As filed with the Securities and Exchange Commission on June 11, 1996
1933 Act Registration No. 33-68704
1940 Act Registration No. 811-8006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 10 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [ ]
Amendment No. 12 [x]
(Check appropriate box or boxes)
MORGAN GRENFELL INVESTMENT TRUST
(Exact name of registrant as specified in Charter)
885 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices)
Registrant's Telephone Number,
including Area Code: 212-230-2600
Copy to:
James E. Minnick Ernest V. Klein, Esq.
Morgan Grenfell Capital Management, Inc. Hale and Dorr
885 Third Avenue Sixty State Street
New York, New York 10022 Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X on August 27, 1996 pursuant to paragraph (a)(2) of Rule 485
-----
Registrant has registered an indefinite number of shares pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended. Registrant filed a
Rule 24f-2 Notice for its fiscal year ended October 31, 1995 on November 15,
1995.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
Morgan Grenfell Investment Trust
N-1A Item No. Location
- ------------- --------
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment
Objectives and Policies;
Description of Securities
and Investment Techniques
and Related Risks;
Additional Investment
Information; Organization
and Shares of the Trust
Item 5. Management of the Fund Management of the Funds
Item 6. Capital Stock and Other Securities Dividends, Distributions and
Taxes; Organization and
Shares of the Trust;
Purchase of Shares
Item 7. Purchase of Securities Being Purchase of Shares; Net
Offered Asset Value
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
Part B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
<PAGE>
N-1A Item No. Location
- ------------- --------
Item 13. Investment Objectives and Policies Additional Information on
Fund Investments and
Strategies and Related
Risks; Investment
Restrictions; Investment
Advisory and Other Services
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers
Holders of Securities
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services; Additional
Information
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices
Item 18. Capital Stock and Other General Information About
Securities the Trust
Item 19. Purchase, Redemption and Net Asset Value
Pricing of Securities Being
Offered
Item 20. Tax Status Taxes
Item 21. Underwriters Investment Advisory and Other
Services
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
-2-
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
885 Third Avenue
New York, New York 10022
August 27, 1996
Morgan Grenfell Investment Trust (the "Trust") is an open-end
management investment company consisting of a number of investment portfolios.
This Prospectus offers the following diversified investment portfolios of the
Trust: Morgan Grenfell Fixed Income Fund, Morgan Grenfell Municipal Bond Fund,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund, Morgan Grenfell
Microcap Fund and Morgan Grenfell Large Cap Growth Fund (each a "Fund").
Information concerning investment portfolios of the Trust that focus on
international investments is contained in a separate prospectus that may be
obtained by calling 1-800-814-3401.
The investment objective of Morgan Grenfell Fixed Income Fund and
Morgan Grenfell Short-Term Fixed Income Fund is to seek a high level of income
consistent with the preservation of capital. The investment objective of
Morgan Grenfell Municipal Bond Fund and Morgan Grenfell Short-Term Municipal
Bond Fund is to seek a high level of income exempt from federal income tax,
consistent with the preservation of capital. The primary investment objective
of Morgan Grenfell Smaller Companies Fund and Morgan Grenfell Large Cap
Growth Fund is to maximize capital appreciation. The sole objective of Morgan
Grenfell Microcap Fund is to maximize capital appreciation.
Each Fund's primary investments are summarized below:
Morgan Grenfell Fixed Income Fund invests primarily in U.S.
dollar-denominated debt securities, including U.S. and non-U.S.
government securities, corporate debt securities and debentures,
mortgage-backed and asset-backed securities and taxable municipal debt
securities, and repurchase agreements with respect to the foregoing. The Fund
expects to maintain a dollar weighted average portfolio maturity of between
five and ten years.
Morgan Grenfell Municipal Bond Fund invests primarily in municipal
debt securities that pay interest exempt from U.S. federal income tax. The
Fund expects to maintain a dollar weighted average portfolio maturity of
between five and ten years.
Morgan Grenfell Short-Term Fixed Income Fund invests in the same
types of securities as Morgan Grenfell Fixed Income Fund, but maintains a
dollar weighted average portfolio maturity of no longer than three years.
Morgan Grenfell Short-Term Municipal Bond Fund invests in the same
types of securities as Morgan Grenfell Municipal Bond Fund, but maintains a
dollar weighted average portfolio maturity of no longer than three years.
Morgan Grenfell Smaller Companies Fund invests primarily in equity
and equity-related securities of small capitalization U.S. companies.
(continued on next page)
- 1 -
<PAGE>
[continued]
Morgan Grenfell Microcap Fund invests primarily in equity and
equity-related securities of micro capitalization U.S. companies. Micro
capitalization or "microcap" companies are the smallest capitalization
U.S. companies.
Morgan Grenfell Large Cap Growth Fund invests primarily in equity and
equity-related securities of large capitalization U.S. companies.
=============================================
This Prospectus provides information about the Trust and each of the
Funds that investors should know before investing in the Funds. Investors
should carefully read this Prospectus and retain it for future reference. For
investors seeking more detailed information, the Statement of Additional
Information dated August 27, 1996, as amended or supplemented from time to
time, is available upon request without charge by calling 1-800-814-3401 or by
writing to SEI Financial Services Company, 680 East Swedesford Road, Wayne,
Pennsylvania 19087-1658. The Statement of Additional Information, which is
incorporated by reference into this Prospectus, has been filed with the
Securities and Exchange Commission. Not all of the Funds are available in
certain states. Please call 1-800-814-3401 to determine availability in a
particular state.
---------------------------------------------------
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------------------------------
- 2 -
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Expense Information 4
Financial Highlights 6
Introduction to the Funds 9
Risk Factors 10
Investment Objectives and Policies 11
Description of Securities and Investment Techniques
and Related Risks 17
Additional Investment Information 27
Management of the Funds 29
Purchase of Shares 32
Redemption of Shares 34
Net Asset Value 37
Dividends, Distributions and Taxes 37
Organization and Shares of the Trust 40
Performance Information 41
Appendix A (Tax Certification Instructions) A-1
- 3 -
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Short-Term Smaller Large Cap
Fixed Income Municipal Fixed Income Municipal Companies Microcap Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Fund Fund * Fund *
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases ................ None None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends ................ None None None None None None None
Deferred Sales Charge Imposed
on Redemptions ** ................... None None None None None None None
Exchange Fee ........................ None None None None None None None
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (as a percentage of average net assets after reduction of advisory fee)
Advisory fees ....................... 0.40% 0.40% 0.40% 0.40% 1.00% 1.50% 0.75%
Administration fees ................. 0.12% 0.12% 0.46% 0.46% 0.38% 0.25% 0.17%
Other Expenses ...................... 0.11% 0.10% 0.27% 0.27% 0.28% 0.28% 0.31%
Reduction of Advisory Fee and Expense
Limitation by Adviser *** ........... (0.08)% (0.07)% (0.58)% (0.58)% (0.41)% (0.28)% (0.23)%
Net Fund Operating Expenses ......... 0.55% 0.55% 0.55% 0.55% 1.25% 1.75% 1.00%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Microcap Fund and Large Cap Growth Fund were not operational during the
fiscal year ended October 31, 1995.
** A fee, curently $10, will be imposed on redemptions by wire.
*** The Adviser has agreed to reduce its advisory fee and to make arrangements
to limit certain other expenses to the extent necessary to limit Fund
Operating Expenses of each Fund, on an annualized basis, to the specified
percentages of each Fund's assets shown in the above table as Net Operating
Expenses. The above table and the following example reflect this voluntary
agreement. In its sole discretion, the Adviser may terminate or modify this
voluntary agreement at any time although the Adviser has no present intention
of doing so. The purpose of the voluntary agreement is to enhance a Fund's
total return during the period when, because of its smaller size, fixed
expenses have a more significant impact on total return. If the Adviser's
voluntary agreement was not in effect, the Fund Operating Expenses for each
Fund would be as follows: Fixed Income Fund 0.63%, Municipal Bond Fund 0.62%,
Short-Term Fixed Income Fund 1.13%, Short-Term Municipal Bond Fund 1.13%,
Smaller Companies Fund 1.66%, Microcap Fund 2.03% and Large Cap Growth Fund
1.23%.
- 4 -
<PAGE>
Example:
Investors would pay the following expenses on a $1,000 1 investment
assuming (1) a 5% annual return and (2) redemption at the end of each time
period:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Morgan Grenfell Fixed Income Fund $6 $18 $31 $69
Morgan Grenfell Municipal Bond Fund $6 $18 $31 $69
1 Year 3 Years
------ -------
Morgan Grenfell Short-Term Fixed Income Fund $ 6 $18
Morgan Grenfell Short-Term Municipal Bond Fund $ 6 $18
Morgan Grenfell Smaller Companies Fund $13 $40
Morgan Grenfell Microcap Fund $18 $55
Morgan Grenfell Large Cap Growth Fund $10 $32
1 The minimum initial investment required for each Fund is $250,000.
Exchanges may be made in amounts as low as $50,000. See "Purchase of
Shares--Exchange Privilege."
The purpose of the Expense Information Table and Example is to assist
investors in understanding the various direct and indirect costs and expenses
that an investment in a Fund will bear. "Other Expenses" included in the
Expense Information Table and Example for Morgan Grenfell Fixed Income Fund
and Morgan Grenfell Municipal Bond Fund are based on expenses incurred by
these two Funds during the fiscal year ended October 31, 1995. "Other
Expenses" for Morgan Grenfell Large Cap Growth Fund, Morgan Grenfell Smaller
Companies Fund, Morgan Grenfell Microcap Fund, Morgan Grenfell Short-Term
Fixed Income Fund and Morgan Grenfell Short-Term Municipal Bond Fund are based
on estimates for the current fiscal year ending October 31, 1996 (assumes each
Fund other than Large Cap Growth Fund has average net assets of $10 million
for such year; assumes Large Cap Growth Fund has net assets of $25 million for
such year). If the average net assets of any of these Funds exceeds the
assumed dollar amount for such year, then that Fund's "Other Expenses" (as a
percentage of average net assets) will be lower than the rate shown in the
table. Conversely, if any of these Funds' average net assets are lower than
the assumed dollar amount for such year, then that Fund's "Other Expenses" (as
a percentage of net assets) will be higher than the rate shown in the table.
The Example assumes reinvestment of all dividends and distributions
and that the percentage amounts listed in the Expense Information Table remain
the same each year. If the Adviser were to discontinue its voluntary fee
reductions, the expenses contained in the Example could increase.
The Example is designed for information purposes only, and should not
be considered a representation of future expenses or return for any Fund.
Actual expenses and return vary from year to year and may be higher or lower
than those shown. For further information regarding advisory and
administration fees, and other expenses of the Funds, see "Management of the
Funds."
- 5 -
<PAGE>
FINANCIAL HIGHLIGHTS
Selected unaudited data for an outstanding share of each Fund other
than Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund
(which had not commenced operations prior to April 30, 1996) during the
six-month period ended April 30, 1996 is set forth on the next two pages. This
information should be read in conjunction with these Funds' unaudited
semiannual financial statements as of April 30, 1996 and the notes thereto,
which appear in the Funds' Statement of Additional Information.
Selected audited data for an outstanding share of each of these Funds
is presented for periods prior to and ending October 31, 1995. This data,
insofar as it relates to the period ended October 31, 1995, has been audited
by Price Waterhouse LLP, the Funds' independent accountants. The data for
periods prior to and ending October 31, 1994 for Morgan Grenfell Fixed Income
Fund and Morgan Grenfell Municipal Bond Fund has been audited by Arthur
Andersen LLP, which previously served as the independent accountants of these
two Funds. This information should be read in conjunction with the Funds'
audited financial statements as of October 31, 1995 and the notes thereto,
which appear in the Funds' Statement of Additional Information. The Funds'
annual report, which contains additional performance information, and
Statement of Additional Information are available free of charge by calling
1-800-814-3401.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions Ratio of
Value Investment and from Net from Realized Net Asset Net Assets Expenses to
Beginning Income / Unrealized Investment Capital Value End Total End of Average
Year of Period (Loss) Gains/(Losses) Income Gains of Period Return Period (000) Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------
Municipal Bond Fund
- -----------------------------
1996 *
1995 $10.37 $0.61 $ 0.49 $(0.61) -- $10.86 10.90% $221,058 0.54%
1994 $11.36 $0.60 $(0.61) $(0.60) $(0.38) $10.37 (0.15)% $165,677 0.54%
1993 $10.56 $0.67 $ 0.84 $(0.67) $(0.04) $11.36 14.68% $148,022 0.55%
1992 (1) $10.00 $0.60 $ 0.56 $(0.60) -- $10.56 13.42% $ 94,700 0.55%
- -----------------------------
Fixed Income Fund
- -----------------------------
1996 *
1995 $ 9.93 $0.70 $ 0.69 $(0.70) -- $10.62 14.53% $494,221 0.54%
1994 $10.95 $0.64 $(0.91) $(0.64) $(0.11) $ 9.93 (2.58)% $239,556 0.54%
1993 $ 9.92 $0.64 $ 1.03 $(0.64) -- $10.95 17.28% $147,917 0.55%
1992 (2) $10.00 $0.06 $(0.08) $(0.06) -- $ 9.92 (1.61)% $ 25,528 0.55%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUB-TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period Ended October 31
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio
to Average Expense Expense Turnover
Year Net Assets Limitations) Limitations) Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------
Municipal Bond Fund
- -----------------------------
1996 *
1995 5.75% 0.62% 5.67% 63%
1994 5.60% 0.67% 5.47% 94%
1993 5.94% 0.75% 5.74% 160%
1992 (1) 6.31% 0.79% 6.07% 143%
- -----------------------------
Fixed Income Fund
- -----------------------------
1996 *
1995 6.81% 0.63% 6.72% 182%
1994 6.22% 0.66% 6.10% 251%
1993 6.01% 0.72% 5.84% 196%
1992 (2) 5.24% 1.66% 4.13% 148%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
* Unaudited data for the six month period ended April 30, 1996.
** Total return for the period indicated has not been annualized.
(1) Municipal Bond Fund commenced operations on 12/13/91. All ratios for the
period have been annualized.
(2) Fixed Income Fund commenced operations on 9/18/92. All ratios for the
period have been annualized.
- -------------------------------------------------------------------------------
- 7 -
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions Ratio of
Value Investment and from Net from Realized Net Asset Net Assets Expenses to
Beginning Income / Unrealized Investment Capital Value End Total End of Average
Year of Period (Loss) Gains/(Losses) Income Gains of Period Return Period (000) Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------
Short-Term Municipal Bond Fund
- -------------------------------------
1996 *
1995 (3) $10.00 $0.30 $ 0.13 $(0.30) -- $10.13 4.39%** $ 3,724 0.52%
- -------------------------------------
Short-Term Fixed Income Fund
- -------------------------------------
1996 *
1995 (4) $10.00 $0.37 $ 0.01 $(0.37) -- $10.01 3.82%** $ 4,140 0.52%
- -------------------------------------
Smaller Companies Fund
- -------------------------------------
1996 *
1995 (5) $10.00 $0.03 $ 0.52 -- -- $10.55 5.50%** $ 2,638 1.25%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUB-TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period Ended October 31
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio
to Average Expense Expense Turnover
Year Net Assets Limitations) Limitations) Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------
Short-Term Municipal Bond Fund
- -------------------------------------
1996 *
1995 (3) 4.60% 2.16% 2.96% 62%
- -------------------------------------
Short-Term Fixed Income Fund
- -------------------------------------
1996 *
1995 (4) 5.86% 2.84% 3.54% 90%
- -------------------------------------
Smaller Companies Fund
- -------------------------------------
1996 *
1995 (5) 0.94% 2.28% (0.09)% 23%
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
* Unaudited data for the six month period ended April 30, 1996.
** Total return for the period indicated has not been annualized.
(3) Short-Term Municipal Bond Fund commenced operations on 3/6/95. All ratios
for the period have been annualized.
(4) Short-Term Fixed Income Fund commenced operations on 3/13/95. All ratios
for the period have been annualized.
(5) Smaller Companies Fund commenced operations on 6/30/95. All ratios for the
period have been annualized.
- -------------------------------------------------------------------------------
- 8 -
<PAGE>
INTRODUCTION TO THE FUNDS
Morgan Grenfell Investment Trust (the "Trust") offers a number of
mutual funds, each of which is a separate series of the Trust. This Prospectus
offers shares of Morgan Grenfell Fixed Income Fund, Morgan Grenfell Municipal
Bond Fund, Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell
Short-Term Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund, Morgan
Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund (each a
"Fund"). Information regarding the Trust's other mutual funds (the
"International Funds"), which invest primarily in non-U.S. securities, is
contained in a separate prospectus that may be obtained by calling
1-800-814-3401.
Morgan Grenfell Capital Management, Inc. (the "Adviser" or "MGCM"),
with offices in Philadelphia and New York City, serves as investment adviser
to each of the Funds. The Adviser is a U.S. investment management subsidiary
of London-based Deutsche Morgan Grenfell Group plc. Together with the Adviser
and its other investment management subsidiaries, Deutsche Morgan Grenfell
Group plc now has over US$80 billion under management.
Morgan Grenfell Smaller Companies Fund, Morgan Grenfell Microcap
Fund, Morgan Grenfell Short-Term Fixed Income Fund and Morgan Grenfell
Short-Term Municipal Bond Fund are newly organized funds that have limited
operating histories. As of the date of this Prospectus, Morgan Grenfell Large
Cap Growth Fund had not commenced operations and, therefore, had no operating
history. There can be no assurance that any Fund will be able to achieve its
investment objectives.
General Portfolio Management Strategies
Fixed Income Investments. In selecting fixed income investments
(including municipal securities) for Fixed Income Fund, Short-Term Fixed
Income Fund, Municipal Bond Fund and Short-Term Municipal Bond Fund, the
Adviser seeks to achieve these Funds' investment objectives by identifying
fixed income securities which it believes to be undervalued relative to the
market rather than forecasting changes in the interest rate environment. Fixed
income securities may be undervalued for a variety of reasons, such as market
inefficiencies relating to lack of market information about particular
features of such securities, supply and demand shifts and lack of market
penetration by some issues.
Equity Investments. In selecting equity investments for Large Cap
Growth Fund, Smaller Companies Fund and Microcap Fund (the "Equity Funds"),
the Adviser looks for companies whose earnings it believes will grow both
faster than inflation and faster than the economy in general. An Equity Fund
may invest in such a company if the Adviser believes that such growth is not
yet fully reflected in the market price of the company's securities. In
managing the Smaller
- 9 -
<PAGE>
Companies Fund and the Microcap Fund, the Adviser may also consider the
fundamental value of a company, and may invest in a company where it believes
that value is not fully recognized in the marketplace. Fundamental value is
determined by taking into account various factors including earnings per
share, the ratio of book value to market price, and the company's cash flow
and dividend yield.
In selecting equity investments, the Adviser considers a number of
company-specific factors, including quality of management, a leading or
dominant position in a major product line, a sound financial position, and a
relatively high rate of return on invested capital so that future growth can
be financed from internal sources. The Adviser also considers a company's
record of dividend payments and/or the likelihood that the Company will pay
dividends in the future. However, consistent with their investment objectives,
each Equity Fund may purchase securities of companies that are not expected to
pay dividends in the foreseeable future.
RISK FACTORS
An investment in any of the Funds is neither insured nor guaranteed
by the U.S. Government, or any agency thereof or any other entity. The value
of each Fund's portfolio securities, and thus the net asset value of its
shares will fluctuate as a result of market factors, including interest rate
and stock market changes, such that the value of the shares, when redeemed,
may be more or less than their original cost.
In addition, certain of the Funds may employ investment techniques,
including options and futures contracts and other investments that may be
considered derivative investments. These may entail special risks. For
example, there is no limit on the percentage of assets of an Equity Fund that
may be at risk with respect to futures and related options. See "Investment
Objectives and Policies" and "Description of Securities and Investment
Techniques and Related Risks."
- 10 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Fixed Income Fund and Short-Term Fixed Income Fund
The investment objective of the Fixed Income Fund and the Short-Term
Fixed Income Fund (the "Fixed Income Funds") is to seek a high level of income
consistent with the preservation of capital. The Fixed Income Fund expects to
maintain a dollar weighted average remaining portfolio maturity of 5 to 10
years. The Short-Term Fixed Income Fund will maintain a dollar weighted
average remaining portfolio maturity of no more than 3 years. Because of its
shorter portfolio maturity, it is expected that the Short-Term Fixed Income
Fund's per share net asset value will be less volatile in response to changes
in interest rates. However, under normal conditions, it is expected that the
Fixed Income Fund will have a higher yield than the Short-Term Fixed Income
Fund.
Each Fixed Income Fund will normally invest at least 80% of its
assets in fixed income securities of all types, including (i) U.S. Treasury
obligations; (ii) obligations issued or guaranteed as to principal and
interest by agencies and instrumentalities of the U.S. Government; (iii)
custodial receipts evidencing separately traded principal and interest
components of U.S. Government obligations; (iv) corporate bonds and
debentures; (v) equipment lease and trust certificates; (vi) mortgage-backed
securities and asset-backed securities; (vii) U.S. dollar denominated
securities of the Government of Canada and its provincial and local
governments, U.S dollar denominated securities issued or guaranteed by foreign
governments, their political subdivisions, agencies or instrumentalities and
U.S. dollar denominated obligations of supranational entities; (viii) taxable
municipal securities, and state, municipal or private activity bonds; and (ix)
repurchase agreements involving any of the foregoing. Certain of these
securities may have floating or variable rates of interest or include put
features providing the Fund the right to sell the security at face value prior
to maturity. The existence in a Fund's portfolio of floating and variable rate
securities and securities with put features will have the effect of shortening
its dollar weighted average maturity. Each Fixed Income Fund may purchase
securities on a when-issued basis. Neither Fixed Income Fund's investments in
U.S. dollar denominated securities of non-U.S. issuers will exceed 25% of its
total assets.
Subject to its portfolio maturity policy, a Fixed Income Fund may
purchase securities with any stated remaining maturity. In determining the
maturity of mortgage-backed securities, the Adviser will use the expected life
of such securities, which is based upon the anticipated prepayment patterns of
the underlying mortgages.
Each Fixed Income Fund invests primarily in fixed income securities
that, at the time of purchase, are either rated in one of the
- 11 -
<PAGE>
three highest rating categories assigned by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's"),
Duff & Phelps, Inc. ("Duff") or Fitch Investors Service, Inc. ("Fitch")
or unrated securities determined by the Adviser to be of comparable
quality. However, each Fixed Income Fund may also invest up to 15% of
its assets in fixed income securities that are, at the time of purchase,
either rated within the fourth highest rating category assigned by
Moody's, Standard & Poor's , Duff or Fitch, or unrated but determined by
the Adviser to be of comparable quality. See "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities." In the
event any security held by a Fixed Income Fund is downgraded below the rating
categories set forth above, the Adviser will review the security and determine
whether to retain or dispose of that security, provided that neither Fixed
Income Fund may hold, at any time, more than 5% of its net assets in fixed
income securities that are not investment grade. Fixed income securities rated
in one of the four highest ratings categories and unrated securities
determined by the Adviser to be of comparable quality are referred to herein
as "investment grade fixed income securities." Fixed income securities in the
lowest investment grade category are considered medium grade securities. Such
securities have speculative characteristics, involve greater risk of loss than
higher quality securities, and are more sensitive to changes in the issuer's
capacity to pay.
Under normal conditions, each Fixed Income Fund may hold up to 20% of
its total assets in cash or money market instruments in order to maintain
liquidity, or in the event that the Adviser determines that securities meeting
the Fund's investment objective and policies are not otherwise readily
available for purchase. For a definition of money market instruments and the
Fixed Income Funds' policies on temporary defensive investments, see
"Description of Securities and Investment Techniques and Related
Risks--Additional Investment Techniques."
Municipal Bond Fund and Short-Term Municipal Bond Fund
The investment objective of the Municipal Bond Fund and the
Short-Term Municipal Bond Fund (the "Municipal Funds") is to seek a high level
of income exempt from regular federal income tax (i.e., excluded from gross
income for federal income tax purposes), consistent with the preservation of
capital. However, there is no restriction on the percentage of either
Municipal Fund's assets that may be invested in obligations the interest on
which is a preference item for purposes of the federal alternative minimum
tax. The Municipal Bond Fund expects to maintain a dollar weighted average
remaining portfolio maturity of 5 to 10 years. The Short-Term Municipal Bond
Fund will maintain a dollar weighted average remaining portfolio maturity of
no more than 3 years. Because of its shorter portfolio maturity, it is
expected that the Short-Term Municipal Bond Fund's per share net asset value
will be less volatile in response to changes in interest rates. However, under
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normal conditions, it is expected that the Municipal Bond Fund will have a
higher yield than the Short-Term Municipal Bond Fund.
Under normal market conditions, each Municipal Fund invests at least
80% of its total assets in municipal securities the interest on which is
exempt from regular federal income tax, and invests at least 65% of its total
assets in municipal bonds. Municipal bonds consist of (i) debt obligations,
including municipal leases, issued by or on behalf of public authorities to
obtain funds to be used for various public facilities, for refunding
outstanding obligations, for general operating expenses and for lending such
funds to other public institutions and facilities, and (ii) certain private
activity and industrial development bonds issued by or on behalf of public
authorities to obtain funds to provide for the construction, equipment, repair
or improvement of privately operated facilities. The issuers of these
municipal securities may be located in all 50 U.S. states, the District of
Columbia, Puerto Rico and other U.S. territories and possessions. Certain of
these securities may have variable and floating rates of interest or include
"put" features providing the Fund the right to sell the securities at face
value prior to maturity. The existence in a Fund's portfolio of variable and
floating rate securities and securities having put features will have the
effect of shortening its average dollar weighted portfolio maturity. The
Municipal Funds may purchase securities on a when-issued basis.
The Municipal Funds' investments in municipal notes may include, but
are not limited to, general obligation notes, tax anticipation notes (notes
sold to finance working capital needs of the issuers in anticipation of
receiving taxes on a future date), revenue anticipation notes (notes sold to
provide needed cash prior to receipt of expected non-tax revenues from a
specific source), bond anticipation notes, certificates of indebtedness,
demand notes and construction loan notes and participation rights therein.
Investments in any of the notes described above will be limited to those
obligations that, at the time of purchase, are rated MIG-1 or V-MIG-1 by
Moody's, rated SP-1 by Standard & Poor's, or are unrated but are determined by
the Adviser to be of comparable quality.
The Municipal Funds' investments in municipal bonds may include, but
are not limited to, general obligation bonds, revenue or special obligation
bonds, and private activity and industrial development bonds. Each Municipal
Fund may invest 25% or more of its total assets in private activity and
industrial development bonds if the interest paid on them is exempt from
regular income tax. See "Description of Securities and Investment
Techniques--Fixed Income Securities."
Except as noted below, municipal bonds in which a Municipal Fund
invests must be rated A or better by Moody's or by Standard & Poor's at the
time of investment or, if unrated, must be determined by the Adviser to be of
comparable quality. Each Municipal Fund may, however, invest up to 15% of its
assets in bonds that, at the time of purchase, are
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rated Baa by Moody's, rated BBB by Standard & Poor's, or unrated and
determined by the Adviser to be of comparable quality. Municipal securities in
the lowest investment grade category are considered medium grade securities.
Such securities have speculative characteristics, involve greater risk of loss
than higher quality securities, and are more sensitive to changes in the
issuer's capacity to pay.
The Municipal Funds' investments in tax-exempt commercial paper will
be limited to obligations that, at the time of purchase, are rated at least
A-1 by Standard & Poor's or Prime-1 by Moody's, or that are unrated but are
determined by the Adviser to be of comparable quality. The Municipal Funds may
purchase other types of tax-exempt instruments as long as they are of a
quality equivalent to the long-term bond or commercial paper ratings stated
above.
In the event any security held by either Municipal Fund is downgraded
below the rating categories set forth above, the Adviser will review the
security and determine whether to retain or dispose of that security, provided
that neither Municipal Fund will hold, at any time, more than 5% of its net
assets in securities that are rated below investment grade.
Under normal circumstances, each Municipal Fund may invest up to 20%
of its total assets in certain taxable securities in order to maintain
liquidity. In addition, for temporary defensive purposes during periods when
the Adviser determines that market conditions warrant, each Municipal Fund may
invest without limit in such taxable securities. Such taxable securities
include: U.S. Treasury obligations (including separately traded interest and
principal component parts of U.S. Treasury obligations, transferable through
the federal book-entry system and known as Separately Traded Registered
Interest and Principal Securities or "STRIPS"); other marketable obligations
issued or guaranteed as to principal and interest by agencies or
instrumentalities of the U.S. Government whether or not backed by the full
faith and credit of the U.S. Treasury; short-term instruments of U.S.
commercial banks or savings and loan institutions (not including foreign
branches of U.S. banks or U.S. branches of foreign banks) that are members of
the Federal Reserve System or the Federal Deposit Insurance Corporation and
that have total assets of $1 billion or more as shown on their last published
financial statements at the time of investment; repurchase agreements
involving any of the foregoing obligations; and, to the extent permitted by
applicable law, shares of other investment companies investing solely in the
foregoing obligations.
Distributions by a Fund that are derived from income from taxable
securities held by the Fund will generally be taxable to shareholders as
ordinary income.
