investments in Canadian Commercial Paper, foreign
securities and Europaper (as those terms are defined in the relevant
Prospectuses of the Trust). The Equity Funds may purchase sponsored and
unsponsored American Depository Receipts ("ADRS"). Sponsored ADRs are listed on
the New York Stock Exchange; unsponsored ADRs are not. Therefore, there may be
less information available about the issuers of unsponsored ADRs than the
issuers of sponsored ADRs. Unsponsored ADRs are restricted securities.
3
<PAGE> 35
Foreign investments may subject a Fund to investment risks that differ in
some respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks and
foreign banks are not regulated by U.S. banking authorities and may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks. In addition, foreign banks generally are not bound by
the accounting, auditing, and financial reporting standards comparable to those
applicable to U.S. banks.
LIMITATIONS ON THE USE OF FOREIGN INVESTMENTS. Investments in all types
of foreign obligations or securities will not exceed 25% of the net assets of a
Fund.
FOREIGN CURRENCY TRANSACTIONS
Some of the Funds may engage in various strategies to hedge against
interest rate and currency risks. These strategies may consist of use of any of
the following, some of which also have been described above: options on Fund
positions or currencies, financial and currency futures, options on such
futures, forward foreign currency transactions, forward rate agreements and
interest rate and currency swaps, caps and floors. To the extent a Fund enters
into such transactions in markets other than in the United States, the Fund may
be subject to certain currency, settlement, liquidity, trading and other risks
similar to those described above with respect to a Fund's investments in foreign
securities. A Fund may enter into such transactions only in connection with
hedging strategies. While a Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of Fund shares, the net asset value
of the Fund will fluctuate. There can be no assurance that a Fund's hedging
transactions will be effective. Furthermore, a Fund may only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates or currency exchange rates occur.
Some of the Funds are authorized to deal in forward foreign exchange
between currencies of the different countries in which the Fund will invest and
multi-national currency units as a hedge against possible variations in the
foreign exchange rate between these currencies. This is accomplished through
contractual agreements entered into in the interbank market to purchase or sell
one specified currency for another currency at a specified future date (up to
one year) and price at the time of the contract. The Funds' dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions.
Transaction Hedging. When a Fund engages in transaction hedging, it
enters into foreign currency transactions with respect to specific receivables
or payables of the Fund generally arising in connection with the purchase or
sale of its portfolio securities. A Fund will engage in transaction hedging when
it desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging, a Fund will attempt to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received.
Some of the Funds may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. Some
of the Funds may also enter into contracts to purchase or sell foreign
currencies at a future date ("FORWARD CONTRACTS"). Although there is no current
intention to do so, the Funds reserve the right to purchase and sell foreign
currency futures contracts traded in the United States and subject to regulation
by the CFTC.
For transaction hedging purposes, some of the Funds may also purchase
U.S. exchange-listed call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives a Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives a Fund the right to sell a currency at an
exercise price until the
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expiration of the option. A call option on a futures contract gives a Fund the
right to assume a long position in the futures contract until the expiration of
the option. A call option on currency gives a Fund the right to purchase a
currency at the exercise price until the expiration of the option.
Position Hedging. When engaging in position hedging, a Fund will enter
into foreign currency exchange transactions to protect against a decline in the
values of the foreign currencies in which its portfolio securities are
denominated (or an increase in the value of currency for securities which Banc
One Investment Advisors expects to purchase, when a Fund holds cash or
short-term investments). In connection with the position hedging, a Fund may
purchase or sell foreign currency forward contracts or foreign currency on a
spot basis. Some of the Funds may purchase U.S. exchange-listed put or call
options on foreign currency and foreign currency futures contracts and buy or
sell foreign currency futures contracts traded in the United States and subject
to regulation by the CFTC, although the Funds have no current intention to do
so.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward contract or futures
contract. Accordingly, a Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the security or securities being hedged is less than the amount of foreign
currency the Fund is obligated to deliver and if a decision is made to sell the
security or securities and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security or securities if the market
value of such security or securities exceeds the amount of foreign currency the
Fund is obligated to deliver.
Although the Fund has no current intention to do so, a Fund may write
covered call options on up to 100% of the currencies in its portfolio to offset
some of the costs of hedging against fluctuations in currency exchange rates.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which a Fund owns or expects to purchase or
sell. They simply seek to maintain an investment portfolio that is relatively
neutral to fluctuations in the value of the U.S. dollar relative to major
foreign currencies and establish a rate of exchange which one can achieve at
some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency. Moreover, it may not be possible for a Fund to hedge
against a devaluation that is so generally anticipated that a Fund is not able
to contract to sell the currency at a price above the anticipated devaluation
level.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Some of the Funds, for
hedging purposes only, may purchase forward foreign currency exchange contracts,
which involve an obligation 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 as
agreed by the parties, at a price set at the time of the contract. In the case
of a cancellable forward contract, the holder has the unilateral right to cancel
the contract at maturity by paying a specified fee. The contracts are traded in
the interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
margin or other deposit requirement, and no commissions are charged at any stage
for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month. Forward contracts may be in any amounts
agreed upon by the parties rather than predetermined amounts. Also, forward
foreign exchange contracts are entered into directly between currency traders so
that no intermediary is required.
At the maturity of a forward contract, a Fund may either accept or make
delivery of the currency specified in the contract, or at or prior to maturity
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
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FOREIGN CURRENCY FUTURES CONTRACTS. Some of the Funds may purchase
foreign currency futures contracts. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange. A Fund will enter into foreign
currency futures contracts. A Fund's investment in foreign currency futures is
subject to limits detailed below with respect to investments in futures
generally.
When a Fund purchases or sells a futures contract, it is required to
deposit with its custodian an amount of cash or U.S. Treasury bills known as
"initial margin." The nature of initial margin is different from that of margin
in security transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Fund upon termination of the contract,
assuming the Fund satisfies its contractual obligation.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when a Fund sells a futures contract and the price of the
underlying currency rises above the delivery price, the Fund's position declines
in value. The Fund then pays a broker a variation margin payment equal to the
difference between the delivery price of the futures contract and the market
price of the currency underlying the futures contract. Conversely, if the price
of the underlying currency falls below the delivery price of the contract, the
Fund's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the market price of the currency underlying the futures
contract.
When a Fund terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a loss or gain. Such closing transactions involve
additional commission costs.
In addition to the margin requirements discussed above, transactions in
currency futures contracts may involve the segregation of funds pursuant to
requirements imposed by the Securities and Exchange Commission (the "SEC").
Under those requirements, where a Fund has a long position in a futures or
forward contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by a Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments or currency underlying the futures or forward contracts (but are not
less than the price at which the short positions were established). However,
segregation of assets is not required if the Fund "covers" a long position. For
example, instead of segregating assets, a Fund, when holding a long position in
a futures or forward contract, could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held by the Fund. In addition, where a Fund takes short positions, or
engages in sales of call options, it need not segregate assets if it "covers"
these positions. For example, where a Fund holds a short position in a futures
or forward contract, it may cover by owning the instruments or currency
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures or forward contract at a price
no higher than the price at which the short position was established. Where a
Fund sells a call option on a futures or forward contract, it may cover either
by entering into a long position in the same contract at a price no higher than
the strike price of the call option or by owning the instruments or currency
underlying the futures or forward contract. The Fund could also cover this
position by holding a separate call option permitting it to purchase the same
futures or forward contract at a price no higher than the strike price of the
call option sold by the Fund.
At the maturity of a futures contract, the Fund may either accept or make
delivery of the currency specified in the contract, or at or prior to maturity
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Funds intend to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
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position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin.
FOREIGN CURRENCY OPTIONS. Some of the Funds may purchase U.S.
exchange-listed call and put options on foreign currencies. Such options on
foreign currencies operate similarly to options on securities. Options on
foreign currencies are affected by all of those factors which influence foreign
exchange rates and investments generally.
A Fund is authorized to purchase or sell listed foreign currency options,
and currency swap contracts as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities (including securities
denominated in the ECU) owned by the Fund, sold by the Fund but not yet
delivered, committed or anticipated to be purchased by the Fund, or in
transaction or cross-hedging strategies. As an illustration, a Fund may use such
techniques to hedge the stated value in U.S. dollars of an investment in a
Japanese yen-dominated security. In such circumstances, for example, the Fund
may purchase a foreign currency put option enabling it to sell a specified
amount of yen for dollars at a specified price by a future date. To the extent
the hedge is successful, a loss in the value of the dollar relative to the yen
will tend to be offset by an increase in the value of the put option. To offset,
in whole or in part, the cost of acquiring such a put option, the Fund also may
sell a call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Fund gives up
on the opportunity to profit without limit from increases in the relative value
of the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. Options on futures contracts are traded on
boards of trade or futures exchanges. Currency swap contacts are negotiated two
party agreements entered into in the interbank market whereby the parties
exchange two foreign currencies at the inception of the contract and agree to
reverse the exchange at a specified future time and at a specified exchange
rate. The Funds will not speculate in foreign currency options, futures or
related options or currency swap contracts. Accordingly, the Funds will not
hedge a currency substantially in excess (as determined by Banc One Investment
Advisors) of the market value of the securities denominated in such currency
which it owns, the expected acquisition price of securities which it has
committed or anticipates to purchase which are denominated in such currency,
and, in the cases of securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. Further, a Fund
will segregate, at its Custodians, U.S. government or other high quality
securities having a market value representing any subsequent net decrease in the
market value of such hedged positions including net positions with respect to
cross-currency hedges. A Fund may not incur potential net liabilities with
respect to currency and securities positions, including net liabilities with
respect to cross-currency hedges, of more than 33 1/3% of its total assets from
foreign currency options, futures, related options and forward currency
transactions.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealer or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options market.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are
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<PAGE> 39
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
RISK FACTORS IN HEDGING TRANSACTIONS
Correlation. Foreign currency hedging transactions present certain risks.
In particular, the variable degree of correlation between price movements
of the instruments used in hedging strategies and price movements in the
security being hedged creates the possibility that losses on the hedge
may be greater than gains in the value of the Fund's securities.
Liquidity. In addition, these instruments may not be liquid in all
circumstances. As a result, in volatile markets, a Fund may not be able
to dispose of or offset a transaction without incurring losses. Although
the contemplated use of hedging instruments should tend to reduce the
risk of loss due to a decline in the value of the hedged security, at the
same time the use of these instruments could tend to limit any potential
gain which might result from an increase in the value of such security.
Judgement of the Advisor. Successful use of hedging instruments is
subject to the ability of the Banc One Investment Advisors to predict
correctly movements in the direction of interest and currency rates and
other factors affecting markets for securities. If the expectations of
Banc One Investment Advisors are not met, the Fund would be in a worse
position than if a hedging strategy had not been pursued. For example, if
the Fund has hedged against the possibility of an increase in interest
rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund
will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its hedging
positions. In addition, when hedging with instruments that require
variation margin payments, if the Fund has insufficient cash to meet
daily variation margin requirements, it may have to sell securities to
meet such requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market.
Thus, the Fund may have to sell securities at a time when it is
disadvantageous to do so.
FUTURES AND OPTIONS TRADING
The Funds may enter into futures contracts, options, options on futures
contracts and stock index futures contracts and options thereon for the purposes
of remaining fully invested, reducing transaction costs, or managing interest
rate risk.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security, class of
securities, or an index at a specified future time and at a specified price. A
stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
trading of the contracts and the price at which the futures contract is
originally struck. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S.
government agency.
Although most futures contracts by their terms call for actual delivery
and acceptance of the underlying securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," or "selling" a contract
previously "purchased") in an identical contract to terminate the position. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified price, to sell
or to purchase the underlying futures contract, upon exercise of the option, at
any time during the option period. Brokerage commissions are incurred when a
futures contract is bought or sold.
When making futures trades, the Funds are required to make a good faith
margin deposit in cash or government securities with a broker or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Initial margin deposits on futures
contracts are customarily set at
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levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Funds intend to enter into futures
contracts, options on futures contracts, index futures and options thereon that
are traded on an exchange regulated by the CFTC if, to the extent that such
futures and options are not for "bona fide hedging purposes" (as defined by the
CFTC), the aggregate initial margin and premiums on such positions (excluding
the amount by which options are in the money) do not exceed 5% of the Fund's
total assets at current value. A Fund, however, may invest more than such amount
for bona fide hedging purposes, and also may invest more than such amount if it
obtains authority to do so from the CFTC without rendering the fund a commodity
pool operator or adversely affecting its status as an investment company for
federal securities laws or income tax purposes.
A Fund may buy and sell futures contracts and related options to manage
its exposure to changing interest rates and security prices. When interest rates
are expected to rise or market values of portfolio securities are expected to
fall, a Fund can seek through the sale of futures contracts to offset a decline
in the value of its portfolio securities. When interest rates are expected to
fall or market values are expected to rise, a Fund, through the purchase of such
contracts, can attempt to secure better rates or prices for the Fund than might
later be available in the market when it effects anticipated purchases.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Funds' exposure to market fluctuations, the use of
futures contracts may be a more effective means of managing this exposure. While
the Funds will incur commission expenses in both opening and closing out futures
positions, these costs may be lower than transaction costs that would be
incurred in the purchase and sale of the underlying securities.
A Fund's ability to effectively utilize futures trading depends on
several factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying reference
security or index. Second, it is possible that a lack of liquidity for futures
contracts could exist in the secondary market, resulting in an inability to
close a futures position prior to its maturity date. Third, the purchase of a
futures contract involves the risk that a Fund could lose more than the original
margin deposit required to initiate a futures transaction.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS
None of the Funds will enter into futures contract transactions for
purposes other than bona fide hedging purposes to the extent that, immediately
thereafter, the sum of its initial margin deposits and premiums on open
contracts exceeds 5% of the market value of the respective Fund's total assets.
None of the Funds will enter into futures contracts to the extent that the value
of the futures contracts held would exceed 25% of the respective Fund's total
assets.
The Funds have undertaken to restrict their futures contract trading as
follows: first, the Funds will not engage in transactions in futures contracts
for speculative purposes; second, the Funds will not market themselves to the
public as commodity pools or otherwise as vehicles for trading in the
commodities futures or commodity options markets; third, the Funds will disclose
to all prospective Shareholders the purpose of and limitations on their
commodity futures trading; fourth, the Funds will submit to the CFTC special
calls for information. Accordingly, registration as a commodities pool operator
with the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in
futures contracts may involve the segregation of funds pursuant to requirements
imposed by the SEC. Under those requirements, where
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a Fund has a long position in a futures contract, it may be required to
establish a segregated account (not with a futures commission merchant or
broker) containing cash or certain liquid assets equal to the purchase price of
the contract (less any margin on deposit). For a short position in futures or
forward contracts held by a Fund, those requirements may mandate the
establishment of a segregated account (not with a futures commission merchant or
broker) with cash or certain liquid assets that, when added to the amounts
deposited as margin, equal the market value of the instruments underlying the
futures contracts (but are not less than the price at which the short positions
were established). However, segregation of assets is not required if a Fund
"covers" a long position. For example, instead of segregating assets, a Fund,
when holding a long position in a futures contract, could purchase a put option
on the same futures contract with a strike price as high or higher than the
price of the contract held by the Fund. In addition, where a Fund takes short
positions, or engages in sales of call options, it need not segregate assets if
it "covers" these positions. For example, where a Fund holds a short position in
a futures contract, it may cover by owning the instruments underlying the
contract. The Funds may also cover such a position by holding a call option
permitting it to purchase the same futures contract at a price no higher than
the price at which the short position was established. Where a Fund sells a call
option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by the Fund. In certain circumstances, entry into a
futures contract that substantially eliminates risk of loss and the opportunity
for gain in an "appreciated financial position" will also accelerate gain to the
Funds.
RISK FACTORS IN FUTURES TRANSACTIONS
LIQUIDITY. Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Fund would continue
to be required to make daily cash payments to maintain the required margin. In
such situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, a Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge such positions. The Funds will minimize the risk that they
will be unable to close out a futures contract by only entering into futures
contracts which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
RISK OF LOSS. The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. Because the
deposit requirements in the futures markets are less onerous than margin
requirements in the securities market, there may be increased participation by
speculators in the futures market which may also cause temporary price
distortions. A relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. Thus,
a purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the futures strategies engaged
in by the Funds typically for risk management purposes, Banc One Investment
Advisors do not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. Each Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
CORRELATION RISK. Utilization of futures transactions by a Fund involves
the risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that a Fund could lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
PRICE FLUCTUATIONS. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of contract, no trades may be made
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on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
Some futures strategies, including selling futures, buying puts and
writing covered calls, may reduce a Fund's exposure to price fluctuations. Other
strategies, including buying futures, and buying calls, tend to increase market
exposure. Futures and options may be combined with each other in order to adjust
the risk and return characteristics of the overall portfolio. A Fund expects to
enter into these transactions to manage a return or spread on a particular
investment or portion of its assets, to protect against any increase in the
price of securities a Fund anticipates purchasing at a later date, or for other
risk management strategies.
OPTIONS CONTRACTS
The Funds may use options on securities or futures contracts as a hedging
device. An option gives the buyer of the option the right (but not the
obligation) to purchase a futures contract or security at a specified price
(also called the STRIKE price). A CALL OPTION gives the buyer the "right to
purchase" a security at a specified price (the exercise price) at any time until
a certain date (the expiration date). So long as the obligation of the writer of
a call option continues, the writer may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring the writer to deliver
the underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing an option
identical to that previously sold. To secure the writer's obligation to deliver
the underlying security in the case of a call option, subject to the rules of
the Options Clearing Corporation, a writer is required to deposit in escrow the
underlying security or other assets in accordance with such rules.
A PUT OPTION gives the buyer the right to sell the underlying futures
contract or security. The seller (or "writer") of a put option must purchase
futures contracts or securities at a strike price if the option is exercised. In
the case of a call option, the seller must sell the futures contract or security
in the underlying futures contract or security at the strike price if the option
is exercised.
A NAKED OPTION is an option written by a party who does not own the
underlying futures contract or security. A COVERED OPTION is an option written
by a party who does own the underlying position. The initial purchase (sale) of
an option is an "opening transaction." In order to close out an option position,
the Fund may enter into a "closing transaction". This involves the sale
(purchase) of an option contract on the same security with the same exercise
price and expiration date as the option contract originally opened.
A call option on a futures contract or security is said to be
"in-the-money" if the strike price is below current market levels and
"out-of-the-money" if the strike price is above current market levels. A put
option is "in-the-money" if the strike price is above current market levels, and
"out-of-the-money" if the strike price is below current market levels.
Options have limited life spans, usually tied to the delivery or
settlement date of the underlying futures contract or security. Some options,
however, expire significantly in advance of such dates. An option that is
"out-of-the-money" and not offset by the time it expires becomes worthless. On
certain exchanges "in-the-money" options are automatically exercised on their
expiration date, but on others unexercised options simply become worthless after
their expiration date. Options usually trade at a premium (referred to as the
"time value" of the option) above their intrinsic value (the difference between
the market price for the underlying futures contract or equity security and the
strike price). As an option nears its expiration date, the market value and the
intrinsic value move into parity as the time value diminishes.
Increased market volatility generally increases the value of options by
increasing the probability of favorable market swings, putting outstanding
options "in-the-money." Although purchasing options is a limited risk trading
approach, significant losses can be incurred by doing so.
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WRITING (SELLING) COVERED CALLS
The Funds may write (sell) covered call options and purchase options to
close out options previously written by the Fund. The Funds' purpose in writing
covered call options is to generate additional premium income. This premium
income will serve to enhance a Fund's total return and will reduce the effect of
any price decline of the security involved in the option. Generally, the Funds
will write covered call options on securities which, in the opinion of Banc One
Investment Advisors are not expected to make any major price moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Fund. The Funds will write only covered call options. This means that a
Fund will only write a call option on a security which a Fund already owns.
Fund securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with each Fund's
investment objectives. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked options, which a Fund will not do), but capable of
enhancing the Fund's total return. When writing a covered call option, a Fund,
in return for the premium, gives up the opportunity for profit from a price
increase in the underlying security above the exercise price, but conversely
retains the risk of loss should the price of the security decline. Unlike one
who owns securities not subject to an option, a Fund has no control over when it
may be required to sell the underlying securities, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. Thus, the security could be "called away" at a price substantially below
the fair market value of the security. If a call option which a Fund has written
expires, a Fund will realize a gain in the amount of the premium; however, such
gain may be offset by a decline in the market value of the underlying security
during the option period. If the call option is exercised, a Fund will realize a
gain or loss from the sale of the underlying security. The security covering the
call will be maintained in a segregated account of the Fund's custodian. The
Funds do not consider a security covered by a call to be "pledged" as that term
is used in each Fund's policy which limits the pledging or mortgaging of its
assets.
The premium received is the market value of an option. The premium each
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, Banc One Investment Advisors, in determining
whether a particular call option should be written on a particular security,
will consider the reasonableness of the anticipated premium and the likelihood
that a liquid secondary market will exist for those options. The premium
received by a Fund for writing covered call options will be recorded as a
liability in the Fund's statement of assets and liabilities. This liability will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per Share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The liability will be extinguished upon expiration
of the option, the purchase of an identical option in the closing transaction,
or delivery of the underlying security upon the exercise of the option.
Generally, a Fund, in order to avoid the exercise of an option sold by
it, will be able to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless selling (in the case of a
call option) or purchasing (in the case of a put option) the underlying
securities is determined to be in a Fund's best interest. A closing purchase
transaction consists of a Fund purchasing an option having the same terms as the
option sold by a Fund, and has the effect of cancelling a Fund's position as a
seller. The premium which a Fund will pay in executing a closing purchase
transaction may be higher (or lower) than the premium received when the option
was sold, depending in large part upon the relative price of the underlying
security at the time of each transaction. To the extent options sold by a Fund
are exercised and a Fund delivers securities to the holder of a call option, a
Fund's turnover rate will increase, which would cause a Fund to incur additional
brokerage expenses.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call options it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that a Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction
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costs in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by a Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, a Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs will be incurred.
A Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
PURCHASING CALL OPTIONS
The Funds may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option. In the event that paying a premium for a call option, together with a
price movement in the underlying security, is such that exercise of the option
would not be profitable to the Fund, loss of the premium may be offset by a
decrease in the acquisition cost of securities by the Fund.
PURCHASING PUT OPTIONS
The Funds may also purchase put options to protect their portfolio
holdings in an underlying security against a decline in market value. Such hedge
protection is provided during the life of the put option since the Fund, as
holder of the put option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. For a put option to be profitable, the market price of the underlying
security must decline sufficiently below the exercise price to cover the premium
and transaction costs. By using put options in this manner, the Fund will reduce
any profit it might otherwise have realized from appreciation of the underlying
security by the premium paid for the put option and by transaction cost.
However, any loss of premium may be offset by an increase in the value of the
Fund's securities.
SECURED PUTS
The Funds may write secured puts. For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer at the strike price of the option which may
be substantially in excess of the fair market value of the security. If a
secured put option expires unexercised, the writer realizes a gain in the amount
of the premium.
STRADDLES AND SPREADS
The Funds also may engage in straddles and spreads. In a straddle
transaction, a Fund either buys a call and a put or sells a call and a put on
the same security. In a spread, the Fund purchases and sells a call or a put.
The Fund will sell a straddle when Banc One Investment Advisors believes the
price of a security will be stable. The Fund will receive a premium on the sale
of the put and the call. A spread permits the Fund to make a hedged investment
that the price of a security will increase or decline
RISK FACTORS IN OPTIONS TRANSACTIONS
Risk of Loss. When it purchases an option, a Fund runs the risk that it
will lose its entire investment in the option in a relatively short period of
time, unless the Fund exercises the option or enters into a closing sale
transaction with respect to the option during the life of the option. If the
price of the underlying security does not rise (in the case of a call) or fall
(in the case of a put) to an extent sufficient to cover the option premium and
transaction costs, a Fund will lose part or all of its investment in the option.
This contrasts with
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an investment by a Fund in the underlying securities, since the Fund may
continue to hold its investment in those securities notwithstanding the lack of
a change in price of those securities. In addition, there may be imperfect or no
correlation between the changes in market value of the securities held by the
Funds and the prices of the options.
Judgement of Advisor. The successful use of the options strategies
depends on the ability of Banc One Investment Advisors to assess interest rate
and market movements correctly and to accurately calculate the fair price of the
option. The effective use of options also depends on a Fund's ability to
terminate option positions at times when Banc One Investment Advisors deems it
desirable to do so. A Fund will take an option position only if Banc One
Investment Advisors believes there is a liquid secondary market for the option,
however, there is no assurance that a Fund will be able to effect closing
transactions at any particular time or at an acceptable price.
Liquidity. If a secondary trading market in options were to become
unavailable, a Fund could no longer engage in closing transactions. Lack of
investor interest might adversely affect the liquidity of the market for
particular options or series of options. A marketplace may discontinue trading
of a particular option or options generally. In addition, a market could become
temporarily unavailable if unusual events, such as volume in excess of trading
or clearing capability, were to interrupt normal market operations. A
marketplace may at times find it necessary to impose restrictions on particular
types of options transactions, which may limit a Fund's ability to realize its
profits or limit its losses.
Market Restrictions. Disruptions in the markets for the securities
underlying options purchased or sold by a Fund could result in losses on the
options. If trading is interrupted in an underlying security, the trading of
options on that security is normally halted as well. As a result, a Fund as
purchaser or writer of an option will be unable to close out its positions until
option trading resumes, and it may be faced with losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation ("OCC") or other options markets may impose exercise
restrictions. If a prohibition on exercise is imposed at the time when trading
in the option has also been halted, a Fund as purchaser or writer of an option
will be locked into its position until one of the two restrictions has been
lifted. If a prohibition on exercise remains in effect until an option owned by
a Fund has expired, the Fund could lose the entire value of its option.
Foreign Investment Risks. Special risks are presented by
internationally-traded options. Because of time differences between the United
States and the various foreign countries, and because different holidays are
observed in different countries, foreign option markets may be open for trading
during hours or on days when U.S. markets are closed. As a result, option
premiums may not reflect the current prices of the underlying interest in the
United States.
LIMITATIONS ON THE USE OF OPTIONS.
Each Fund will limit the writing of put and call options to 25% of its
net assets. Some Funds may enter into over-the-counter option transactions.
There will be an active over-the-counter market for such options which will
establish their pricing and liquidity. Broker/Dealers with whom the Trust will
enter into such option transactions shall have a minimum net worth of
$20,000,000.
GOVERNMENT SECURITIES
Obligations of certain agencies and instrumentalities of the U.S.
government, such as the Government National Mortgage Association ("GINNIE MAE")
and the Export-Import Bank, are supported by the full faith and credit of the
U.S. Treasury; others, such as the Federal National Mortgage Association
("FANNIE MAE"), are supported by the right of the issuer to borrow from the
Treasury; others are supported by the discretionary authority of the U.S.
government to purchase the agency's obligations; and still others, such as the
Federal Farm Credit Banks and the Federal Home Loan Mortgage Corporation
("FREDDIE MAC") are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. A Fund will invest in the obligations of such
agencies or instrumentalities only when Banc One Investment Advisors believes
that the credit risk with respect thereto is minimal. For information on
mortgage-related securities issued by certain agencies or instrumentalities of
the U.S. government, see "Investment Objectives and Policies--Mortgage-Related
Securities" in this Statement of Additional Information.
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HIGH YIELD/ HIGH RISK SECURITIES/JUNK BONDS
The Mid Cap Opportunities Fund may invest in convertible securities that
are rated below investment grade by the primary rating agencies (BB or lower by
S&P and BA or lower by Moody's). Such convertible securities may be structured
as bonds or preferred stock that convert to common stock. Terms used to describe
such convertible securities include "high yield securities," "lower rated
bonds," "non-investment grade bonds," "below investment grade bonds," and "junk
bonds." Generally, lower rated debt securities provide a higher yield than
higher rated debt securities of similar maturity, but are subject to a greater
degree of risk with respect to the ability of the issuer to meet its principal
and interest obligations. Issuers of high yield, high risk securities may not be
as strong financially as those issuing higher rated securities. These securities
are regarded as predominately speculative. The market value of high yield
securities may fluctuate more than the market value of higher rated securities,
since high yield securities tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities, which fluctuate
primarily in response to the general level of interest rates, assuming that
there has been no change in the fundamental quality of such securities. The
market prices of fixed income securities generally fall when interest rates
rise. Conversely, the market prices of fixed-income securities generally rise
when interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. Reduced liquidity also could adversely affect the
Fund's ability to accurately value high yield securities. Issuers of high yield
securities also are more vulnerable to real or perceived economic changes (for
instance, an economic downturn or prolonged period of rising interest rates),
political changes or adverse developments specific to the issuer. Adverse
economic, political or other developments may impair the issuer's ability to
service principal and interest obligations, to meet projected business goals and
to obtain additional financing, particularly if the issuer is highly leveraged.