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Smaller Companies Fund
The primary investment objective of the Smaller Companies Fund is to
maximize capital appreciation. The Fund seeks current income as its secondary
investment objective. Under normal market conditions, the Fund pursues these
objectives by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of small
capitalization U.S. companies. Equity securities in which the Fund may invest
include common stocks and preferred stocks, while equity-related securities
include warrants, purchased call options and other rights to acquire stocks.
See "Description of Securities and Investment Techniques and Related Risks."
For purposes of the Fund's investment policies, small capitalization
companies are those ranked (at time of investment) according to market
capitalization in the bottom 20% of the Wilshire 5000 Index. The Adviser
believes that investments in equity and equity-related securities of many
small capitalization companies, although involving greater risk, provide the
opportunity for greater capital growth than investments in larger,
better-known companies. For a description of the risks associated with
investing in small capitalization companies, see "Description of Securities
and Investment Techniques and Related Risks-Small and Micro Capitalization
Companies."
Up to 35% of the Fund's total assets may be invested in investment
grade fixed income securities (see definition on page 11), cash equivalents
and equity and equity-related securities of medium and large capitalization
companies. In the event any fixed income security held by the Fund is
downgraded below investment grade, the Adviser will review the security and
determine whether to retain or dispose of it. In no event, however, will the
Fund hold more than 5% of its net assets in fixed income securities that are
not investment grade. Up to 5% of the Fund's net assets (measured at time of
investment) may be invested in the securities of non-U.S. issuers of all
sizes.
Microcap Fund
The investment objective of the Microcap Fund is to maximize capital
appreciation. Under normal market conditions, the Fund pursues this objective
by investing at least 65% of its total assets in common stocks of micro
capitalization U.S. companies and securities convertible into such stocks. For
purposes of the Fund's investment policies, micro capitalization companies are
those ranked (at the time of investment) according to market capitalization in
the bottom 5% of the U.S. equity market, including both listed and unlisted
companies.
The Adviser believes that investments in many micro capitalization
companies, although involving greater risk, provide the opportunity for
greater capital growth than investments in larger, better-known
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companies. In particular, the Adviser believes that the inefficiencies in this
sector of the marketplace often provide opportunities for investment gains.
The Fund's investments in securities of U.S. micro capitalization companies
will be limited to securities traded on a U.S. exchange or in the
over-the-counter market. For a description of the risks associated with
investing in micro capitalization companies, see "Description of Securities
and Investment Techniques and Related Risks -- Small and Micro Capitalization
Companies."
Up to 25% of the Fund's total assets may be invested in securities of
non-U.S. companies with individual market capitalizations that would place
them in the bottom 5% of the U.S. equity market. For liquidity purposes, the
Fund will normally invest a portion of its assets (no more than 35%) in high
quality debt securities and money market instruments with remaining maturities
of one year or less, including repurchase agreements. In addition, the Fund
may invest up to 5% of its net assets in non-convertible bonds and preferred
stocks that are rated, at the time of purchase, Aaa or Aa by Moody's or AAA or
AA by Standard & Poor's or determined by the Adviser to be of comparable
quality.
Large Cap Growth Fund
The primary investment objective of the Large Cap Growth Fund is to
maximize capital appreciation. The Fund seeks current income as its secondary
investment objective. Under normal market conditions, the Fund pursues these
objectives by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of large
capitalization U.S. companies. The Fund may invest in the same types of equity
and equity-related securities as the Smaller Companies Fund (see above).
For purposes of the Fund's investment policies, large capitalization
companies are those ranked (at time of investment) according to market
capitalization in the top 25% of the Wilshire 5000 Index, a broad-based index
that includes nearly all U.S. public companies. The Adviser believes that the
equity and equity-related securities of many large capitalization companies
offer significant potential for capital growth, but with less risk than
investments in smaller capitalization companies.
Up to 35% of the Fund's total assets may be invested in investment
grade fixed income securities (see definition on page 11), cash equivalents
and equity and equity-related securities of small and medium capitalization
companies. In the event any fixed income security held by the Fund is
downgraded below investment grade, the Adviser will review the security and
determine whether to retain or dispose of it. In no event, however, will the
Fund hold more than 5% of its net assets in fixed income securities that are
not investment grade. Up to 5% of the Fund's net assets (measured at time of
investment) may be invested in the securities of non-U.S. issuers of all
sizes.
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<PAGE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS
Fixed Income Securities
General. Each Fund may invest in fixed income securities. In periods
of declining interest rates, the yield (income from portfolio investments over
a stated period of time) of a Fund that invests in fixed income securities may
tend to be higher than prevailing market rates, and in periods of rising
interest rates, the yield of the Fund may tend to be lower. Also, when
interest rates are falling, the inflow of net new money to such a Fund will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the yield of the Fund. In
periods of rising interest rates, the opposite can be true. The net asset
value of a Fund investing in fixed income securities can generally be expected
to change as general levels of interest rates fluctuate. The value of fixed
income securities in a Fund's portfolio generally varies inversely with
changes in interest rates. Prices of fixed income securities with longer
effective maturities are more sensitive to interest rate changes than those
with shorter effective maturities.
Private Activity and Industrial Development Bonds. The Fixed Income
Funds and the Municipal Funds may invest in private activity and industrial
development bonds, which are obligations issued by or on behalf of public
authorities to raise money to finance various privately owned or operated
facilities for business and manufacturing, housing, sports and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports, parking or sewage or solid waste
disposal facilities, as well as certain other categories. The payment of the
principal and interest on such bonds is generally dependent solely on the
ability of the facility's user to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
Put Bonds. The Fixed Income Funds and the Municipal Funds may invest
in "put" bonds, which are tax exempt securities (including securities with
variable interest rates) that may be sold back to the issuer of the security
at face value at the option of the holder prior to their stated maturity. The
Adviser intends to purchase only those "put" bonds for which the put option is
an integral part of the security as originally issued. The option to "put" the
bond back to the issuer prior to the stated final maturity can cushion the
price decline of the bond in a rising interest rate environment. However, the
premium paid, if any, for an option to put will have the effect of reducing
the yield otherwise payable on the underlying security. For the purpose of
determining the "maturity" of securities purchased subject to an option to
put, and for the purpose of determining the dollar weighted average maturity
of a Fund holding such securities, the Fund will consider "maturity" to be the
first date on which it has the right to demand
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payment from the issuer of the put although the final maturity of the
security is later than such date.
Variable or Floating Rate Instruments and Variable Rate Demand
Instruments. The Fixed Income Funds and the Municipal Funds may invest in
variable or floating rate instruments and variable rate demand instruments,
including variable amount master demand notes. These instruments will normally
involve industrial development or revenue bonds that provide that the rate of
interest is set as a specific percentage of a designated base rate (such as
the prime rate) at a major commercial bank. In addition, the interest rate on
these securities may be reset daily, weekly or on some other reset period and
may have a floor or ceiling on interest rate changes. A Fund holding such an
instrument can demand payment of the obligation at all times or at stipulated
dates on short notice (not to exceed 30 days) at par plus accrued interest.
U.S. Government Securities. The Funds may invest in obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported either by (i) the full faith and
credit of the U.S. Government (such as securities of the Small Business
Administration), (ii) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (iii) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association, or (iv) only the
credit of the issuer. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government agencies or instrumentalities in
the future.
The Fixed Income Funds and the Municipal Funds may also invest in
separately traded principal and interest components of securities
guaranteed or issued by the U.S. Government or its agencies,
instrumentalities or sponsored enterprises if such components are traded
independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS") or any similar program
sponsored by the U.S. Government. However, no Fund may actively trade
these instruments. STRIPS are sold as zero coupon securities. See
"Zero Coupon Securities."
Custodial Receipts. Custodial receipts are interests in separately
traded interest and principal component parts of U.S. Government securities
that are issued by banks or brokerage firms and are created by depositing U.S.
Government securities into a special account at a custodian bank. The
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of
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the certificates or receipts evidencing ownership and maintains the register.
Custodial receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities
("CATS"). TIGRs and CATS are interests in private proprietary accounts while
TRs and STRIPS (see "U.S. Government Securities" above) are interests in
accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon
securities; for more information, see "Zero Coupon Securities."
Zero Coupon Securities. STRIPS and custodial receipts (TRs, TIGRs and
CATS) are sold as zero coupon securities, that is, fixed income securities
that have been stripped of their unmatured interest coupons. Zero coupon
securities are sold at a (usually substantial) discount and redeemed at face
value at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accreted over the life of the
security, and the accretion constitutes the income earned on the security for
both accounting and tax purposes. Because a Fund must distribute the accreted
amounts in order to qualify for favorable tax treatment, it may have to sell
portfolio securities to generate cash to satisfy the applicable distribution
requirements. Because of these features, the market prices of zero coupon
securities are generally more volatile than the market prices of securities
that have similar maturity but that pay interest periodically. Zero coupon
securities are likely to respond to a greater degree to interest rate changes
than are non-zero coupon securities with similar maturity and credit
qualities.
Securities of Foreign Issuers
Each Equity Fund and each Fixed Income Fund may invest to a limited
extent in securities of foreign issuers and supranational entities.
Investments in the securities of foreign issuers and supranational entities
may subject the Funds to investment risks that differ in some respects from
those related to investments in securities of U.S. issuers. Such risks include
future adverse political and economic developments, possible imposition of
withholding taxes on income, possible seizure, nationalization or
expropriation of foreign deposits, possible establishment of exchange controls
or taxation at the source or fluctuation in value due to changes in currency
exchange rates. Foreign issuers of securities often engage in business
practices different from those of domestic issuers of similar securities and
there may be less information publicly available about foreign issuers. In
addition, foreign issuers are, generally speaking, subject to less government
supervision and regulation and different accounting treatment than are those
in the United States.
To the extent that they invest in non-U.S. securities, the Equity
Funds may enter into forward currency exchange contracts ("forward contracts")
and currency options to hedge against currency exchange rate fluctuations.
Forward contracts and options may be considered derivative instruments.
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An Equity Fund may enter into forward contracts and currency options
to protect against an anticipated rise in the U.S. dollar price of securities
that it intends to purchase. In addition, an Equity Fund may enter into
forward contracts and currency options to protect against the decline in value
of its foreign currency denominated or quoted portfolio securities, or a
decline in the value of anticipated dividends from such securities, due to a
decline in the value of the foreign currency against the U.S. dollar. The
forecasting of currency market movements is extremely difficult and there can
be no assurance that currency hedging strategies will be successful. If the
Adviser is incorrect in its forecast, currency hedging strategies may result
in investment performance worse than if the strategies were not attempted. In
addition, forward contracts and over-the-counter currency options may be
illiquid and are subject to the risk that the counterparty will default on its
obligations. For more information on these instruments, see the Statement of
Additional Information.
Mortgage-Backed and Asset-Backed Securities
The Fixed Income Funds and, to a more limited extent, the Municipal
Funds may invest in mortgage-backed securities, which represent direct or
indirect participations in, or are collateralized by and payable from,
mortgage loans secured by real property. The Fixed Income Funds may also
invest in asset-backed securities, which represent participations in, or are
secured by and payable from, assets such as motor vehicle installment sales,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements and
other categories of receivables. Such securities are generally issued by
trusts and special purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more
rapid repayment than their stated maturity date would indicate as a result of
the pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying
mortgage-backed and asset-backed securities can be expected to accelerate, and
thus impair a Fund's ability to reinvest the returns of principal at
comparable yields. Accordingly, the market values of such securities will vary
with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
and asset-backed securities. Asset-backed securities present certain risks
that are not presented by mortgage-backed securities because asset-backed
securities generally do not have the benefit of a security interest in
collateral that is comparable to mortgage assets. In addition, there is the
possibility that, in some cases, recoveries on repossessed collateral may not
be available to support payments on these securities. Many mortgage and
asset-backed securities may be considered derivative instruments. No Fund will
invest 25% or more of its total assets in
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collateralized mortgage obligations or in asset-backed securities (in each
case, excluding U.S. Government Securities).
Options
Written Options. Each Equity Fund may write (sell) covered put and
call options on equity and fixed income securities and enter into related
closing transactions. A Fund may receive fees (referred to as "premiums") for
granting the rights evidenced by the options. However, in return for the
premium for a written call option, the Fund assumes certain risks. For
example, in the case of a written call option, the Fund forfeits the right to
any appreciation in the underlying security while the option is outstanding. A
put option gives to its purchaser the right to compel the Fund to purchase an
underlying security from the option holder at the specified price at any time
during the option period. In contrast, a call option written by the Fund gives
to its purchaser the right to compel the Fund to sell an underlying security
to the option holder at a specified price at any time during the option
period. Upon the exercise of a put option written by a Fund, the Fund may
suffer a loss equal to the difference between the price at which the Fund is
required to purchase the underlying security and its market value at the time
of the option exercise, less the premium received for writing the option. All
options written by a Fund are covered. In the case of a call option, this
means that the Fund will own the securities subject to the option or an
offsetting call option as long as the written option is outstanding, or will
have the absolute and immediate right to acquire other securities that are the
same as those subject to the written option. In the case of a put option, this
means that the Fund will deposit cash or high grade liquid debt obligations in
a segregated account with the custodian with a value at least equal to the
exercise price of the put option.
Purchased Options. The Equity Funds may also purchase put and call
options on securities. A put option entitles a Fund to sell, and a call option
entitles a Fund to buy, a specified security at a specified price during the
term of the option. The advantage to the purchaser of a call option is that it
may hedge against an increase in the price of portfolio securities it
ultimately wishes to buy. The advantage to the purchaser of a put option is
that it may hedge against a decrease in the price of portfolio securities it
ultimately wishes to sell.
Each Equity Fund may enter into closing transactions in order to
offset an open option position prior to exercise or expiration by selling an
option it has purchased or by entering into an offsetting option. If a Fund
cannot effect closing transactions, it may have to retain a security in its
portfolio it would otherwise sell, or deliver a security it would otherwise
retain.
The Funds may purchase and sell options traded on U.S. exchanges and,
to the extent permitted by law, options traded over-the-counter. The Funds
will treat purchased over-the-counter options as illiquid.
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There can be no assurance that a liquid secondary market will exist for any
particular option. Over-the-counter options also involve the risk that a
counterparty will fail to meet its obligation under the option.
Stock Index Options
The Equity Funds may purchase and write exchange-listed put and call
options on stock indices to hedge against risks of market-wide price
movements. A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. Examples
of well-known stock indices are the Standard & Poor's Index of 500 Common
Stocks and the Wilshire 5000 Index. Options on stock indices are similar to
options on securities. However, because options on stock indices do not
involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer in cash a fixed multiple of the
amount by which the exercise price exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on the
exercise date.
When an Equity Fund writes an option on a stock index, it will cover
the option by depositing cash or high grade liquid debt obligations or a
combination of both in an amount equal to the market value of the option, in a
segregated account, which will be marked to market daily, with the Fund's
custodian, and will maintain the account while the option is open.
Alternatively, and only in the case of a written call option on a stock index,
the Fund may cover the written option by owning an offsetting call option.
Futures Contracts and Options on Futures Contracts
When deemed advisable by the Adviser, each of the Equity Funds may
enter into futures contracts and purchase and write options on futures
contracts to hedge against changes in interest rates, securities prices or
currency exchange rates or for certain non-hedging purposes. The Funds may
purchase and sell financial futures contracts, including stock index futures,
and purchase and write related options. A Fund may engage in futures and
related options transactions for hedging and nonhedging purposes as defined in
regulations of the Commodity Futures Trading Commission. A Fund will not enter
into futures contracts or options thereon for non-hedging purposes, if
immediately thereafter, the aggregate initial margin and premiums required to
establish non-hedging positions in futures contracts and options on futures
will exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating the Funds to purchase securities, require the Funds to segregate
cash or high grade liquid debt obligations with a value equal to the amount of
the Fund's obligations.
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Limitations and Risks Associated With Transactions In Options, Futures
Contracts and Options on Futures Contracts
Each Equity Fund's options and futures transactions involve (1)
liquidity risk that contractual positions cannot be easily closed out in the
event of market changes or generally in the absence of a liquid secondary
market, (2) correlation risk that changes in the value of hedging positions
may not match the securities market fluctuations intended to be hedged, and
(3) market risk that an incorrect prediction of securities prices by the
Adviser may cause a Fund to perform worse than if such positions had not been
taken. The ability to terminate over-the-counter options is more limited than
with exchange traded options and may involve the risk that the counterparty to
the option will not fulfill its obligations. In accordance with a position
taken by the Securities and Exchange Commission (the "Commission"), each Fund
will limit its investments in illiquid securities to 15% of the Fund's net
assets. The Funds will treat over-the-counter options and the assets used to
cover such options as illiquid securities subject to this limitation, except
that, with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction
at a formula price, the amount of the illiquid securities may be calculated
with reference to the formula price.
Options and futures transactions are highly specialized activities
which involve investment techniques and risks that are different from those
associated with ordinary portfolio transactions. Gains and losses on
investments in options and futures depend on the Adviser's ability to predict
the direction of stock prices and other economic factors. The loss that may be
incurred by a Fund in entering into futures contracts and written options
thereon is potentially unlimited. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain facilities of an options clearing entity or other entity
performing the regulatory and liquidity functions of an options clearing
entity inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. Most futures exchanges limit the amount of fluctuation permitted in a
futures contract's prices during a single trading day. Once the limit has been
reached no further trades may be made that day at a price beyond the limit.
The price limit will not limit potential losses, and may in fact prevent the
prompt liquidation of futures positions, ultimately resulting in further
losses.
Except as set forth above under "Futures Contracts and Options on
Futures Contracts", there is no limit on the percentage of an Equity Fund's
assets that may be at risk with respect to futures contracts and related
options. A Fund may not invest more than 25% of its total assets in purchased
protective put options nor more than 5% of its total assets in purchased
options other than protective put options. A Fund's transactions in options,
futures
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<PAGE>
contracts and options on futures contracts may be limited by the requirements
for qualification of the Fund as a regulated investment company for tax
purposes. See "Taxes" in the Statement of Additional Information. Options,
futures contracts and options on futures contracts are derivative instruments.
Small and Micro Capitalization Companies
Smaller Companies Fund and Microcap Fund invest a significant portion
of their assets in smaller, lesser-known companies which the Adviser believes
offer greater growth potential than larger, more mature, better-known
companies. Investing in the securities of these companies, however, also
involves greater risk and the possibility of greater portfolio price
volatility. Among the reasons for the greater price volatility of these small
companies and unseasoned stocks are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks
and the greater sensitivity of small companies to changing economic conditions
in their geographic region. For example, securities of these companies involve
higher investment risk than that normally associated with larger firms due to
the greater business risks of small size and limited product lines, markets,
distribution channels and financial and managerial resources.
Many smaller capitalization companies in which Smaller Companies Fund
and Microcap Fund may invest are not well-known to the investing public, do
not have significant institutional ownership and are followed by relatively
few securities analysts. As a result, there may be less publicly available
information concerning these companies than exists for larger capitalization
companies. Also, the securities of smaller capitalization companies traded on
the over-the-counter market may have fewer market makers, wider spreads
between their quoted bid and asked prices and lower trading volumes, resulting
in comparatively greater price volatility and less liquidity than exists for
securities of larger capitalization companies.
Convertible Securities and Preferred Stocks
Subject to its investment objectives and policies, each Equity Fund
may invest in convertible securities, which are ordinarily preferred stock or
long-term debt obligations of an issuer convertible at a stated exchange rate
into common stock of the issuer. The market value of convertible securities
tends to decline as interest rates increase and, conversely, to increase as
interest rates decline. Convertible securities generally offer lower interest
or dividend yields than non-convertible securities of similar quality.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the price of the convertible security
tends to reflect the value of the underlying common stock. As the market price
of the underlying common stock declines, the convertible security tends to
trade increasingly on a yield basis, and thus may not depreciate to the same
extent as the underlying common stock. Convertible securities generally rank
senior to common stocks in an
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issuer's capital structure and are consequently of higher quality and entail
less risk than the issuer's common stock. However, the extent to which such
risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. In
evaluating a convertible security, the Adviser will give primary emphasis to
the attractiveness of the underlying common stock. The convertible debt
securities in which each Fund may invest are subject to the same rating
criteria and downgrade policy as the Fund's investments in fixed income
securities.
Diversification and Concentration of Investments
Each Fund is "diversified" under the 1940 Act and is also subject to
issuer diversification requirements imposed on regulated investment companies
by Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
See "Investment Restrictions" and "Taxes" in the Funds' Statement of
Additional Information. In addition, as a matter of fundamental policy, no
Fund may invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the same
industry (except U.S. Government securities).
Currently, it is not anticipated that either Municipal Fund will
invest 25% or more of its total assets (at market value at the time of
purchase) in: (a) securities of one or more issuers conducting their principal
activities in the same state; or (b) securities the principal and interest of
which is paid from revenues of projects with similar characteristics, except
that 25% or more of either Municipal Fund's total assets may be invested in
single family and multi-family housing obligations. To the extent a Municipal
Fund concentrates its investments in single family and multi-family housing
obligations, the Fund will be subject to the peculiar risks associated with
investments in such obligations, including prepayment risks and the risks of
default on housing loans, which may be affected by economic conditions and
other factors relating to such obligations.
Additional Investment Techniques
When-Issued Securities and Forward Commitments. Each Fund may
purchase securities on a when-issued, delayed delivery or forward commitment
basis. When these transactions are negotiated, the price of the securities is
fixed at the time of the commitment, but delivery and payment may take place
up to 90 days after the date of the commitment to purchase for equity
securities, and up to 45 days after such date for fixed income securities.
When-issued securities or forward commitments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date.
When a Fund purchases securities on a forward commitment or when-issued basis,
the Fund's custodian will maintain in a segregated account cash or liquid high
grade debt obligations having a value (determined daily) at least equal to the
amount of the Fund's purchase commitment. Although each Fund will
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purchase securities on a when-issued basis only with the intention of actually
acquiring securities for its portfolio, a Fund may dispose of a when-issued
security prior to settlement if the Adviser deems it appropriate to do so.
Repurchase Agreements. Each Fund may enter into repurchase
agreements. In a repurchase agreement, a Fund buys a security subject to the
right and obligation to sell it back to the other party at the same price plus
accrued interest. The Fund's custodian will hold the security as collateral
for the repurchase agreement. Collateral must be maintained at a value at
least equal to 102% of the repurchase price, but repurchase agreements involve
some credit risk to a Fund if the other party defaults on its obligation and
the Fund is delayed in or prevented from liquidating the collateral. A Fund
will enter into repurchase agreements only with financial institutions deemed
to present minimal risk of bankruptcy during the term of the agreement based
on guidelines established and periodically reviewed by the Trust's Board of
Trustees.
Illiquid Securities. Each Equity Fund, each Fixed Income Fund and the
Short-Term Municipal Bond Fund will not invest more than 15% of its net assets
in illiquid securities. Municipal Bond Fund will not invest more than 10% of
its total assets in illiquid securities. Illiquid securities include
repurchase agreements and fixed time deposits maturing in more than seven days
and securities that are not readily marketable.
Restricted Securities. Each Equity Fund and each Fixed Income Fund
may invest to a limited extent in restricted securities. Restricted securities
are securities that may not be sold freely to the public without prior
registration under federal securities laws or an exemption from registration.
Restricted securities will be considered illiquid unless they are restricted
securities offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act of 1933 and the Board of Trustees determines
that these securities are liquid based upon a review of the trading markets
for the specific securities.
Warrants. Each Equity Fund may invest in warrants. Warrants generally
entitle the holder to buy a specified number of shares of common stock at a
specified price, which is often higher than the market price at the time of
issuance, for a period of years or in perpetuity. Warrants may be issued in
units with other securities or separately, and may be freely transferrable and
traded on exchanges. While the market value of a warrant tends to be more
volatile than that of the securities underlying the warrant, the market value
of a warrant may not necessarily change with that of the underlying security.
A warrant ceases to have value if it is not exercised prior to any expiration
date to which the warrant is subject.
Lending Securities. For the purpose of realizing income, the Morgan
Grenfell Short-Term Fixed Income Fund, the Morgan Grenfell Short-
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Term Municipal Bond Fund and each Equity Fund may lend to broker-dealers
portfolio securities amounting to not more than 33 1/3% of its total assets
taken at current value. These transactions must be fully collateralized by
cash, cash equivalents or U.S. Government securities at all times. They
nevertheless involve some credit risk to a Fund if the other party should
default on its obligation and the Fund is delayed in or prevented from
recovering the collateral. Voting rights with respect to a portfolio security
pass to the borrower when the security is loaned by a Fund, but the Adviser is
required to call the loan if necessary to vote on a material event affecting
the Fund's investment in the loaned security.
Other Investment Companies. Each Fund may invest in the aggregate no
more than 10% of its total assets, calculated at the time of purchase, in the
securities of other investment companies. In addition, a Fund may not invest
more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the voting securities of any other
investment company. A Fund will indirectly bear its proportionate share of any
management or other fees paid by investment companies in which it invests, in
addition to its own fees.
Temporary Defensive Investments. For temporary defensive purposes
during periods when the Adviser determines that conditions warrant, each
Equity Fund and each Fixed Income Fund may invest up to 100% of its assets in
cash and money market instruments, including securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; certificates of
deposit, time deposits, and bankers' acceptances issued by banks or savings
and loans associations having net assets of at least $500 million as of the
end of their most recent fiscal year; commercial paper rated at the time of
purchase at least A-1 by Standard & Poor's or P-1 by Moody's, or unrated
commercial paper determined by the Adviser to be of comparable quality;
repurchase agreements involving any of the foregoing; and, to the extent
permitted by applicable law, shares of other investment companies investing
solely in money market instruments. For a description of the Municipal Funds'
policy with respect to temporary defensive investments, see "Investment
Objectives and Policies--Municipal Bond Fund and Short-Term Municipal Bond
Fund."
ADDITIONAL INVESTMENT INFORMATION
Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions
which are described in detail in the Statement of Additional Information.
Those investment restrictions designated as fundamental in the Statement of
Additional Information can be changed only with shareholder approval. Each
Fund's investment objective and all other investment restrictions and policies
are nonfundamental and can be changed by the Board of Trustees of the Trust at
any time without shareholder approval. Each Fund's shareholders will, however,
be given
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30 days' advance written notice of any change in a Fund's investment
objective.
Each Fund has fundamental investment restrictions with respect to
borrowing, lending, diversification of investments, senior securities,
pledging of assets, underwriting, real estate investments and commodities. See
"Investment Restrictions" in the Statement of Additional Information.
Portfolio Transactions
The Adviser is responsible for making specific decisions to buy and
sell portfolio securities for the Funds. The Adviser is also responsible for
selecting brokers and dealers to effect these transactions and negotiating, if
possible, brokerage commissions and dealers' charges. Securities traded in the
over-the-counter markets and fixed income securities generally are traded on a
net basis with the dealers acting as principal for their own accounts without
a stated commission.
The primary consideration in selecting broker-dealers to execute
portfolio security transactions is the execution of such portfolio
transactions at the most favorable prices. Consideration may also be given to
the broker-dealer's sale of shares of the Funds. Subject to the most favorable
price requirement and the provisions of Section 28(e) of the Securities
Exchange Act of 1934, as amended, securities may be bought from or sold to
broker-dealers who have furnished statistical, research and other information
or services to the Adviser. Higher commissions may be paid to broker-dealers
that provide research services. See "Portfolio Transactions and Brokerage
Commissions" in the Statement of Additional Information for a more detailed
discussion of portfolio transactions. The Trustees will periodically review
each Fund's portfolio transactions.
Pursuant to procedures established by the Trustees, subject to
applicable regulations and consistent with the above policy of obtaining the
most favorable overall price, the Adviser may place securities transactions
with SEI Financial Services Company, the Funds' distributor (the
"Distributor"), and brokers with whom the Adviser or the Distributor is
affiliated. No Fund will effect principal transactions with an affiliated
broker.
Portfolio Turnover
It is estimated that, under normal circumstances, the portfolio
turnover rate of each of the Equity Funds will not exceed 150%. It is
estimated that, under normal circumstances, the portfolio turnover rate of
each of the Fixed Income Funds and the Municipal Funds will not exceed 175%.
The higher portfolio turnover rates of the Fixed Income Funds and the
Municipal Funds may result from their respective portfolio management
strategies. The Fixed Income Funds and the Municipal Funds
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may sell securities held for a short time in order to take advantage of what
the Adviser believes to be temporary disparities in normal yield relationships
between securities. A high rate of portfolio turnover (i.e., 100% or higher)
will result in correspondingly higher transaction costs to a Fund,
particularly if the Fund's primary investments are equity securities. A high
rate of portfolio turnover will also increase the likelihood of short-term
gains (distributions of which are taxable to shareholders as ordinary income)
and, under some circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code (see "Portfolio Transactions"
and "Dividends, Distributions and Taxes"). See "Financial Highlights" for each
Fund's portfolio turnover for the fiscal period ended October 31, 1995.
MANAGEMENT OF THE FUNDS
The Board of Trustees of the Trust is responsible for the overall
supervision and management of the Funds. The day-to-day operations of the
Funds, including investment decisions, have been delegated to the Adviser. The
Statement of Additional Information contains general background information
regarding each Trustee and executive officer of
the Trust.