In the event of a default, the Fund would experience a reduction of its income
and could expect a decline in the market value of the defaulted securities.
Finally, proposed or yet to be proposed new laws may have a possible
negative impact on the market for high yield, high risk bonds. As an example, in
the late 1980's, legislation required federally-insured savings and loan
associations to divest their investments in high yield, high risk bonds. New
legislation, if enacted, could have a material negative effect on a Fund's net
asset value and investment practices.
INVESTMENT COMPANY SECURITIES
The Funds may invest up to 5% of their total assets in the securities of
any one investment company (another mutual fund), but may not own more than 3%
of the outstanding securities of any one investment company or invest more than
10% of their total assets in the securities of other investment companies. Other
investment company securities may include securities of a money market fund of
The One Group(R), and securities of other investment companies for which Banc
One Investment Advisors serves as investment advisor or administrator. Because
other investment companies employ an investment advisor, such investments by the
Funds may cause Shareholders to bear duplicate fees. Banc One Investment
Advisors will waive its fee attributable to the assets of the investing fund
invested in funds advised by Banc One Investment Advisors; and, to the extent
required by the laws of any state in which shares of the Trust are sold, Banc
One Investment Advisors will waive its fees attributable to the assets of any
Fund invested in any investment company.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Some of the Funds may invest in fixed and floating rate loans ("LOANS")
arranged through private negotiations between issuers (which may be corporate
issuers or issuers of sovereign debt obligations) and one or more financial
institutions ("LENDERS"). Investments in loans are expected in most instances to
be in the form of participations in Loans ("PARTICIPATIONS") and assignments of
all or a portion of Loans ("ASSIGNMENTS") from third parties. Because loan
participants and assignments may be illiquid, a Fund will invest no more than
15% of its net assets in loan participations and other illiquid assets. The
government that is the borrower on the Loan will be considered by the Fund to be
the issuer of a Participations or Assignment for purposes of the Fund's
fundamental investment policy that it will not invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry (i.e., foreign government). A Fund's investment in
Participations typically will result in the Fund having a contractual
relationship only with the Lender and not with the borrower.
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When a Fund purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by a Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. The assignability of certain sovereign debt obligations
is restricted by the governing documentation as to the nature of the assignee
such that the only way in which a Fund may acquire an interest in a Loan is
through a Participation and not an Assignment. A Fund may have difficulty
disposing of Assignments and Participations because to do so it will have to
assign such securities to a third party. Because there is no liquid market for
such securities, the Funds anticipate that such securities could be sold only to
a limited number of institutional investors. The lack of a liquid secondary
market may have an adverse impact on the value of such securities and a Fund's
ability to dispose of particular Assignments or Participations when necessary to
meet a Fund's liquidity needs in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for a Fund to assign a value to those securities for purposes of
valuing a Fund's portfolio and calculating its net asset value.
MORTGAGE-RELATED SECURITIES
MORTGAGE-BACKED SECURITIES (CMOS AND REMICS). Mortgage-backed securities
include collateralized mortgage obligations ("CMOS") and Real Estate Mortgage
Investment Conduits ("REMICS"). Mortgage-backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental agencies
such as Ginnie Mae and government-related organizations such as Fannie Mae and
Freddie Mac, as well as by nongovernmental issuers such as commercial banks,
savings and loan institutions, mortgage bankers, and private mortgage insurance
companies. Such non-governmental mortgage securities cannot be treated as U.S.
government securities for purposes of investment policies. A REMIC is a CMO that
qualifies for special tax treatment under the Code and invests in certain
mortgages principally secured by interests in real property and other permitted
investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-related securities
and among the securities that they issue.
Ginnie Mae Securities. Mortgage-related securities issued by Ginnie Mae
include Ginnie Mae Mortgage Pass-Through Certificates which are
guaranteed as to the timely payment of principal and interest by Ginnie
Mae and such guarantee is backed by the full faith and credit of the
United States. Ginnie Mae is a wholly-owned U.S. government corporation
within the Department of Housing and Urban Development. Ginnie Mae
certificates also are supported by the authority of Ginnie Mae to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Fannie Mae Securities Mortgage-related securities issued by Fannie Mae
include Fannie Mae Guaranteed Mortgage Pass-Through Certificates which
are solely the obligations of Fannie Mae and are not backed by or
entitled to the full faith and credit of the United States. Fannie Mae is
a government-sponsored organization owned entirely by private
stock-holders. Fannie Mae Certificates are guaranteed as to timely
payment of the principal and interest by Fannie Mae.
Freddie Mac Securities. Mortgage-related securities issued by Freddie Mac
include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a
corporate instrumentality of the United States, created pursuant to an
Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Banks and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Mac
Certificates entitle the holder to timely payment of interest, which is
guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When Freddie Mac does not guarantee timely payment of
principal, Freddie Mac may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it
becomes payable.
CMOs and guaranteed REMIC pass-through certificates ("REMIC
CERTIFICATES") issued by Fannie Mae, Freddie Mac, Ginnie Mae and private issuers
are types of multiple class pass-through securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Bond Fund does not currently intend to purchase
residual interests in REMICs. The REMIC Certificates represent beneficial
ownership interests in a REMIC Trust, generally consisting of mortgage loans or
Fannie Mae, Freddie Mac or Ginnie Mae guaranteed mortgage pass-through
certificates (the
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"MORTGAGE ASSETS"). The obligations of Fannie Mae, Freddie Mac or Ginnie Mae
under their respective guaranty of the REMIC Certificates are obligations solely
of Fannie Mae, Freddie Mac or Ginnie Mae, respectively.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
For Freddie Mac REMIC Certificates, Freddie Mac guarantees the timely
payment of interest, and also guarantees the payment of principal as payments
are required to be made on the underlying mortgage participation certificates
("PCS"). PCs represent undivided interests in specified residential mortgages or
participation therein purchased by Freddie Mac and placed in a PC pool. With
respect to principal payments on PCs, Freddie Mac generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or
deduction. Freddie Mac also guarantees timely payment of principal on certain
PCS referred to as "Gold PCs."
Ginnie Mae REMIC Certificates guarantee the full and timely payment of
interest and principal on each class of securities (in accordance with the terms
of those classes as specified in the related offering circular supplement). The
Ginnie Mae guarantee is backed by the full faith and credit of the United States
of America.
REMIC Certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are
treated as U.S. government securities for purposes of investment policies. CMOs
and REMIC Certificates provide for the redistribution of cash flow to multiple
classes. Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. This reallocation of
interest and principal results in the redistribution of prepayment risk across
to different classes. This allows for the creation of bonds with more or less
risk than the underlying collateral exhibits. Principal prepayments on the
mortgage loans or the Mortgage Assets underlying the CMOs or REMIC Certificates
may cause some or all of the classes of CMOs or REMIC Certificates to be retired
substantially earlier than their final distribution dates. Generally, interest
is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly
basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
Additional structures of CMOs and REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-BONDS"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC CERTIFICATES"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount of principal payable on the next payment date. The
PAC Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes. The Z-Bonds in which
the Funds may invest may bear the same non-credit-related risks as do other
types of Z-Bonds. Z-Bonds in which the Fund may invest will not include residual
interest.
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MORTGAGE DOLLAR ROLLS. Some of the Funds may enter into Mortgage Dollar
Rolls in which the Funds sell securities for delivery in the current month and
simultaneously contract with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. When a Fund enters into mortgage dollar rolls, the Fund will hold and
maintain a segregated account until the settlement date, cash or liquid, high
grade debt securities in an amount equal to the forward purchase price. The
Funds benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of the Funds compared with what such
performance would have been without the use of mortgage dollar rolls. The
benefits derived from the use of mortgage dollar rolls may depend upon Banc One
Investment Advisors' ability to predict correctly mortgage prepayments and
interest rates. There is no assurance that mortgage dollar rolls can be
successfully employed. The Funds currently intend to enter into mortgage dollar
rolls that are accounted for as a financing transaction. For purposes of
diversification and investment limitations, mortgage dollar rolls are considered
to be mortgage-backed securities.
STRIPPED MORTGAGE BACKED SECURITIES. Stripped Mortgage Backed Securities
("SMBS") are derivative multi-class mortgage securities. SMBS are usually
structured with two classes that receive different proportions of the interest
and principal distributions from a pool of mortgage assets. A common type of
SMBS will have one class receiving all of the interest from the mortgage assets
("IOS"), while the other class will receive all of the principal ("POS").
Mortgage IOs receive monthly interest payments based upon a notional amount that
declines over time as a result of the normal monthly amortization and
unscheduled prepayments of principal on the associated mortgage POs.
In addition to the risks applicable to Mortgage-Related Securities in
general, SMBS are extremely sensitive to changes in prepayments and interest
rates. Even though such securities have been guaranteed by an agency or
instrumentality of the U.S. government, under certain interest rate or
prepayment rate scenarios, the Funds may fail to fully recover their investment
in such securities. Changes in prepayment rates can cause the return on
investment in IOs to be highly volatile, and under extremely high prepayment
conditions IOs can incur significant losses. POs are bought at a discount to the
ultimate principal repayment value. The rate of return on a PO will vary with
prepayments, rising as prepayments increase and falling as prepayments decrease.
The market value of the class consisting entirely of principal payments
generally is unusually volatile in response to changes in interest rates. The
yields on a class of SMBS that receives all or most of the interest from
mortgage assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that any premium paid will not be fully recouped.
Banc One Investment Advisors will seek to manage these risks (and potential
benefits) by investing in a variety of such securities and by using certain
analytical and hedging.
A Fund may only invest in SMBS issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Although the market for SMBS is
increasingly liquid, certain SMBS may not be readily marketable and will be
considered illiquid for purposes of the Funds' limitations on investments in
illiquid securities.
ADJUSTABLE RATE MORTGAGE LOANS. The Bond Fund may invest in adjustable
rate mortgage loans ("ARMS"). ARMs eligible for inclusion in a mortgage pool
will generally provide for a fixed initial mortgage interest rate for a
specified period of time. Thereafter, the interest rates (the "MORTGAGE INTEREST
RATES") may be subject to periodic adjustment based on changes in the applicable
index rate (the "INDEX RATE"). The adjusted rate would be equal to the Index
Rate plus a gross margin, which is a fixed percentage spread over the Index Rate
established for each ARM at the time of its origination.
Adjustable interest rates can cause payment increases that some borrowers
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may
also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the
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interest accruing on a Negatively Amortizing ARM, any such excess interest is
added to the principal balance of the loan, causing negative amortization and
will be repaid through future monthly payments. It may take borrowers under
Negatively Amortizing ARMs longer periods of time to achieve equity and may
increase the likelihood of default by such borrowers. In the event that a
monthly payment exceeds the sum of the interest accrued at the applicable
Mortgage Interest Rate and the principal payment which would have been necessary
to amortize the outstanding principal balance over the remaining term of the
loan, the excess (or "accelerated amortization") further reduces the principal
balance of the ARM. Negatively Amortizing ARMs do not provide for the extension
of their original maturity to accommodate changes in their Mortgage Interest
Rate. As a result, unless there is a periodic recalculation of the payment
amount (which there generally is), the final payment may be substantially larger
than the other payments. These limitations on periodic increases in interest
rates and on changes in monthly payment protect borrowers from unlimited
interest rate and payment increases.
Certain adjustable rate mortgage loans may provide for periodic
adjustments of scheduled payments in order to amortize fully the mortgage loan
by its stated maturity. Other adjustable rate mortgage loans may permit their
stated maturity to be extended or shortened in accordance with the portion of
each payment that is applied to interest as affected by the periodic interest
rate adjustments.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury bill rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities,
the 11th District Federal Home Loan Bank Cost of Funds, the National Median Cost
of Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of the Fund's portfolio and therefore in the net
asset value of the Fund's shares will be a function of the length of the
interest rate reset periods and the degree of volatility in the applicable
indices.
In general, changes in both prepayment rates and interest rates will
change the yield on Mortgage-Backed Securities. The rate of principal
prepayments with respect to ARMs has fluctuated in recent years. As is the case
with fixed mortgage loans, ARMs may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, ARMs could be subject to higher prepayment
rates than if prevailing interest rates remain constant because the availability
of fixed rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their ARMs to "lock-in" a lower fixed interest rate.
Conversely, if prevailing interest rates rise significantly, ARMs may prepay at
lower rates than if prevailing rates remain at or below those in effect at the
time such ARMs were originated. As with fixed rate mortgages, there can be no
certainty as to the rate of prepayments on the ARMs in either stable or changing
interest rate environments. In addition, there can be no certainty as to whether
increases in the principal balances of the ARMs due to the addition of deferred
interest may result in a default rate higher than that on ARMs that do not
provide for negative amortization. Other factors affecting prepayment of ARMs
include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgage properties and servicing decisions.
RISKS FACTORS OF MORTGAGE-RELATED SECURITIES.
Guarantor Risk. There can be no assurance that the U.S. government would
provide financial support to Fannie Mae, Freddie Mac or Ginnie Mae if necessary
in the future. Although certain mortgage-related securities are guaranteed by a
third party or otherwise similarly secured, the market value of the security,
which may fluctuate, is not so secured.
Interest Rate Sensitivity. If a Fund purchases a mortgage-related
security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from changes in interest rates or
prepayments in the underlying mortgage collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled
prepayments on the underlying mortgages and, therefore, it is not possible to
predict accurately the security's return to the Funds. In addition, regular
payments received in respect of mortgage-related securities include
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both interest and principal. No assurance can be given as to the return the
Funds of the Trust will receive when these amounts are reinvested.
Market Value. The market value of the Fund's adjustable rate
Mortgage-Backed Securities may be adversely affected if interest rates increase
faster than the rates of interest payable on such securities or by the
adjustable rate mortgage loans underlying such securities. Furthermore,
adjustable rate Mortgage-Backed Securities or the mortgage loans underlying such
securities may contain provisions limiting the amount by which rates may be
adjusted upward and downward and may limit the amount by which monthly payments
may be increased or decreased to accommodate upward and downward adjustments in
interest rates.
Prepayments. Although having less risk of decline during periods of
rising interest rates, adjustable rate Mortgage-Backed Securities have less
potential for capital appreciation than fixed rate Mortgage-Backed Securities
because their coupon rates will decline in response to market interest rate
declines. The market value of fixed rate Mortgage-Backed Securities may be
adversely affected as a result of increases in interest rates and, because of
the risk of unscheduled principal prepayments, may benefit less than other fixed
rate securities of similar maturity from declining interest rates. Finally, to
the extent Mortgage-Backed Securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the Fund's principal investment to the extent of the premium paid. On the other
hand, if such securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal will increase current
and total returns and will accelerate the recognition of income.