The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as investment
adviser to each Fund pursuant to the terms of investment advisory contracts
between the Trust, on behalf of the Funds, and MGCM (the "Advisory
Contracts"). MGCM is registered as an investment adviser with the Commission
and provides a full range of investment advisory services to institutional
clients. All of the outstanding voting stock of MGCM is owned by Morgan
Grenfell Asset Management, Ltd. ("MGAM"), which is a wholly-owned subsidiary
of Deutsche Morgan Grenfell Group plc. Deutsche Morgan Grenfell Group plc is
an indirect wholly-owned subsidiary of Deutsche Bank AG, an international
commercial and investment banking group. As of December 31, 1995, MGCM managed
approximately $8 billion in assets.
Under its Advisory Contracts with the Trust, the Adviser manages each
Fund's business and investment affairs. For these services, the Adviser is
entitled to a monthly fee at an annual rate of each Fund's average daily net
assets as follows:
Annual Rate
-----------
Morgan Grenfell Fixed Income Fund 0.40%
Morgan Grenfell Municipal Bond Fund 0.40%
Morgan Grenfell Short-Term Fixed Income Fund 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund 0.40%
Morgan Grenfell Smaller Companies Fund 1.00%
Morgan Grenfell Microcap Fund 1.50%
Morgan Grenfell Large Cap Growth Fund 0.75%
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<PAGE>
The advisory fees to which the Advisor is entitled for Large Cap
Growth Fund, Smaller Companies Fund and Microcap Fund are higher than the fees
paid by most funds but the Adviser believes they are comparable to the fees
paid by funds having similar investment objectives. As described in "Expense
Information," the Adviser has voluntarily agreed to reduce its advisory fee
and to make arrangements to limit certain other expenses to the extent
necessary to limit each Fund's operating expenses to a specified level. For
the fiscal period ended October 31, 1995, this voluntary agreement was in
effect for each Fund (other than Morgan Grenfell Large Cap Growth Fund and
Morgan Grenfell Microcap Fund, which were not in operation during such
period). During this period, Morgan Grenfell Fixed Income Fund, Morgan
Grenfell Municipal Bond Fund, Morgan Grenfell Short-Term Fixed Income Fund,
Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund paid advisory fees equal to 0.31%, 0.32%, 0.00%, 0.00%, and
0.00% of their respective average daily net assets.
Each Fixed Income Fund and Municipal Fund is managed by David W.
Baldt, Executive Vice President and Fixed Income Manager of the Adviser. Mr.
Baldt has been in the investment advisory business since 1973 (with the
Adviser since 1989) and has managed fixed income investments since 1973.
Smaller Companies Fund and Microcap Fund are each managed by Robert
Kern, Executive Vice President of the Adviser, and his team which includes two
other experienced portfolio managers, Audrey M.T. Jones and David A. Baratta.
Mr. Kern has been in the investment advisory business since 1965 (with the
Adviser since 1986) and has managed investments in small capitalization
companies since 1970. Ms. Jones has been employed by the Adviser as a
portfolio manager since 1986. Prior to joining the Adviser in 1993, Mr.
Baratta worked as a portfolio manager for AIG Global Investors and Shearson
Lehman Asset Management.
The Large Cap Growth Fund is managed by a committee consisting of
investment professionals employed by the Adviser. This committee makes
investment decisions for the Fund.
The Trust, on behalf of each Fund, is responsible for all of the
Fund's expenses other than those expressly assumed by the Adviser under the
terms of the Advisory Contracts. The expenses borne by each Fund include the
Fund's advisory fee, transfer agent fee and taxes and its proportionate share
of custodian fees, expenses of issuing reports to shareholders, legal fees,
auditing and tax fees, blue sky fees, fees of the Commission, insurance
expenses and disinterested Trustees' fees. The Adviser has temporarily agreed,
under certain circumstances, to reduce or not impose its management fee as
described under "Expense Information." In the event that a Fund's expenses for
any fiscal year exceed the limits established by certain state securities
administrators, the Adviser will reduce its fee payable on behalf of
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such Fund by the amount of such excess, but only to the extent of the Fund's
advisory fee.
Administrator and Distributor
The Trust has entered into Administration Agreements with SEI
Financial Management Corporation ("SEI Financial Management" or the
"Administrator"), 680 East Swedesford Road, Wayne, Pennsylvania 19087- 1658,
pursuant to which SEI Financial Management receives from all series of the
Trust (i.e., the Funds and the International Funds) an aggregate monthly fee
at the following annual rates of the aggregate average daily net assets
("aggregate assets") of such series:
0.15% of aggregate assets under $300 million
0.12% of next $200 million of aggregate assets
0.10% of next $500 million of aggregate assets
0.08% of aggregate assets exceeding $1 billion
Each Fund that offers its shares pays the Administrator a minimum
annual fee of $50,000. For the fiscal period ended October 31, 1995, the
Administrator received fees from the Fixed Income Fund, the Municipal Bond
Fund, the Short-Term Fixed Income Fund, the Short-Term Municipal Bond Fund and
the Smaller Companies Fund equal to 0.12%, 0.12%, 0.93%, 0.64% and 0.49% of
their respective average daily net assets.
The Administrator generally assists in all matters relating to the
administration of the Funds, including the coordination and monitoring of any
third parties furnishing services to the Funds, the preparation and
maintenance of financial and accounting records, and the provision of the
necessary office space, equipment and personnel to perform administrative and
clerical functions.
SEI Financial Services Company (the "Distributor"), 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, serves as the distributor of
shares of the Funds pursuant to a Distribution Agreement with the Trust and
assists in the sale of shares of the Funds.
Custodians and Transfer Agent
The Trust has entered into a Custodian Agreement with CoreStates
Bank, N.A. ("CoreStates"), pursuant to which CoreStates serves as custodian of
the assets of Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal
Bond Fund.
The Trust has entered into a Custodian Agreement with The Northern
Trust Company ("Northern"), pursuant to which Northern serves as custodian of
the assets of the Equity Funds, Morgan Grenfell Short-Term Fixed Income Fund
and Morgan Grenfell Short-Term Municipal Bond Fund.
DST Systems, Inc. (the "Transfer Agent"), 210 W. 10th Street, Kansas
City, Missouri 64105, serves as the transfer agent of the Funds.
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The Transfer Agent maintains the records of each shareholder's account,
processes purchases and redemptions of the Funds' shares, acts as dividend and
distribution disbursing agent and performs other shareholder servicing
functions.
Additional information regarding the services performed by the
Administrator, the Distributor, the Custodian and the Transfer Agent is
provided in the Statement of Additional Information.
PURCHASE OF SHARES
Shares of any Fund may be purchased on any Business Day at the net
asset value next determined after receipt of the order in good order by the
Transfer Agent. A "Business Day" means any day on which the New York Stock
Exchange (the "NYSE") is open. Shareholders will be entitled to dividends
payable with respect to their shares of a Fund if they are shareholders of the
Fund on the record date for such dividend. There is no sales charge in
connection with purchases of shares. The Trust reserves the right, in its sole
discretion, to reject any purchase offer and to suspend the offering of
shares.
The minimum initial investment for any record shareholder account
with a Fund is $250,000 and subsequent investments will be accepted in any
amount. The Trust reserves the right to vary the initial investment minimum
and to establish minimums for additional investments at any time. In addition,
the Trust may waive the minimum initial investment requirement for any
investor. The Trust does not issue share certificates.
Purchases by Mail
Shares may be purchased initially by completing the Account
Application accompanying this Prospectus and mailing it, together with a check
in the amount of $250,000 or more drawn on a U.S. bank payable to the
appropriate Fund for each account an investor wishes to open, to:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
210 W. 10th Street
Kansas City, MO 64105
Subsequent investments in an existing account in any Fund may be made
at any time by sending to the Transfer Agent, at the above address, a check
payable to the appropriate Fund, along with either (i) a subsequent order form
which may be obtained from the Transfer Agent or (ii) a letter stating the
amount of the investment, the name of the Fund and the account number in which
the investment is to be made. Investors
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<PAGE>
should indicate the name of the appropriate Fund and account number on all
correspondence.
Purchases by Wire
Investors having an account with a commercial bank that is a member
of the Federal Reserve System may purchase shares of any Fund by requesting
their bank to transmit funds by wire to:
United Missouri Bank of Kansas City, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment by wire, an
investor must first telephone 1-800-407-7301 to be assigned a wire account
number. The investor may then transmit funds by wire through the wire
procedures described above. The investor's name, account number, social
security or other taxpayer identification number, and address must be
specified in the wire. In addition, investors making initial investments by
wire must promptly complete the Account Application accompanying this
Prospectus and forward it to the Transfer Agent at:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
210 W. 10th Street
Kansas City, MO 64105
Subsequent Purchases: Additional investments may be made at any
time through the wire procedures described above, which must include the
investor's name and account number.
Reports to Shareholders and Confirmations
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. All transactions in shares of a
Fund and dividends and distributions paid by a Fund are reflected in
confirmations issued by the Transfer Agent at the time of the transaction
and/or in monthly statements issued by the Transfer Agent. A year-to-date
statement will be provided by the Transfer Agent. Shareholders with inquiries
regarding a Fund may call Morgan Grenfell Investment Trust at 1-800-814-3401
or write to Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City,
MO 64141-6165.
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Exchange Privilege
The Funds provide a telephone exchange privilege and a written
exchange privilege. Shares of a Fund may be exchanged in amounts as low as
$50,000 for shares of any other Fund or any International Fund. A shareholder
should obtain and read the prospectus relating to an International Fund and
consider its investment objective, policies and fees before making an exchange
into that fund. Exchanges will be permitted only in those states in which the
relevant fund is available for sale.
If a shareholder elects the telephone exchange privilege on the
Account Application, the shareholder will be able to effect the exchange of
shares in its account by telephone, as long as all accounts are identically
registered. A shareholder can exchange shares by telephone by calling
1-800-407-7301 before 4:00 p.m., Eastern time, on any Business Day. Shares
exchanged will be valued at their respective net asset values next determined
after the telephone exchange request is received. Neither the Funds nor their
agents will be liable for any loss incurred by a shareholder as a result of
following instructions communicated by telephone that they reasonably believe
to be genuine. To confirm that telephone exchange requests are genuine, the
Funds will employ reasonable procedures such as providing written confirmation
of telephone exchange transactions and tape recording of telephone exchange
requests. If a Fund does not employ such reasonable procedures, it may be
liable for any loss incurred by a shareholder due to a fraudulent or other
unauthorized telephone exchange request. The Funds reserve the right to refuse
any request made by any shareholder. Investors will receive 60 days written
notice prior to any change in a Fund's telephone exchange procedures.
In addition to using the telephone exchange privilege, shareholders
in any of the Funds may exchange their shares for shares in any other Fund by
submitting a written request, in proper form, to the Transfer Agent. Shares
exchanged in this manner will be valued at their respective net asset values
next determined after the receipt of the written exchange request.
An exchange is treated as a sale of the shares exchanged and,
therefore, may produce a gain or loss to the shareholder that is recognizable
for tax purposes. Investors will receive 60 days' written notice prior to any
change in a Fund's exchange procedures.
REDEMPTION OF SHARES
How To Redeem
Shareholders may redeem shares of a Fund without charge upon request
on any Business Day by placing redemption requests with the
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Transfer Agent prior to 4:00 p.m., Eastern Time. Shares are redeemed at the
net asset value next determined after receipt of the redemption request by the
Transfer Agent. Shares subject to a redemption request will earn any dividends
for which the record date is the day the request is received.
Redemption requests may be made by telephoning Morgan Grenfell
Investment Trust at 1-800-407-7301 or by a written request addressed to the
Transfer Agent in accordance with the procedures set forth below. A written
request must specify the number of shares to be redeemed, the Fund from which
shares are being redeemed, the account number, payment instructions and the
exact registration on the account. Signatures must be guaranteed in accordance
with the procedures set forth below under "Payment of Redemption Proceeds." A
shareholder may request redemptions by telephone if the optional telephone
redemption privilege is elected on the Account Application. In order to verify
the authenticity of telephone redemption requests, the Transfer Agent's
telephone representatives will request that the caller provide certain
information unique to the account. If the caller is unable to provide this
information, telephone redemption requests will not be processed and the
redemption will have to be completed by mail. As long as the Transfer Agent's
telephone representatives comply with the procedures described above, neither
the Trust nor the Transfer Agent will be liable for any losses due to
fraudulent or unauthorized transactions. Finally, it may be difficult to
implement telephone redemptions in times of drastic economic or market
changes.
Payment of Redemption Proceeds
Redemption proceeds ordinarily will be wired to the bank account
designated on the Account Application, unless payment by check has been
requested. For redemption requests received by the Transfer Agent by 4:00
p.m., Eastern time, redemption proceeds often will be wired the next Business
Day. Normally, redemption proceeds will be wired within seven days after the
Transfer Agent receives the appropriate redemption request documents,
including any additional documentation that may be required by the Transfer
Agent in order to establish that a redemption request has been properly
authorized. In addition, the payment of redemption proceeds for shares of a
Fund recently purchased by check will be delayed for up to 15 calendar days.
After a wire has been initiated by the Transfer Agent, neither the Transfer
Agent nor the Trust assumes any further responsibility for the performance of
intermediaries or the shareholder's bank in the transfer process. If a
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problem with such performance arises, the shareholder should deal directly
with such intermediaries or bank.
Shareholders may request that redemption payments be made by Federal
Reserve wire or Automated Clearing House (ACH) wire. The Custodian may deduct
a wire charge (curently $10) from redemption payments made by Federal Reserve
wire. Shareholders cannot redeem shares of any Fund by Federal Reserve wire on
Federal holidays restricting wire transfers. There is no charge for ACH wire
transactions; however, such transactions will not be posted to a shareholder's
bank account until the second Business Day following the transaction.
A shareholder may change the bank designated to receive redemption
proceeds by providing written notice to the Transfer Agent which has been
signed by the shareholder or its authorized representative. This signature
must be guaranteed by a bank, a securities broker or dealer, a credit union
having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies standards established by the Transfer Agent. The Transfer Agent may
also require additional documentation in connection with a request to change a
designated bank.
If the Board of Trustees determines that it is appropriate in order
to protect the best interests of a Fund and its shareholders, the Fund, under
the limited circumstances described below, may satisfy all or part of a
redemption request by delivering portfolio securities to a redeeming investor.
However, the Trust, on behalf of each Fund, has elected, pursuant to Rule
18f-1 under the 1940 Act, to redeem its shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. Only redemptions in excess of this limit may be paid
in kind. In-kind payments would not have to constitute a cross-section of a
Fund's portfolio. Investors receiving redemption payment in portfolio
securities will not have eliminated their investment exposure by their
redemption as would investors receiving their redemption payment in cash.
Instead these investors will be subject to risks inherent in owning such
securities, including market value and currency fluctuations, difficulties in
selling securities in particular markets and repatriating the sales proceeds,
and the political and other risks described under "Description of Securities
and Investment Techniques and Related Risks - Foreign Securities." In
addition, a shareholder generally will incur additional expenses, such as
brokerage commissions and, in the case of foreign currency denominated
securities, currency conversion fees or expenses, on the sale or other
disposition of securities received from a Fund. Any portfolio securities paid
or distributed to a redeeming shareholder would be valued as described under
"Net Asset Value."
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NET ASSET VALUE
The net asset value per share of each Fund is normally calculated as
of the close of regular trading on the NYSE, currently 4:00 p.m. Eastern time,
on each Business Day. The net asset value of each Fund's shares is determined
by adding the value of all securities, cash and other assets of the Fund,
subtracting liabilities (including accrued expenses and dividends payable) and
dividing the result by the total number of outstanding shares of the Fund.
For purposes of calculating each Fund's net asset value per share,
equity securities traded on a recognized securities exchange are valued at
their last sale price on the principal exchange on which they are traded on
the valuation day or, if no sale occurs, at the bid price. Unlisted equity
securities for which current market quotations are readily available are
valued at their most recent bid price. Debt securities and other fixed-income
investments owned by the Funds are valued at prices supplied by independent
pricing agents, which prices reflect broker-dealer supplied valuations and
electronic data processing techniques. Short-term obligations maturing in
sixty days or less may be valued at amortized cost, which does not take into
account unrealized gains or losses on portfolio securities. Amortized cost
valuation involves initially valuing a security at its cost, and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the security's
market value. While this method provides certainty in valuation, it may result
in periods in which the value of the security, as determined by the amortized
cost method, may be higher or lower than the price a Fund would receive if the
Fund sold the security. Other assets and assets whose market value does not,
in the opinion of the Adviser, reflect fair value are valued at fair value
using methods determined in good faith by the Board of Trustees.
Certain portfolio securities held by the Equity Funds and the Fixed
Income Funds may be listed on foreign exchanges which trade on days when the
NYSE is closed. As a result, the net asset value of each such Fund may be
significantly affected by such trading on days when shareholders have no
ability to redeem shares of the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Equity Fund declares and pays dividends from net investment
income, if any, and distributes net short-term capital gain, if any, at least
annually. Each Fixed Income Fund and each Municipal Fund distributes
substantially all of its net investment income in the form of dividends
declared daily and paid monthly. Each Fund also distributes at least annually
substantially all of the realized net long-term capital gain, if any, which it
realizes for each taxable year and may make distributions at any other times
when necessary to satisfy
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<PAGE>
applicable tax requirements. Capital losses, including any capital loss
carryovers from prior years, are taken into account in determining the amounts
of short-term and long-term capital gains to be distributed.
From time to time, a portion of a Fund's distributions may constitute
a return of capital for tax purposes. Dividends and distributions are made in
additional shares of the same Fund or, at the shareholder's election, in cash.
The election to reinvest dividends and distributions or receive them in cash
may be changed at any time upon written notice to the Transfer Agent. If no
election is made, all dividends and capital gain distributions will be
reinvested.
Taxes
Each Fund is treated as a separate entity for federal income tax
purposes and has elected or intends to elect to be treated as a regulated
investment company under Subchapter M of the Code. Each Fund intends to
qualify for such treatment for each taxable year. To qualify as a regulated
investment company, each Fund must satisfy certain requirements relating to
the sources of its income, diversification of its assets and distribution of
its income to shareholders. As a regulated investment company, a Fund will not
be subject to federal income or excise tax on any net investment income or net
realized capital gain that is distributed to its shareholders in accordance
with certain timing requirements of the Code.
Dividends paid by a Fund from its net investment income (except for
tax-exempt interest earned by the Municipal Funds), certain net realized
foreign exchange gains, the excess of net short-term capital gain over net
long-term capital loss and original issue discount (except for such discount
on the Municipal Funds' tax-exempt obligations) or market discount income will
be taxable to shareholders as ordinary income. Dividends paid by a Fund from
any excess of net long-term capital gain over net short-term capital loss will
be taxable to a shareholder as long-term capital gain regardless of how long
the shareholder has held its shares. These tax consequences will apply
regardless of whether distributions are received in cash or reinvested in
shares. A portion of the dividends paid to corporate shareholders by the
Equity Funds from dividends they receive from U.S. domestic corporations may
qualify for the dividends-received deduction for corporate shareholders,
subject to holding period requirements and debtfinancing limitations under the
Code. Certain distributions declared in October, November or December and paid
in January of the following year are taxable to shareholders as if received on
December 31 of the year in which they are declared. Shareholders will be
informed annually about the amount and character of distributions received
from a Fund for federal income tax purposes.
Each Municipal Fund intends to satisfy certain requirements of the
Code so that it may distribute the tax-exempt interest it receives as
"exempt-interest dividends," as defined in the Code. Distributions of a
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<PAGE>
Municipal Fund that are attributable to interest on tax-exempt obligations and
that the Municipal Fund designates as exempt-interest dividends will be
excluded from gross income for federal income tax purposes, although all or a
portion of such a distribution may increase a shareholder's liability (if any)
for the federal alternative minimum tax and the entire distribution may be
includable in the tax base for determining taxability of social security or
railroad retirement benefits. Distributions by a Municipal Fund from sources
other than tax-exempt interest will generally be taxable as described in the
preceding paragraph. Persons who are "substantial users" (or related persons
to such substantial users) of facilities financed by industrial development or
certain private activity bonds should consult their own tax advisers before
purchasing shares of a Municipal Fund. Interest on indebtedness incurred or
continued to purchase or carry shares of a Municipal Fund is not deductible to
the extent attributable to such Fund's distributions that are exempt-interest
dividends.
Individuals and certain other classes of shareholders may be subject
to 31% backup withholding of federal income tax on dividends (other than
exempt-interest dividends), redemptions and exchanges if they fail to furnish
their correct taxpayer identification number and certain certifications or if
they are otherwise subject to back-up withholding. Individuals, corporations
and other shareholders that are not U.S. persons under the Code are subject to
different tax rules and may be subject to non-resident alien withholding at
the rate of 30% (or a lower rate provided by an applicable tax treaty) on
amounts treated as ordinary dividends from a Fund and, unless a current IRS
Form W-8 or acceptable substitute is on file, to back-up witholding on certain
other payments from a Fund.
Investors should consider the tax implications of buying shares
immediately prior to a distribution. Investors who purchase shares shortly
before the record date for a distribution will pay a per share price that
includes the value of the anticipated distribution and will be taxed on any
taxable distribution even though the distribution represents a return of a
portion of the purchase price.
Redemptions and exchanges of shares are taxable events on which a
shareholder may recognize a gain or loss.
In addition to federal taxes, a shareholder may be subject to state,
local or foreign taxes on dividends, capital gain distributions, or the
proceeds of redemptions or exchanges. A state income (and possibly local
income and/or intangible property) tax exemption is generally available to the
extent a Fund's distributions are derived from interest on (or, in the case of
intangibles taxes, the value of its assets is attributable to) certain U.S.
Government obligations and/or municipal obligations of certain issuers located
in the state or locality imposing the applicable taxes. In some states, such
an exemption may be available only if certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. The Funds
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<PAGE>
may not satisfy such requirements in some states or localities. Shareholders
should consult their tax advisors regarding specific questions about federal,
state, local or foreign taxes and special rules that may be applicable to
certain classes of investors, such as retirement plans, financial
institutions, tax-exempt entities, insurance companies and non-U.S. persons.
ORGANIZATION AND SHARES OF THE TRUST
The Trust was formed as a business trust under the laws of the State
of Delaware on September 13, 1993, and commenced investment operations on
January 3, 1994. The Board of Trustees of the Trust is responsible for the
overall management and supervision of the affairs of the Trust. The
Declaration of Trust authorizes the Board of Trustees to create separate
investment series or portfolios of shares. As of the date hereof, the Trustees
have established the Funds described in this Prospectus and eleven additional
series. Until December 28, 1994, the Fixed Income Fund and the Municipal Bond
Fund were series of The Advisors' Inner Circle Fund, a business trust
organized under the laws of The Commonwealth of Massachusetts on July 18,
1991. The Declaration of Trust further authorizes the Trust to classify or
reclassify any series or portfolio of shares into one or more classes.
Each share of a Fund represents an equal proportionate interest in
the assets belonging to that Fund. When issued, shares of the Funds are fully
paid and nonassessable. In the event of liquidation, shareholders are entitled
to share pro rata in the net assets of the applicable Fund available for
distribution to shareholders. Shares of the Funds entitle their holders to one
vote per share, are freely transferable and have no preemptive, subscription
or conversion rights.
Shares of a Fund will be voted separately with respect to matters
pertaining to that Fund except for the election of Trustees and the
ratification of independent accountants. For example, shareholders of each
Fund are required to approve the adoption of any investment advisory agreement
relating to such Fund and any change in the fundamental investment
restrictions of such Fund. Approval by the shareholders of one Fund is
effective only as to that Fund. The Trust does not intend to hold shareholder
meetings, except as may be required by the 1940 Act. The Trust's Declaration
of Trust provides that special meetings of shareholders shall be called for
any purpose, including the removal of a Trustee, upon written request of
shareholders entitled to vote at least 10% of the outstanding shares of the
Trust, or Fund, as the case may be. In addition, if ten or more shareholders
of record who have held shares for at least six months and who hold in the
aggregate either shares having a net asset value of $25,000 or 1% of the
outstanding shares, whichever is less, seek to call a meeting for the purpose
of removing a Trustee, the Trust has agreed to provide certain information to
such shareholders and generally to assist their efforts.
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<PAGE>
Certain of the Trustees and officers of the Trust reside outside the
United States, and substantially all the assets of these persons are located
outside the United States. It may not be possible, therefore, for investors to
effect service of process within the United States upon these persons or to
enforce against them, in United States courts or foreign courts, judgments
obtained in United States courts predicated upon the civil liability
provisions of the federal securities laws of the United States or the laws of
the State of Delaware. In addition, it is not certain that a foreign court
would enforce, in original actions or in actions to enforce judgments obtained
in the United States, liabilities against these Trustees and officers
predicated solely upon the federal securities laws. See "Trustees and
Officers" in the Statement of Additional Information.
As of May 17, 1996, the Adviser owned 85.87% of the outstanding
shares of the Smaller Companies Fund.
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and
yield for a Fund, may be quoted in advertisements or in communications to
shareholders. A Fund's total return may be calculated on an annualized and
aggregate basis for various periods (which periods will be stated in the
advertisement). Average annual return reflects the average percentage change
per year in value of an investment in a Fund. Aggregate total return reflects
the total percentage change over the stated period. In calculating total
return, dividends and capital gain distributions made by the Fund during the
period are assumed to be reinvested in the Fund's shares. A Fund's yield
reflects a Fund's overall rate of income on portfolio investments as a
percentage of the share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the net
asset value per share on the last day of that period.
For the Municipal Funds, tax-equivalent yield may also be quoted.
Tax-equivalent yield is calculated by determining the rate of return that
would have to be achieved on a fully taxable investment to produce the after
tax equivalent of a Municipal Fund's yield, assuming certain tax brackets for
a shareholder.
To help investors better evaluate how an investment in a Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss performance as reported by various financial publications. The
performance of a Fund may be compared in publications to the performance of
various indices and investments for which reliable performance data is
available. In addition, the performance of a Fund may be compared in
publications to averages, performance rankings or other information prepared
by recognized mutual fund statistical services.
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<PAGE>
Performance quotations of a Fund represent the Fund's past
performance and, consequently, should not be considered representative of the
future performance of the Fund. The value of Fund shares, when redeemed, may
be more or less than the original cost. Any fees charged by banks or other
institutional investors directly to their customer accounts in connection with
investments in shares of a Fund are not at the direction or within the control
of the Funds and will not be included in the Funds' calculations of total
return.
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<PAGE>
APPENDIX A - 1
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if
you fail to provide your correct Taxpayer Identification Number (TIN) and the
certifications in Section H or you are otherwise subject to backup
withholding. Amounts withheld and forwarded to the IRS can be credited as a
payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minor=s Act, the TIN of the minor should
be furnished. If you do not have a TIN, you may apply for one using forms
available at local offices of the Social Security Administration or the IRS.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and write "exempt" after
their signature in section H of the application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Funds and
must provide certain certifications on IRS Form W-8 to avoid backup
withholding with respect to other payments. For further information, see
Internal Revenue Code Sections 1441, and 1442 and 3406 and/or consult your tax
adviser.
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<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
680 East Swedesford Road
Wayne, Pennsylvania 19087-1658
Distributor
SEI Financial Services Company
680 East Swedesford Road
Wayne, Pennsylvania 19087-1658
Custodians
The Northern Trust Company
Fifty South LaSalle Street
Chicago, Illinois 60675
CoreStates Bank, N.A.
P.O. Box 7618
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
Transfer Agent
DST Systems, Inc.
SEI Division CT-7
210 W. 10th Street
Kansas City, Missouri 64105
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Service Information
Existing accounts, new accounts, prospectuses,
statements of additional information,
applications, and service forms - 1-800-814-3401
Telephone Exchanges - 1-800-407-7301
Share Price and Performance
Information - 1-800-814-3401
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
August 27, 1996
Morgan Grenfell Investment Trust (the "Trust") is an open-end,
management investment company consisting of eighteen investment portfolios,
each having separate and distinct investment objectives and policies. This
Statement of Additional Information provides supplementary information
pertaining to the following investment portfolios of the Trust (each, a
"Fund"):
(bullet) Morgan Grenfell Fixed Income Fund
(bullet) Morgan Grenfell Municipal Bond Fund
(bullet) Morgan Grenfell Short-Term Fixed Income Fund
(bullet) Morgan Grenfell Short-Term Municipal Bond Fund
(bullet) Morgan Grenfell Smaller Companies Fund
(bullet) Morgan Grenfell Microcap Fund
(bullet) Morgan Grenfell Large Cap Growth Fund
This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Funds' Prospectus dated August 27,
1996, as amended or supplemented from time to time (the "Prospectus"). A copy
of the Prospectus may be obtained without charge from SEI Financial Services
Company, the Trust's Distributor, by calling 1-800-814-3401 or writing to 680
East Swedesford Road, Wayne, Pennsylvania 19087-1658.
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<PAGE>
TABLE OF CONTENTS
Page
----
Introduction............................................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks....................................... 4
Investment Restrictions.................................................. 30
Trustees and Officers.................................................... 37
Investment Advisory and Other Services................................... 41
Portfolio Transactions .................................................. 47
Net Asset Value.......................................................... 50
Performance Information.................................................. 51
Taxes.................................................................... 55
General Information About the Trust...................................... 64
Additional Information................................................... 68
Financial Statements..................................................... 69
Appendix A -- Description of Ratings..................................... A-1
---------------
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or
in the Prospectus in connection with the offering made by the Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Trust or its Distributor. The Prospectus does
not constitute an offering by the Trust or by the Distributor in any
jurisdiction in which such offering may not lawfully be made. Shares of the
Funds are not available in certain states. Please call 1-800-814-3401 to
determine availability in your state.
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that
currently consists of eighteen separate investment portfolios. This Statement
of Additional Information relates to the following six separate investment
portfolios of the Trust (the "Funds"):
Morgan Grenfell Smaller Companies Fund
Morgan Grenfell Microcap Fund
Morgan Grenfell Large Cap Growth Fund
(collectively, the "Equity Funds")
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Short-Term Fixed Income Fund
(collectively, the "Fixed Income Funds")
Morgan Grenfell Municipal Bond Fund
Morgan Grenfell Short-Term Municipal Bond Fund
(collectively, the "Municipal Funds")
The Funds are classified as "diversified" within the meaning of the
Investment Company Act of 1940 (the "1940 Act").
Morgan Grenfell Capital Management, Inc. (the "Adviser" or "MGCM")
serves as investment adviser to the Funds. SEI Financial Services Company
(the "Distributor") serves as the Funds' principal underwriter and
distributor. SEI Financial Management Corporation serves as the Funds'
administrator.
The information contained in this Statement of Additional Information
generally supplements the information contained in the Prospectus. No investor
should invest in a Fund without first reading the Prospectus. Capitalized
terms used herein and not otherwise defined have the same meaning ascribed to
them in the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of each Fund.
Fixed Income Securities
Variable and Floating Rate Instruments. Debt instruments purchased by
a Fund may be structured to have variable or floating interest rates. These
instruments may include variable amount master demand notes that permit the
indebtedness to vary in addition to providing for periodic adjustments in the
interest rates. The Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and,
if the instrument is subject to a demand feature, will continuously monitor
their financial ability to meet payment on demand. Where necessary to ensure
that a variable or floating rate instrument is equivalent to the quality
standards applicable to a Fund's fixed income investments, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Any bank providing such a bank letter, line of credit, guarantee or loan
commitment will meet the Fund's investment quality standards relating to
investments in bank obligations. A Fund will invest in variable and floating
rate instruments only when the Adviser deems the investment to involve minimal
credit risk. The Adviser will also continuously monitor the creditworthiness
of issuers of such instruments to determine whether a Fund should continue to
hold the investments.
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the instruments, and
a Fund could suffer a loss if the issuer defaults or during periods in which a
Fund is not entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject
to the Fund's limitation on investments in illiquid securities when a reliable
trading market for the instruments does not exist and the Fund may not demand
payment of the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the
money market instruments in which each Fund may invest (such as commercial
paper and bank obligations), are dependent on a variety of factors, including
general money market conditions, conditions in the particular market for the
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<PAGE>
obligation, the financial condition of the issuer, the size of the offering,
the maturity of the obligation and the ratings of the issue. The ratings of
Standard and Poors Ratings Group ("Standard & Poor's"), Moody's Investor
Service, Inc. ("Moody's") and other recognized rating organizations represent
their respective opinions as to the quality of the obligations they undertake
to rate. Ratings, however, are general and are not absolute standards of
quality or value. Consequently, obligations with the same rating, maturity and
interest rate may have different market prices. See Appendix A for a
description of the ratings provided by Standard & Poor's, Moody's and certain
other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees or the Adviser, pursuant to
guidelines established by the Board of Trustees, will consider such an event
in determining whether the Fund should continue to hold the security in
accordance with the interests of the Fund and applicable regulations of the
Securities and Exchange Commission (the "Commission"). In no event, however,
will a Fund hold more than 5% of its net assets in fixed income securities
that are not investment grade.
Custodial Receipts. Each of the Fixed Income Funds may acquire U.S.
Government Securities and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or
investment brokerage firm. Having separated the interest coupons from the
underlying principal of the U.S. Government Securities, the holder will resell
the stripped securities in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRs") and
"Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons
are sold separately from the underlying principal, which is usually sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are generally held in book-entry form at a Federal Reserve Bank.
Counsel to the underwriters of these certificates or other evidences of
ownership of U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government Securities for federal
tax and securities purposes. In the case of CATS and TIGRS, the Internal
Revenue Service ( the "IRS") has reached this conclusion for the purpose of
applying the tax diversification requirements applicable to regulated
investment companies such as the Funds. CATS and TIGRS are not considered U.S.
Government Securities by the staff of the Commission. Further, the IRS
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<PAGE>
conclusion noted above is contained only in a general counsel memorandum, which
is an internal document of no precedential value or binding effect, and a
private letter ruling, which also may not be relied upon by the Funds. The Trust
is not aware of any binding legislative, judicial or administrative authority on
this issue.
Preferred Stock
Each of the Equity Funds, subject to its investment objectives, may
purchase preferred stock. Preferred stocks are equity securities, but
possess certain attributes of debt securities and are generally considered
fixed income securities. Holders of preferred stocks normally have the right
to receive dividends at a fixed rate when and as declared by the issuer's
board of directors, but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the preferred stock may
be cumulative, and in such cases all cumulative dividends usually must be paid
prior to dividend payments to common stockholders. Because of this preference,
preferred stocks generally entail less risk than common stocks. Upon
liquidation, preferred stocks are entitled to a specified liquidation
preference, which is generally the same as the par or stated value, and are
senior in right of payment to common stocks. However, preferred stocks are
equity securities in that they do not represent a liability of the issuer and
therefore do not offer as great a degree of protection of capital or assurance
of continued income as investments in corporate debt securities. In addition,
preferred stocks are subordinated in right of payment to all debt obligations
and creditors of the issuer, and convertible preferred stocks may be
subordinated to other preferred stock of the same issuer. See "Convertible
Securities and Preferred Stocks" in the Prospectus for a description of
certain characteristics of convertible preferred stock.
Warrants
As stated in the Prospectus, each of the Equity Funds may purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. The purchase of warrants
involves a risk that a Fund could lose the purchase value of a warrant if the
right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of
the related security may exceed the value of the subscribed security's market
price such as when there is no movement in the level of the underlying
security. A Fund will not invest more than 5% of its net assets, taken at
market value, in warrants, or more than 2% of its net assets, taken at market
value, in warrants not listed on a recognized securities exchange.
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<PAGE>
Warrants acquired by a Fund in units or attached to other securities shall not
be included in determining compliance with these percentage limitations. See
"Investment Restrictions."
Municipal Securities
As stated in the Prospectus, the Municipal Funds and, to a more
limited extent, the Fixed Income Funds may invest in municipal securities.
Municipal securities consist of bonds, notes and other instruments issued by
or on behalf of states, territories and possessions of the United States
(including the District of Columbia) and their political subdivisions,
agencies or instrumentalities, the interest on which is exempt from regular
federal income tax (i.e., excluded from gross income for federal income tax
purposes but not necessarily exempt from the federal alternative minimum tax
or from state and local taxes). Municipal securities may also be issued on
a taxable basis (i.e., the interest on such securities is not exempt from
regular federal income tax).
Municipal securities are often issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. 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. Municipal securities also include
"private activity" or industrial development bonds, which are issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of municipal securities are
"general obligations" and "revenue obligations." General obligations are
secured by the issuer's pledge of its full faith and credit for the payment of
principal and interest although the characteristics and enforcement of general
obligations may vary according to the law applicable to the particular issuer.
Revenue obligations, which include, but are not limited to, private activity
bonds, resource recovery bonds, certificates of participation and certain
municipal notes, are not backed by the credit and taxing authority of the
issuer and are payable solely 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. Nevertheless, the obligations
of the issuer may also be backed by a letter of credit, guarantee or
insurance. General obligations and revenue obligations
- 7 -
<PAGE>
may be issued in a variety of forms, including commercial paper, fixed,
variable and floating rate securities, tender option bonds, auction rate bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is
a variety of hybrid and special types of municipal securities. There are also
numerous differences in the credit backing of municipal securities both within
and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a municipal security which is not a general
obligation is made by the Adviser based on the characteristics of the
municipal security, the most important of which is the source of funds for the
payment of principal and interest on such securities.
An entire issue of municipal securities may be purchased by one or a
small number of institutional investors such as a Fund. Thus, the issue may
not be said to be publicly offered. Unlike some securities that are not
publicly offered, a secondary market exists for many municipal securities that
were not publicly offered initially and such securities can be readily
marketable.
The obligations of an issuer to pay the principal of and interest on
a municipal security are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act, and laws, if any, that may be enacted by Congress or
state legislatures extending the time for payment of principal or interest or
imposing other constraints upon the enforcement of such obligations. There is
also the possibility that, as a result of litigation or other conditions, the
power or ability of the issuer to pay when due principal of or interest on a
municipal security may be materially affected.
Municipal Leases, Certificates of Participation and Other
Participation Interests. A municipal lease is an obligation in the form of a
lease or installment purchase contract which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations
is generally exempt from state and local taxes in the state of issuance (as
well as regular Federal income tax). Municipal leases frequently involve
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of
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<PAGE>
"non-appropriation" clauses that relieve the governmental issuer of any
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. Thus, a Fund's investment in municipal leases will be
subject to the special risk that the governmental issuer may not appropriate
funds for lease payments.
In addition, such leases or contracts may be subject to the temporary
abatement of payments in the event the issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased equipment. Although
the obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of a Fund's original investment.
Certificates of participation represent undivided interests in
municipal leases, installment purchase contracts or other instruments. The
certificates are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or installment purchase contracts.
Certain municipal lease obligations and certificates of participation
may be deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or
quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Adviser will consider factors unique to particular lease
obligations and certificates of participation affecting the marketability
thereof. These include the general creditworthiness of the issuer, the
importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund. No Fund may invest more
than 5% of its net assets in municipal leases.
Each Municipal Fund and each Fixed Income Fund may purchase
participations in municipal securities held by a commercial bank or other
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financial institution. Such participations provide a Fund with the right to a
pro rata undivided interest in the underlying municipal securities. In
addition, such participations generally provide a Fund with the right to
demand payment, on not more than seven days notice, of all or any part of the
Fund's participation interest in the underlying municipal security, plus
accrued interest.
Municipal Notes. Municipal securities in the form of notes generally
are used to provide for short-term capital needs, in anticipation of an
issuer's receipt of other revenues or financing, and typically have maturities
of up to three years. Such instruments may include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Tax and Revenue
Anticipation Notes and Construction Loan Notes. Tax Anticipation Notes are
issued to finance the working capital needs of governments. Generally, they
are issued in anticipation of various tax revenues, such as income, sales,
property, use and business taxes, and are payable from these specific future
taxes. Revenue Anticipation Notes are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under federal
revenue sharing programs. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most
cases, the long-term bonds then provide the funds needed for repayment of the
notes. Tax and Revenue Anticipation Notes combine the funding sources of both
Tax Anticipation Notes and Revenue Anticipation Notes. Construction Loan Notes
are sold to provide construction financing. These notes are secured by
mortgage notes insured by the Federal Housing Authority; however, the proceeds
from the insurance may be less than the economic equivalent of the payment of
principal and interest on the mortgage note if there has been a default. The
obligations of an issuer of municipal notes are generally secured by the
anticipated revenues from taxes, grants or bond financing. An investment in
such instruments, however, presents a risk that the anticipated revenues will
not be received or that such revenues will be insufficient to satisfy the
issuer's payment obligations under the notes or that refinancing will be
otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper
typically represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by state and local governments and their agencies to
finance working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions.
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Pre-Refunded Municipal Securities. The principal of and interest on
municipal securities that have been pre-refunded are no longer paid from the
original revenue source for the securities. Instead, after pre-refunding the
source of such payments is typically an escrow fund consisting of obligations
issued or guaranteed by the U.S. Government. The assets in the escrow fund are
derived from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded municipal securities. Issuers of municipal securities use this
advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or are
redeemed by the issuer. Pre-refunded municipal securities are usually
purchased at a price which represents a premium over their face value.
Tender Option Bonds. A tender option bond is a municipal security
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates. The bond is typically issued in
conjunction with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof.
As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the bond's fixed coupon
rate and the rate, as determined by a remarketing or similar agent at or near
the commencement of such period, that would cause the securities, coupled with
the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate.
However, an institution will not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrade in the credit rating
assigned to the issuer of the bond. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer
and the financial institution is
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deemed, in light of the Fund's credit quality requirements, to be inadequate.
Each Municipal Fund intends to invest only in tender option bonds the interest
on which will, in the opinion of bond counsel, counsel for the issuer of
interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the IRS
will agree with such counsel's opinion in any particular case, there is a risk
that a Municipal Fund will not be considered the owner of such tender option
bonds and thus will not be entitled to treat such interest as exempt from such
tax. Additionally, the federal income tax treatment of certain other aspects
of these investments, including the proper tax treatment of tender option
bonds and the associated fees, in relation to various regulated investment
company tax provisions is unclear. Each Municipal Fund intends to manage its
portfolio in a manner designed to eliminate or minimize any adverse impact
from the tax rules applicable to these investments.
Auction Rate Securities. Auction rate securities consist of auction
rate municipal securities and auction rate preferred securities issued by
closed-end investment companies that invest primarily in municipal securities.
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids
are made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The dividend rate set by the auction
is the lowest interest or dividend rate that covers all securities offered for
sale. While this process is designed to permit auction rate securities to be
traded at par value, there is the risk that an auction will fail due to
insufficient demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end
fund may be designated as exempt from federal income tax to the extent they
are attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided
that the preferred securities are treated as equity securities for federal
income tax purposes and the closed-end fund complies with certain tests under
the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of
complying with the 20% limitation on each Municipal Fund's investments in
taxable investments, auction rate preferred securities will be treated as
taxable investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Each Fund's investments in auction rate preferred securities of
closed-end funds are subject to limitations on investments in other
investment companies, which limitations are prescribed by the 1940 Act and
certain state securities regulations. These limitations include a
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prohibition against acquiring more than 3% of the voting securities of any
other investment company, and investing more than 5% of the Fund's assets in
securities of any one investment company or more than 10% of its assets in
securities of all investment companies. A Fund will indirectly bear its
proportionate share of any management fees paid by such closed-end funds in
addition to the advisory fee payable directly by the Fund.
Private Activity Bonds. Certain types of municipal securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), are issued by or on behalf of
public authorities to obtain funds for privately-operated housing facilities,
airport, mass transit or port facilities, sewage disposal, solid waste
disposal or hazardous waste treatment or disposal facilities and certain local
facilities for water supply, gas or electricity. Other types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or
commercial facilities, may constitute municipal securities, although the
current federal tax laws place substantial limitations on the size of such
issues. The interest from certain private activity bonds owned by a Fund
(including a Municipal Fund's distributions attributable to such interest) may
be a preference item for purposes of the alternative minimum tax.
Mortgage-Backed Securities
As stated in the Prospectus, the Fixed Income Funds and the Municipal
Funds may invest in mortgage-backed securities, including derivative
instruments. Mortgage-backed securities represent direct or indirect
participations in or obligations collateralized by and payable from mortgage
loans secured by real property. Each Fixed Income Fund and each Municipal Fund
may invest in mortgage-backed securities issued or guaranteed by U.S.
Government agencies or instrumentalities such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Obligations
of GNMA are backed by the full faith and credit of the U.S. Government.
Obligations of FNMA and FHLMC are not backed by the full faith and credit of
the U.S. Government but are considered to be of high quality since they are
considered to be instrumentalities of the United States. The
market value and yield of these mortgage-backed securities can vary due to
market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of Federally insured
mortgage loans with a maximum maturity of 30 years. The scheduled monthly
interest and principal payments relating to mortgages in the pool
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will be "passed through" to investors. Government mortgage-backed securities
differ from conventional bonds in that principal is paid back to the
certificate holders over the life of the loan rather than at maturity. As a
result, there will be monthly scheduled payments of principal and interest.
Only the Fixed Income Funds may invest in mortgage-backed securities
issued by non-governmental entities including collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
CMOs are securities collateralized by mortgages, mortgage pass-throughs,
mortgage pay-through bonds (bonds representing an interest in a pool of
mortgages where the cash flow generated from the mortgage collateral pool is
dedicated to bond repayment), and mortgage-backed bonds (general obligations
of the issuers payable out of the issuers' general funds and additionally
secured by a first lien on a pool of single family detached properties). Many
CMOs are issued with a number of classes or series which have different
maturities and are retired in sequence. Investors purchasing such CMOs in the
shortest maturities receive or are credited with their pro rata portion of the
unscheduled prepayments of principal up to a predetermined portion of the
total CMO obligation. Until that portion of such CMO obligation is repaid,
investors in the longer maturities receive interest only. Accordingly, the
CMOs in the longer maturity series are less likely than other mortgage
pass-throughs to be prepaid prior to their stated maturity. Although some of
the mortgages underlying CMOs may be supported by various types of insurance,
and some CMOs may be backed by GNMA certificates or other mortgage
pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar
to CMOs in that they issue multiple classes of securities, including "regular"
interests and "residual" interests. The Funds do not intend to acquire
residual interests in REMICs under current tax law, due to certain
disadvantages for regulated investment companies that acquire such interests.
Mortgage-backed securities are subject to unscheduled principal
payments representing prepayments on the underlying mortgages. Although these
securities may offer yields higher than those available from other types of
securities, mortgage-backed securities may be less effective than other types
of securities as a means of "locking in" attractive long-term rates because of
the prepayment feature. For instance, when interest rates decline, the value
of these securities likely will not rise as much as comparable debt securities
due to the prepayment feature. In addition, these prepayments can cause the
price of a mortgage-backed security originally purchased at a premium to
decline in price to its par value, which may result in a loss.
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Due to prepayments of the underlying mortgage instruments,
mortgage-backed securities do not have a known actual maturity. In the absence
of a known maturity, market participants generally refer to an estimated
average life. The Adviser believes that the estimated average life is the most
appropriate measure of the maturity of a mortgage-backed security.
Accordingly, in order to determine whether such security is a permissible
investment, it will be deemed to have a remaining maturity of three years or
less if the average life, as estimated by the Adviser, is three years or less
at the time of purchase of the security by a Fund. An average life estimate is
a function of an assumption regarding anticipated prepayment patterns. The
assumption is based upon current interest rates, current conditions in the
relevant housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants could produce somewhat
different average life estimates with regard to the same security. Although
the Adviser will monitor the average life of the portfolio securities of each
Fixed Income Fund and Municipal Fund and make needed adjustments to comply
with the Funds' policy as to average dollar weighted portfolio maturity, there
can be no assurance that the average life of portfolio securities as estimated
by the Adviser will be the actual average life of such securities.
As stated in the Prospectus, no Fund will invest 25% or more of its
total assets in CMOs (other than U.S. Government Securities).
Asset-Backed Securities
As stated in the Prospectus, the Fixed Income Funds may invest in
asset-backed securities, which represent participations in, or are secured by
and payable from, pools of assets including company receivables, truck and
auto loans, leases and credit card receivables. The asset pools that back
asset-backed securities are securitized through the use of privatelyformed
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation, or other credit
enhancements may be present. Certain asset backed securities may be considered
derivative instruments. As stated in the Prospectus, no Fund will invest 25%
or more of its total assets in asset-backed securities.
Foreign Securities
Subject to their respective investment objectives and policies, the
Equity Funds and the Fixed Income Funds may invest in securities of foreign
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issuers. While the Equity Funds' non-U.S. investments may be denominated in
any currency, the Fixed Income Funds' investments in foreign securities may be
denominated only in the U.S. dollar. Foreign securities may offer investment
opportunities not available in the United States, but such investments also
involve significant risks not typically associated with investing in domestic
securities. In many foreign countries, there is less publicly available
information about foreign issuers, and there is less government regulation and
supervision of foreign stock exchanges, brokers and listed companies. Also, in
many foreign countries, companies are not subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic issuers. Security trading practices differ and there may be
difficulty in enforcing legal rights outside the United States. Settlement of
transactions in some foreign markets may be delayed or may be less frequent
than in the United States, which could affect the liquidity of the Funds'
portfolios. Additionally, in some foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the removal of
securities, property, or other Fund assets, political or social instability or
diplomatic developments which could affect investments in foreign securities.
To the extent the Equity Funds' investments are denominated in
foreign currencies, the net asset values of such Funds may be affected
favorably or unfavorably by fluctuations in currency exchange rates and by
changes in exchange control regulations. For example, if the Adviser increases
an Equity Fund's exposure to a foreign currency, and that currency's value
subsequently falls, the Adviser's currency management may result in increased
losses to the Fund. Similarly, if the Adviser hedges an Equity Fund's exposure
to a foreign currency, and that currency's value rises, the Fund will lose the
opportunity to participate in the currency's appreciation. The Equity Funds
will incur transaction costs in connection with conversions between
currencies.
Foreign Government Securities. The foreign government securities in
which the Fixed Income Funds and the Equity Funds may invest generally consist
of debt obligations issued or guaranteed by national, state or provincial
governments or similar political subdivisions. The Fixed Income Funds and the
Equity Funds may invest in foreign government securities in the form of
American Depositary Receipts. Foreign government securities also include debt
securities of supranational entities. Currently, each Fixed Income Fund
intends to invest only in obligations issues or guaranteed by the Asian
Development Bank, the Inter-American Development Bank, the International Bank
for Reconstruction and Development (the "World Bank"), the African Development
Bank, the European Coal and Steel Community, the European Economic Community,
the European Investment Bank and the Nordic Investment Bank. Foreign
government securities also include mortgage-related
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securities issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
Forward Foreign Currency Exchange Contracts
Each of the Equity Funds may exchange currencies in the normal course
of managing its investments in foreign securities and may incur costs in doing
so because a foreign exchange dealer will charge a fee for conversion. An Equity
Fund may conduct foreign currency exchange transactions on a "spot" basis (i.e.,
for prompt delivery and settlement) at the prevailing spot rate for purchasing
or selling currency in the foreign currency exchange market. An Equity Fund also
may enter into forward foreign currency exchange contracts ("forward currency
contracts") or other contracts to purchase and sell currencies for settlement at
a future date. A foreign exchange dealer, in that situation, will expect to
realize a profit based on the difference between the price at which a foreign
currency is sold to the Equity Fund and the price at which the dealer will cover
the purchase in the foreign currency market. Foreign exchange transactions are
entered into at prices quoted by dealers, which may include a mark-up over the
price that the dealer must pay for the currency.
A forward currency contract involves 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 agreed upon by the parties, at a price set
at the time of the contract. These 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 deposit
requirement, and no commissions are generally charged at any stage for trades.
At the maturity of a forward contract, an Equity Fund may either
accept or make delivery of the currency specified in the contract or, at or
prior to maturity, enter into a closing purchase transaction involving the
purchase or sale of an offsetting contract. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract.
The Equity Funds may enter into forward currency contracts only for
the following hedging purposes. First, when an Equity Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when an Equity Fund anticipates the receipt in a foreign currency
of dividend or interest payments on such a security which it holds, the Fund
may desire to "lock in" the U.S. dollar price of the security or the
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U.S. dollar equivalent of such dividend or interest payment, as the case may
be. By entering into a forward contract for the purchase or sale, for a fixed
amount of U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, the Fund will attempt to protect itself against an
adverse change in the relationship between the U.S. dollar and the subject
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.
Additionally, when management of an Equity Fund believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may cause the Fund to enter into a forward
contract to sell, for a fixed amount of U.S. dollars, the amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date on which the contract is entered into and
the date it matures. Using forward currency contracts in an attempt to protect
the value of a Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which a Fund can achieve
at some future point in time. The precise projection of short-term currency
market movements is not possible, and short-term hedging provides a means of
fixing the dollar value of only a portion of a Fund's foreign assets.
A Fund's custodian will place cash or liquid, high grade debt
securities ("High Grade Debt Securities") (i.e., securities rated in one of
the top three ratings categories by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's"), or a
comparable rating agency, or, if unrated, deemed by the Adviser to be of
comparable credit quality) into a segregated account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
forward currency contracts requiring the Fund to purchase foreign currencies.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis
so that the value of the account will equal the amount of a Fund's commitments
with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although forward currency contracts are not
presently regulated by the Commodity Futures Trading Commission (the "CFTC"),
the CFTC may in the future assert authority to regulate these contracts. In
such event, the Funds' ability to utilize forward currency contracts may be
restricted. In addition, a particular forward currency
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contract and assets used to cover such contract may be illiquid.
The Equity Funds generally will not enter into a forward currency
contract with a term of greater than one year.
While the Equity Funds will enter into forward currency contracts to
reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while the Equity Funds may benefit from currency
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be an imperfect correlation between a Fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. Such imperfect correlation may
cause a Fund to sustain losses which will prevent the Fund from achieving a
complete hedge or expose the Fund to risk of foreign currency exchange loss.
Forward currency contracts may be considered derivative instruments.
Each Equity Fund's activities in forward currency exchange contracts,
currency futures contracts and related options and currency options (see
below) may be limited by the requirements of subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Options on Securities, Securities Indices and Foreign Currencies
Each of the Equity Funds may write covered put and call options and
purchase put and call options. Such options may relate to particular
securities, to various stock indices, or to currencies. The Funds may write
call and put options which are issued by the Options Clearing Corporation
(the "OCC") or which are traded on U.S. and non-U.S. exchanges and
over-the-counter. These instruments may be considered derivative
instruments. See "Description of Securities and Investment Techniques and
Related Risks -- Options" in the Prospectus.
A call option on a securities index provides the holder with the
right to receive a cash payment upon exercise of the option if the market
value of the underlying index exceeds the option's exercise price. Conversely,
a put option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index is less than the option's exercise price. The amount of any
payment to the option holder will be equal to the difference between the
closing price of the index at the time of exercise and the exercise price of
the option expressed in U.S. dollars or a foreign currency, times a specified
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multiple. A put option on a currency gives its holder the right to sell an
amount (specified in units of the underlying currency) of the underlying
currency at the stated exercise price at any time prior to the option's
expiration. Conversely, a call option on a currency gives its holder the right
to purchase an amount (specified in units of the underlying currency) of the
underlying currency at the stated exercise price at any time prior to the
option's expiration.
The Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed
options by the OCC, which performs the obligations of its members who fail to
do so in connection with the purchase or sale of options. OTC options and the
assets used to cover such options will be deemed illiquid for purposes of each
Equity Fund's 15% limitation on investments in illiquid securities, except
that with respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction
at a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the Commission.
An Equity Fund will write call options only if they are "covered." In
the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or High Grade Debt Securities
in such amount are held in a segregated account by the Fund's custodian) upon
conversion or exchange of other securities held by it. For a call option on an
index, the option is covered if the Fund maintains with the Fund's custodian
cash or cash equivalents equal to the contract value. A call option on a
security or an index is also covered if the Fund holds a call on the same
security or index as the call written by the Fund where the exercise price of
the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written provided
the difference is maintained by the Fund in cash or High Grade Debt Securities
in a segregated account with the Fund's custodian. A call option on currency
written by a Fund is covered if the Fund owns an equal amount of the
underlying currency.
When a Fund purchases a put option, the premium paid by it is
recorded as an asset of the Fund. When the Fund writes an option, an amount
equal to
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the net premium (the premium less the commission paid by the Fund) received by
the Fund is included in the liability section of the Fund's statement of
assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be marked-to-market on an ongoing basis to reflect the
current value of the option purchased or written. The current value of a
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option purchased by the Fund
expires unexercised, the Fund realizes a loss equal to the premium paid. If
the Fund enters into a closing sale transaction on an option purchased by it,
the Fund will realize a gain if the premium received by the Fund on the
closing transaction is more than the premium paid to purchase the option, or a
loss if it is less. If an option written by the Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, it
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by the
Fund is exercised, the proceeds to the Fund from the exercise will be
increased by the net premium originally received, and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on
securities, securities indices and currencies. For example, there are
significant differences between the securities markets, currency markets and
the corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded OTC or on a
U.S. or non-U.S. securities exchange may be absent for reasons which include
the following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal
operations on an exchange; the facilities of an exchange or the OCC may not at
all times be adequate to handle current trading volume; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options that had been issued by the OCC as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during
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which the underlying securities and currencies are traded. To the extent that
the options markets close before the markets for the underlying securities and
currencies, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The risks described above also apply to options on
futures, which are discussed below.
Futures Contracts and Related Options
To hedge against changes in interest rates or securities prices and
for certain non-hedging purposes, the Equity Funds may purchase and sell
various kinds of futures contracts, and purchase and write call and put
options on any of such futures contracts. The Equity Funds may also enter into
closing purchase and sale transactions with respect to any of such contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), indices, currencies and other financial
instruments. The Equity Funds will engage in futures and related options
transactions only for bona fide hedging or other non-hedging purposes as
defined in regulations promulgated by the CFTC. All futures contracts entered
into by the Equity Funds are traded on U.S. exchanges or boards of trade that
are licensed and regulated by the CFTC or on foreign exchanges approved by the
CFTC.