Yield Characteristics. The yield characteristics of Mortgage-Backed
Securities differ from those of traditional fixed income securities. The major
differences typically include more frequent interest and principal payments,
usually monthly, and the possibility that prepayments of principal may be made
at any time. Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic, social and other factors and cannot
be predicted with certainty. As with fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater prepayment rate in a declining
interest rate environment. The yields to maturity of the Mortgage-Backed
Securities in which the Funds invest will be affected by the actual rate of
payment (including prepayments) of principal of the underlying mortgage loans.
The mortgage loans underlying such securities generally may be prepaid at any
time without penalty. In a fluctuating interest rate environment, a predominant
factor affecting the prepayment rate on a pool of mortgage loans is the
difference between the interest rates on the mortgage loans and prevailing
mortgage loan interest rates (giving consideration to the cost of any
refinancing). In general, if mortgage loan interest rates fall sufficiently
below the interest rates on fixed rate mortgage loans underlying mortgage
pass-through securities, the rate of prepayment would be expected to increase.
Conversely, if mortgage loan interest rates rise above the interest rates on the
fixed rate mortgage loans underlying the mortgage pass-through securities, the
rate of prepayment may be expected to decrease.
MUNICIPAL SECURITIES
Municipal Securities are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, roads, schools, water and sewer works, and other
utilities. Other public purposes for which Municipal Securities may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to lend to other public institutions and
facilities. In addition, certain debt obligations known as "PRIVATE ACTIVITY
BONDS" may be issued by or on behalf of municipalities and public authorities to
obtain funds to provide certain water, sewage and solid waste facilities,
qualified residential rental projects, certain local electric, gas and other
heating or cooling facilities, qualified hazardous waste facilities, high-speed
intercity rail facilities, governmentally-owned airports, docks and wharves and
mass commuting facilities, certain qualified mortgages, student loan and
redevelopment bonds and bonds used for certain organizations exempt from federal
income taxation.
Certain debt obligations known as "INDUSTRIAL DEVELOPMENT BONDS" under
prior federal tax law may have been issued by or on behalf of public authorities
to obtain funds to provide certain privately operated housing facilities, sports
facilities, industrial parks, convention or trade show facilities, airport, mass
transit, port or parking facilities, air or water pollution control facilities,
sewage or solid waste disposal facilities, and certain facilities for water
supply. Other private activity bonds and industrial development bonds issued to
fund the construction, improvement, equipment or repair of privately-operated
industrial, distribution, research, or commercial facilities may also be
Municipal Securities, but the size of such issues is limited under current and
prior federal tax law. The aggregate amount of most private activity bonds and
industrial development bonds is limited (except in the case of certain types of
facilities) under federal tax law by an
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annual "volume cap." The volume cap limits the annual aggregate principal amount
of such obligations issued by or on behalf of all governmental instrumentalities
in the state.
The two principal classifications of Municipal Securities consist of
"general obligation" and "limited" (or revenue) issues. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Private
activity bonds and industrial development bonds generally are revenue bonds and
thus not payable from the unrestricted revenues of the issuer. The credit and
quality of such bonds is generally related to the credit of the bank selected to
provide the letter of credit underlying the bond. Payment of principal of and
interest on industrial development revenue bonds is the responsibility of the
corporate user (and any guarantor).
The Funds may also acquire "moral obligation" issues, which are normally
issued by special purpose authorities, and in other tax-exempt investments
including pollution control bonds and tax-exempt commercial paper. Each Fund may
purchase short-term tax-exempt General Obligations Notes, Tax Anticipation
Notes, Bond Anticipation Notes, Revenue Anticipation Notes, Project Notes, and
other forms of short-term tax-exempt loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements, or other revenues. Project Notes are issued by a state or local
housing agency and are sold by the Department of Housing and Urban Development.
While the issuing agency has the primary obligation with respect to its Project
Notes, they are also secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the federal government will lend the issuer an amount equal to the principal of
and interest on the Project Notes.
There are, of course, variations in the quality of Municipal Securities,
both within a particular classification and between classifications, and the
yields on Municipal Securities depend upon a variety of factors, including
general money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligations, and the rating of the issue. The ratings of Moody's
and S&P represent their opinions as to the quality of Municipal Securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate and rating may have different yields while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Banc One Investment Advisors or the applicable Sub-Advisor
will consider such an event in determining whether the Fund should continue to
hold the obligations.
Municipal securities may include OBLIGATIONS OF MUNICIPAL HOUSING
AUTHORITIES and SINGLE-FAMILY MORTGAGE REVENUE BONDS. Weaknesses in Federal
housing subsidy programs and their administration may result in a decrease of
subsidies available for payment of principal and interest on housing authority
bonds. Economic developments, including fluctuations in interest rates and
increasing construction and operating costs, may also adversely impact revenues
of housing authorities. In the case of some housing authorities, inability to
obtain additional financing could also reduce revenues available to pay existing
obligations. Single-family mortgage revenue bonds are subject to extraordinary
mandatory redemption at par in whole or in part from the proceeds derived from
prepayments of underlying mortgage loans and also from the unused proceeds of
the issue within a stated period which may be within a year from the date of
issue.
MUNICIPAL LEASES are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid. They may take the form of a lease, an installment
purchase contract, a conditional sales contract, or a participation interest in
any of the above. The Board of Trustees is responsible for determining the
credit quality of unrated municipal leases, on an ongoing basis, including an
assessment of the likelihood that the lease will not be canceled.
RISK FACTORS IN MUNICIPAL SECURITIES
Tax Risk. The Code imposes certain continuing requirements on issuers of
tax-exempt bonds regarding the use, expenditure and investment of bond
proceeds and the payment of rebates to the United States of America.
Failure by the issuer to comply subsequent to the issuance of tax-exempt
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bonds with certain of these requirements could cause interest on the
bonds to become includable in gross income retroactive to the date of
issuance.
Housing Authority Tax Risk. The exclusion from gross income for Federal
income tax purposes for certain housing authority bonds depends on
qualification under relevant provisions of the Code and on other
provisions of Federal law. These provisions of Federal law contain
certain ongoing requirements relating to the cost and location of the
residences financed with the proceeds of the single-family mortgage bonds
and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing bonds. While the issuers of the
bonds, and other parties, including the originators and servicers of the
single-family mortgages and the owners of the rental projects financed
with the multi-family housing bonds, covenant to meet these ongoing
requirements and generally agree to institute procedures designed to
insure that these requirements will be consistently met, there is no
assurance that the requirements will be consistently met. The failure to
meet these requirements could cause the interest on the bonds to become
taxable, possibly retroactively from the date of issuance, thereby
reducing the value of the bonds and subjecting Shareholders to
unanticipated tax liabilities and possibly requiring a Fund to sell the
bonds at the reduced value. Furthermore, any failure to meet these
ongoing requirements might constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the
bond or require the issuer to redeem the bond. In any event, where the
mortgage is insured by the Federal Housing Administration ("FHA"), the
consent of the FHA may be required before insurance proceeds would become
payable to redeem the mortgage subsidy
Information Risk. Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations having
a class of securities registered under the Securities Exchange Act of
1934.
State and Federal Laws. An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and
other laws affecting the rights and remedies of creditors, such as the
federal bankruptcy code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon the
enforcement of such obligations. The power or ability of an issuer to
meet its obligations for the payment of interest on and principal of its
Municipal Securities may be materially adversely affected by litigation
or other conditions.
Litigation and Current Developments. Such litigation or conditions may
from time to time have the effect of introducing uncertainties in the
market for tax-exempt obligations or certain segments thereof, or may
materially affect the credit risk with respect to particular bonds or
notes. Adverse economic, business, legal or political developments might
affect all or a substantial portion of a Fund's Municipal Securities in
the same manner.
New Legislation. From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income
tax exemption for interest on tax exempt bonds, and similar proposals may
be introduced in the future. The Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not
possible to determine what effect the adoption of such proposals could
have on (i) the availability of Municipal Securities for investment by
the Funds, and (ii) the value of the investment portfolios of the Funds.
LIMITATIONS ON THE USE OF MUNICIPAL SECURITIES
The Bond Fund may invest in Municipal Securities either by purchasing
them directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Municipal Securities, provided that, in the opinion of counsel to the initial
seller of each such certificate or instrument, any discount accruing on such
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Municipal Securities will to the same
extent as interest on such Municipal Securities be exempt from federal income
tax and state income tax (where applicable) and not treated as a preference item
for individuals for purposes of the federal alternative minimum tax.
The Fund may also invest in Municipal Securities by purchasing from banks
participation interests in all or part of specific holdings of Municipal
Securities. Such participation may be backed in whole or in part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the Fund in connection with the arrangement. The Fund
will not purchase participation interests unless it
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receives an opinion of counsel or a ruling of the Internal Revenue Service that
interest earned by it on Municipal Securities in which it holds such
participation interest is exempt from federal income tax and state income tax
(where applicable) and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
NEW FINANCIAL PRODUCTS
New options and futures contracts and other financial products, and
various combinations thereof, continue to be developed and certain of the Funds
may invest in any such options, contracts and products as may be developed to
the extent consistent with each Fund's investment objective, policies and
restrictions and the regulatory requirements applicable to investment companies.
These various products may be used to adjust the risk and return
characteristics of each Fund's investments. These various products may increase
or decrease exposure to security prices, interest rates, commodity prices, or
other factors that affect security values, regardless of the issuer's credit
risk. If market conditions do not perform consistent with expectations, the
performance of each Fund would be less favorable than it would have been if
these products were not used. In addition, losses may occur if counterparties
involved in transactions do not perform as promised. These products may expose
the Fund to potentially greater return as well as potentially greater risk of
loss than more traditional fixed income investments.
PERCS*
The Equity Funds may invest in Preferred Equity Redemption Cumulative
Stock ("PERCS") which is a form of convertible preferred stock that actually has
more of an equity component than it does fixed income characteristics. These
instruments permit companies to raise capital via a surrogate for common equity.
PERCS are preferred stock which convert to common stock after a specified period
of time, usually three years, and are considered the equivalent of equity by the
ratings agencies. Issuers pay holders a substantially higher dividend yield than
that on the underlying common, and in exchange, the holder's appreciation is
capped, usually at about 30 percent. PERCS are callable at any time. The PERC is
mandatorily convertible into common stock, but is callable at any time at an
initial call price that reflects a substantial premium to the stock's issue
price. PERCS offer a higher dividend than that available on the common stock,
but in exchange the investors agree to the company placing a cap on the
potential price appreciation. The call price declines daily in an amount that
reflects the incremental dividend that holders enjoy. PERCS are listed on an
exchange where the common stock is listed.
*PERCS is a registered trademark of Morgan Stanley, which does not
sponsor and is in no way affiliated with The One Group Investment Trust.
PREFERRED STOCK
Preferred stock is a class of stock that generally pays dividends at a
specified rate and has preference over common stock in the payment of dividends
and liquidation. Preferred stock generally does not carry voting rights. As with
all equity securities, the price of preferred stock fluctuates based on changes
in a company's financial condition and on overall market and economic
conditions.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
The Funds may invest in equity interests or debt obligations issued by
REITs. REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling property that has appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Similar to
investment companies, REITs are not taxed on income distributed to shareholders
provided they comply with several requirements of the Code. A Fund will
indirectly bear its proportionate share of expenses incurred by REITs in which a
Fund invests in addition to the expenses incurred directly by a Fund.
Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs, while mortgage REITs may be affected by the quality of any credit
extended.
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REITs are dependent upon management skills, are not diversified, are subject to
heavy cash flow dependency, default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax free
pass-through of income under the Code and failing to maintain their exemption
from registration under the Act.
REITs (especially mortgage REITs) are also subject to interest rate
risks. When interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investment in such loans will gradually
align themselves to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Investment in REITs involves risks similar to those associated with
investing in small capitalization companies. REITs may have limited financial
resources, may trade less frequently and in a limited volume and may be subject
to more abrupt or erratic price movements than larger company securities.
Historically, small capitalization stocks, such as REITs, have been more
volatile in price than the larger capitalization stocks included in the S&P
Index of 500 Common Stocks.
REPURCHASE AGREEMENTS
Under the terms of a repurchase agreement, a Fund would acquire
securities from a seller, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price would
generally equal the price paid by the Fund plus interest negotiated on the basis
of current short-term rates, which may be more or less than the rate on the
underlying portfolio securities. The seller under a repurchase agreement will be
required to maintain the value of collateral held pursuant to the agreement at
not less than the repurchase price (including accrued interest).
If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price under the agreement, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Additionally, there is no controlling legal precedent under U.S. law and there
may be no controlling legal precedents under the laws of certain foreign
jurisdictions confirming that a Fund would be entitled, as against a claim by
such seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, although (with respect to repurchase agreements subject to U.S. law)
the Board of Trustees of the Trust believes that, under the regular procedures
normally in effect for custody of a Fund's securities subject to repurchase
agreements and under federal laws, a court of competent jurisdiction would rule
in favor of the Trust if presented with the question. Securities subject to
repurchase agreements will be held by the Trust's custodian or another qualified
custodian or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered by the SEC to be loans by a Fund under the 1940 Act.
Repurchase Agreement Counterparties. Repurchase counterparties include
Federal Reserve member banks with assets in excess of $1 billion and
registered broker dealers which Banc One Investment Advisors deems
creditworthy under guidelines approved by the Board of Trustees.
REVERSE REPURCHASE AGREEMENTS
Funds may borrow money for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such agreements, a Fund would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. A Fund would enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time a Fund
entered into a reverse repurchase agreement, it would place in a segregated
custodial account assets, such as cash or liquid securities consistent with the
Fund's investment restrictions and having a value equal to the repurchase price
(including accrued interest), and would subsequently monitor the account to
ensure that such equivalent value was maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the price at which the Fund is obligated to repurchase the
securities. Reverse repurchase agreements are considered by the SEC to be
borrowings by a Fund under the 1940 Act.
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RESTRICTED SECURITIES
The Funds may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 and other restricted securities. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is generally sold
to institutional investors, such as the Funds, who agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) commercial paper is normally resold to other institutional
investors like the Funds through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section 4(2) commercial paper and
possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Funds intend,
therefore, to treat restricted securities that meet the liquidity criteria
established by the Board of Trustees, including Section 4(2) commercial paper
and Rule 144A Securities, as determined by Banc One Investment Advisors, as
liquid and not subject to the investment limitation applicable to illiquid
securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a SEC Staff position set forth in the
adopting release for Rule 144A under the Securities Act of 1933 ("RULE 144A").
Rule 144A is a nonexclusive safe-harbor for certain secondary market
transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for resale. The Funds believe that the Staff of the SEC
has left the question of determining the liquidity of all restricted securities
to the Trustees. The Trustees have directed Banc One Investment Advisors to
consider the following criteria in determining the liquidity of certain
restricted securities:
- the frequency of trades and quotes for the security;
- the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
- dealer undertakings to make a market in the security; and
- the nature of the security and the nature of the marketplace trades.
Certain Section 4(2) commercial paper programs cannot rely on Rule 144A
because, among other things, they were established before the adoption of the
rule. However, the Trustees may determine for purposes of the Trust's liquidity
requirements that an issue of 4(2) commercial paper is liquid if the following
conditions, which are set forth in a 1994 SEC no-action letter, are met:
- The 4(2) paper must not be traded flat or in default as to principal or
interest;
- The 4(2) paper must be rated in one of the two highest rating
categories by a least two NRSROs, or if only one NRSRO rates the security, by
that NRSRO, or if unrated, is determined by Banc One Investment Advisors to be
of equivalent quality; and
- Banc One Investment Advisors must consider the trading market for the
specific security, taking into account all relevant factors, including but not
limited, to whether the paper is the subject of a commercial paper program that
is administered by an issuing and paying agent bank and for which there exists a
dealer willing to make a market in that paper, or is administered by a direct
issuer pursuant to a direct placement program; and
- Banc One Investment Advisors shall monitor the liquidity of the 4(2)
commercial paper purchased and shall report to the Board of Trustees promptly if
any such securities are no longer determined to be liquid if such determination
causes a Fund to hold more than 15% of its net assets in illiquid securities in
order for the Board of Trustees to consider what action, if any, should be taken
on behalf of The One Group Investment Trust, unless Banc One Investment Advisors
is able to dispose of illiquid assets in an orderly manner in an amount that
reduces the Fund's holdings of illiquid assets to less than 15% of its net
assets; and
- Banc One Investment Advisors shall report to the Board of Trustees on
the appropriateness of the purchase and retention of liquid restricted
securities under these Guidelines no less frequently that quarterly.
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SECURITIES LENDING
In order to generate additional income, each of the Funds may lend up to
33_% of the securities in which they are invested pursuant to agreements
requiring that the loan be continuously secured by cash, securities of the U.S.
government or its agencies, shares of an investment trust or mutual fund,
letters of credit or any combination of cash, such securities, shares, or
letters of credit as collateral equal at all times to at least 100% of the
market value plus accrued interest on the securities lent. The Funds will
continue to receive interest on the securities lent while simultaneously seeking
to earn interest on the investment of cash collateral in U.S. government
securities, shares of an investment trust or mutual fund, or commercial paper,
repurchase agreements, variable and floating rate instruments, restricted
securities, asset-backed securities, and the other types of investments
permitted by the applicable Fund's prospectus. Collateral is marked to market
daily to provide a level of collateral at least equal to the market value of the
securities lent. There may be risks of delay in recovery of the securities or
even loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will only be made to borrowers deemed by Banc One
Investment Advisors to be of good standing under guidelines established by the
Trust's Board of Trustees and when, in the judgment of Banc One Investment
Advisors, the consideration which can be earned currently from such securities
loans justifies the attendant risk. Loans are subject to termination by the
Funds or the borrower at any time, and are therefore, not considered to be
illiquid investments.
SHORT-TERM FUNDING AGREEMENTS
The Bond Fund may, in order to enhance yield, make limited investments in
short-term funding agreements issued by banks and highly rated U.S. insurance
companies. Short-term funding agreements issued by insurance companies are
sometimes referred to as Guaranteed Investment Contracts ("GICS"), while those
issued by banks are referred to as Bank Investment Contracts ("BICS"). Pursuant
to such agreements, the Fund makes cash contributions to a deposit account at a
bank or insurance company. The bank or insurance company then credits to the
Fund on a monthly basis guaranteed interest at either a fixed, variable or
floating rate. These contracts are general obligations of the issuing bank or
insurance company (although they may be the obligations of an insurance company
separate account) and are paid from the general assets of the issuing entity.
The Fund will purchase short-term funding agreements only from banks and
insurance companies which, at the time of purchase, are rated in one of the
three highest rating categories and have assets of $1 billion or more.
Generally, there is no active secondary market in short-term funding agreements.
Therefore, short-term funding agreements may be considered by the Fund to be
illiquid investments. To the extent that a short-term funding agreement is
determined to be illiquid, such agreements will be acquired by the Fund only if,
at the time of purchase, no more than 15% of the Fund's net assets will be
invested in short-term funding agreements and other illiquid securities.
SPDRS
Certain Funds may invest in Standard & Poor's Depository Receipts
("SPDRS"). SPDRs are interests in unit investment trusts. Such investment trusts
invest in a securities portfolio that includes substantially all of the common
stocks (in substantially the same weights) as the common stocks included in a
particular Standard & Poor's Index such as the S&P 500. SPDRs are traded on the
American Stock Exchange, but may not be redeemed. The results of SPDRs will not
match the performance of the designated S&P Index due to reductions in the
SPDRs' performance attributable to transaction and other expenses, including
fees paid by the SPDR to service providers. SPDRs distribute dividends on a
quarterly basis.
SPDRs are not actively managed. Rather, a SPDR's objective is to track
the performance of a specified index. Therefore, securities may be purchased,
retained and sold by SPDRs at times when an actively managed trust would not do
so. As a result, you can expect greater risk of loss (and a correspondingly
greater prospect of gain) from changes in the value of securities that are
heavily weighted in the index than would be the case if SPDR was not fully
invested in such securities. Because of this, a SPDR's price can be volatile,
and a Fund may sustain sudden, and sometimes substantial, fluctuations in the
value of its investment in SPDRs.
A Fund will limit its investments in SPDRs to 5% of the Fund's total
assets and 3% of the outstanding voting securities of the SPDRs issuer.
Moreover, a Fund's investments in SPDRs will not exceed 10% of the Fund's total
assets, when aggregated with all other investments in investment companies.
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STRUCTURED INSTRUMENTS
Structured instruments are debt securities issued by agencies of the U.S.
government (such as Ginnie Mae, Fannie Mae, and Freddie Mac), banks,
corporations, and other business entities whose interest and/or principal
payments are indexed to certain specific foreign currency exchange rates,
interest rates, or one or more other reference indices. Structured instruments
frequently are assembled in the form of medium-term notes, but a variety of
forms are available and may be used in particular circumstances. Structured
instruments are commonly considered to be derivatives.
The terms of such structured instruments provide that their principal
and/or interest payments are adjusted upwards or downwards to reflect changes in
the reference index while the structured instruments are outstanding. In
addition, the reference index may be used in determining when the principal is
redeemed. As a result, the interest and/or principal payments that may be made
on a structured product may vary widely, depending on a variety of factors,
including the volatility of the reference index and the effect of changes in the
reference index on principal and/or interest payment.
While structured instruments may offer the potential for a favorable rate
of return from time to time, they also entail certain risks. Structured
instruments may be less liquid than other debt securities, and the price of
structured instruments may be more volatile. If the value of the reference index
changes in a manner other than that expected by Banc One Investment Advisors,
principal and/or interest payments on the structured instrument may be
substantially less than expected. In addition, although structured instruments
may be sold in the form of a corporate debt obligation, they may not have some
of the protection against counterparty default that may be available with
respect to publicly traded debt securities (i.e., the existence of a trust
indenture). In that respect, the risks of default associated with structured
instruments may be similar to those associated with swap contracts. See "Swaps,
Caps and Floors."
The Funds will invest only in structured securities that are consistent
with each Fund's investment objective, policies and restrictions and Banc One
Investment Advisors' outlook on market conditions. In some cases, depending on
the terms of the reference index, a structured instrument may provide that the
principal and/or interest payments may be adjusted below zero; however, a Fund
will not invest in structured instruments if the terms of the structured
instrument provide that the Fund may be obligated to pay more than its initial
investment in the structured instrument, or to repay any interest or principal
that has already been collected or paid back.
Structured instruments that are registered under the federal securities
laws may be treated as liquid. In addition, many structured instruments may not
be registered under the federal securities laws. In that event, a Fund's ability
to resell such a structured instrument may be more limited than its ability to
resell other Fund securities. The Fund will treat such instruments as illiquid,
and will limit its investments in such instruments to no more than 15% of its
net assets, when combined with all other illiquid investments of the Fund.
SWAPS, CAPS AND FLOORS
Certain of the Funds may enter into swaps, caps, and floors on various
securities (such as U.S. government securities), securities indexes, interest
rates, prepayment rates, foreign currencies or other financial instruments or
indexes, in order to protect the value of the Fund from interest rate
fluctuations and to hedge against fluctuations in the floating rate market in
which the Fund's investments are traded, for both hedging and non-hedging
purposes. While swaps, caps, and floors (sometimes hereinafter collectively
referred to as "SWAP CONTRACTS") are different from futures contracts (and
options on futures contracts) in that swap contracts are individually negotiated
with specific counterparties, the Funds will use swap contracts for purposes
similar to the purposes for which they use options, futures, and options on
futures. Those uses of swap contracts (i.e., risk management and hedging)
present the Funds with risks and opportunities similar to those associated with
options contracts, futures contracts, and options on futures.
See "Futures Contracts" and "Risk Factors in Futures Contracts."
The Funds may enter into these transactions to manage their exposure to
changing interest rates and other market factors. Some transactions may reduce
each Fund's exposure to market fluctuations while others may tend to increase
market exposure.
Swap contracts typically involve an exchange of obligations by two
sophisticated parties. For example, in an interest rate swap, the Fund may
exchange with another party their respective rights to receive interest, such as
an exchange of fixed rate payments for floating rate payments. Currency swaps
involve the exchange
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of respective rights to make or receive payments in specified currencies.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, however,
is tied to a reference pool or pools of mortgages.
Caps and floors are variations on swaps. The purchase of a cap entitles
the purchaser to receive a principal amount from the party selling the cap to
the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of an interest rate floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specified index falls below a predetermined interest rate or
amount. Caps and floors are similar in many respects to over-the-counter options
transactions, and may involve investment risks that are similar to those
associated with options transactions and options on futures contracts.
Because swap contracts are individually negotiated, they remain the
obligation of the respective counterparties, and there is a risk that a
counterparty will be unable to meet its obligations under a particular swap
contract. If a counterparty defaults on a swap contract with a Fund, the Fund
may suffer a loss. To address this risk, each Fund will usually enter into
interest rate swaps on a net basis, which means that the two payment streams
(one from the Fund to the counterparty, one to the Fund from the counterparty)
are netted out, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments. Interest rate swaps do not involve the delivery
of securities, other underlying assets, or principal, except for the purposes of
collateralization as discussed below. Accordingly, the risk of loss with respect
to interest rate swaps entered into on a net basis would be limited to the net
amount of the interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the Fund's risk of
loss consists of the net amount of interest payments that a Fund is
contractually entitled to receive. In addition, the Fund may incur a market
value adjustment on securities held upon the early termination of the swap. To
protect against losses related to counterparty default, the Funds may enter into
swaps that require transfers of collateral for changes in market value. In
contrast, currency swaps and other types of swaps may involve the delivery of
the entire principal value of one designated currency or financial instrument in
exchange for the other designated currency or financial instrument. Therefore,
the entire principal value of such swaps may be subject to the risk that the
other party will default on its contractual delivery obligations.
In addition, because swap contracts are individually negotiated and
ordinarily non-transferable, there also may be circumstances in which it would
be impossible for a Fund to close out its obligations under the swap contract
prior to its maturity. Under such circumstances, the Fund might be able to
negotiate another swap contract with a different counterparty to offset the risk
associated with the first swap contract. Unless the Fund is able to negotiate
such an offsetting swap contract, however, the Fund could be subject to
continued adverse developments, even after Banc One Investment Advisors has
determined that it would be prudent to close out or offset the first swap
contract.
The Funds will not enter into any mortgage swap, interest rate swap, cap
or floor transaction unless the unsecured commercial paper, senior debt, or the
claims paying ability of the other party thereto is rated in one of the top two
rating categories by at least one NRSRO, or if unrated, determined by Banc One
Investment Advisors to be of comparable quality.
The use of swaps involves investment techniques and risks different from
and potentially greater than those associated with ordinary Fund securities
transactions. If Banc One Investment Advisors is incorrect in its expectations
of market values, interest rates, or currency exchange rates, the investment
performance of the Funds would be less favorable than it would have been if this
investment technique were not used. In addition, in certain circumstances entry
into a swap contract that substantially eliminates risk of loss and the
opportunity for gain in an "appreciated financial position" will accelerate gain
to the Funds.
The Staff of the SEC is presently considering its position with respect
to swaps, caps and floors as senior securities. Pending a determination by the
Staff, the Funds will either treat swaps, caps and floors as being subject to
their senior securities restrictions or will refrain from engaging in swaps,
caps and floors. Once the Staff has expressed a position with respect to swaps,
caps and floors, the Funds intend to engage in swaps, caps and floors, if at
all, in a manner consistent with such position. To the extent the net amount of
an interest rate or mortgage swap is held in a segregated account, consisting of
cash or liquid, high grade debt securities, the Funds and Banc One Investment
Advisors believe that swaps do not constitute senior securities under the
Investment Company Act of 1940 and, accordingly, will not treat them as being
subject to each Fund's borrowing restrictions. The net amount of the excess, if
any, of each Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained
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in a segregated account by the Funds' Custodian. The Bond Fund generally will
limit its investments in swaps, caps and floors to 25% of its total assets.
TREASURY RECEIPTS
Certain of the Funds may purchase interests in separately traded interest
and principal component parts of U.S. Treasury obligations that are issued by
banks or brokerage firms and are created by depositing U.S. Treasury notes and
U.S. Treasury bonds into a special account at a custodian bank. Receipts include
Treasury Receipts ("TRS"), Treasury Investment Growth Receipts ("TIGRS"), and
Certificates of Accrual on Treasury Securities ("CATS").
U.S. TREASURY OBLIGATIONS
The Funds may invest in bills, notes and bonds issued by the U.S.