Futures Contracts. A futures contract may generally be described as
an agreement between two parties to buy and sell a particular financial
instrument for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract). Futures contracts obligate the long or short holder to take or make
delivery of a specified quantity of a commodity or financial instrument, such
as a security or the cash value of a securities index, during a specified
future period at a specified price.
When interest rates are rising or securities prices are falling, an
Equity Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, an Equity Fund, through the purchase
of futures contracts, can attempt to secure better rates or prices than might
later be available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result
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in a profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Equity Funds may instead make, or take,
delivery of the underlying securities whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities are traded guarantees that, if still open, the
sale or purchase will be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that a Fund proposes to acquire. The
Equity Funds may, for example, take a "short" position in the futures market
by selling futures contracts in order to hedge against an anticipated rise in
interest rates or a decline in market prices that would adversely affect the
value of a Fund's portfolio securities. Such futures contracts may include
contracts for the future delivery of securities held by a Fund or securities
with characteristics similar to those of the Fund's portfolio securities. If,
in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for an Equity Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such
differential by having the Fund enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against
price changes affecting a Fund's securities portfolio. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of a
Fund's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the Equity Funds may take a "long" position by
purchasing futures contracts. This would be done, for example, when a Fund
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the applicable market
to be less favorable than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the Equity Funds the right (but not the
obligation) for a specified price to sell or to purchase, respectively, the
underlying futures contract at any time during the option period. As the
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purchaser of an option on a futures contract, a Fund obtains the benefit of
the futures position if prices move in a favorable direction but limits its
risk of loss in the event of an unfavorable price movement to the loss of the
premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
to sell a futures contract (if the option is exercised), which may have a
value higher than the exercise price. Conversely, the writing of a put option
on a futures contract generates a premium which may partially offset an
increase in the price of securities that a Fund intends to purchase. However,
a Fund becomes obligated to purchase a futures contract (if the option is
exercised) which may have a value lower than the exercise price. Thus, the
loss incurred by a Fund in writing options on futures is potentially unlimited
and may exceed the amount of the premium received. The Funds will incur
transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The
Equity Funds' ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
The Equity Funds may use options on futures contracts solely for bona
fide hedging or other non-hedging purposes as described below.
Other Considerations. The Equity Funds will engage in futures and
related options transactions only for bona fide hedging or non-hedging
purposes as permitted by CFTC regulations which permit principals of an
investment company registered under the 1940 Act to engage in such
transactions without registering as commodity pool operators. Each Equity Fund
will determine that the price fluctuations in the futures contracts and
options on futures used by it for hedging purposes are substantially related
to price fluctuations in securities or instruments held by the Fund or
securities or instruments which it expects to purchase. Except as stated
below, the Equity Funds' futures transactions will be entered into for
traditional hedging purposes--i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they
are denominated) that a Fund owns or futures contracts will be purchased to
protect a Fund against an increase in the price of securities (or the currency
in which they are denominated) that a Fund intends to purchase. As evidence of
this hedging intent, each Equity Fund expects that, on 75% or
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more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Fund will have purchased,
or will be in the process of purchasing, equivalent amounts of related
securities (or assets denominated in the related currency) in the cash market
at the time when the futures or option position is closed out. However, in
particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging
definition, a CFTC regulation now permits a Fund to elect to comply with a
different test under which the aggregate initial margin and premiums required
to establish non-hedging positions in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. A
Fund will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a regulated investment company for
federal income tax purposes. See "Taxes."
Each Equity Fund will be required, in connection with transactions in
futures contracts and the writing of options on futures contracts, to make
margin deposits, which will be held by its custodian for the benefit of the
futures commission merchant through whom the Fund engages in such futures and
option transactions. These transactions involve brokerage costs, require
margin deposits and, in the case of futures contracts and options obligating a
Fund to purchase securities, require a Fund to segregate cash or High Grade
Debt Securities in an account maintained with its custodian to cover such
contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, unanticipated changes in interest rates or securities prices may result
in a poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability
to close a futures position prior to its maturity date.
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In the event of an imperfect correlation between a futures position
and portfolio position which is intended to be protected, the desired
protection may not be obtained and an Equity Fund may be exposed to risk of
loss. The risk of imperfect correlation may be minimized by investing in
contracts whose price behavior is expected to resemble that of the Fund's
underlying securities. The Funds will attempt to minimize the risk that they
will be unable to close out futures positions by entering into such
transactions on a national exchange with an active and liquid secondary
market.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory
note of a U.S or non-U.S issuer. Each of the Funds may purchase commercial
paper as described in the Prospectus. Each Fund may also invest in variable
rate master demand notes which typically are issued by large corporate
borrowers and which provide for variable amounts of principal indebtedness and
periodic adjustments in the interest rate. Demand notes are direct lending
arrangements between a Fund and an issuer, and are not normally traded in a
secondary market. A Fund, however, may demand payment of principal and accrued
interest at any time. In addition, while demand notes generally are not rated,
their issuers must satisfy the same criteria as those that apply to issuers of
commercial paper. The Adviser will consider the earning power, cash flow and
other liquidity ratios of issuers of demand notes and continually will monitor
their financial ability to meet payment on demand. See also "Fixed Income
Securities --Variable and Floating Rate Instruments."
Bank Obligations
As stated in the Prospectus, each Fund's investments in money market
instruments may include certificates of deposit, time deposits and bankers'
acceptances. Certificates of Deposit ("CDs") are short-term negotiable
obligations of commercial banks. Time Deposits ("TDs") are non-negotiable
deposits maintained in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers usually in connection with international
transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). U.S. banks organized under state law are supervised
and examined by state banking authorities but are members of the Federal
Reserve System only if they elect to join. Most state banks are insured by the
FDIC (although such insurance may not be of material benefit to a Fund,
depending upon the principal amount of CDs of each bank held by
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the Fund) and are subject to federal examination and to a substantial body of
federal law and regulation. As a result of governmental regulations, U.S.
branches of U.S. banks, among other things, generally are required to maintain
specified levels of reserves, and are subject to other supervision and
regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased
by the Funds, are supervised and subject to examination by the Office of
Thrift Supervision. U.S. savings and loan associations are insured by the
Savings Association Insurance Fund which is administered by the FDIC and
backed by the full faith and credit of the U.S. Government.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described
in the Prospectus.
For purposes of the 1940 Act and, generally for tax purposes, a
repurchase agreement is considered to be a loan from the Fund to the seller of
the obligation. For other purposes, it is not clear whether a court would
consider such an obligation as being owned by the Fund or as being collateral
for a loan by the Fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
obligation before its repurchase, under the repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such
delays may result in a loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with
any unsecured debt instrument purchased for the Funds, the Adviser seeks to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case, the seller of the obligation.
In addition to the risk of bankruptcy or insolvency proceedings, there is the
risk that the seller may fail to repurchase the security. However, if the
market value of the obligation falls below an amount equal to 102% of the
repurchase price (including accrued interest), the seller of the obligation
will be required to deliver additional securities so that the market value of
all securities subject to the repurchase agreement equals or exceeds the
repurchase price.
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<PAGE>
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase
or sell particular securities with payment and delivery taking place at a
future date (perhaps one or two months later), permit the Fund to lock in a
price or yield on a security, regardless of future changes in interest rates.
A Fund will purchase securities on a "when-issued" or forward commitment basis
only with the intention of completing the transaction and actually purchasing
the securities. If deemed appropriate by the Adviser, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered
to the Fund on the settlement date. In these cases the Fund may realize a gain
or loss, and distributions attributable to any such gain would be taxable to
shareholders.
When a Fund agrees to purchase securities on a "when-issued" or
forward commitment basis, the Fund's custodian will set aside cash or liquid
High Grade Debt Securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to
satisfy a purchase commitment, and in such a case the Fund may be required
subsequently to place additional assets in the separate account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitments. The market value of a Fund's net assets will generally fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. Because a Fund's liquidity
and ability to manage its portfolio might be affected when it sets aside cash
or portfolio securities to cover such purchase commitments, each Fund expects
that its commitments to purchase when-issued securities and forward
commitments will not exceed 33% of the value of its total assets. When a Fund
engages in "when-issued" and forward commitment transactions, it relies on the
other party to the transaction to consummate the trade. Failure of such party
to do so may result in the Fund incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued"
purchase or a forward commitment to purchase securities, and any subsequent
fluctuations in their market value, are taken into account when determining
the market value of a Fund starting on the day the Fund agrees to purchase the
securities. The Fund does not earn interest or dividends on the securities it
has committed to purchase until the settlement date.
Borrowing
Each Fund may borrow for temporary or emergency purposes, although
borrowings by the Fixed Income Fund and the Municipal Bond Fund may not
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exceed 10% of the value of their respective net assets. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the asset coverage should
decline below 300% as a result of market fluctuations or for other reasons, a
Fund will be required to sell some of its portfolio securities within three
days to reduce its borrowings and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. To limit the potential leveraging effects of a Fund's borrowings,
each Equity Fund, the Short-Term Fixed Income Fund and the Short-Term
Municipal Bond Fund will not make investments while borrowings are in excess
of 5% of total assets. The Fixed Income Fund and the Municipal Bond Fund may
not make additional investments while they have any borrowings outstanding.
Borrowing generally will exaggerate the effect on net asset value of any
increase or decrease in the market value of the portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Fund also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate. See "Investment
Restrictions."
Lending Portfolio Securities
Each Fund, other than Fixed Income Fund and Municipal Bond Fund, may
lend portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made by a Fund, may not exceed 33 1/3%
of the value of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, cash equivalents or U.S. Government securities. The
cash or instruments collateralizing the Fund's loans of securities will be
maintained at all times in a segregated account with the Fund's custodian, in
an amount at least equal to the current market value of the loaned securities.
From time to time, a Fund may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or
a third party that is unaffiliated with the Fund and is acting as a "placing
broker". No fee will be paid to affiliated persons of the Fund. The Board of
Trustees will make a determination that the fee paid to the placing broker is
reasonable.
By lending portfolio securities, a Fund can increase its income by
continuing to receive amounts equal to the interest or dividends on the loaned
securities as well as by either investing the cash collateral in
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short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government securities are used as collateral. A Fund will
comply with the following conditions whenever it loans securities: (i) the
Fund must receive at least 100% cash collateral or equivalent securities from
the borrower; (ii) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the collateral;
(iii) the Fund must be able to terminate the loan at any time; (iv) the Fund
must receive reasonable interest on the loan, as well as amounts equal to the
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable custodian fees
in connection with the loan; and (vi) voting rights on the loaned securities
may pass to the borrower except that, if a material event will occur affecting
the investment in the loaned securities, the Fund must terminate the loan in
time to vote the securities on such event.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be
changed with respect to a Fund without the approval of a "majority" (as
defined in the 1940 Act) of the outstanding shares of that Fund. For the
purposes of the 1940 Act, "majority" means the lesser of (a) 67% or more of
the shares of the Fund present at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy or
(b) more than 50% of the shares of the Fund.
Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of,
a Fund with the exception of borrowings permitted by fundamental investment
restriction (2) listed below for Short-Term Fixed Income Fund, Short-Term
Municipal Bond Fund and the Equity Funds and fundamental investment
restriction (3) listed below for Fixed Income Fund and Municipal Bond Fund.
The nonfundamental investment restrictions set forth below may be
changed or amended by the Trust's Board of Trustees without shareholder
approval.
Investment Restrictions That Apply to Short-Term Fixed Income Fund, Short-
Term Municipal Bond Fund and the Equity Funds
Fundamental Investment Restrictions. The Trust may not, on behalf of
a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2),
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(6) and (7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Fund's
investment policy, and the pledge, mortgage or hypothecation of the Fund's
assets within the meaning of paragraph (3) below are not deemed to be senior
securities, if appropriately covered.
(2) Borrow money (i) except from banks as a temporary measure for
extraordinary emergency purposes and (ii) except that the Fund may enter into
reverse repurchase agreements and dollar rolls, if appropriately covered, with
banks, broker-dealers and other parties; provided that, in each case, the Fund
is required to maintain asset coverage of at least 300% for all borrowings.
For the purposes of this investment restriction, short sales, transactions in
currency, forward contracts, swaps, options, futures contracts and options on
futures contracts, and forward commitment transactions shall not constitute
borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options and the purchase of securities or currencies on a forward commitment
or delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to forward contracts, options, futures contracts and
options on futures contracts.
(4) Act as an underwriter, except to the extent that, in connection
with the disposition of Fund securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real
estate mortgage loans, except that the Fund may invest in securities of
corporate or governmental entities secured by real estate or marketable
interests therein or securities issued by companies (other than real estate
limited partnerships) that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend Fund securities in
accordance with the Fund's investment policies and may purchase or invest in
repurchase agreements, bank certificates of deposit, all or a portion of an
issue of bonds, bank loan participation agreements, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon the
original issuance of the securities.
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(7) Invest in commodities or commodity contracts or in puts, calls,
or combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This restriction does
not apply to investments in obligations of the U.S. Government or any of its
agencies or instrumentalities.
In addition, each Fund will adhere to the following
fundamental investment restriction:
With respect to 75% of its total assets, a Fund may not
purchase securities of an issuer (other than the U.S. Government, or any of
its agencies or instrumentalities, or other investment companies), if
(a) such purchase would cause more than 5% of the Fund's
total assets taken at market value to be invested in the securities
of such issuer, or
(b) such purchase would at the time result in more than 10%
of the outstanding voting securities of such issuer being held by the
Fund.
NonFundamental Investment Restrictions. The Trust may not, on behalf
of a Fund:
(a) Participate on a joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable Fund securities with other accounts under the management of the
Adviser to save commissions or to average prices among them is not deemed to
result in a securities trading account.
(b) Purchase securities on margin or make short sales unless by
virtue of its ownership of other securities, the Fund has the right to obtain,
without payment of additional consideration, securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is
made upon the same conditions, except that a Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
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securities and in connection with transactions involving forward foreign
currency exchange transactions, options, futures and options on futures.
(c) Purchase securities of other investment companies, except in the
open market where no commission or profit to a sponsor or dealer results from
the purchase other than the customary broker's commission and as permitted by
the Investment Company Act of 1940 and the rules and regulations thereunder.
(d) Purchase securities of any issuer which, together with any
predecessor, has a record of less than three years' continuous operations
prior to the purchase if such purchase would cause investments of the Fund in
all such issuers to exceed 5% of the value of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management
of any company.
(f) Purchase warrants of any issuer, if, as a result of such
purchases, more than 2% of the value of the Fund's net assets would be
invested in warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange or more than 5% of the value of the net assets of
the Fund would be invested in warrants generally, whether or not so listed.
For these purposes, warrants are to be valued at the lesser of cost or market,
but warrants acquired by the Fund in units with or attached to debt securities
shall be deemed to be without value.
(g) Purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or directors or officers of the Adviser or
any investment management subsidiary of the Adviser individually owns
beneficially more than 0.5% and together own beneficially more than 5% of the
securities of such issuer.
(h) Purchase interests in oil, gas or other mineral leases or
exploration programs; however, this policy will not prohibit the acquisition
of securities of companies engaged in the production or transmission of oil,
gas or other minerals.
(i) Purchase any security, including any repurchase agreement
maturing in more than seven days, which is illiquid, if more than 15% of the
net assets of the Fund, taken at market value, would be invested in such
securities.
(j) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A
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under the Securities Act of 1933; provided, however, that no more than 15% of
the Fund's total assets may be invested in restricted securities including
restricted securities eligible for resale under Rule 144A.
(k) Write covered calls or put options with respect to more than 25%
of the value of its total assets or invest more than 5% of its total assets in
puts, calls, spreads, or straddles, other than protective put options.
The staff of the Commission has taken the position that fixed time
deposits maturing in more than seven days that cannot be traded on a secondary
market and participation interests in loans are illiquid. Until such time (if
any) as this position changes, the Trust, on behalf of each Fund, will include
such investments in determining compliance with the 15% limitation on
investments in illiquid securities. Restricted securities (including
commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933
which the Board of Trustees has determined are readily marketable will not be
deemed to be illiquid for purposes of such restriction.
"Value" for the purposes of the foregoing investment restrictions
shall mean the market value used in determining each Fund's net asset value.
Investment Restrictions That Apply to the Fixed Income Fund And the
Municipal Bond Fund
Fundamental Investment Restrictions. The Trust may not, on behalf of
the Fixed Income Fund or the Municipal Bond Fund:
(1) Acquire more than 10% of the voting securities of any one issuer.
(2) Invest in companies for the purpose of exercising control.
(3) Borrow money except for temporary or emergency purposes and then
only in an amount not exceeding 10% of the value of its total assets. Any
borrowing will be done from a bank and to the extent that such borrowing
exceeds 5% of the value of a Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall below
300%, a Fund shall, within three days thereafter or such longer period as the
Securities and Exchange Commission may prescribe by rules and regulations,
reduce the amount of its borrowings to such an extent that the asset coverage
of such borrowings shall be at least 300%. This borrowing provision is
included for temporary liquidity or emergency purposes. All borrowings will be
repaid before making investments and any interest paid on such borrowings will
reduce income.
(4) Make loans, except that a Fund may purchase or hold debt
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instruments in accordance with its investment objective and policies, and a
Fund may enter into repurchase agreements.
(5) Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such
loan.
(6) Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodities contracts and
interests in a pool of securities that are secured by interests in real
estate. However, subject to the permitted investments of the Fund, a Fund may
invest in municipal securities or other obligations secured by real estate or
interests therein.
(7) Make short sales of securities, maintain a short position or
purchase securities on margin, except that a Fund may obtain short-term
credits as necessary for the clearance of security transactions.
(8) Act as an underwriter of securities of other issuers except as it
may be deemed an underwriter in selling a portfolio security.
(9) Purchase securities of other investment companies except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
(10) Issue senior securities (as defined in the Investment Company
Act of 1940) except in connection with permitted borrowings as described above
or as permitted by rule, regulation or order of the Securities and Exchange
Commission.
(11) Purchase or retain securities of an issuer if an officer,
trustee, partner or director of the Fund or any investment adviser of the Fund
owns beneficially more than 1/2 of 1% of the shares or securities of such
issuer and all such officers, trustees, partners and directors owning more
than 1/2 of 1% of such shares or securities together own more than 5% of such
shares or securities.
(12) Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
(13) Write or purchase puts, calls, options or combinations thereof
or invest in warrants, except that a Fund may purchase "put" bonds as described
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<PAGE>
in the Prospectus.
Nonfundamental Investment Restrictions.
(1) A Fund may not invest in illiquid securities in an amount
exceeding, in the aggregate, 10% of the Municipal Bond Fund's total assets and
15% of the Fixed Income Fund's net assets. An illiquid security is a security
that 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 of seven days, time deposits with a withdrawal penalty,
non-negotiable instruments and instruments for which no market exists.
(2) A Fund may not purchase securities of any issuer which, together
with any predecessor, has a record of less than three years' continuous
operations prior to the purchase if such purchase would cause investments of
the Fund in all such issuers to exceed 15% of the value of the total assets of
the Fund and the Fund may not invest more than 5% of its total assets in
restricted securities, excluding restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933; provided, however,
that no more than 15% of the Fund's total assets may be invested in restricted
securities including restricted securities eligible for resale under Rule
144A.
(3) A Fund may not purchase securities of other investment companies
except in the open market where no commission or profit to a sponsor or dealer
results from the purchase other than the customary broker's commission and as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
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<PAGE>
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is
set forth below. An asterisk (*) indicates those Trustees deemed to be
"interested persons" of the Trust for purposes of the 1940 Act.
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- ---------------- ---------- ----------------------
James E. Minnick(1)* President, Chief President, Secretary and
885 Third Avenue Executive Treasurer, MGCM (since 1990).
New York, NY 10022 Officer, and
(age 48) Trustee
Patrick W. W. Disney(1)* Senior Vice Director, Morgan Grenfell
20 Finsbury Circus President and Investment Services Limited
London EC2M 1NB Trustee ("MGIS")(since 1988).
ENGLAND
(age 40)
Paul K. Freeman(2) Trustee Chief Executive Officer,
3941 South Bellaire The Eric Group, Inc.
Englewood, CO 80110 (environmental insurance)
(age 46) (since 1986).
Graham E. Jones(2) Trustee Senior Vice President, BGK
330 Garfield Street Realty Inc. (since 1995);
Santa Fe, NM 87501 Financial Manager, Practice
(age 63) Management Systems (medical
information services)
(1988-95); Director, 12
closed-end funds managed by
Morgan Stanley Asset
Management; Trustee, 10
open-end mutual funds managed
by Weiss, Peck & Greer.
William N. Searcy(2) Trustee Pension & Savings Trust
5100 Foxridge Drive #2011 Officer, Sprint Corporation
Mission, KS 66202 (telecommunications) (since
(age 49) 1989).
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<PAGE>
Hugh G. Lynch Trustee Director, International
767 Fifth Avenue Investments, General Motors
New York, NY 10153 Investment Management
(age 58) Corporation (since
September 1990).
Edward T. Tokar* Trustee Vice President--Investments,
101 Columbia Road Allied Signal Inc. (advanced
Morristown, NJ 07962 technology and manufacturer)
(age 49) (since 1985).
Jeffrey A. Cohen Treasurer, Controller, Mutual Fund
680 East Swedesford Road Principal Accounting, SEI Corporation
Wayne, PA 19087-1658 Accounting (since May 1994); Director,
(age 35) Officer, Chief Mutual Fund Accounting, SEI
Financial Officer Corporation (1991-1994);
Audit Manager, Price
Waterhouse (1989-1991).
Neil P. Jenkins(3) Vice President Director, MGCM (since 1991),
885 Third Avenue Morgan Grenfell International
New York, NY 10022 Funds Management, (since
(age 36) 1995), and Morgan Grenfell &
Co., Ltd. (since 1985).
David W. Baldt Vice President Executive Vice President and
1435 Walnut Street Director of Fixed Income
Philadelphia, PA 19102 Investments, MGCM (since
(age 47) 1989).
Ian D. Kelson Vice President Director, MGIS (since 1988);
20 Finsbury Circus Chief Investment Officer,
London EC2M 1NB Fixed Income, MGIS (since
England 1989).
(age 40)
James H. Grifo Vice President Senior Vice President and
1435 Walnut Street Director, MGCM (since 1996);
Philadelphia, PA 19102 Senior Vice President, GT
(age 45) Global Financial (since
1990).
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<PAGE>
Mark G. Arthus Secretary and Director, Compliance and
885 Third Avenue Compliance Financial Control, MGCM
New York, NY 10022 Officer (since 1992); Vice President,
(age 40) Senior Compliance Officer
and other positions,
Citibank, N.A. (to 1992)
----------------------------------------------------------------------------
1 Member of the Trust's Valuation and Dividend Committees.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee
Certain of the Trustees and officers of the Trust reside outside the
United States, and substantially all the assets of these persons are located
outside the United States. It may not be possible, therefore, for investors to
effect service of process within the United States upon these persons or to
enforce against them, in United States courts or foreign courts, judgments
obtained in United States courts predicated upon the civil liability provisions
of the federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
Messrs. Jones, Freeman and Searcy are members of the Audit Committee
of the Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the
Trust matters relating to accounting and auditing practices and procedures,
accounting records, internal accounting controls and the functions performed
by the Trust's custodian, administrator and transfer agent.
As of May 17, 1996, the Trustees and officers of the Trust owned, as
a group, less than one percent of the outstanding shares of each Fund other
than Morgan Grenfell Short-Term Municipal Bond Fund. On such date, the
Trustees and officers of the Trust owned, as a group, 24.25% of the
outstanding shares of Morgan Grenfell Short-Term Municipal Bond Fund.
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<PAGE>
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an
annual fee of $15,000 provided that they attend each regular Board meeting
during the year. Members of the Audit Committee also receive $1,000 for each
Audit Committee meeting attended. The Chairman of the Audit Committee receives
an additional $1,000 per year. The Trustees are also reimbursed for
out-of-pocket expenses incurred by them in connection with their duties as
Trustees.
The following table sets forth the compensation paid by the Trust to
the Trustees for the fiscal year of the Trust ended October 31, 1995:
Pension or
Retirement Benefits Aggregate
Accrued as Part of Compensation from
Name of Trustees Fund Expenses the Trust / Complex*
- ---------------- ------------- ---------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ 14,500
Graham E. Jones $ 0 $ 14,500
William N. Searcy $ 0 $ 15,500
Hugh G. Lynch $ 0 $ 13,500
Edward T. Tokar $ 0 $ 0
* The Trustees listed above do not serve on the Board of any other
investment company that may be considered to belong to the same complex as the
Trust.
The above figures reflect the Board of Trustees' adoption of a new
Trustee compensation schedule, effective as of May 20, 1995, as well as the
old compensation schedule, which was in effect prior to May 20, 1995.
Trustees' compensation figures for fiscal years after October 31, 1995 will be
higher than these figures because Trustee compensation during such years will
be paid solely in accordance with the new schedule.
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as the investment
adviser to each Fund other than Microcap Fund pursuant to the terms of two
Management Contracts, each dated December 28, 1994. MGCM acts as the
investment adviser to Microcap Fund pursuant to the terms of a Management
Contract dated August 7, 1996 (referred to collectively herein with the
Management Contracts referred to in the preceding sentence as the "Management
Contracts"). Pursuant to the Management Contracts, the Adviser supervises and
assists in the management of the assets of each Fund and furnishes each Fund
with research, statistical, advisory and managerial services. The Adviser pays
the ordinary office expenses of the Trust and the compensation, if any, of all
officers and employees of the Trust and all Trustees who are "interested
persons" (as defined in the 1940 Act) of the Adviser.
Under the Management Contracts, the Trust, on behalf of each Fund is
obligated to pay the Adviser a monthly fee at an annual rate of each Fund's
average daily net assets as follows:
Annual Rate
-----------
Morgan Grenfell Large Cap Growth Fund............................. 0.75%
Morgan Grenfell Smaller Companies Fund............................ 1.00%
Morgan Grenfell Microcap Fund .................................... 1.50%
Morgan Grenfell Fixed Income Fund................................. 0.40%
Morgan Grenfell Short-Term Fixed Income Fund...................... 0.40%
Morgan Grenfell Municipal Bond Fund............................... 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund.................... 0.40%
Each Fund's advisory fees are paid monthly and will be prorated if
the Adviser shall not have acted as the Fund's investment adviser during the
entire monthly period. The Adviser has temporarily agreed, under certain
circumstances, to reduce or not impose its management fee and to make
arrangements to limit certain other expenses as described in the Prospectus
under "Expense Information." In the event that a Fund's expenses for any
fiscal year exceed the limits established by certain state securities
administrators, the Adviser will reduce its fee payable on behalf of such Fund
by the amount of such excess, but only to the extent of the Fund's advisory
fee.
For the fiscal years ended October 31, 1995, 1994 and 1993, Morgan
Grenfell Fixed Income Fund paid the Adviser net advisory fees of $1,150,707,
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<PAGE>
$532,189 and $159,535, respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Adviser net advisory fees of $595,795, $444,910,
and $307,859, respectively. For the fiscal period ended October 31, 1995,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund paid no
advisory fees to the Adviser. The foregoing advisory fee payments and
non-payments reflect expense limitations that were in effect during the
indicated periods. Morgan Grenfell Large Cap Growth Fund and Morgan Grenfell
Microcap Fund were not in operation during any of the indicated periods and,
accordingly, paid no advisory fees during such periods.
The Management Contract between MGCM and the Trust, on behalf of the
Equity Funds, the Short-Term Fixed Income Fund and the Short-Term Municipal
Bond Fund, was most recently approved on November 17, 1995 by a vote of the
Trust's Board of Trustees, including a majority of those Trustees who were not
parties to such Management Contract or "interested persons" of any such
parties. The Management Contract between MGCM and the Trust, on behalf of the
Fixed Income Fund and the Municipal Bond Fund, was approved on November 17,
1995 by a vote of the Trust's Board of Trustees, including a majority of those
Trustees who were not parties to such Management Contract or "interested
persons" of any such parties.
The Management Contract between MGCM and the Trust, on behalf of
Microcap Fund, was approved on May 16, 1996 by a vote of the Trust's Board of
Trustees, including a majority of those Trustees who were not parties to such
Management Contract or "interested persons" of any such parties.
The Management Contracts will remain in effect until November 30,
1996 (August 7, 1998, in the case of the Management Contract for Microcap
Fund), and will continue in effect thereafter, with respect to each Fund, only
if such continuance is specifically approved annually by the Trustees,
including a majority of the Trustees who are not parties to the Management
Contracts or "interested persons" of any such parties, or by a vote of a
majority of the outstanding shares of each Fund. The Management Contracts are
terminable by vote of the Board of Trustees, or, with respect to a Fund, by
the holders of a majority of the outstanding shares of the Fund, at any time
without penalty on 60 days' written notice to the Adviser. Termination of a
Management Contract with respect to a Fund will not terminate or otherwise
invalidate any provision of either Management Contract with respect to any
other Fund. The Adviser may terminate any Management Contract at any time
without penalty on 60 days' written notice to the Trust. Each Management
Contract terminates automatically in the event of its "assignment" (as such
term is defined in the 1940 Act).