Treasury and separately traded interest and principal component parts of such
obligations that are transferable through the Federal book-entry system known as
Separately Traded Registered Interest and Principal Securities ("STRIPS") and
Coupon Under Book Entry Safekeeping ("CUBES"). The Funds may also invest in
Inflation Indexed Treasury Obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations purchased by the Funds may carry variable or floating
rates of interest, may involve a conditional or unconditional demand feature and
may include variable amount master demand notes.
VARIABLE AMOUNT MASTER DEMAND NOTES are demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between a Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
may demand payment of principal and accrued interest. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes (which are normally manufacturing, retail, financial, brokerage,
investment banking and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. Banc One Investment Advisors will
consider the earning power, cash flow, and other liquidity ratios of the issuers
of such notes and will continuously monitor their financial status and ability
to meet payment on demand. In determining average weighted portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from
the issuer through demand.
The Funds subject to their investment objective policies and
restrictions, may acquire VARIABLE AND FLOATING RATE INSTRUMENTS. A variable
rate instrument is one whose terms provide for the adjustment of its interest
rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its par value. A floating rate instrument
is one whose terms provide for the adjustment of its interest rate whenever a
specified interest rate changes and which, at any time, can reasonably be
expected to have a market value that approximates its par value. Such instrument
are frequently not rated by credit rating agencies; however, unrated variable
and floating rate instruments purchased by a Fund will be determined by Banc One
Investment Advisors under guidelines established by the Trust's Board of
Trustees to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, Banc One Investment Advisors will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition. There
may be no active secondary market with respect to a particular variable or
floating rate instrument purchased by a Fund. The absence of such an active
secondary market, could make it difficult for the Fund to dispose of the
variable or floating rate instrument involved in the event the issuer of the
instrument defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. Variable or floating
rate instruments may be secured by bank letters of credit or other assets. A
Fund will purchase a variable or floating rate instrument to facilitate
portfolio liquidity or to permit investment of the Fund's assets at a favorable
rate of return.
LIMITATIONS ON THE USE OF VARIABLE AND FLOATING RATE NOTES. Variable
and floating rate instruments for which no readily available market exists will
be purchased in an amount which, together with securities with legal or
contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceeds 15%
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of the Fund's net assets only if such instruments are subject to a demand
feature that will permit the Fund to demand payment of the principal within
seven days after demand by the Fund. There is no limit on the extent to which a
Fund may purchase demand instruments that are not illiquid. If not rated, such
instruments must be found by Banc One Investment Advisors under guidelines
established by the Trust's Board of Trustees, to be of comparable quality to
instruments that are rated high quality. A rating may be relied upon only if it
is provided by a nationally recognized statistical rating organization that is
not affiliated with the issuer or guarantor of the instruments. For a
description of the rating symbols of S&P, Moody's, and Fitch used in this
paragraph, see the Appendix.
WARRANTS
Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to buy a proportionate amount of common
stock at a specified price, usually at a price that is higher than the market
price at the time of issuance of the warrant. The right may last for a period of
years or indefinitely.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Funds may purchase securities on a "when-issued" and forward
commitment basis. When a Fund agrees to purchase securities, the Fund's
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. The Funds may purchase securities on a
when-issued basis when deemed by Banc One Investment Advisors to present
attractive investment opportunities. When-issued securities are purchased for
delivery beyond the normal settlement date at a stated price and yield, thereby
involving the risk that the yield obtained will be less than that available in
the market at delivery. The Funds generally will not pay for such securities or
earn interest on them until received. Although the purchase of securities on a
when-issued basis is not considered to be leveraging, it has the effect of
leveraging. When Banc One Investment Advisors purchases a when-issued security,
the Custodian will set aside cash or liquid securities to satisfy the purchase
commitment. In such a case, a Fund may be required subsequently to place
additional assets in the separate account in order to assure that the value of
the account remains equal to the amount of the Fund's commitment. The Fund's net
assets may fluctuate to a greater degree when it sets aside portfolio securities
to cover such purchase commitments than when it sets aside cash. In addition,
when a Fund engages in "when-issued" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund's
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous.
In a forward commitment transaction, the Funds contract to purchase
securities for a fixed price at a future date beyond customary settlement time.
The Funds are required to hold and maintain in a segregated account until the
settlement date, cash, U.S. government securities or liquid high-grade debt
obligations in an amount sufficient to meet the purchase price. Alternatively,
the Funds may enter into offsetting contracts for the forward sale of other
securities that they own. The purchase of securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date.
Limitations on the Use of When Issued Securities and Forward
Commitments. No Fund intends to purchase "when-issued" securities for
speculative purposes but only for the purpose of acquiring portfolio securities.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of Banc One Investment Advisors to manage the Fund might, as described
in the Prospectus, be affected in the event its commitments to purchase
when-issued securities ever exceeded 40% of the value of its assets. Commitments
to purchase when-issued securities will not, under normal market conditions,
exceed 25% of a Fund's total assets, and a commitment will not exceed 90 days. A
Fund may dispose of a when-issued security or forward commitment prior to
settlement if Banc One Investment Advisors deems it appropriate to do so.
INVESTMENT RESTRICTIONS
The investment objective and the following investment restrictions are
fundamental policies of each Fund. Fundamental policies cannot be changed with
respect to a Fund without the consent of the holders of a majority of the Fund's
outstanding shares. The term "majority of the outstanding shares" means the vote
of (i) 67% or more of the Fund's shares present at a meeting, if more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the Fund's outstanding shares, whichever is less.
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Each Fund may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Fund would be invested in the securities of such issuer
or the Fund would own more than 10% of the outstanding voting securities of such
issuer. This restriction applies to 75% of the Fund's assets. For purposes of
this limitation, a security is considered to be issued by the government entity
whose assets and revenues guarantee or back the security. With respect to
private activity bonds or industrial development bonds backed only by the assets
and revenues of a nongovernmental user, such user would be considered the
issuer.
2. Purchase any securities which would cause more than 25% of the total
assets of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this limitation does not apply to investments in the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities. For purposes of this limitation
(i) utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a separate
industry; and (ii) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of their parents.
3. Make loans, except that a Fund may (i) purchase or hold debt
instruments in accordance with its investment objectives and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending as
described in the Prospectus and in the Statement of Additional Information.
4. Purchase securities on margin, sell securities short, or participate
on a joint or joint and several basis in any securities trading account.
5. Underwrite the securities of other issuers except to the extent that
a Fund may be deemed to be an underwriter under certain securities laws in the
disposition of "restricted securities."
6. Purchase or sell commodities or commodity contracts, except that the
Funds may purchase or sell financial futures contracts for bona fide hedging and
other permissible purposes.
7. Purchase participation or other direct interests in oil, gas or
mineral exploration or development programs (although investments by the Funds
in marketable securities of companies engaged in such activities are not hereby
precluded).
8. Invest in any issuer for purposes of exercising control or
management.
9. Purchase securities of other investment companies except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
10. Purchase or sell real estate (however, each Fund may, to the extent
appropriate to its investment objective, purchase securities secured by real
estate or interests therein or securities issued by companies investing in real
estate or interests therein).
11. Borrow money or issue senior securities, except that each Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Fund's total assets at
the time of its borrowing. A Fund will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The foregoing percentages will apply at the time
of the purchase of a security.
The following investment restrictions are non-fundamental except as
noted otherwise and therefore can be changed by the Board of Trustees without
prior shareholder approval.
No Fund may invest in illiquid securities in an amount exceeding, in
the aggregate, 15% of the Fund's net assets. An illiquid security is a security
which cannot be disposed of promptly (within seven days) and in the usual course
of business without a loss, and includes repurchase agreements maturing in
excess
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of seven days, time deposits with a withdrawal penalty, non-negotiable
instruments and instruments for which no market exists.
The foregoing percentages apply at the time of purchase of a security.
Banc One Investment Advisors Corporation shall report to the Board of Trustees
promptly if any of a Fund's investments are no longer determined to be liquid or
if the market value of Fund assets has changed if such determination or change
causes a Fund to hold more than 15% of its net assets in illiquid securities in
order for the Board of Trustees to consider what action, if any, should be taken
on behalf of the Trust, unless Banc One Investment Advisors is able to dispose
of illiquid assets in an orderly manner in an amount that reduces the Fund's
holdings to less than 15% of its net assets.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities. The calculation excludes all
securities whose maturities at the time of acquisition were one year or less.
Portfolio turnover for the Bond Fund is expected to be less than 50%; and for
the Equity Funds is expected to be less than 100%. Higher turnover rates will
generally result in higher brokerage expenses. Portfolio turnover may vary
greatly from year to year as well as within a particular year.
ADDITIONAL TAX INFORMATION CONCERNING THE FUNDS
It is the policy of each Fund to meet the requirements necessary to
qualify as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "CODE"). By following such policy, each
Fund expects to eliminate or reduce to a nominal amount the federal income taxes
to which it may be subject.
In order to qualify as a regulated investment company, each Fund must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies, and (2)
diversify its holdings so that at the end of each quarter of its taxable year
(i) at least 50% of the market value of the Fund's assets is represented by cash
or cash items, United States Government securities, securities of other
regulated investment companies, and other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than United States Government securities or the securities
of other regulated investment companies) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may limit the range of the Fund's investments. If
a Fund qualifies as a regulated investment company, it will not be subject to
federal income tax on the part of its income distributed to shareholders,
provided the Fund distributes during its taxable year at least (a) 90% of its
investment company taxable income, and (b) 90% of the excess of (i) its
tax-exempt interest income less (ii) certain deductions attributable to that
income. Each Fund intends to make sufficient distributions to Shareholders to
meet this requirement.
For a discussion of the tax consequences of variable annuity contracts,
refer to the prospectuses of other separate accounts offering variable life and
variable annuity contracts and qualified pension and retirement plan documents
as they may be applicable to your situation. Variable annuity contracts
purchased through insurance company separate accounts provide for the
accumulation of all earnings from interest, dividends, and capital appreciation
without current federal income tax liability for the owner. Depending on the
variable annuity contract, distributions from the contract may be subject to
ordinary income tax and, in addition, on distributions before age 59 1/2, a 10%
penalty tax. Only the portion of a distribution attributable to income on the
investment in the contract is subject to federal income tax. Investors should
consult with competent tax advisors for a more complete discussion of possible
tax consequences in a particular situation.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined) for the calendar year plus 98% of their "capital
gain net income" (as defined) for the 1-year period ending on October 31 of such
calendar year. The balance, if any, of such income must be distributed during
the next calendar year. If distributions during a calendar year were less than
the required amount, a particular Fund would be subject to a non-deductible
excise tax
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<PAGE> 64
equal to 4% of the deficiency. A Fund is exempt from this excise tax if at all
times during the calendar year each shareholder in the Fund was either a trust
described in Section 401(a) of the Code and exempt from tax under section 501(a)
of the Code or a segregated asset account of a life insurance company held in
connection with variable contracts.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts held in the Funds. The Code
provides that a variable annuity contract shall not be treated as an annuity
contract for any period (and any subsequent period) for which the investments
are not, in accordance with regulations prescribed by the Treasury Department,
adequately diversified. Disqualification of the variable annuity contract as an
annuity contract would result in immediate imposition of federal income tax on
variable annuity contract owners with respect to earnings allocable to the
contract. This liability would generally arise prior to the receipt of payments
under the contract. Section 817(h)(2) of the Code is a safe harbor provision
which provides that variable annuity contracts meet the diversification
requirements if, as of the close of each quarter, the underlying assets meet the
diversification standards for a regulated investment company and no more than
fifty-five percent (55%) of the total assets consists of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
The Treasury Department has issued Regulations (Treas. Reg. 1.817-5),
that establish diversification requirements for the investment portfolios
underlying variable annuity contracts. The Regulations amplify the
diversification requirements for variable annuity contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the total
assets of the portfolio is represented by any one investment; (ii) no more than
70 percent of such value is represented by any two investments; (iii) no more
than 80 percent of such value is represented by any three investments; and (iv)
no more than 90 percent of such value is represented by any four investments.
For purposes of these Regulations all securities of the same issuer, all
interests in the same real estate project and all interests in the same
commodity are treated as a single investment. The Code provides that for
purposes of determining whether or not the diversification standards imposed on
the underlying assets of variable annuity contracts by Section 817(h) of the
Code have been met, "each United States government agency or instrumentality
shall be treated as a separate issuer."
Each Fund will be managed in such a manner as to comply with the
diversification requirements. It is possible that in order to comply with the
diversification requirements, less desirable investment decisions may be made
which would affect the investment performance of such Fund.
The above discussion of the federal income tax treatment of the Funds
assumes that all the insurance company accounts holding shares of a Fund are
either segregated asset accounts underlying variable contracts as defined in
Section 817(d) of the Code or the general account of a life insurance company as
defined in Section 816 of the Code. Additional tax consequences may apply to
holders of variable contracts investing in a Fund if any of those contracts are
not treated as annuity, endowment or life insurance contracts.
VALUATION
VALUATION OF THE FUNDS
Securities traded on a national securities exchange are valued at the
last quoted sale price on the principal exchange, or if no sale, at their fair
value as determined in good faith under consistently applied procedures
authorized by the Board of Trustees. Securities traded only in the
over-the-counter (OTC) market are valued at the last quoted sale price, or if
there is no sale, at the quoted bid price provided by an independent pricing
agent. Corporate debt securities and debt securities of U.S. issuers, including
municipal securities, are valued by a combination of daily quotes and matrix
evaluations provided by dealers or by an independent pricing service approved by
the Board of Trustees. Inactive securities that have little or no trading
activity are evaluated by the independent pricing services by obtaining dealer
quotes. Futures contracts and options thereon treaded on a commodities exchange
or board of trade are valued at the last sales price at the close of trading, or
if there was no sale, the quoted bid price at the close of trading, or if there
was not sale, the quoted bid price at the close of trading. Securities for which
reliable market quotations are not readily available, or for which the pricing
agent does not provide a valuation that in the judgment of the Fund's investment
adviser represents fair value, shall each be valued in accordance with
procedures authorized by the Board of Trustees.
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<PAGE> 65
The Funds may invest in repurchase agreements with institutions that the
investment advisor has determined are creditworthy. Each repurchase agreement is
recorded at cost. The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange or other principal
market on which it is traded, which value is then converted into its U.S. Dollar
equivalent at the foreign exchange rate reported by the independent pricing
agent via WM/Reuters Forex as of the close of the London exchange.
ADDITIONAL INFORMATION REGARDING THE CALCULATION OF PER SHARE NET ASSET VALUE
The net asset value of each Fund is determined and its Shares are
priced as of the times specified in the Funds' Prospectus. The net asset value
per Share of each Fund is calculated by determining the value of the interest in
the securities and other assets of the Fund, less liabilities and dividing such
amount by the number of Shares of the Fund outstanding.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold continuously to insurance company separate
accounts. The Funds may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "EXCHANGE") is restricted by applicable rules and regulations of
the Securities and Exchange Commission, (b) the Exchange is closed for other
than customary weekend and holiday closings, (c) the Securities and Exchange
Commission has by order permitted such suspension, or (d) an emergency exists as
determined by the Securities and Exchange Commission.
MANAGEMENT OF THE TRUST
TRUSTEES & OFFICERS
Overall responsibility for management of the Funds rests with Board of
Trustees of the Funds. There are currently six Trustees, all of whom, except
John F. Finn, are not "interested persons" of the Funds within the meaning of
that term under the Investment Company Act of 1940. The Trustees, in turn, elect
the officers of the Funds to supervise actively its day-to-day operations.
The Trustees of the Funds, their addresses, ages and principal
occupations during the past five years are set forth below.
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH THE FUNDS DURING PAST 5 YEARS
- ---------------- -------------- -------------------
Peter C. Marshall Trustee From November, 1993,
DCI Marketing, Inc. to present, President,
2727 W. Good Hope Road DCI Marketing, Inc.
Milwaukee, WI 53209
Age: 56
Charles I. Post Trustee From July, 1986 to
7615 4th Avenue West present, self-employed as a
Bradenton, FL 34209 management consultant.
Age: 70
John S. Randall Trustee Since 1972, self-employed as a
3005 North Lake Drive management consultant.
Milwaukee, WI 53211
Age: 85
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<PAGE> 66
Frederick W. Ruebeck Trustee From June, 1988 to
Eli Lilly & Company present; Director of Investments,
Lilly Corporate Center Eli Lilly and Company
307 East McCarty
Indianapolis, IN 46285
Age: 58
Robert A. Oden Jr. Trustee From 1995 to present, President
Office of the President Kenyon College; from 1989 to
Ransom Hall 1995, Headmaster, The Hotchkiss
Kenyon College School
Gambier, OH 43022
Age: 51
John F. Finn Trustee Since 1975, President of Gardner,
President Inc. (wholesale distributor to the
Gardner, Inc. outdoor power equipment industry).
1150 Chesepeake Avenue
Columbus, Ohio 43212
Age: 51
The Trustees of the Funds receive fees and expenses for each meeting of the
Board of Trustees attended. The Compensation Table on the next page sets forth
the total compensation to the Trustees from the Trust for the fiscal year ended
December 31, 1997.
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<PAGE> 67
COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED ANNUAL TOTAL
COMPENSATION AS PART BENEFITS COMPENSATION
NAME OF PERSON, FROM THE OF FUND UPON FROM THE
POSITION FUNDS EXPENSES(2) RETIREMENT FUND COMPLEX
<S> <C> <C> <C> <C>
Peter C. Marshall, $3,000 N/A N/A $39,000
Chairman
Charles I. Post, $3,000 N/A N/A $36,500
Trustee
John S. Randall, $3,000 N/A N/A $36,500
Trustee
Robert A Oden $750 N/A N/A $9,125
Trustee
Frederick W. Ruebeck, $3,000 N/A N/A $36,500
Trustee
</TABLE>
(1) "Fund Complex" comprises the 5 funds of the Trust, as well as the 33
funds of The One Group(R) as of December 31, 1997. Compensation for the
"Fund Complex" is for the fiscal year ended December 31, 1997.
(2) Pursuant to a Deferred Compensation Plan for Trustees of The One Group
Investment Trust (the "PLAN") adopted at the August 19, 1998 Board of
Trustee meeting, the Trustees may defer all or a part of their
compensation payable by the Trust. Under the Plan, the Trustees may
specify Class I Shares (formerly fiduciary class shares) of one or more
funds of The One Group to be used to measure the performance of a
Trustee's deferred compensation account. A Trustee's deferred
compensation account will be paid at such times as elected by the
Trustee subject to certain mandatory payment provisions in the Plan
(e.g., death of a Trustee).
The officers of the Funds receive no compensation directly from the Funds for
performing the duties of their offices. The officers of the Trust, their
addresses, ages and principal occupations during the past five years are shown
below:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH THE TRUST DURING PAST 5 YEARS
- ---------------- -------------- -------------------
<S> <C> <C>
James F. Laird, Jr.* President Mr. Laird was elected Vice
Three Nationwide Plaza and Treasurer President-General Manager
Columbus, Ohio 43215 of Nationwide Advisory
Age: 41 Services, Inc., the
Administrator of The One
Group Investment
Trust on April 5, 1995.
Prior to being elected General
Manager, Mr. Laird served as
Treasurer of Nationwide
Advisory Services, Inc. since
November, 1987.
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME AND ADDRESS WITH THE TRUST DURING PAST 5 YEARS
- ---------------- -------------- -------------------
<S> <C> <C>
Karen R. Tackett* Vice President Since August 1998, Ms. Tackett has been
Three Nationwide Plaza and Assistant Director Strategic Development of
Columbus, Ohio 43215 Treasurer Nationwide Advisory Services, Inc. From
Age: 32 March 1996 until July, 1998, Ms. Tackett
was Accounting Manager for Nationwide
Advisory Services, Inc. Prior to that,
Ms. Tackett was Audit Manager and held
various other Positions with
PricewaterhouseCoopers LLP fka Coopers &
Lybrand L.L.P.
Craig A. Carver* Vice President Mr. Carver has been Tax and Compliance
Three Nationwide Plaza and Assistant Manager of Nationwide Advisory Services,
Columbus, Ohio 43215 Secretary Inc. since January, 1996. Prior to that
Age: 43 time, Mr. Carver served as Financial
Controls Manager of Nationwide Advisory
Services, Inc.
Christopher A. Cray* Vice President Mr. Cray has been Treasurer of
Three Nationwide Plaza and Secretary Nationwide Advisory Services, Inc. since
Columbus, Ohio 43215 September, 1997. Prior to that time he
Age: 39 served as Director-Corporate Accounting
of Nationwide Insurance Enterprises.
Robert O. Cline* Vice President Mr. Cline has been Associate Vice
Three Nationwide Plaza and Assistant President-Variable Annuities since May
Columbus, Ohio 43215 Treasurer 1998, and prior thereto and since 1995,
Age: 39 Associate Vice President-Financial
Operations, of Nationwide Financial
Services. Prior to that he served as
Director-Operational Controls and
Treasury Services.
</TABLE>
* All officers listed above are "interested persons" of the Funds as defined in
the Investment Company Act of 1940.
INVESTMENT ADVISOR
Investment advisory services to each of the Funds are provided by Banc
One Investment Advisors. Banc One Investment Advisors makes the investment
decisions for the assets of the Funds and continuously reviews, supervises and
administers the Fund's investment program, subject to the supervision of, and
policies established by, the Trustees. The Funds' shares are not sponsored,
endorsed or guaranteed by, and do not constitute obligations or deposits of any
bank affiliate of Banc One Investment Advisors and are not insured by the FDIC
or issued or guaranteed by the U.S. Government or any of its agencies.
As of June 30, 1998, Banc One Investment Advisors, an indirect
wholly-owned subsidiary of BANK ONE CORPORATION, a bank holding company located
in the state of Illinois, managed over $59 billion
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<PAGE> 69
in assets. BANK ONE CORPORATION has affiliate banking organizations in Arizona,
Colorado, Illinois, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma,
Texas, Utah, West Virginia and Wisconsin. In addition, BANK ONE CORPORATION has
several affiliates that engage in data processing, venture capital, investment
and merchant banking, and other diversified services including trust management,
investment management, brokerage, equipment leasing, mortgage banking, consumer
finance, and insurance.
Banc One Investment Advisors represents a consolidation of the
investment advisory staffs of a number of bank affiliates of BANK ONE
CORPORATION, which have considerable experience in the management of open-end
management investment company portfolios, including The One Group (an open-end
management investment company which offers units of beneficial interest in 33
separate funds, seven of which bear the same name as seven Funds of the Trust
and are managed similarly to such Funds) since 1985.
All investment advisory services are provided to the Funds by Banc One
Investment Advisors pursuant to an investment advisory agreement dated August 1,
1994 (the "Advisory Agreement"). Unless sooner terminated, the Advisory
Agreement will continue in effect until August 31, 1999, and will continue in
effect as to a particular Fund from year to year thereafter if such continuance
is approved at least annually by the Trust's Board of Trustees or by vote of a
majority of the outstanding Shares of such Fund (as defined under "ADDITIONAL
INFORMATION--Miscellaneous" in this Statement of Additional Information), and a
majority of the Trustees who are not parties to the respective investment
advisory agreements or interested persons (as defined in the Investment Company
Act of 1940) of any party to the respective investment advisory agreements by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement is terminable as to a particular Fund at any time on 60 days' written
notice without penalty by the Trustees, by vote of a majority of the outstanding
Shares of that Fund, or by the Fund's Advisor, as the case may be. The Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the Investment Company Act of 1940.
Banc One Investment Advisors is entitled to a fee, which is calculated
daily and paid monthly, at the following percentages of the average daily net
assets of each Fund: 0.60% for the Bond Fund, 0.74% for the Value Growth Fund,
0.74% for the Mid Cap Opportunities Fund, and 0.74% for the Mid Cap Value Fund.
Banc One Investment Advisors has voluntarily agreed to waive all or part of its
fees in order to limit the Funds' total operating expenses to not more than .75%
of the average daily net assets of the Bond Fund, not more than 0.95% of the
average daily net assets of the Value Growth Fund, not more than 0.95% of the
average daily net assets of the Mid Cap Opportunities Fund, and not more than
0.95% of the average daily net assets of the Mid Cap Value Fund. These fee
waivers are voluntary and may be terminated at any time.
The Advisory Agreement provides that Banc One Investment Advisors shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Advisor in the
performance of its duties, or from reckless disregard by it of its duties and
obligations thereunder.
GLASS-STEAGALL ACT
In 1971, the United States Supreme Court held in INVESTMENT COMPANY
INSTITUTE V. CAMP that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "BOARD") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment advisor, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM V.
INVESTMENT COMPANY INSTITUTE that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisors to registered closed-end investment companies. In the BOARD
OF GOVERNORS case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisors to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
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<PAGE> 70
In the Advisory Agreement, Banc One Investment Advisors has represented
to the Funds that it possesses the legal authority to perform the investment
advisory services contemplated by the agreement and described in the Prospectus
and this Statement of Additional Information without violation of applicable
statutes and regulations. Future changes in either Federal or state statutes and
regulations relating to the permissible activities of banks or bank holding
companies and the subsidiaries or affiliates of those entities, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent or restrict Banc One Investment
Advisors from continuing to perform such services for the Funds. Depending upon
the nature of any changes in the services which could be provided by Banc One
Investment Advisors, the Board of Trustees of the Funds would review the Funds'
relationship with Banc One Investment Advisors and consider taking all action
necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of BANK ONE CORPORATION subsidiary banks or
their correspondent banks in connection with customer purchases of Shares of the
Trust, these banks might be required to alter materially or discontinue the
services offered by them to Customers. It is not anticipated, however, that any
change in the Funds' method of operations would affect its net asset value per
Share or result in financial losses to any customer.
PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement, Banc One Investment Advisors
determines, subject to the general supervision of the Board of Trustees of the
Funds and in accordance with each Fund's investment objective and restrictions,
which securities are to be purchased and sold by each such Fund and which
brokers are to be eligible to execute its portfolio transactions. Purchases and
sales of portfolio securities with respect to the Bond Fund usually are
principal transactions in which portfolio securities are purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters of portfolio securities include a commission or concession
paid by the issuer to the underwriter and purchases from dealers serving as
market makers may include the spread between the bid and asked price.
Transactions on stock exchanges (other than certain foreign stock exchanges)
involve the payment of negotiated brokerage commissions. Transactions in the
over-the-counter market are generally principal transactions with dealers. With
respect to the over-the-counter market, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved except in
those circumstances where better price and execution are available elsewhere.
While Banc One Investment Advisors generally seeks competitive spreads or
commissions, the Funds may not necessarily pay the lowest spread or commission
available on each transaction, for reasons discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by Banc One Investment Advisors with respect to the Funds
based on its best judgment and in a manner deemed fair and reasonable to
Shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers who provide supplemental investment research to Banc One Investment
Advisors may receive orders for transactions by the Funds. Information so
received is in addition to and not in lieu of services required to be performed
by Banc One Investment Advisors and does not reduce the advisory fees payable to
Banc One Investment Advisors. Such information may be useful to Banc One
Investment Advisors in serving both the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to Banc One Investment Advisors in carrying out its obligations to
the Funds.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Banc One Investment Advisors or
its affiliates except as may be permitted under the Investment Company Act of
1940, and will not give preference to correspondents of BANK ONE CORPORATION
subsidiary banks with respect to such transactions, securities, savings
deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those
for the other Funds or any other investment company or account managed by Banc
One Investment Advisors. Any such other investment company or account may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a given Fund and
another Fund, investment company or account the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
Banc One Investment Advisors believes to be equitable to the Fund(s) and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained by a Fund. To the
39
<PAGE> 71
extent permitted by law, Banc One Investment Advisors may aggregate the
securities to be sold or purchased by it for a Fund with those to be sold or
purchased by it for other Funds or for other investment companies or accounts in
order to obtain best execution. As provided by the Advisory Agreement, in making
investment recommendations for the Funds, Banc One Investment Advisors will not
inquire or take into consideration whether an issuer of securities proposed for
purchase or sale by the Funds is a customer of Banc One Investment Advisors or
its parent or subsidiaries or affiliates and, in dealing with its commercial
customers, Banc One Investment Advisors and its parent, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Funds.
ADMINISTRATOR
Nationwide Advisory Services, Inc. ("NAS") serves as Administrator (the
"ADMINISTRATOR") to each Fund pursuant to an administration agreement with the
Trust (the "ADMINISTRATION AGREEMENT"). The Administrator assists in supervising
all operations of each Fund to which it serves (other than those performed under
the Advisory Agreement, and Custodian and Transfer Agency Agreements for that
Fund). The Administrator is a broker-dealer registered with the Securities and
Exchange Commission, and is a member of the National Association of Securities
Dealers, Inc.