Each Management Contract provides that the Adviser shall not be
liable
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<PAGE>
for any error of judgment or mistake of law or for any loss suffered by
the Trust or any Fund in connection with the performance of the Adviser's
obligations under the Management Contract with the Trust, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its duties or from reckless
disregard of its duties and obligations thereunder.
In the management of the Funds and its other accounts, the Adviser
allocates investment opportunities to all accounts for which they are
appropriate subject to the availability of cash in any particular account and
the final decision of the individual or individuals in charge of such
accounts. Where market supply is inadequate for a distribution to all such
accounts, securities are allocated based on a Fund's pro rata portion of the
amount ordered. In some cases this procedure may have an adverse effect on the
price or volume of the security as far as a Fund is concerned. However, it is
the judgment of the Board that the desirability of continuing the Trust's
advisory arrangements with the Adviser outweighs any disadvantages that may
result from contemporaneous transactions. See "Portfolio Brokerage."
MGCM is registered with the Commission as an investment adviser and
provides a full range of investment advisory services to institutional
clients. MGCM is a direct wholly-owned subsidiary of Morgan Grenfell Asset
Management, Ltd., which is a wholly-owned subsidiary of Deutsche Morgan
Grenfell Group plc. Deutsche Morgan Grenfell Group plc is an indirect
wholly-owned subsidiary of Deutsche Bank AG, an international commercial and
investment banking group. As of April 30, 1996, MGCM managed approximately
$8.05 billion in assets for various individual and institutional accounts,
including the Morgan Grenfell SMALLCap Fund, Inc., a registered, closed-end
investment company for which it acts as investment adviser.
Portfolio Turnover
Each Fund's portfolio turnover rate is calculated by dividing the
lesser of the dollar amount of sales or purchases of portfolio securities by
the average monthly value of a Fund's portfolio securities, excluding
securities having a maturity at the date of purchase of one year or less. For
the fiscal periods ended October 31, 1995 and 1994, the portfolio turnover
rates for Morgan Grenfell Fixed Income Fund were 182% and 251%, respectively.
For the same periods, the portfolio turnover rates for Morgan Grenfell
Municipal Bond Fund were 63% and 94%, respectively. The significant difference
between Morgan Grenfell Fixed Income Fund's turnover rates for these two
periods was attributable to the fact that abnormal bond market events in 1994
caused the
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<PAGE>
Fund to readjust the composition of its investment portfolio more than it
would have in a normal year. For the fiscal period ended October 31, 1995, the
portfolio turnover rates for Morgan Grenfell Short-Term Fixed Income Fund,
Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund were 90%, 62% and 23%, respectively.
The Administrator
As described in the Prospectus, SEI Financial Management Corporation
(the "Administrator") serves as the Trust's administrator pursuant to an
administration agreement between the Administrator and the Trust, on behalf of
the Funds (the "Administration Agreement"). Pursuant to the Administration
Agreement, the Administrator has agreed to furnish statistical and research
data, clerical services, and stationery and office supplies; prepare and file
various reports with the appropriate regulatory agencies including the
Commission and state securities commissions; and provide accounting and
bookkeeping services for the Funds, including the computation of each Fund's
net asset value, net investment income and net realized capital gains, if any.
For its services under the Administration Agreement, the
Administrator receives from all series of the Trust an aggregate monthly fee
at the following annual rates of the aggregate average daily net assets
("aggregate assets") of such series:
0.15% of aggregate assets under $300 million
0.12% of next $200 million of aggregate assets
0.10% of next $500 million of aggregate assets
0.08% of aggregate assets exceeding $1 billion
For the fiscal years ended October 31, 1995, 1994 and 1993, Morgan
Grenfell Fixed Income Fund paid the Administrator administration fees of
$455,614, $259,094 and $104,526, respectively. For the same years, Morgan
Grenfell Municipal Bond Fund paid the Administrator administration fees of
$227,872, $231,957 and $217,109, respectively. The administration fee paid by
Morgan Grenfell Municipal Bond Fund for the year ended October 31, 1993
reflects an expense limitation that was in effect during that year. For the
fiscal period ended October 31, 1995, Morgan Grenfell Short-Term Fixed Income
Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell
Smaller Companies Fund paid the Administrator administration fees of $12,500,
$12,500 and $4,167, respectively. Morgan Grenfell Large Cap Growth Fund and
Morgan Grenfell Microcap Fund were not in operation during any of the periods
described in this paragraph and, accordingly, paid no administration fees for
such periods.
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<PAGE>
The Administration Agreement provides that the Administrator shall
not be liable under the Administration Agreement except for bad faith or gross
negligence in the performance of its duties or from the reckless disregard by
it of its duties and obligations thereunder.
Expenses of the Trust
The Trust pays: (i) fees and expenses of any investment adviser and
any administrator of the Funds; (ii) fees and expenses incurred by the Funds
in connection with membership in investment company organizations; (iii)
brokers' commissions; (iv) payment for portfolio pricing services to a pricing
agent, if any; (v) legal expenses (including an allocable portion of the cost
of its employees rendering legal services to the Funds); (vi) interest,
insurance premiums, taxes or governmental fees; (vii) the fees and expenses of
the transfer agent of the Funds; (viii) clerical expenses of issue, redemption
or repurchase of shares of the Funds; (ix) the expenses of and fees for
registering or qualifying shares of the Funds for sale and of maintaining the
registration of the Funds and registering the Funds as a broker or a dealer;
(x) the fees and expenses of Trustees who are not affiliated with the Adviser;
(xi) the cost of preparing and distributing reports and notices to
shareholders, the Commission and other regulatory authorities; (xii) the fees
or disbursements of custodians of the Fund's assets, including expenses
incurred in the performance of any obligations enumerated by the Declaration
of Trust or By-Laws of the Trust insofar as they govern agreements with any
such custodian; (xiii) costs in connection with annual or special meetings of
shareholders, including proxy material preparation, printing and mailing;
(xiv) charges and expenses of the Trust's auditor; (xv) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business; and (xvi) expenses of an
extraordinary and nonrecurring nature.
Transfer Agent
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105
(the "Transfer Agent") serves as the transfer and dividend disbursing agent
for the Funds pursuant to a transfer agency agreement (the "Transfer Agency
Agreement"), under which the Transfer Agent (i) maintains shareholder
accounts, and (ii) makes periodic reports to the Trust's Board of Trustees
concerning the operations of each Fund.
The Distributor
The Trust, on behalf of the Funds, has entered into a distribution
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<PAGE>
agreement (the "Distribution Agreement") pursuant to which SEI Financial
Services Company, 680 East Swedesford Road, Wayne, Pennsylvania 19087 (the
"Distributor"), as agent, serves as principal underwriter for the continuous
offering of shares of each Fund. The Distributor has agreed to use its best
efforts to solicit orders for the purchase of shares of each Fund, although it
is not obligated to sell any particular amount of shares. Shares of the Funds
are not subject to sales loads or distribution fees. The Adviser, and not the
Trust, is responsible for payment of any expenses or fees incurred in the
marketing and distribution of shares of the Funds.
The Distribution Agreement will remain in effect for one year from
its effective date and will continue in effect thereafter only if such
continuance is specifically approved annually by the Trustees, including a
majority of the Trustees who are not parties to the Distribution Agreement or
"interested persons" of such parties. The Distribution Agreement was approved
by the initial shareholder of each Fund other than Microcap Fund on December
28, 1994. The Distribution Agreement was approved by the initial shareholder
of Microcap Fund on August 5, 1996. The Distribution Agreement was most
recently approved on November 17, 1995 by a vote of the Trust's Board of
Trustees, including a majority of those Trustees who were not parties to the
Distribution Agreement or "interested persons" of any such parties. The
Distribution Agreement is terminable, as to a Fund, by vote of the Board of
Trustees, or by the holders of a majority of the outstanding shares of the
Fund, at any time without penalty on 60 days' written notice to the Trust and
Adviser. The Distributor may terminate the Distribution Agreement at any time
without penalty on 90 days' written notice to the Trust.
Custodian
As described in the Prospectus, CoreStates Bank, N.A. ("CoreStates"),
whose principal business address is Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, PA 19101 maintains custody of the assets of Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund. As described in the
Prospectus, The Northern Trust Company ("Northern"), whose principal business
address is Fifty South LaSalle Street, Chicago, Illinois 60675, maintains
custody of the assets of the other Funds.
Under their custody agreements with the Trust, CoreStates and
Northern (i) maintain separate accounts in the name of each Fund, (ii) hold
and transfer portfolio securities on account of each Fund, (iii) accept
receipts and make disbursements of money on behalf of each Fund, (iv) collect
and receive all income and other payments and distributions on account of each
Fund's portfolio securities and (v) make periodic reports to the Trust's Board
of Trustees concerning each Fund's operations. CoreStates and Northern
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<PAGE>
are authorized to select one or more foreign or domestic banks or companies to
serve as sub-custodian on behalf of the Funds.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the
Adviser makes decisions with respect to and places orders for all purchases
and sales of portfolio securities for the Funds. In executing portfolio
transactions, the Adviser seeks to obtain the best net results for the Funds,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. Commission rates, being a
component of price, are considered together with such factors. Where
transactions are effected on a foreign securities exchange, the Funds employ
brokers, generally at fixed commission rates. Commissions on transactions on
U.S. securities exchanges are subject to negotiation. Where transactions are
effected in the over-the-counter market or third market, the Funds deal with
the primary market makers unless a more favorable result is obtainable
elsewhere. Fixed income securities purchased or sold on behalf of the Funds
normally will be traded in the over-the-counter market on a net basis (i.e.
without a commission) through dealers acting for their own account and not as
brokers or otherwise through transactions directly with the issuer of the
instrument. Some fixed income securities are purchased and sold on an exchange
or in over-the-counter transactions conducted on an agency basis involving a
commission.
Pursuant to the Management Contracts, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board
of Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In addition, the Management
Contracts authorize the Adviser, subject to the periodic review of the Trust's
Board of Trustees, to cause a Fund to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that the Adviser determines in good faith that such commission is reasonable
in relation to the value of the brokerage and research services provided by
such broker-dealer, viewed in terms of either the particular
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<PAGE>
transaction or the overall responsibilities of the Adviser to the Fund. Such
brokerage and research services may consist of pricing information, reports
and statistics on specific companies or industries, general summaries of
groups of bonds and their comparative earnings and yields, or broad overviews
of the securities markets and the economy.
Supplemental research information utilized by the Adviser is in
addition to, and not in lieu of, services required to be performed by the
Adviser and does not reduce the advisory fees payable to the Adviser. The
Trustees will periodically review the commissions paid by the Funds to
consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Funds. It
is possible that certain of the supplemental research or other services
received will primarily benefit one or more other investment companies or
other accounts of the Adviser for which investment discretion is exercised.
Conversely, a Fund may be the primary beneficiary of the research or services
received as a result of portfolio transactions effected for such other account
or investment company. During the fiscal period ended October 31, 1995, the
Adviser did not, pursuant to any agreement or understanding with a broker or
otherwise through an internal allocation procedure, direct any Fund's
brokerage transactions to a broker because of research services provided by
such broker.
Investment decisions for each Fund and for other investment accounts
managed by the Adviser are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for
two or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as
to amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect on the price or value of
the security as far as a Fund is concerned, in other cases it is believed to
be beneficial to a Fund. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for other investment companies or accounts in executing
transactions.
Pursuant to procedures determined by the Trustees and subject to the
general policies of the Funds and Section 17(e) of the 1940 Act, the Adviser
may place securities transactions with brokers with whom it is affiliated
("Affiliated Brokers").
Section 17(e) of the 1940 Act limits to "the usual and customary
broker's commission" the amount which can be paid by the Funds to an
Affiliated Broker acting as broker in connection with transactions effected on
a securities exchange. The Board, including a majority of the Trustees
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<PAGE>
who are not "interested persons" of the Trust or the Adviser, has adopted
procedures designed to comply with the requirements of Section 17(e) of the
1940 Act and Rule 17e-1 promulgated thereunder to ensure that the broker's
commission is "reasonable and fair compared to the commission, fee or other
remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time...."
A transaction would not be placed with an Affiliated Broker if a Fund
would have to pay a commission rate less favorable than their contemporaneous
charges for comparable transactions for their other most favored, but
unaffiliated, customers except for accounts for which they act as a clearing
broker, and any of their customers determined, by a majority of the Trustees
who are not "interested persons" of the Fund or the Adviser, not to be
comparable to the Fund. With regard to comparable customers, in isolated
situations, subject to the approval of a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, exceptions may be made.
Since the Adviser, as investment adviser to the Funds, has the obligation to
provide management, which includes elements of research and related skills,
such research and related skills will not be used by them as a basis for
negotiating commissions at a rate higher than that determined in accordance
with the above criteria. The Funds will not engage in principal transactions
with Affiliated Brokers. When appropriate, however, orders for the account of
the Funds placed by Affiliated Brokers are combined with orders of their
respective clients, in order to obtain a more favorable commission rate. When
the same security is purchased for two or more funds or customers on the same
day, each fund or customer pays the average price and commissions paid are
allocated in direct proportion to the number of shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement
setting forth the total amount of all compensation retained by them or any
associated person of them in connection with effecting transactions for the
account of the Funds, and the Board reviews and approves all the Funds'
portfolio transactions on a quarterly basis and the compensation received by
Affiliated Brokers in connection therewith. During the fiscal years ended
October 31, 1993, 1994 and 1995, neither the Fixed Income Fund nor the
Municipal Bond Fund paid any brokerage commissions to any Affiliated Broker.
During the fiscal period ended October 31, 1995, neither Short-Term Fixed
Income Fund, Short-Term Municipal Bond Fund nor Smaller Companies Fund paid
any brokerage commissions to any affiliated broker.
Affiliated Brokers do not knowingly participate in commissions paid
by the Funds to other brokers or dealers and do not seek or knowingly receive
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any reciprocal business as the result of the payment of such commissions. In
the event that an Affiliated Broker learns at any time that it has knowingly
received reciprocal business, it will so inform the Board.
For the fiscal years ended October 31, 1995, 1994 and 1993, Morgan
Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond Fund paid no
brokerage commissions. For fiscal year ended October 31, 1995, Morgan Grenfell
Short-Term Fixed Income Fund and Morgan Grenfell Short-Term Municipal Bond
Fund paid no brokerage commissions. For the fiscal period ended October 31,
1995, Morgan Grenfell Smaller Companies Fund paid aggregate brokerage
commissions of $3,778.
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible
for determining in good faith the fair value of the securities of each Fund.
In accordance with procedures adopted by the Board of Trustees, the net asset
value per share of each Fund is calculated by determining the net worth of the
Fund (assets, including securities at value, minus liabilities) divided by the
number of shares outstanding. Each Fund computes its net asset value at the
close of such regular trading, which is normally 4:00 p.m. Eastern time, on
each day on which the New York Stock Exchange ("NYSE") is open (a "Business
Day"). The NYSE is closed on Saturdays and Sundays as well as the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For purposes of calculating each Fund's net asset value per share,
equity securities traded on a recognized U.S. or foreign securities exchange
or the National Association of Securities Dealers Automated Quotation System
("NASDAQ") are valued at their last sale price on the principal exchange on
which they are traded or NASDAQ (if NASDAQ is the principal market for such
securities) on the valuation day or, if no sale occurs, at the bid price.
Unlisted equity securities for which market quotations are readily available
are valued at the most recent bid price.
Debt securities and other fixed income investments of the Funds are
valued at prices supplied by independent pricing agents, which prices reflect
broker-dealer supplied valuations and electronic data processing techniques.
Short-term obligations maturing in sixty days or less may be valued at
amortized cost, which method does not take into account unrealized gains or
losses on such portfolio securities. Amortized cost valuation involves
initially valuing a security at its cost, and thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the security. While
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this method provides certainty in valuation, it may result in periods in which
the value of the security, as determined by amortized cost, may be higher or
lower than the price the Fund would receive if the Fund sold the security.
Other assets and assets in which market quotations are not readily
available are valued at fair value using methods determined in good faith by
the Board of Trustees.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well before the
4:00 P.M. (Eastern Time) close of business on each Business Day. In addition,
European or Far Eastern securities trading generally or in a particular
country or countries may not take place on all Business Days. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not Business Days and on which the Funds'
net asset values are not calculated. Such calculation may not take place
contemporaneously with the determination of the prices of certain portfolio
securities used in such calculation. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
close of the regular trading on the NYSE will not be reflected in the Funds'
calculation of net asset values unless the Adviser deems that the particular
event would materially affect net asset value, in which case an adjustment
will be made.
PERFORMANCE INFORMATION
Yield
From time to time, each Fixed Income Fund and each Municipal Fund may
advertise its yield and (in the case of the Municipal Funds) its taxequivalent
yield. The yield of a 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 for each like period over one year and is shown as a percentage of
the investment. In particular, yield will be calculated according to the
following formula:
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YIELD = 2 [(a - b +1)6 - 1]
-----
cd
Where: a = dividends and interest earned by the
Fund during the period;
b = net expenses accrued for the period;
c = average daily number of shares out-standing during the
period entitled to receive dividends; and
d = maximum offering price per share on
the last day of the period.
Tax-equivalent yield is computed by dividing the portion of the yield
that is tax exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield that is not tax exempt.
Actual yields will depend on such variables as asset quality, average
asset maturity, the type of instruments a Fund invests in, changes in interest
rates on money market instruments, changes in the expenses of the Fund and
other factors.
Yields are one basis upon which investors may compare the Funds with
other mutual funds; however, yields of other mutual funds and other investment
vehicles may not be comparable because of the factors set forth above and
differences in the methods used in valuing portfolio instruments.
For the 30-day period ended October 31, 1995, the yields of the Fixed
Income Fund, the Municipal Bond Fund, the Short-Term Fixed Income Fund and the
Short-Term Municipal Bond Fund were 6.32%, 5.40%, 5.73% and 4.84%,
respectively. If the expense limitations described in the Prospectus for these
Funds had not been in effect during this period, the yields of these Funds
would have been 6.24%, 5.33%, 3.44% and 3.23%, respectively. For the same
period, the tax-equivalent yields of the Municipal Bond Fund and the
Short-Term Municipal Bond Fund were 8.94% and 8.01%, respectively, assuming
the highest Federal Income Tax bracket for individuals (39.6%). If the expense
limitations described in the Prospectus for these Funds had not been in effect
during this period, the tax-equivalent yields of these Funds would have been
8.82% and 5.35%, respectively, assuming the same Federal Income Tax bracket.
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Total Return
Each Fund that advertises its "average annual total return" computes
such return by determining the average annual compounded rate of return during
specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:
ERV
T = [(-----) 1/n - 1]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional
portion thereof);
P = hypothetical initial payment of
$1,000; and
n = period covered by the computation,
expressed in years.
Each Fund that advertises its "aggregate total return" computes such
returns by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, (2) all recurring fees
charged to all shareholder accounts are included, and (3) for any account fees
that vary with the size of the account, a mean (or median) account size in the
Fund during the periods is reflected. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption
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of the hypothetical investment after deduction of all nonrecurring charges at
the end of the measuring period. For the fiscal year ended October 31, 1995
and for the period from December 13, 1991 (commencement of the Municipal Bond
Fund's operations) through October 31, 1995, the total return for such Fund
was 10.90% and 9.46%, respectively. For their respective periods from
commencement of operations to October 31, 1995, the average annual total
returns of Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell
Short-Term Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund were
3.82%, 4.39% and 5.50%, respectively. For the fiscal year ended October 31,
1995 and for the period from September 18, 1992 (commencement of the Fixed
Income Fund's operations) through October 31, 1995, the total return for such
Fund was 14.53% and 8.94%, respectively. If the expense limitations described
in the Prospectus for the above Funds had not been in effect during the
indicated periods, the total returns of these Funds for such periods would
have been lower than the total return figures shown in this paragraph.
The Funds may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to,
Barron's, The Wall Street Journal, Weisenberger Investment Companies Service,
Business Week, Changing Times, Financial World, Forbes, Fortune and Money. In
addition, the Funds may from time to time advertise their performance relative
to certain indices and benchmark investments, including: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average
current yield for the mutual fund industry and rank mutual fund performance);
(b) the CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
(which analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Shearson Lehman Brothers Aggregate Bond Index or its
component indices (the Aggregate Bond Index measures the performance of
Treasury, U.S. Government agency, corporate, mortgage and Yankee bonds); (f)
the Standard & Poor's Bond Indices (which measure yield and price of
corporate, municipal and U.S. Government bonds); and (g) historical investment
data supplied by the research departments of Goldman Sachs, Shearson Lehman
Hutton, First Boston Corporation, Morgan Stanley, Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data. The
composition of the investments in such indices and the characteristics of such
benchmark investments are not identical to, and in some cases are very
different from, those of the Funds' portfolios. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may not be
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identical to the formulas used by the Funds to calculate their performance
figures.
TAXES
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the
specific federal, state, local and foreign tax consequences of investing in
the Funds. The summary is based on the laws in effect on the date of this
Statement of Additional Information, which are subject to change.
General
Each Fund is a separate taxable entity. Each Fund has elected or
intends to elect to be treated, and intends to qualify for each taxable
year, as a regulated investment company under Subchapter M of the Code.
Qualification of any Fund as a regulated investment company under the
Code requires, among other things, that (a) the Fund derive at least 90% of
its annual gross income (including tax-exempt interest) from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities or foreign currencies, or other
income (including but not limited to gains from options, futures, and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% gross income test"); (b) the Fund derive
less than 30% of its annual gross income from the sale or other disposition of
any of the following which was held for less than three months: (i) stock or
securities; (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies); and (iii) foreign
currencies and foreign currency options, futures and forward contracts that
are not directly related to the Fund's principal business of investing in
stock or securities or options and futures with respect to stocks or
securities (the "short-short test"); and (c) the Fund diversify its holdings
so that, at the close of each quarter of its taxable year, (i) at least 50% of
the market value of its total (gross) assets is comprised of cash, cash items,
United States Government securities, securities of other regulated investment
companies and other securities limited in respect of any
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one issuer to an amount not greater in value than 5% of the value of the
Fund's total assets and to not more than 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 and securities of other regulated
investment companies) or two or more issuers controlled by the Fund and
engaged in the same, similar or related trades or businesses. Gains from the
sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to a
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities will be treated as gains from the
disposition of investments held for less than three months under the
short-short test (even though characterized as ordinary income for some
purposes) if such currencies or instruments were held for less than three
months. In addition, future Treasury regulations could provide that qualifying
income under the 90% gross income test will not include gains from foreign
currency transactions that are not directly related to a Fund's principal
business of investing in stock or securities or options and futures with
respect to stock or securities. Using foreign currency positions or entering
into foreign currency options, futures or forward contracts for purposes other
than hedging currency risk with respect to securities in a Fund's portfolio or
anticipated to be acquired may not qualify as "directly-related" under these
tests.
If a Fund complies with such provisions, then in any taxable year in
which the Fund distributes at least 90% of the sum of (i) its "investment
company taxable income" (which includes dividends, taxable interest, taxable
accrued original issue discount, accrued, realized market discount, income
from securities lending, any net short-term capital gain in excess of net
long-term capital loss and certain net realized foreign exchange gains and
is reduced by deductible expenses) and (ii) the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions ("net tax-exempt
interest"), the Fund (but not its shareholders) will be relieved of federal
income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or net capital gain (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained.
If a Fund retains any net capital gain, the Fund may designate the
retained amount as undistributed capital gains in a notice to its shareholders
who, if subject to U.S. federal income tax on long-term capital gains, (i)
will be required to include in income for federal income tax purposes, as
long-term capital gain, their shares of such undistributed amount, and (ii)
will be entitled to credit their proportionate shares of the
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<PAGE>
tax paid by the Fund against their U.S. federal income tax liabilities, if
any, and to claim refunds to the extent the credit exceeds such liabilities.
For U.S. federal income tax purposes, the tax basis of shares owned
by a shareholder of a Fund will be increased by an amount equal under current
law to 65% of the amount of undistributed net capital gains included in the
shareholder's gross income. Each Fund intends to distribute at least annually
to its shareholders all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year
a Fund does not qualify as a regulated investment company, it will be taxed on
all of its investment company taxable income and net capital gain at corporate
rates, and any net tax-exempt interest may be subject to alternative minimum
tax.
In order to avoid a 4% federal excise tax, each Fund must distribute
(or be deemed to have distributed) by December 31 of each calendar year at
least 98% of its taxable ordinary income for such year, at least 98% of the
excess of its capital gains over its capital losses (generally computed on the
basis of the one-year period ending on October 31 of such year), and all
taxable ordinary income and the excess of capital gains over capital losses
for the previous year that were not distributed in such year and on which no
federal income tax was paid by the Fund. For federal income tax purposes,
dividends declared by a Fund in October, November or December to shareholders
of record on a specified date in such a month and paid during January of the
following year are treated as distributed by the Fund and are taxable to such
shareholders as if received on December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options
and futures contracts, options thereon and certain forward contracts (except
certain foreign currency options, forward contracts and futures contracts)
entered into by the Equity Funds will generally be treated as capital gains
and losses. Certain of the futures contracts, forward contracts and options
held by the Funds will be required to be "marked-to-market" for federal income
tax purposes, that is, treated as having been sold at their fair market value
on the last day of the Funds' taxable year. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts, or
options (except for certain foreign currency options, forward contracts, and
futures contracts) will be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. As a result of certain hedging
transactions entered into by a Fund, such Fund may be required to defer the
recognition of losses on futures or forward contracts and options or
underlying securities or foreign currencies to the extent of any unrecognized
gains on related positions and the characterization of gains or
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losses as long-term or short-term may be changed. The tax provisions described
above applicable to options, futures and forward contracts may affect the
amount, timing and character of a Fund's distributions to shareholders. The
short-short test described above may limit a Fund's ability to use options,
futures and forward transactions as well as its ability to engage in short
sales. Certain tax elections may be available to the Funds to mitigate some of
the unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions and instruments that may affect the
amount, timing and character of income, gain or loss recognized by the Equity
Funds. Under these rules, foreign exchange gain or loss realized with respect
to foreign currencies and certain futures and options thereon, foreign
currency-denominated debt instruments, foreign currency forward contracts, and
foreign currency-denominated payables and receivables will generally be
treated as ordinary income or loss although in some cases elections may be
available that would alter this treatment.
If an Equity Fund or a Fixed Income Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital
gain) or hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gain from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but
any such election could require the Fund to recognize taxable income or gain
without the concurrent receipt of cash. The applicable Funds may limit and/or
manage their holdings in passive foreign investment companies to minimize
their tax liability or maximize their return from these investments.
A Fund that invests in foreign securities may be subject to foreign
withholding or other foreign taxes on certain income (possibly including, in
some cases, capital gains) from such securities. Tax conventions between
certain countries and the U.S. may reduce or eliminate such taxes. The
Funds will not be entitled to pass through such foreign taxes to their
shareholders, who consequently will not be entitled to any U.S. tax credits or
deductions for such taxes.
Each Fund's investments in zero coupon securities or other securities
bearing original issue discount or, if the Fund elects to include market
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discount in income currently, market discount will generally cause it to
realize income prior to the receipt of cash payments with respect to these
securities. Options, futures or forward contracts subject to the mark to
market rules described above may have the same result if recognized mark to
market gains exceed recognized mark to market losses. In order to obtain cash
to distribute this income or gain, maintain its qualification as a regulated
investment company, and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Municipal Fund purchases tax-exempt municipal securities which
are generally accompanied by an opinion of bond counsel to the effect that
interest on such securities is not included in gross income for federal income
tax purposes. It is not economically feasible to, and the Municipal Funds
therefore do not, make any additional independent inquiry into whether such
securities are in fact tax-exempt. Bond counsels' opinions will generally be
based in part upon covenants by the issuers and related parties regarding
continuing compliance with federal tax requirements. Tax laws, especially
those enacted during the last decade, not only had the effect of limiting the
purposes for which tax-exempt bonds could be issued and reducing the supply of
such bonds, but also increased the number and complexity of requirements that
must be satisfied on a continuing basis in order for bonds to be and remain
tax-exempt. If the issuer of a bond or a user of a bond-financed facility
fails to comply with such requirements at any time, interest on the bond could
become taxable, retroactive to the date the obligation was issued. In that
event, a portion of a Municipal Fund's distributions attributable to interest
such Fund received on such bond for the current year and for prior years could
be characterized or recharacterized as taxable income.
Each Fixed Income Fund and each Municipal Fund may purchase municipal
securities together with the right to resell the securities to the seller at
an agreed upon price or yield within a specified period prior to the maturity
date of the securities. Such a right to resell is commonly known as a "put"
and is also referred to as a "standby commitment." A Fund may pay for a
standby commitment either separately, in cash, or in the form of a higher
price for the securities which are acquired subject to the standby commitment,
thus increasing the cost of securities and reducing the yield otherwise
available. Additionally, a Fund may purchase beneficial interests in municipal
securities held by trusts, custodial arrangements or partnerships and/or
combined with third-party puts or other types of features such as interest
rate swaps; those investments may require the Fund to pay "tender fees" or
other fees for the various features provided.
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The IRS has issued a revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The IRS has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The IRS has subsequently announced
that it will not ordinarily issue advance ruling letters as to the identity of
the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each Fund intends to take the position that it is the
owner of any municipal obligations acquired subject to a standby commitment or
other third party put and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance
that the IRS will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of
these investments, including the treatment of tender fees paid by the Fund, in
relation to various regulated investment company tax provisions is unclear.
However, the Adviser intends to manage each Fund's portfolio in a manner
designed to minimize any adverse impact from the tax rules applicable to these
investments.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if
any, during the eight years following the year of the loss. To the extent
subsequent years' capital gains are offset by such losses, they would not
result in federal income tax liability to the applicable Fund and,
accordingly, would generally not be distributed to shareholders. At October
31, 1995, Municipal Bond Fund had capital loss carryforwards of approximately
$1,556,000 and Smaller Companies Fund had capital loss carryforwards of
approximately $6,000, in each case expiring (if not previously used) in the
fiscal year ended October 31, 2003.
U.S. Shareholders -- Distributions
A Municipal Fund's distributions from the tax-exempt interest it
receives will generally be exempt from federal income tax, provided that such
Fund qualifies as a regulated investment company, at least 50% of the value of
the Fund's total assets at the close of each quarter of its taxable year
consists of obligations that pay interest excluded from gross income under
Section 103(a) of the Code, and the Fund properly designates such distributions
as "exempt-interest dividends." The portions of such exempt-
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interest dividends, if any, derived from interest on certain private activity
bonds will constitute tax preference items and may give rise to, or increase
liability under, the federal alternative minimum tax for particular
shareholders. In addition, all exempt-interest dividends may increase a
corporate shareholder's liability, if any, for the corporate alternative
minimum tax and will be taken into account in determining the portion, if any,
of a shareholder's social security benefits or certain railroad retirement
benefits that is subject to tax.
For U.S. federal income tax purposes, distributions by the Funds
other than the Municipal Funds, whether reinvested in additional shares or
paid in cash, generally will be taxable to shareholders who are subject to
tax. Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a
distribution in an amount equal to the amount of cash they would have received
had they elected to receive cash and will have a cost basis in each share
received equal to such amount divided by the number of shares received.
Distributions from investment company taxable income of any Fund, including
the Municipal Funds, for the year will be taxable as ordinary income.
Investment company taxable income includes, among other things, income from
repurchase agreements and securities loans; accrued, recognized market
discount; a portion of the discount on certain stripped tax-exempt obligations
and their coupons; and net short-term capital gain (in excess of net long-term
capital loss) from the sale of investments or options or futures transactions
or the disposition of rights to when-issued securities prior to issuance.
Distributions to corporate shareholders designated as derived from dividend
income received by a Fund, if any, that would be eligible for the dividends
received deduction if the Fund were not a regulated investment company will be
eligible, subject to certain holding period and debt-financing restrictions,
for the 70% dividends received deduction for corporations. Because eligible
dividends are limited to those received by a Fund from U.S. domestic
corporations all dividends paid by the Municipal Funds, and all or a
substantial portion of the dividends paid by the Fixed Income Funds, will
generally not qualify for the dividends received deduction. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted current earnings over
its alternative minimum taxable income, which may increase its liability for
the federal alternative minimum tax, and the dividend may, if it is treated as
an "extraordinary dividend" under the Code, reduce such shareholder's tax
basis in its shares of a Fund. Capital gain dividends (i.e., dividends from
net capital gain) paid by any Fund, including the Municipal Funds, if
designated as such in a written notice to shareholders mailed not later than
60 days after a Fund's taxable year closes, will be taxed to shareholders as
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long-term capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received deduction for
corporations.
Interest on indebtedness incurred directly or indirectly to purchase
or carry shares of a Municipal Fund will not be deductible to the extent it is
deemed related to exempt-interest dividends paid by such Fund.
A Municipal Fund may not be an appropriate investment for persons who
are, or are related to, substantial users of facilities financed by industrial
development or private activity bonds.
Shareholders are required to report tax-exempt income, including
exempt-interest dividends, on their federal income tax returns. Each Municipal
Fund will inform shareholders of the federal income tax status of its
distributions after the end of each calendar year, including the amounts that
qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum
tax. Shareholders who have not held shares of a Municipal Fund for a full
taxable year may have designated as tax-exempt or as a tax preference item a
percentage of their distributions which is not exactly equal to a
proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in the Fund.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their
tax advisers for more information.
U.S. Shareholders -- Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed
of, the shareholder will generally recognize gain or loss equal to the
difference between the shareholder's adjusted tax basis in the shares and the
cash, or fair market value of any property, received. Assuming the shareholder
holds the shares as a capital asset at the time of such sale or other
disposition, such gain or loss should be capital in character, and long-term
if the shareholder has held the shares for more than one year, otherwise
short-term. However, any loss realized on the sale, redemption or other
disposition of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any capital gain dividend
received with respect to such shares and will be disallowed to the extent of
any exempt-interest dividends received with respect to such shares.
Additionally, any loss realized on a sale, redemption or other disposition of
shares of a
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<PAGE>
Fund will be disallowed to the extent the shares disposed of are replaced with
shares of the same Fund within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of, such as pursuant to a
dividend reinvestment in shares of the Fund. If disallowed, the loss will be
reflected in an adjustment to the basis of the shares acquired.
The Funds may be required to withhold, as "backup withholding,"
federal income tax at a rate of 31% from taxable dividends (including
distributions from a Fund's net long-term capital gains) and share redemption
and exchange proceeds to individuals and other non-exempt shareholders who
fail to furnish the Funds with a correct taxpayer identification number
("TIN") certified under penalties of perjury, or if the Internal Revenue
Service or a broker notifies the Funds that the payee has failed to properly
report interest or dividend income to the IRS or that the TIN furnished by the
payee to the Funds is incorrect, or if (when required to do so) the payee
fails to certify under penalties of perjury that it is not subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
United States federal income tax liability. Distributions by a Municipal Fund
will not be subject to backup withholding, however, for any year such Fund
reasonably estimates that at least 95% of its dividends will be
exempt-interest dividends.
Non-U.S. Shareholders
Shareholders who, as to the United States, are nonresident aliens,
foreign corporations, fiduciaries of foreign trusts or estates, foreign
partnerships or other non-U.S. investors generally will be subject to U.S.
withholding tax at the rate of 30% on distributions treated as ordinary income
unless the tax is reduced or eliminated pursuant to a tax treaty or the
dividends are effectively connected with a U.S. trade or business of the
shareholder. In the latter case the dividends will be subject to tax on a net
income basis at the graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net capital gain, including amounts retained by
a Fund which are designated as undistributed capital gains, to a non-U.S.
shareholder will not be subject to U.S. income or withholding tax unless the
distributions are effectively connected with the shareholder's trade or
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption
of shares of a Fund will not be subject to U.S. federal income or withholding
- 63 -
<PAGE>
tax unless the gain is effectively connected with the shareholder's trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. investors should consult their tax advisers about the
applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
State and Local
The Funds may be subject to state or local taxes in jurisdictions in
which the Funds may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of a Fund and
its shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
GENERAL INFORMATION ABOUT THE TRUST
General
The Trust is an open-end investment company organized as a Delaware
business trust on September 13, 1993. The Trust commenced operations on
January 3, 1994. Until December 30, 1994, the Fixed Income Fund and the
Municipal Bond Fund were series of The Advisors' Inner Circle Fund, a
Massachusetts business trust organized under the laws of the Commonwealth of
Massachusetts on July 18, 1991.
In the event of a liquidation or dissolution of the Trust or an
individual Fund, shareholders of a particular Fund would be entitled to
receive the assets available for distribution belonging to such Fund.
Shareholders of a Fund are entitled to participate in the net distributable
assets of the particular Fund involved on liquidation, based on the number of
shares of the Fund that are held by each shareholder.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Fund on matters affecting an individual Fund.
Shares are freely transferable and have no preemptive, subscription or
conversion rights. The Trust does not expect to hold shareholder meetings
except as required by the 1940 Act or the Agreement and Declaration of Trust
(the "Declaration of Trust"). See "Organization and Shares of the Trust" in
the Prospectus.
- 64 -
<PAGE>
As of May 17, 1996, the following shareholders owned the following
respective percentages of the outstanding shares of the Fixed Income Fund, the
Municipal Bond Fund, The Short-Term Municipal Bond Fund, the Short-Term Fixed
Income Fund and The Smaller Companies Fund:
Fixed Income Fund:
- ------------------
SEI Trust Company 16.23%
680 E. Swedesford Road
Wayne, PA 19087
BATRUS & Co. 7.93%
c/o Bankers Trust Company
PO Box 9005
Church Street Station
New York, NY 10006
The Bank of New York TTEE 5.09%
FBO Niagara Mohawk Power Corp.
Repersented Health VEBA
One Wall Street
New York, NY 10286
Municipal Bond Fund:
- --------------------
SEI Trust Company 10.81%
680 E. Swedesford Road
Wayne, PA 19087
Batrus & Co., (New York Corporation) 46.93%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
INFID & Co. 7.75%
c/o Bankers Trust Co.
PO Box 9005 Church Street Station
New York, NY 10008
- 65 -
<PAGE>
Short-Term Municipal Bond Fund:
- -------------------------------
SEI Trust Company 27.28%
680 E. Swedesford Road
Wayne, PA 19087
James E. Minnick & Nancy Minnick JTTEN 10.60%
3421 St. Davids Road
Newtown Square, PA 19073
Phyllis Kingsbury 9.56%
27 Inverness Ct.
Short Hils, NJ 07078
Emily Kingsbury 11.05%
610 New Albany Road
Moorestown, NJ 08057
Neil Patrick Jenkins 6.46%
420 E. 81st Street Apt 3
New York, NY 10028
Wilmington Trust Co FBO David Baldt 7.48%
1100 N. Market Street
Wilmington, DE 19890
Short-Term Fixed Income Fund:
- -----------------------------
BATRUS & Co., (New York Corporation) 30.11%
c/o Bankers Trust
PO Box 9005 Church Street Station
New York, NY 10006
SEI Trust Company 13.25%
680 E. Swedesford Road
Wayne, PA 19087
Infid & Co. 6.06%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
- 66 -
<PAGE>
Margaret J. Rogers, Philip Jonsson 42.66%
Kenneth Jonsson for Estate of John E. Johsson
5600 W Lovers Lane #323
Dallas, TX 75209
Smaller Companies Fund:
- -----------------------
Morgan Grenfell Capital Management, Inc. 85.87%
(Delaware Corporation)
885 Third Avenue Suite 3200
New York, NY 10022
Deutsche Morgan Grenfell 12.75%
1290 Avenue of the Americas
New York, NY 10104
It is expected that, on the date of this Statement of Additional
Information, SEI Financial Corporation will be the beneficial and record owner
of 100% of the outstanding shares of the Microcap Fund.
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under
Delaware law, the shareholders of a business trust are not generally subject
to liability for the debts or obligations of the trust. Similarly, Delaware
law provides that none of the Funds will be liable for the debts or
obligations of any other Fund. However, no similar statutory or other
authority limiting business trust shareholder liability exists in other
states. As a result, to the extent that a Delaware business trust or a
shareholder is subject to the jurisdiction of the courts in such other states,
the courts may not apply Delaware law and may thereby subject the Delaware
business trust shareholders to liability. To guard against this risk, the
Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. Notice of such disclaimer will normally
be given in each agreement, obligation or instrument entered into or executed
by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Fund for any loss suffered by a shareholder as
a result of an obligation of the Fund. 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 satisfy any
judgment
- 67 -
<PAGE>
thereon. The Trustees believe that, in view of the above, the risk of personal
liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in
the Declaration of Trust protects a Trustee against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct
of his or her office.
Consideration for Purchases of Shares
The Trust generally will not issue shares of the Funds for
consideration other than cash. At the Trust's sole discretion, however, it may
issue Fund shares for consideration other than cash in connection with an
acquisition of portfolio securities (other than municipal debt securities
issued by state political subdivisions or their agencies or instrumentalities)
or pursuant to a bona fide purchase of assets, merger or other reorganization,
provided (i) the securities meet the investment objectives and policies of the
Fund; (ii) the securities are acquired by the Fund for investment and not for
resale; (iii) the securities are not restricted as to transfer either by law
or liquidity of market; and (iv) the securities have a value which is readily
ascertainable (and not established only by valuation procedures) as evidenced
by a listing on the American Stock Exchange or the New York Stock Exchange or
by quotation on the NASD Automated Quotation System. An exchange of securities
for Fund shares will generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
Price Waterhouse LLP serves as the Funds' independent accountants,
providing audit services, including review and consultation in connection with
various filings by the Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the securities of the Funds and certain
other series of the Trust. If further information is desired with respect to
the Trust, the Funds or such other series, reference is made to the
Registration Statement and the exhibits filed as a part thereof.
- 68 -
<PAGE>
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October
31, 1995 are included in this Statement of Additional Information in reliance
upon the report of Price Waterhouse LLP, the Trust's independent accountants,
as experts in accounting and auditing. The Trust's unaudited financial
statements for the period ended April 30, 1996 are also included in this
Statement of Additional Information.
- 69 -
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS
The rating descriptions set forth below are believed to be the most
recent rating descriptions available from Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's), Duff &
Phelps, Inc. ("Duff") and Fitch Investors Service ("Fitch") at the date of
this Statement of Additional Information for the securities listed. Ratings
are generally given to securities at the time of issuance. While the rating
agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessilarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
I. Long-Term Debt Ratings
Moody's Investors Service, Inc.
Description of four highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (1,2 and 3) in each rating category to
indicate the security's ranking within the category):
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - 1
<PAGE>
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to prinicpal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, ie:, 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.
Standard & Poor's Ratings Group (1)
Description of the four highest long-term debt ratings by Standard &
Poor's (Standard & Poor's may apply a plus (+) or minus (-) to a particular
rating classification to show relative standing within the classification):
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
(1) Rates all governmental bodies having $1,000,000 or more of debt
outstanding, unless adequate information is not available.
A - 2
<PAGE>
Duff & Phelps, Inc.
Description of the four highest long-term debt ratings by Duff (Duff
may apply a plus or minus to show relative standing within a rating category):
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB: Investment grade. Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
Fitch Investores Service
Description of the four highest long-term ratings by Fitch (plus or
minus signs are used with a rating symbol to indicate the relative position of
the credit within the rating category):
AAA: Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
forseeable events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of thest issues is generally
rated "F-1+".
A: Bonds considered to be investment grade and of high crdit quality.
The obligor's ability to pay interest and to repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
A - 3
<PAGE>
BBB: Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and to repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
II. Short-Term Debt Ratings
Short-term debt ratings may be assigned, for example, to commercial
paper, master demand notes, bank instruments and letters of credit.
Moody's description of its highest short-term debt rating:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Lending market positions in well established
industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial
markets and assured sources of alternative liquidity.
Standard & Poor's description of its highest short-term debt rating:
A-1 This designation indicated that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
A - 4
<PAGE>
III. Short-Term Loan / Municipal Note Ratings
Moody's description of its two highest short-term loan / municipal note
ratings:
MIG-1/VMIG-1 This description denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceeding group.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or 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, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
A - 5
<PAGE>
The financial statements of Morgan Grenfell Investment Trust are incorporated
into this Statment of Additional Information by reference from Morgan Grenfell
Investment Trust's 1995 Annual Report to Shareholders for the year ended
October 31, 1995 (filed electronically on December 29, 1995; file no.
811-8006; accession no. 0000950109-95-005471).
<PAGE>
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
The financial highlights of the Registrant are included in Part A of
the Registration Statement and the financial statements of the
Registrant are included in Part B of the Registration Statement and
are incorporated therein by reference from Registrant's 1995 Annual
Report to Shareholders for the year ended October 31, 1995 (filed
electronically on December 29, 1995; file no. 811-8006; accession
no. 0000950109-95- 005471).
(b) Exhibits:
Except as noted, the following exhibits are being filed herewith:
*1. Agreement and Declaration of Trust of Registrant dated
September 13, 1993, as amended.
*2. Amended By-Laws of Registrant.
*5(a). Management Contract dated January 3, 1994, as amended as of
April 25, 1994, April 1, 1995 and September 1, 1995, between
Morgan Grenfell Investment Services Limited and Registrant, on
behalf of Morgan Grenfell International Equity Fund, Morgan
Grenfell Global Equity Fund, Morgan Grenfell European Equity
Fund, Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell International Small Cap Equity Fund, Morgan Grenfell
Japanese Small Cap Equity Fund, Morgan Grenfell European Small
Cap Equity Fund, Morgan Grenfell Emerging Markets Equity Fund,
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging
Markets Debt Fund.
*5(b). Management Contract dated as of December 28, 1994 between
Morgan Grenfell Capital Management, Inc. and Registrant, on
behalf of Morgan Grenfell Fixed Income Fund and Morgan Grenfell
Municipal Bond Fund.
C-1
<PAGE>
*5(c). Management Contract dated as of December 28, 1994 between
Morgan Grenfell Capital Management, Inc. and Registrant, on
behalf of Morgan Grenfell Large Cap Growth Fund, Morgan
Grenfell Smaller Companies Fund, Morgan Grenfell Short-Term
Fixed Income Fund and Morgan Grenfell Short-Term Municipal Bond
Fund.
5(d). Form of Management Contract between Morgan Grenfell Capital
Management, Inc. and Registrant, on behalf of Morgan Grenfell
Microcap Fund.
6. Distribution Agreement dated as of December 30, 1993 between
SEI Financial Services Company and Registrant, on behalf of all
of its series.
*8(a). Custody Agreement dated as of December 29, 1993 between The
Northern Trust Company and Registrant, on behalf of Morgan
Grenfell International Equity Fund, Morgan Grenfell Global
Equity Fund, Morgan Grenfell European Equity Fund, Morgan
Grenfell Pacific Basin Equity Fund, Morgan Grenfell
International Small Cap Equity Fund, Morgan Grenfell Japanese
Small Cap Equity Fund, Morgan Grenfell European Small Cap
Equity Fund, Morgan Grenfell Emerging Markets Equity Fund,
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging
Markets Fixed Income Fund, and form of amendment effective as
of December 28, 1994, causing Custody Agreement to apply to
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell
Short-Term Municipal Bond Fund, Morgan Grenfell Large Cap
Growth Fund and Morgan Grenfell Smaller Companies Fund.
*8(b). Custody Agreement dated as of December 28, 1994 between
CoreStates Bank, N.A. and Registrant, on behalf of Morgan
Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond
Fund.
C-2
<PAGE>
**9(a). Administration Agreement between SEI Financial Management
Corporation and Registrant, on behalf of Morgan Grenfell
International Equity Fund, Morgan Grenfell Global Equity Fund,
Morgan Grenfell European Equity Fund, Morgan Grenfell Pacific
Basin Equity Fund, Morgan Grenfell International Small Cap
Equity Fund, Morgan Grenfell Japanese Small Cap Equity Fund,
Morgan Grenfell European Small Cap Equity Fund, Morgan Grenfell
Emerging Markets Equity Fund, Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund
and Morgan Grenfell Emerging Markets Fixed Income Fund
(previously filed with the SEC on December 30, 1993 pursuant to
Pre-Effective Amendment No. 2 to Registrant's Registration
Statement).
**9(b). Transfer Agency Agreement dated as of December 30, 1993
between Supervised Service Company, Inc. and Registrant, on
behalf of Morgan Grenfell International Equity Fund, Morgan
Grenfell Global Equity Fund, Morgan Grenfell European Equity
Fund, Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell International Small Cap Equity Fund, Morgan Grenfell
Japanese Small Cap Equity Fund, Morgan Grenfell European Small
Cap Equity Fund, Morgan Grenfell Emerging Markets Equity Fund,
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging
Markets Fixed Income Fund (previously filed with the SEC on
July 7, 1994 pursuant to Post-Effective Amendment No. 1 to
Registrant's Registration Statement).
**9(c). Form of Administration Agreement dated December 28, 1994
between SEI Financial Management Corporation and Registrant, on
behalf of Morgan Grenfell Large Cap Growth Fund, Morgan
Grenfell Smaller Companies Fund, Morgan Grenfell Fixed Income
Fund, Morgan Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Municipal Bond Fund and Morgan Grenfell Short-Term
Municipal Bond Fund (previously filed with the SEC on October
14, 1994 pursuant to Post-Effective Amendment No. 3 to
Registrant's Registration Statement).
C-3
<PAGE>
**9(d). Transfer Agency Agreement dated as of December 28, 1994
between Supervised Service Company, Inc. and Registrant, on
behalf of Morgan Grenfell Large Cap Growth Fund, Morgan
Grenfell Smaller Companies Fund, Morgan Grenfell Fixed Income
Fund, Morgan Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Municipal Bond Fund and Morgan Grenfell Short-Term
Municipal Bond Fund (previously filed with the SEC on April 4,
1995 pursuant to Post-Effective Amendment No. 6 to Registrant's
Registration Statement).
10. Opinion and Consent of Morris, Nichols, Arsht & Tunnell.
11(a). Consent of Price Waterhouse LLP.
11(b). Consent of Arthur Andersen LLP.
12. Not Applicable.
**13. Share Purchase Agreement dated as of December 29, 1993 between
Registrant and SEI Financial Management Corporation (previously
filed with the SEC on July 7, 1994 pursuant to Post-Effective
Amendment No. 1 to Registrant's Registration Statement).
**16. Performance Quotation Computation appearing as Exhibit 16 to
Post-Effective Amendment No. 13 to the Registration Statement
of The Advisors' Inner Circle Fund (File Nos. 33-42484 and
811-6400) is incorporated herein by reference (previously filed
with the SEC on December 28, 1994 pursuant to Post-Effective
Amendment No. 4 to Registrant's Registration Statement).
*17. Powers of Attorney of Graham E. Jones, William N. Searcy, Paul
K. Freeman, Theresa M. Messina, Patrick W. Disney, James E.
Minnick, Hugh G. Lynch, Edward T. Tokar and Jeffrey A. Cohen.
- ---------------------------
* Previously filed with the SEC on February 14, 1996 and incorporated by
reference herein.
** Previously filed with the SEC on the dates indicated and incorporated by
reference herein.
C-4
<PAGE>
Item 25. Persons Controlled By or Under
Common Control With Registrant
The Registrant does not directly or indirectly control any person.
On the effective date of this Registration Statement, 100% of the shares of
the following series of the Registrant will be owned by SEI Financial
Management Corporation, a Delaware corporation: Morgan Grenfell Global Equity
Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell Pacific Basin
Equity Fund and Morgan Grenfell Japanese Small Cap Equity Fund. SEI Financial
Management Corporation is a wholly-owned subsidiary of SEI Corporation, a
Delaware corporation, which also controls the distributor of the Registrant,
SEI Financial Services Company, and other corporations engaged in providing
various financial and recordkeeping services, primarily to bank trust
departments, pension plan sponsors and investment managers.
Item 26. Number of Holders of Securities
On May 10, 1996, the number of record holders of each series of the
Registrant was as follows:
Number of
Fund Record Holders
- ---- --------------
Morgan Grenfell International Equity Fund 12
Morgan Grenfell Global Equity Fund 1
Morgan Grenfell European Equity Fund 1
Morgan Grenfell Pacific Basin Equity Fund 1
Morgan Grenfell International Small Cap Equity Fund 30
Morgan Grenfell Japanese Small Cap Equity Fund 1
Morgan Grenfell European Small Cap Equity Fund 13
Morgan Grenfell Emerging Markets Equity Fund 40
Morgan Grenfell Global Fixed Income Fund 116
Morgan Grenfell International Fixed Income Fund 25
Morgan Grenfell Emerging Markets Debt Fund 38
Morgan Grenfell Fixed Income Fund 366
Morgan Grenfell Municipal Bond Fund 239
Morgan Grenfell Short-Term Fixed Income Fund 17
Morgan Grenfell Short-Term Municipal Bond Fund 30
Morgan Grenfell Smaller Companies Fund 8
Morgan Grenfell Microcap Fund 0
Morgan Grenfell Large Cap Growth Fund 0
C-5
<PAGE>
Item 27. Indemnification
Article III, Section 7 and Article VII, Section 2 of the
Registrant's Agreement and Declaration of Trust and Article VI of the
Registrant's By-Laws provide for indemnification of the Registrant's trustees
and officers under certain circumstances.
Item 28. Business and Other Connections of Investment Advisers
All of the information required by this item is set forth in the
Form ADV, as amended, of Morgan Grenfell Investment Services Limited (File No.
801-12880) and in the Form ADV, as amended, of Morgan Grenfell Capital
Management, Inc. (File No. 801-27291). The following sections of each such
Form ADV are incorporated herein by reference:
(a) Items 1 and 2 of Part II
(b) Section 6, Business Background, of
each Schedule D.
Item 29. Principal Underwriter
(a) The Registrant's distributor is SEI Financial Services Company
("SFS"), which also acts as distributor for SEI Daily Income
Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index
Funds, SEI Institutional Managed Trust, SEI International
Trust, Stepstone Funds, The Advisors' Inner Circle Fund, The
Pillar Funds, CUFUND, STI Classic Funds, CoreFunds, Inc., First
American Funds, Inc., First American Investment Funds, Inc.,
The Arbor Fund, 1784 Funds, The PBHG Funds, Inc., Marquis
Funds, Inventor Funds, Inc., The Achievement Funds Trust,
Insurance Investment Products Trust, Bishop Street Funds,
CrestFunds, Inc., STI Classic Variable Trust ARK Funds, Monitor
Funds, FMB Funds, Inc., SEI Asset Allocation Trust and Turner
Funds pursuant to distribution agreements dated July 15, 1982,
November 29, 1982, December 3, 1982, July 10, 1985, January 22,
1987, August 30, 1988, January 30, 1991, November 14, 1991,
February 28, 1992, May 1, 1992, May 29, 1992, October 30, 1992,
November 1, 1992, November 1, 1992, January 28, 1993, June 1,
1993, July 16, 1993, August 17, 1993, August 1, 1994, December
27, 1994, December 30, 1994, January 27, 1995, March 1, 1995,
August 18, 1995, November 1, 1995, January 11, 1996, March 1,
1996, April 1, 1996 and April 30, 1996, respectively.
C-6
<PAGE>
(b) The following table lists, for each director and officer of
SFS, the information indicated.
Name and Positions and
Principal Business Position and Offices Office with
Address* with Underwriter Registrant
- ------------------ -------------------- -------------
Alfred P. West, Jr. Director, Chairman and None
Chief Executive Officer
Henry H. Greer Director, President and None
Chief Operating Officer
Carmen V. Romeo Director, Executive Vice None
President and Treasurer
Gilbert L. Beebower Executive Vice President None
Richard B. Lieb Executive Vice President, None
President - Investment
Services Division
Leo J. Dolan, Jr. Senior Vice President None
Carl A. Guarino Senior Vice President None
Jerome Hickey Senior Vice President None
David G. Lee Senior Vice President None
William Madden Senior Vice President None
A. Keith McDowell Senior Vice President None
Dennis J. McGonigle Senior Vice President None
Hartland J. McKeown Senior Vice President None
James V. Morris Senior Vice President None
Steven Onofrio Senior Vice President None
Kevin P. Robins Senior Vice President, None
General Counsel and
Secretary
Robert Wagner Senior Vice President None
Patrick K. Walsh Senior Vice President None
Kenneth Zimmer Senior Vice President None
Robert Crudup Vice President and None
Managing Director
Vic Galef Vice President and None
Managing Director
Kim Kirk Vice President and None
Managing Director
John Krzeminski Vice President and None
Managing Director
Carolyn McLaurin Vice President and None
Managing Director
Barbara Moore Vice President and None
Managing Director
C-7
<PAGE>
W. Kelso Morrill Vice President and None
Controller
Donald Pepin Vice President and None
Managing Director
Mark Samuels Vice President and None
Managing Director
Wayne M. Withrow Vice President and None
Managing Director
Mick Duncan Vice President and Team Leader None
Robert Ludwig Vice President and Team Leader None
Vicki Malloy Vice President and Team Leader None
Robert Aller Vice President None
Steve Bendinelli Vice President None
Marc H. Cahn Vice President and None
Assistant Secretary
Gordon W. Carpenter Vice President None
Barbara A. Nugent Vice President and None
Assistant Secretary
Todd Cipperman Vice President and None
Assistant Secretary
Ed Daly Vice President None
Jeff Drennen Vice President None
Kathy Heilig Vice President None
Larry Hutchison Vice President None
Michael Kantor Vice President None
Samuel King Vice President None
Donald H. Korytowski Vice President None
Robert S. Ludwig Vice President None
Jack May Vice President None
Sandra K. Orlow Vice President and None
Assistant Secretary
Larry Pokora Vice President None
Kim Rainey Vice President None
Paul Sachs Vice President None
Steve Smith Vice President None
Daniel Spaventa Vice President None
Kathryn L. Stanton Vice President and None
Assistant Secretary
William Zawaski Vice President None
James Dougherty Director of Brokerage Services None
- ---------------------------
* The principal business address of each of the listed persons is SEI
Financial Services Company, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658.
(c) Not applicable.