Under the Administration Agreement, the Administrator has agreed to
price the portfolio securities of each Fund it serves and to compute the net
asset value and net income of such Funds on a daily basis, to maintain office
facilities for the Funds, to maintain each such Fund's financial accounts and
records, and to furnish the Funds with data processing, clerical, accounting,
and bookkeeping services, and certain other services required by the Funds with
respect to each such Fund. The Administrator prepares annual and semi-annual
reports to the Securities and Exchange Commission, prepares federal and state
tax returns, prepares filings with state securities commissions, and generally
assists in all aspects of the Trust's operations other than those performed
under the Advisory Agreement, and Custodian and Transfer Agency Agreements.
Under the Administration Agreement, the Administrator may delegate all or any
part of its responsibilities thereunder.
Unless sooner terminated, the Administration Agreement between the
Trust and NAS will continue in effect through August 31, 1999. The
Administration Agreement thereafter shall be renewed automatically for
successive one year terms, unless written notice not to renew is given by the
non-renewing party to the other party at least sixty days prior to the
expiration of the then-current term. The Administration Agreement will be
reviewed and ratified at least annually by the Board of Trustees, provided that
the Administration Agreement is also reviewed and ratified by the majority of
the Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the Investment Company Act of 1940) of any party to the
Administration Agreement, by vote cast in person at a meeting called for the
purpose of reviewing and ratifying the Administration Agreement. The
Administration Agreement is terminable with respect the Trust only upon mutual
agreement of the parties to the Administration Agreement and for cause (as
defined in the Administration Agreement) by the party alleging cause, on not
less than sixty days' notice by the Board of Trustees or by NFS.
The Administrator is entitled to a fee for its services for each of the
Funds, which is calculated daily and paid monthly, at the following annualized
percentages of average net assets of the Trust (less the assets of the Equity
Index Fund): 0.24% of the Trust's average net assets that are less than $250
million and 0.14% of the Trust's average net assets that are greater than $250
million.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Funds in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Cash and securities owned by the Funds are held by State Street Bank
and Trust Company ("STATE STREET") pursuant to a Custodian Agreement with the
Trust (the "CUSTODIAN AGREEMENT"). Under the Custodian Agreement, State Street
(i) maintains a separate account or accounts in the name of each Fund; (ii)
makes receipts and disbursements of money on behalf of each Fund; (iii) collects
and receives all income and other payments and distributions on account of the
Funds' portfolio securities; (iv) responds to correspondence from security
brokers and others relating to its duties; and (v) makes periodic reports to the
Board of Trustees concerning the Funds' operations. State Street may, at its own
expense, open and maintain
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<PAGE> 72
a sub-custody account or accounts on behalf of the Trust, provided that State
Street shall remain liable for the performance of all of its duties under the
Custodian Agreements.
Bank One Trust Company, N.A. serves as Sub-Custodian in connection with
the Trust's securities lending activities, pursuant to agreements between the
Trust, State Street and Bank One Trust Company. Bank One Trust Company receives
a fee paid by the Trust.
Rules adopted under the Investment Company Act of 1940 permit the Funds
to maintain their securities and cash in the custody of certain eligible banks
and securities depositories.
Nationwide Investors Services, Inc. ("NIS"), One Nationwide Plaza,
Columbus, Ohio, 43215, a subsidiary of NAS, the Administrator of the Trust,
serves as Transfer Agent and Dividend Disbursing Agent for each Fund pursuant to
Transfer Agency Agreement with the Trust (the "TRANSFER AGENCY AGREEMENT").
Under the Transfer Agency Agreement, NIS has agreed (i) to issue and redeem
Shares of the Funds; (ii) to address and mail all communications by the Trust to
its Shareholders, including reports to Shareholders, dividend and distribution
notices, and proxy material for its meetings of Shareholders; (iii) to respond
to correspondence or inquiries by Shareholders and others relating to its
duties; (iv) to maintain Shareholder accounts and certain sub-accounts; and (v)
to make periodic reports to the Board of Trustees concerning the Funds
operations.
EXPERTS
PricewaterhouseCoopers LLP serves as the independent accountants of the Trust.
The law firm of Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite
800 East, Washington, D.C. 20005-3333 are counsel to the Trust.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's Declaration of
Trust was filed with the Secretary of State of the Commonwealth of Massachusetts
on June 7, 1993 and authorizes the Board of Trustees to issue an unlimited
number of Shares, which are units of beneficial interest, without par value. The
Trust's Declaration of Trust authorizes the Board of Trustees to establish one
or more series of Shares of the Trust, and to classify or reclassify any series
into one or more classes by setting or changing in any one or more respects the
preferences, designations, conversion, or other rights, restrictions, or
limitations as to dividends, conditions of redemption, qualifications, or other
terms applicable to the Shares of such class, subject to those matters expressly
provided for in the Declaration of Trust, as amended, with respect to the Shares
of each series of the Trust. The Trust presently includes nine series of Shares
which represent interests in the Government Bond Fund, Asset Allocation Fund,
Growth Opportunities Fund, Large Company Growth Fund, Equity Index Fund, Bond
Fund, Value Growth Fund, Mid Cap Opportunities Fund, and the Mid Cap Value Fund.
The Declaration of Trust may not be amended without the affirmative
vote of a majority of the outstanding shares of the Trust, except that the
Trustees may amend the Declaration of the Trust without the vote or consent of
shareholders to:
(1) designate series of the Trust; (2) change the name of the Trust; or
(3) supply any omission, cure, correct, or supplement any ambiguous, defective,
or inconsistent provision to conform the Declaration of Trust to the
requirements of applicable federal and state laws or regulations if they deem it
necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid
and non-assessable, except as set forth below. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares. Shares have no subscription
or preemptive rights and only such conversion or exchange rights as the Board of
Trustees may grant in its discretion. When issued for payment as described in
the Prospectus and this Statement of Additional Information, the Trust's Shares
will be fully paid and non-assessable. In the event of a liquidation or
dissolution of the Trust, Shares of a Fund are entitled to receive the assets
available for distribution belonging to the Fund, and a proportionate
distribution, based upon the relative asset values of the respective Funds, of
any general assets not belonging to any particular Fund which are available for
distribution.
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Rule 18f-2 under the Investment Company Act of 1940 provides that any
matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Trust shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding Shares of each Fund affected by the matter. For purposes of
determining whether the approval of a majority of the outstanding Shares of a
Fund will be required in connection with a matter, a Fund will be deemed to be
affected by a matter unless it is clear that the interests of each Fund in the
matter are identical, or that the matter does not affect any interest of the
Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any
change in investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of the outstanding Shares of such Fund.
However, Rule 18f-2 also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts, and the election
of Trustees may be effectively acted upon by Shareholders of the Trust voting
without regard to series.
The Trust may suspend the right of redemption only under the following
unusual circumstances: (i) when the New York Stock Exchange is closed (other
than weekends and holidays) or trading is restricted; (ii) when an emergency
exists, making disposal of portfolio securities or the valuation of net assets
not reasonably practicable; or (iii) during any period when the Securities and
Exchange Commission has by order permitted a suspension of redemption for the
protection of shareholders.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, holders of units of beneficial interest in a
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. However, the Trust's Declaration of
Trust provides that Shareholders shall not be subject to any personal liability
for the obligations of the Trust, and that every written agreement, obligation,
instrument, or undertaking made by the Trust shall contain a provision to the
effect that the Shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the trust property of
any Shareholder held personally liable solely by reason of his being or having
been a Shareholder. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any Shareholder for
any act or obligation of the Trust, and shall satisfy any judgment thereon.
Thus, the risk of a Shareholder incurring financial loss on account of
Shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or
agent of the Trust shall be personally liable in connection with the
administration or preservation of the assets of the trust or the conduct of the
Trust's business; nor shall any Trustee, officer, or agent be personally liable
to any person for any action or failure to act except for his own bad faith,
willful misfeasance, gross negligence, or reckless disregard of his duties. The
Declaration of Trust also provides that all persons having any claim against the
Trustees or the Trust shall look solely to the assets of the Trust for payment.
SHAREHOLDERS
All Shares of the Funds will be purchased by insurance company separate
accounts to fund variable annuity and variable life contracts ("SEPARATE
ACCOUNTS") and qualified pension and retirement plans ("QUALIFIED PLANS"). For
information concerning the purchase and redemption of Shares by Separate
Accounts and Qualified Plans, you should refer to your annuity prospectus or
Qualified Plan Documents as appropriate.
CALCULATION OF PERFORMANCE DATA
The Funds may quote their performance in various ways. All performance
information supplied by the Funds in advertising is historical and is not
intended to indicate future returns. The Funds' share prices, yields and total
returns fluctuate in response to market conditions and other factors, and the
value of Fund shares when redeemed may be more or less than their original cost.
From time to time, Banc One Investment Advisors and/or Administrator
may voluntarily waive all or a portion of its respective fee and absorb certain
expenses for the Funds. Performance information contained in advertisements
includes the effect of deducting a Fund's expenses, but may not include charges
and expenses attributable to the variable annuity, variable life or
pension/retirement plan through which you have made your investment (a "FUNDING
VEHICLE"). Since the Funds' shares may only be purchased through a Funding
Vehicle, you should carefully review your insurance or Qualified Plan documents
for information
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on fees and expenses associated with the Funding Vehicle through which your
shares have been purchased. Excluding such fees and expenses from the Funds'
performance quotations has the effect of increasing the performance quoted.
A Fund's respective total return and average annual total return is
determined by calculating the change in the value of a hypothetical $1,000
investment in a Fund for each of the periods shown. Total return for a Fund is
computed by determining the average annual compounded rate of return over the
applicable period that would equate the initial amount invested to the ending
redeemable value of the investment. The ending redeemable value includes
dividends and capital gain distributions reinvested at net asset value. The
resulting percentages indicated the positive or negative investment results that
an investor would have experienced from changes in net asset value and
reinvestment of dividends and distributions.
Performance will fluctuate from time to time and is not necessarily
representative of future results. Accordingly, a Fund's performance may not
provide for comparison with bank deposits or other investments that pay a fixed
return for a stated period of time. Performance is a function of a Fund's
quality, composition, and maturity, as well as expenses allocated to the Fund.
Statistical and performance information compiled and maintained by CDA
Technologies, Inc. ("CDA") and Interactive Data Corporation may also be used.
CDA is a performance evaluation service that maintains a statistical data base
of performance, as reported by a diverse universe of independently-managed
mutual funds. Interactive Data Corporation is a statistical access service that
maintains a data base of various industry indicators, such as historical and
current price/earning information and individual stock and fixed income price
and return information.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H. 15), may also be used. Also current rate information on municipal
debt obligations of various durations, as reported daily by the Bond Buyer, may
also be used. The Bond Buyer is published daily and is an industry-accepted
source for current municipal bond market information.
Comparative information on the Consumer Price Index may also be
included. This Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return on
investment. From time to time, all of the Funds may quote actual total return
performance in advertising and other types of literature compared to results
reported by the Dow Jones Industrial Average.
The Dow Jones Industrial Average is an industry-accepted unmanaged
index of generally conservative securities used for measuring general market
performance. The performance reported will reflect the reinvestment of all
distributions on a quarterly basis and market price fluctuations. The index does
not take into account any brokerage commissions or other fees. Comparative
information on the Consumer Price Index may also be included.
The Funds may also promote the yield and/or total return performance
and use comparative performance information computed by and available from
certain industry and general market research and publications, such as Lipper
Analytical Services, Inc.
The Funds may quote actual yield and/or total return performance in
advertising and other types of literature compared to indices or averages of
alternative financial products available to prospective investors. The
performance comparisons may include the average return of various bank
instruments, some of which may carry certain return guarantees offered by
leading banks and thrifts as monitored by Bank Rate Monitor, and those of
corporate bond and government security price indices of various durations.
Comparative information on the Consumer Price Index may also be included.
The Funds may also use comparative performance information computed by
and available from certain industry and general market research and
publications, as well as statistical and performance information, compiled and
maintained by CDA. and Interactive Data Corporation.
The Funds may also use current interest rate and yield information on
government debt obligations of various durations, as reported weekly by the
Federal Reserve (Bulletin H. 15). In addition, current rate information on
municipal debt obligations of various durations, as reported daily by the Bond
Buyer, may also be used.
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MISCELLANEOUS
The Trust is not required to hold a meeting of Shareholders for the
purpose of annually electing Trustees except that (i) the Trust is required to
hold a Shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by Shareholders
and (ii) if, as a result of a vacancy on the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the Shareholders,
that vacancy may only be filled by a vote of the Shareholders. In addition,
Trustees may be removed from office by a written consent signed by the holders
of Shares representing two-thirds of the outstanding Shares of the Trust at a
meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of Shares representing not less than 20% of the
outstanding Shares of the Trust. Except as set forth above, the Trustees may
continue to hold office and may appoint successor Trustees.
As used in the Funds' Prospectus and in this Statement of Additional
Information, "assets belonging to a Fund" means the consideration received by
the Trust upon the issuance or sale of Shares in that Fund, together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments, and any funds or payments derived from any reinvestment of such
proceeds, and any general assets of the Trust not readily identified as
belonging to a particular Fund that are allocated to that Fund by the Board of
Trustees. The Board of Trustees may allocate such general assets in any manner
it deems fair and equitable. It is anticipated that the factor that will be used
by the Board of Trustees in making allocations of general assets to particular
Funds will be the relative net asset values of the respective Funds at the time
of allocation. Each Fund's direct liabilities and expenses will be charged to
the assets belonging to that Fund. Each Fund will also be charged in proportion
to its relative net asset value for the general liabilities and expenses of the
Trust. The timing of allocations of general assets and general liabilities and
expenses of the Trust to particular Funds will be determined by the Board of
Trustees of the Trust and will be in accordance with generally accepted
accounting principles. Determinations by the Board of Trustees of the Trust as
to the timing of the allocation of general liabilities and expenses and as to
the timing and allocable portion of any general assets with respect to a
particular Fund are conclusive.
As used in the Funds' Prospectuses and in this Statement of Additional
Information, a "vote of a majority of the outstanding Shares" of the Trust, a
particular Fund, or a particular class of Shares of a Fund, means the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
the Trust, such Fund, or such class of Shares of such Fund, or (b) 67% or more
of the Shares of the Trust, such Fund, or such class of Shares of such Fund
present at a meeting at which the holders of more than 50% of the outstanding
Shares of the Trust, such Fund, or such class of Shares of such Fund are
represented in person or by proxy.
The Trust is registered with the Securities and Exchange Commission as
a management investment company. Such registration does not involve supervision
by the Commission of the management or policies of the Trust.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and Statement of Additional Information.
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