C-8
<PAGE>
Item 30. Location of Accounts and Records
The Agreement and Declaration of Trust, By-Laws and minute books of
the Registrant are in the physical possession of Morgan Grenfell Capital
Management, Inc., 885 Third Avenue, New York, New York 10022. All other books,
records, accounts and other documents required to be maintained under Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder will be in the physical possession of the Registrant's custodians:
The Northern Trust Company, Fifty South LaSalle Street, Chicago, Illinois
60675, and CoreStates Bank, N.A., Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19101, except for certain transfer agency and fund accounting
records which are in the physical possession of DST Systems, Inc., 811 Main
Street, Kansas City, Missouri 64105, the Registrant's transfer agent, and SEI
Financial Management Corporation, the Trust's administrator, 680 East
Swedesford Road, Wayne, Pennsylvania 19087-1658, respectively.
Item 31. Management Services
Not Applicable.
Item 32. Undertaking
(a) Within four to six months from the later of (i) the effective
date of this Post-Effective Amendment under the Securities Act of 1933 and
(ii) the actual date that shares of a series are first sold to the public or
operations otherwise begin with respect to such series, the Registrant
undertakes to file a post-effective amendment covering each series of
Registrant that has not commenced operations prior to the effective date of
this Post-Effective Amendment, using financial statements which need not be
certified.
(b) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter
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<PAGE>
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
(c) The Registrant undertakes to furnish, upon request and without
charge, to each person to whom a prospectus is delivered a copy of the latest
annual report to shareholders of such series (except to the extent a series
has not by such time been required to issue an annual report).
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 10 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York and State of New York, on the 29th day of May 1996.
MORGAN GRENFELL INVESTMENT TRUST
By:/s/ Mark G. Arthus
-----------------------------
Mark G. Arthus
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 10 to the Registrant's Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
James E. Minnick* )
- -------------------- )
James E. Minnick Chief Executive Officer )
(Principal Executive )
Officer) and Trustee )
)
)
/s/Jeffrey A. Cohen ) May 29, 1996
- -------------------- )
Jeffrey A. Cohen Treasurer and Chief )
Financial Officer )
(Principal Financial and )
Accounting Officer) )
)
Paul K. Freeman* )
- -------------------- )
Paul K. Freeman Trustee )
)
)
Graham E. Jones* )
- -------------------- )
Graham E. Jones Trustee )
<PAGE>
Signature Title Date
--------- ----- ----
William N. Searcy* )
- -------------------- )
William N. Searcy Trustee )
)
)
Patrick W. Disney* )
- -------------------- )
Patrick W. Disney Trustee )
)
)
Hugh G. Lynch* )
- -------------------- )
Hugh G. Lynch Trustee )
)
)
Edward T. Tokar* )
- -------------------- )
Edward T. Tokar Trustee )
- ------------
Dated: May 29, 1996
*By:/s/ Mark G. Arthus
-------------------------
Mark G. Arthus, Attorney-in-Fact, pursuant to powers of attorney filed
herewith or incorporated by reference.
<PAGE>
Exhibit Index
Exhibit
Number Document Title
- ------ --------------
5(d). Form of Management Contract between Morgan Grenfell
Capital Management, Inc. and Registrant, on behalf of Morgan
Grenfell Microcap Fund.
6. Distribution Agreement dated as of December 30, 1993
between SEI Financial Services Company and Registrant, on
behalf of all of its series.
10. Opinion and Consent of Morris, Nichols, Arsht & Tunnell.
11(a). Consent of Price Waterhouse LLP.
11(b). Consent of Arthur Andersen LLP.
FORM OF INVESTMENT MANAGEMENT CONTRACT
AGREEMENT made as of the ____ day of July, 1996, by and between Morgan
Grenfell Investment Trust (the "Trust"), on behalf of Morgan Grenfell Microcap
Fund (the "Portfolio"), and Morgan Grenfell Capital Management Incorporated
(the "Adviser").
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended,
consisting of several series of shares, each having its own investment
policies; and
WHEREAS, the Trust has retained SEI Financial Management Corporation (the
"Administrator") to provide administration of the Trust's operations, subject
to the control of the Board of Trustees;
WHEREAS, the Trust desires to retain the Adviser to render investment
management services with respect to the Portfolio, and the Adviser is willing
to render such services:
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1 Duties of Adviser. The Trust employs the Adviser to manage the
investment and reinvestment of the assets, and to continuously
review, supervise, and administer the investment programs of the
Portfolio, to determine in its discretion the securities to be
purchased or sold, to provide the Administrator and the Trust with
records concerning the Adviser's activities which the Trust is
required to maintain, and to render regular reports to the
Administrator and to the Trust's officers and trustees concerning
the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject
to the control of the Board of Trustees of the Trust and in
compliance with such policies as the Trustees may from time to time
establish, and in compliance with the objectives, policies, and
limitations for the Portfolio set forth in the Portfolio's
prospectus and statement of additional information, as amended from
time to time, and applicable laws and regulations.
The Adviser accepts such employment and agrees, at its own expense,
to render the services and to provide the office space, furnishings
and equipment and the
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<PAGE>
personnel required by it to perform the services on the terms and
for the compensation provided herein.
2. Portfolio Transactions. The Adviser is authorized to select the
brokers or dealers that will execute the purchases and sales of
portfolio securities for the Portfolio and is directed to use its
best efforts to obtain the best net results as described from time
to time in the Portfolio's Prospectus and Statement of Additional
Information. The Adviser will promptly communicate to the
Administrator and to the officers and the Trustees of the Trust such
information relating to portfolio transactions as they may
reasonably request.
It is understood that the Adviser will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Trust or be
in breach of any obligation owing to the Trust under this Agreement,
or otherwise, solely by reason of its having directed a securities
transaction on behalf of the Trust to a broker-dealer in compliance
with the provisions of Section 28(e) of the Securities Exchange Act
of 1934 or as otherwise permitted from time to time by the
Portfolio's Prospectus and Statement of Additional Information.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Trust
shall pay to the Adviser compensation at the rate specified in the
Schedule(s) which are attached hereto and made a part of this
Agreement. Such compensation shall be paid to the Adviser at the end
of each month, and calculated by applying a daily rate, based on the
annual percentage rates as specified in the attached Schedule(s), to
the assets of the Portfolio. The fee shall be based on the average
daily net assets for the month involved (less any assets of the
Portfolio held in non-interest bearing special deposits with a
Federal Reserve Bank).
All rights of compensation under this Agreement for services
performed as of the termination date shall survive the termination
of this Agreement.
4. Other Expenses. The Adviser shall pay all expenses of printing and
mailing reports, prospectuses, statements of additional information,
and sales literature relating to its efforts to solicit prospective
clients.
-2-
<PAGE>
5. Excess Expenses. If the expenses for the Portfolio for any fiscal
year (including fees and other amounts payable to the Adviser, but
excluding interest, taxes, brokerage costs, litigation, and other
extraordinary costs) as calculated every business day would exceed
the expense limitations imposed on investment companies by any
applicable statute or regulatory authority of any jurisdiction in
which shares of the Portfolio are qualified for offer and sale, the
Adviser shall bear such excess cost.
However, the Adviser will not bear expenses of the Portfolio which
would result in the Portfolio's inability to qualify as a regulated
investment company under provisions of the Internal Revenue Code of
1986, as amended. Payment of expenses by the Adviser pursuant to
this Section 5 shall be settled on a monthly basis (subject to
fiscal year end reconciliation) by a reduction in the fee payable to
the Adviser for such month pursuant to Section 3 and, if such
reduction shall be insufficient to offset such expenses, by
reimbursing the Trust.
6. Reports. The Trust and the Adviser agree to furnish to each other,
if applicable, current prospectuses, proxy statements, reports to
Shareholders, certified copies of their financial statements, and
such other information with regard to their affairs as each may
reasonably request.
7. Status of Adviser. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser shall be free to render
similar services to others so long as its services to the Trust are
not impaired thereby. The Adviser shall be deemed to be an
independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent
the Trust in any way or otherwise be deemed an agent of the Trust.
8. Certain Records. Any records required to be maintained and preserved
pursuant to the provisions of Rule 31a-1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or
maintained by the Adviser on behalf of the Trust are the property of
the Trust and will be surrendered promptly to the Trust on request.
-3-
<PAGE>
9. Limitation of Liability of Adviser. The duties of the Adviser shall
be confined to those expressly set forth herein, and no implied
duties are assumed by or may be asserted against the Adviser
hereunder. The Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or
for any act or omission in carrying out its duties hereunder, except
a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder, except
as may otherwise be provided under provisions of applicable state
law or Federal securities law which cannot be waived or modified
hereby. (As used in this Paragraph 9, the term "Adviser" shall
include directors, officers, employees and other corporate agents of
the Adviser as well as that corporation itself).
10. Permissible Interests. Trustees, agents, and shareholders of the
Trust are or may be interested in the Adviser (or any successor
thereof) as directors, partners, officers, or shareholders, or
otherwise; directors, partners, officers, agents, and shareholders
of the Adviser are or may be interested in the Trust as Trustees,
shareholders or otherwise; and the Adviser (or any Successor) is or
may be interested in the Trust as a Shareholder or otherwise. In
addition, brokerage transactions for the Portfolio may be effected
through affiliates of the Adviser if approved by the Board of
Trustees, subject to the rules and regulations of the Securities and
Exchange Commission.
11. License of Adviser's Name. The Adviser hereby agrees to grant a
license to the Trust for use of its name in the names of the
Portfolio for the term of this Agreement and such license shall
terminate upon termination of this Agreement.
12. Duration and Termination. This Agreement, unless sooner terminated
as provided herein, shall remain in effect until two years from the
date first set forth above, and thereafter, for periods of one year
so long as such continuance thereafter is specifically approved at
least annually (a) by the vote of a majority of those Trustees of
the Trust who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting
securities of each Portfolio; provided, however, that if the
-4-
<PAGE>
shareholders of the Portfolio fail to approve the Agreement as
provided herein, the Adviser may continue to serve hereunder in the
manner and to the extent permitted by the Investment Company Act of
1940 and rules and regulations thereunder. The foregoing requirement
that continuance of this Agreement be "specifically approved at
least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the rules and regulations
thereunder.
This Agreement may be terminated at any time, without the payment of
any penalty by vote of a majority of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the
Portfolio on not less than 30 days nor more than 60 days written
notice to the Adviser, or by the Adviser at any time without the
payment of any penalty, on 90 days written notice to the Trust. This
Agreement will automatically and immediately terminate in the event
of its assignment. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other
party at any office of such party.
As used in this Section 12, the terms "assignment", "interested
persons", and a "vote of a majority of the outstanding voting
securities" shall have the respective meanings set forth in the
Investment Company Act of 1940 and the rules and regulations
thereunder, subject to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
13. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving
notice to the other party at the last address furnished by the other
party to the party giving notice: if to the Trust, at 885 Third
Avenue, New York, NY 10022 and if to the Adviser, at 885 Third
Avenue, New York, NY 10022.
14. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
A copy of the Certificate of Trust of the Trust is on file with the Secretary
of State of the State of Delaware, and notice is hereby given that this
instrument is executed on behalf of the Trustees of the Trust as Trustees, and
is not binding upon any of
-5-
<PAGE>
the Trustees, officers, or shareholders of the Trust individually but binding
only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed as of the day and year first written above.
MORGAN GRENFELL INVESTMENT TRUST
on behalf of
Morgan Grenfell Microcap Fund
By: __________________________
Mark G. Arthus
Secretary
Attest: ______________________
MORGAN GRENFELL CAPITAL MANAGEMENT INCORPORATED
By: __________________________
James E. Minnick
President
Attest: ______________________
-6-
<PAGE>
Schedule
to the
Investment Advisory Agreement
between
Morgan Grenfell Investment Trust
on behalf of
Morgan Grenfell Microcap Fund
and
Morgan Grenfell Capital Management Incorporated
Pursuant to Article 3, the Trust, on behalf of the Portfolio, shall pay the
Adviser compensation at an annual rate as follows:
Portfolio Fee
- ------------------------ ---
Morgan Grenfell Microcap 1.50% of the average
Fund daily net assets
-7-
DISTRIBUTION AGREEMENT
MORGAN GRENFELL INVESTMENT TRUST
THIS AGREEMENT is made as of this 30th day of December, 1993, between
Morgan Grenfell Investment Trust (the "Trust"), a Delaware business trust, and
SEl Financial Services Company (the "Distributor"), a Pennsylvania
corporation.
WHEREAS, the Trust is registered as an investment company with the
Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940, as amended (the "1940 Act"), and its shares (the "Shares") are
registered with the SEC under the Securities Act of 1933, as amended (the
"1933 Act"); and
WHEREAS, the Distributor is registered as a broker-dealer with the
SEC under the Securities Exchange Act of 1934, as amended (the "1934 Act");
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Trust and Distributor hereby agree as follows:
ARTICLE 1. Sale of Shares. The Trust grants to the Distributor the
non-exclusive right to sell Shares of the Trust at the net asset value per
Share in accordance with the then current prospectus and Statement of
Additional Information of the Trust (the "Prospectus"), as agent on behalf of
the Trust, during the term of this Agreement and subject. to the registration
requirements of the 1933 Act, the rules and regulations of the SEC and the
laws governing the sale of securities in the various states ("Blue Sky Laws").
ARTICLE 2. Solicitation of Sales. In consideration of the right
granted to the Distributor, the Distributor agrees to use all reasonable
efforts, consistent with its other business, in connection with the
distribution of Shares of the Trust; provided, however, that the Distributor
shall not be prevented from entering into like arrangements with other
issuers. The provisions of this paragraph do not obligate the Distributor to
register as a broker or dealer under the Blue Sky Laws of any jurisdiction
when it determines it would be uneconomical for it to do so or to maintain its
registration in any jurisdiction in which it is now registered; nor do they
obligate the Distributor to sell any particular number of Shares.
ARTICLE 3. Authorized Representations. The Distributor is not
authorized by the Trust to give any information or to make any representations
other than those contained in the current Prospectus of the Trust filed with
the SEC or contained in shareholder reports or other material that may be
prepared by or on behalf of the Trust for the Distributor's use. The
Distributor may prepare and distribute sales literature and other material as
it may deem appropriate, provided that such literature and materials have been
approved by the Trust prior to their use.
<PAGE>
ARTICLE 4. Transmission of Purchase Orders. The Distributor agrees to
transmit promptly any orders received by it for purchase of Shares to
Supervised Service Company, the Trust's transfer agent, or any successor
transfer agent of which the Trust has notified the Distributor in writing.
ARTICLE 5. Cessation of Sales. Whenever in their judgment such action
is warranted for any reason, including without limitation market, economic or
political conditions, the Trust's officers may decline to accept any orders
for, or make any sales of, the Shares until such time as they deem it
advisable to accept such orders and to make such sales.
ARTICLE 6. Effectiveness of Registration. None of the Shares may be
offered by either the Distributor or the Trust under any of the provisions of
this Agreement and no orders for the purchase or sale of the Shares under this
Agreement may be accepted by the Trust if and so long as the effectiveness of
the Trust's registration statement, or any necessary amendment to such
registration statement, is suspended under any of the provisions of the 1933
Act or if and so long as a current prospectus as required by Section 5(b)(2)
of the 1933 Act is not on file with the SEC; provided, that nothing contained
in this Article 6 will in any way restrict or have application to or bearing
upon the Trust's obligation to repurchase Shares from any shareholder in
accordance with the Prospectus or Trust's Agreement and Declaration of Trust
dated as of September 13, 1993, as amended from time to time.
ARTICLE 7. Registration of Shares. The Trust agrees that it will take
all action necessary to register Shares under the federal and state securities
laws so that there will be available for sale the number of Shares the
Distributor may reasonably be expected to sell and to pay all fees associated
with said registration. The Trust shall make available to the Distributor such
number of copies of its currently effective Prospectus as the Distributor may
reasonably request. The Trust shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares of
the Trust.
ARTICLE 8. Indemnification of Distributor. The Trust agrees to
indemnify and hold harmless the Distributor and each of its directors and
officers and each person, if any, who controls the Distributor within the
meaning of Section 15 of the 1933 Act against any loss, liability, claim,
damages or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damages, or expense and
reasonable counsel fees and disbursements incurred in connection therewith),
arising by reason of any person acquiring any Shares, and based upon the
ground that the registration statement, Prospectus, shareholder reports or
other information filed or made public by the Trust (as from time to time
amended) included an untrue statement of a material fact or omitted to state a
material fact required to be stated or necessary in order to make the
statements made not misleading. However, the Trust does not agree to indemnify
or hold harmless the Distributor or any such person to the extent that
-2-
<PAGE>
the statements or omission was made in reliance upon, and in conformity with,
information furnished to the Trust by or on behalf of the Distributor.
In no case (i) is the indemnity of the Trust to be deemed to protect
the Distributor or any such person against any liability to the Trust or its
shareholders to which the Distributor or such person otherwise would be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its, his or her duties or by reason of its, his or her reckless
disregard of the Distributor's obligations and duties under this Agreement, or
(ii) is the Trust to be liable to the Distributor or any such person under the
indemnity agreement contained in this paragraph with respect to any claim made
against the Distributor or any such person unless the Distributor or such
person shall have notified the Trust in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the
Distributor or such person (or after the Distributor or the person shall have
received notice of service on any designated agent). However, failure to
notify the Trust of any claim shall not relieve the Trust from any liability
which it may have to the Distributor or any such person against whom such
action is brought otherwise than on account of its indemnity agreement
contained in this paragraph.
The Trust shall be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity provision. If the Trust elects to
assume the defense of any such claim, the defense shall be conducted by
counsel chosen by the Trust and satisfactory to the indemnified defendants in
the suit whose approval shall not be unreasonably withheld. In the event that
the Trust elects to assume the defense of any suit and retain counsel, the
indemnified defendants shall bear the fees and expenses of any additional
counsel retained by them. If the Trust does not elect to assume the defense of
a suit, it will reimburse the indemnified defendants for the reasonable fees
and expenses of any counsel retained by the indemnified defendants.
The Trust agrees to notify the Distributor promptly of the
commencement of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of any of its
Shares.
ARTICLE 9. Indemnification of Trust. The Distributor covenants and
agrees that it will indemnify and hold harmless the Trust and each of its
Trustees and officers and each person, if any, who controls the Trust within
the meaning of Section 15 of the 1933 Act, against any loss, liability,
damages, claim or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, damages, claim or expense and
reasonable counsel fees incurred in connection therewith) arising by reason of
any person acquiring any Shares, and based upon the ground that the
Distributor or any of its employees has committed a wrongful act or that the
registration statement, Prospectus, shareholder reports or other information
filed or made public by the Trust
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<PAGE>
(as from time to time amended) included an untrue statement of a material fact
or omitted to state a material fact required to be stated or necessary in
order to make the statements not misleading, insofar as the statement or
omission was made in reliance upon and in conformity with information
furnished to the Trust by or on behalf of the Distributor.
In no case (i) is the indemnity of the Distributor in favor of the
Trust or any other person indemnified to be deemed to protect the Trust or any
other person against any liability to which the Trust or such other person
would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is the
Distributor to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Trust or any person
indemnified unless the Trust or person, as the case may be, shall have
notified the Distributor in writing of the claim within a reasonable time
after the summons or other first written notification giving information of
the nature of the claim shall have been served upon the Trust or upon any
person (or after the Trust or such person shall have received notice of
service on any designated agent). However, failure to notify the Distributor
of any claim shall not relieve the Distributor from any liability which it may
have to the Trust or any person against whom the action is brought otherwise
than on account of its indemnity agreement contained in this paragraph.
The Distributor shall be entitled to participate, at its own expense,
in the defense or, if it so elects, to assume the defense of any suit brought
to enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by the Distributor and
satisfactory to the indemnified defendants whose approval shall not be
unreasonably withheld. In the event that the Distributor elects to assume the
defense of any suit and retain counsel, the defendants in the suit shall bear
the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will
reimburse the indemnified defendants in the suit for the reasonable fees and
expenses of any counsel retained by them.
The Distributor agrees to notify the Trust promptly of the
commencement of any litigation or proceedings against it in connection with
the issue and sale of any Shares of the Trust.
ARTICLE 10. Effective Date. This Agreement shall be effective upon
its execution, and unless terminated as provided, shall continue in force for
one year from the effective date and thereafter from year to year, provided
that such annual continuance is approved by (i) either the vote of a majority
of the Trustees of the Trust, or the vote of a majority of the outstanding
voting securities of the Trust, and (ii) the vote of a majority of those
Trustees of the Trust who are not parties to this Agreement or the Trust's
Distribution Plan or interested persons of any such party ("Qualified
Trustees"), cast in person at a meeting called for the purpose of voting on
the approval.
-4-
<PAGE>
This Agreement shall automatically terminate in the event of its assignment.
As used in this paragraph the terms "vote of a majority of the outstanding
voting securities", assignment" and "interested person" shall have the
respective meanings specified in the 1940 Act. In addition, this Agreement may
at any time be terminated without penalty by SFS, by a vote of a majority of
Qualified Trustees or by vote of a majority of the outstanding voting
securities of the Trust upon not less than sixty days prior written notice to
the other party.
ARTICLE 11. Notices. Any notice required or permitted to be given
hereunder shall be deemed given when sent by registered or certified mail,
postage pre-paid, addressed to the party to whom the notice is being given at
such party's address set forth below, or at the last address furnished in
writing by such party to the other party:
If to the Trust, at:
Morgan Grenfell Investment Trust
885 Third Avenue
New York, NY 10022
Attention: James E. Minnick
With a copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attention: Ernest V. Klein
If to the Distributor, at:
SEl Financial Management Corporation
680 East Swedesford Road
Wayne, PA 19087
Attention: General Counsel
ARTICLE 12. Limitation of Liability. A copy of the Agreement and
Declaration of Trust of the Trust is on file with the Secretary of State of
the state of Delaware, and notice is hereby given that this Agreement is
executed on behalf of the Trustees of the Trust as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees, officers or shareholders of the Trust individually but
binding only upon the assets and property of the Trust.
ARTICLE 13. Governing Law. This Agreement shall be construed in
accordance with the laws of the state of Delaware and the applicable
provisions of the 1940 Act. To the extent that the applicable laws of the
state of Delaware, or any of the provisions herein, conflict with the
applicable provisions of the 1940 Act, the latter shall control.
-5-
<PAGE>
ARTICLE 14. Multiple Originals. This Agreement may be executed in two
or more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
ARTICLE 15. Limitation of Liability. The Trust and the Administrator
agree that the obligations of the Trust under this Agreement will not be
binding upon any of the Trustees of the Trust, shareholders of the Trust,
nominees, officers, employees or agents, whether past, present or future, of
the Trust, individually, but are binding only upon the assets and property of
the Trust, as provided in the Agreement and Declaration of Trust of the Trust,
as amended from time to time. The execution and delivery of the Agreement has
been authorized by the Trustees of the Trust, and this Agreement has been
signed by an authorized officer of the Trust, acting as such, and neither the
authorization by Trustees nor the execution and delivery by the officer will
be deemed to have been made by any of them or any shareholder of the Trust
personally, but will bind only the property of the Trust as provided in the
Agreement and Declaration of Trust of the Trust. No portfolio of the Trust
will be liable for any claims against, or claims arising with respect to, any
other portfolio of the Trust
IN WITNESS WHEREOF, the Trust and the Distributor have each duly
executed this Agreement, as of the day and year above written.
MORGAN GRENFELL INVESTMENT TRUST
By: ____________________________
Attest: ________________________
SEl FINANCIAL SERVICES COMPANY
By: ____________________________
Attest: ________________________
-6-
[MORRIS, NICHOLS, ARSHT & TUNNELL-LETTERHEAD]
May 29, 1996
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Re: Morgan Grenfell Investment Trust
Ladies and Gentlemen:
We have acted as special Delaware counsel to Morgan Grenfell
Investment Trust, a Delaware business trust (the "Trust"), in connection with
certain matters relating to the issuance of Shares in the Trust. Capitalized
terms used herein and not otherwise herein defined are used as defined in the
Agreement and Declaration of Trust of the Trust dated September 13, 1993 (the
"Governing Instrument").
In rendering this opinion, we have examined copies of the following
documents, each in the form provided to us: the Certificate of Trust of the
Trust filed in the Office of the Secretary of State of the State of Delaware
(the "Recording Office") on September 13, 1993 (the "Certificate"); the
Governing Instrument; the By-laws of the Trust; a Written Consent of the
Trustees of the Trust; certain votes of the Trust; the Trust's Notification of
Registration Filed Pursuant to Section 8(a) of the Investment Company Act of
1940 on Form N-8A as filed with the Securities and Exchange Commission on
September 13, 1993; Post- Effective Amendment No. 10 to the Trust's
Registration Statement under the Securities Act of 1933, as amended, on Form
N-1A to be filed with the Securities and Exchange Commission on or about May
31, 1996 (the "Post-Effective Amendment"); and a certification of good
standing of the Trust obtained as of a recent date from the Recording Office.
In such examinations, we have assumed the genuineness of all signatures, the
conformity to original documents of all documents submitted to us as copies or
drafts of documents to be executed, and the legal capacity of natural persons
to complete the execution of documents. We have further assumed for the
purpose of this opinion: (i) the due authorization, execution and delivery by,
or on behalf of, each of the parties thereto of the above-referenced
instruments, certificates and other documents,
<PAGE>
Morgan Grenfell Investment Trust
May 29, 1996
Page 2
and of all documents contemplated by the Governing Instrument, the By-laws and
applicable resolutions of the Trustees to be executed by investors desiring to
become Shareholders; (ii) the payment of consideration for Shares, and the
application of such consideration, as provided in the Governing Instrument,
and compliance with the other terms, conditions and restrictions set forth in
the Governing Instrument and all applicable resolutions of the Trustees in
connection with the issuance of Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series of Shares
and the rights and preferences attributable thereto as contemplated by the
Governing Instrument); (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books
and records of the Trust in connection with the issuance, redemption or
transfer of Shares; (iv) that no event has occurred subsequent to the filing
of the Certificate that would cause a termination or reorganization of the
Trust under Section 2 or Section 3 of Article VIII of the Governing
Instrument; (v) that the activities of the Trust have been and will be
conducted in accordance with the terms of the Governing Instrument and the
Delaware Act; and (vi) that each of the documents examined by us is in full
force and effect and has not been modified, supplemented or otherwise amended.
No opinion is expressed herein with respect to the requirements of, or
compliance with, federal or state securities or blue sky laws. Further, we
express no opinion on the sufficiency or accuracy of any registration or
offering documentation relating to the Trust or the Shares. As to any facts
material to our opinion, other than those assumed, we have relied without
independent investigation on the above-referenced documents and on the
accuracy, as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Trust is a duly organized and validly existing business trust
in good standing under the laws of the State of Delaware.
2. The Shares of the following Series of the Trust, when issued to
Shareholders of such Series in accordance with the terms, conditions,
requirements and procedures set forth in the Governing Instrument, will
constitute legally issued, fully paid and non-assessable Shares of beneficial
interest in the Trust: Morgan Grenfell Microcap Fund.
3. Under the Delaware Act and the terms of the Governing Instrument,
each Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of private
corporations for profit; provided, however, that we express no opinion with
<PAGE>
Morgan Grenfell Investment Trust
May 29, 1996
Page 3
respect to the liability of any Shareholder who is, was or may become a named
Trustee of the Trust. Neither the existence nor exercise of the voting rights
granted to Shareholders under the Governing Instrument will, of itself, cause
a Shareholder to be deemed a trustee of the Trust under the Delaware Act.
Notwithstanding the foregoing or the opinion expressed in paragraph 2 above,
we note that, pursuant to Section 5 of Article IV of the Governing Instrument,
the Trustees have the power to cause Shareholders, or Shareholders of a
particular Series, to pay certain custodian, transfer, servicing or similar
agent charges by setting off the same against declared but unpaid dividends or
by reducing Share ownership (or by both means).
We understand that the Trust is currently in the process of
registering or qualifying Shares of the above referenced Series in various
states, and we hereby consent to the filing of a copy of this opinion with the
securities administrators of such states and with the Securities and Exchange
Commission as part of the Post-Effective Amendment. In giving this consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder. Except as provided in this paragraph, the opinion set forth above
is expressed solely for the benefit of the addressee hereof and may not be
relied upon by, or filed with, any other person or entity for any purpose
without our prior written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 10 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 11, 1995 relating to the financial statements and financial
highlights of Municipal Bond Fund, Fixed Income Fund, Short-Term Municipal
Bond Fund, Short-Term Fixed Income Fund, Smaller Companies Fund, International
Equity Fund, International Small Cap Equity Fund, European Small Cap Equity
Fund, Emerging Markets Equity Fund, Global Fixed Income Fund, International
Fixed Income Fund, Emerging Markets Debt Fund, Global Equity Fund, European
Equity Fund, Pacific Basin Equity Fund and Japanese Small Cap Equity Fund
(comprising Morgan Grenfell Investment Trust), which appears in such Statement
of Additional Information, and to the incorporation by reference of our report
into the Prospectus which constitutes part of this Registration Statement. We
also consent to the references to us under the headings "Financial Statements"
and "Independent Accountants" in such Statement of Additional Information and
to the reference to us under the heading "Financial Highlights" in such
Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 3, 1996
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to all references to our
firm included in the Post-Effective Amendment No. 10 to the Registration
Statement on Form N1-A of Morgan Grenfell Investment Trust (File No. 33-68704).
/s/ Arthur Andersen LLP
Philadelphia, PA
June 6, 1996
