As filed with the Securities and Exchange Commission on November 1, 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. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [_]
Amendment No. 14 [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 December 31, 1996 pursuant to paragraph (a)(1) 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
Service Shares
Item 7. Purchase of Securities Being Purchase of Service Shares;
Offered Net Asset Value
Item 8. Redemption or Repurchase Redemption of Service
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
Item 13. Investment Objectives and Policies Additional Information on
Fund Investments and
Strategies and Related
Risks; Investment
Restrictions; Investment
Advisory and Other Services
<PAGE>
N-1A Item No. Location
- ------------- --------
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers;
Holders of Securities General Information About
The Trust
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services; Service
Plan; 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 Not Applicable
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
Service Shares
885 Third Avenue
New York, New York 10022
December 31, 1996
Morgan Grenfell Investment Trust (the "Trust") is an open-end
management investment company that includes the following three distinct
investment portfolios that focus on international fixed income investing: Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund (the "Funds"). The
investment objective of Morgan Grenfell Global Fixed Income Fund, Morgan
Grenfell International Fixed Income Fund and Morgan Grenfell Emerging Markets
Debt Fund is to maximize total return; Morgan Grenfell Investment Services
Limited (the "Adviser" or "MGIS"), based in London England, serves as investment
adviser to the Funds. The Funds are designed for long-term investors seeking to
participate in foreign fixed income markets.
Information concerning investment portfolios of the Trust that focus on
U.S. investments (the "Domestic Funds") is contained in a separate prospectus
that may be obtained by calling 1-800-550-6426.
- --------------------------------------------------------------------------------
This Prospectus provides information about the Trust and each of the
Funds that investors should know before investing in service shares of 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 December 31, 1996 as amended or supplemented from
time to time, is available upon request without charge by calling the applicable
telephone number listed on the back cover or by writing 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.
- --------------------------------------------------------------------------------
INVESTMENTS IN EMERGING MARKETS CAN INVOLVE SIGNIFICANT RISKS, AND
MORGAN GRENFELL EMERGING MARKETS DEBT FUND IS DESIGNED FOR AGGRESSIVE INVESTORS.
IN ADDITION, MORGAN GRENFELL EMERGING MARKETS DEBT FUND INVESTS IN LOWER-QUALITY
DEBT SECURITIES (JUNK BONDS), WHICH PRESENT HIGHER RISKS OF UNTIMELY INTEREST
AND PRINCIPAL PAYMENTS, DEFAULT, AND PRICE VOLATILITY THAN HIGHER-QUALITY
SECURITIES, AND MAY PRESENT LIQUIDITY AND VALUATION PROBLEMS.
SERVICE 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.
<PAGE>
Each Fund's primary investments are summarized below:
Morgan Grenfell Global Fixed Income Fund invests primarily in fixed
income securities of issuers throughout the world.
Morgan Grenfell International Fixed Income Fund invests primarily in
fixed income securities of issuers in countries other than the United States.
Morgan Grenfell Emerging Markets Debt Fund invests primarily in fixed
income securities of issuers in countries with emerging securities markets.
ii
<PAGE>
TABLE OF CONTENTS
Page
----
Expense Information 1
Financial Highlights 5
Introduction to the Funds 4
Investment Objectives and Polices 6
Description of Securities and Investment Techniques 8
and Related Risks
Additional Investment Information 22
Management of the Funds 23
Purchase of Service Shares 25
Redemption of Service Shares 27
Net Asset Value 29
Dividends, Distributions and Taxes 30
Organization and Shares of the Trust 31
Performance Information 32
Appendix A A-1
Appendix B B-1
iii
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
GLOBAL FIXED INTERNATIONAL EMERGING MARKETS
FUND NAME INCOME FUND FIXED INCOME FUND DEBT FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Transaction
Expenses:
- --------------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases None None None
Maximum Sales Charge
Imposed on Reinvested
Dividends None None None
Deferred Sales Charge
Imposed on Redemptions None None None
Exchange Fee None None None
- --------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average
net assets after reduction
of advisory fee)
- --------------------------------------------------------------------------------------------------
Advisory fees 0.50% 0.50% 1.50%
Service fees 0.25% 0.25% 0.25%
Other Expenses --% --% --%
Reduction of Advisory Fee
and Expense Limitation
by Adviser * --% --% --%
- --------------------------------------------------------------------------------------------------
Net Fund Operating Expenses 1.00% 1.00% 1.75%
- --------------------------------------------------------------------------------------------------
</TABLE>
* 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 annual basis, to the specified percentage of each
Fund's assets shown in the above table as Net Fund Operating Expenses. The above
table and the following Example reflect this voluntary agreement. In its sole
discretion, the Advisor may terminate or modify this voluntary agreement at any
time after October 31, 1997. The purpose of this 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. After
giving effect to the Adviser's voluntary agreement, each Fund's advisory fee is
as follows: Global Fixed Income Fund __%, International Fixed Income Fund __%
and Emerging Markets Debt Fund __%. If the Adviser 's voluntary agreement were
not in effect, the Fund Operating Expenses for service shares of each Fund would
be as follows: Global Fixed Income Fund, __%; International Fixed Income Fund,
__% and Emerging Markets Debt Fund, __%.
-1-
<PAGE>
Example:
Investors in service shares would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return and (2) redemption at the end
of each time period:
1 3 5 10
Year Years Years Years
---- ----- ----- -----
Morgan Grenfell Global Fixed Income Fund $-- $-- $-- $--
Morgan Grenfell International Fixed Income Fund $-- $-- $-- $--
Morgan Grenfell Emerging Markets Debt Fund $-- $-- $-- $--
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 service shares of a Fund will bear. "Other Expenses"
included in the Expense Information Table and Example are estimates for the
fiscal year ending October 31, 1997 that are based on actual expenses incurred
during the fiscal period ended October 31, 1996, except that the figures shown
assume that the service fees were in effect throughout the year ended October
31, 1996. 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 service fees and other
expenses of the Funds, see "Management of the Funds."
-2-
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Set forth below are selected data for (1) an outstanding institutional
share of each of Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
for the two years ended October 31, 1996 and October 31, 1995. Selected data for
an outstanding institutional share of each of the above Funds during the period
from its inception to October 31, 1994 are also set forth below. The data set
forth below has been audited by ________________,independent accountants, whose
report thereon was unqualified. No data is shown below for service shares of the
Funds because no service shares were outstanding on or prior to October 31,
1996.
The information set forth below should be read in conjunction with the
financial statements and notes thereto which appear in the Statement of
Additional Information. The Statement of Additional Information and the Trust's
annual report for the year ended October 31, 1996, which contains further
information about the Funds' performance, are available free of charge by
calling 1-800-550-6246.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For an Institutional Share Outstanding Throughout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions
Value Investment and from Net from Realized Net Asset Net Assets
Beginning Income / Unrealized Investment Capital Value End Total End of
Year of Period (Loss) Gains/(Losses) Income (4) Gains of Period Return Period (000)
---- --------- ---- ------------ ---------- ----- --------- ------ ------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------
Global Fixed Income Fund
- ---------------------------------------------------
1996
1995 $ 9.85 $ 0.35 $ 0.99 (0.20) -- $ 10.99 13.88% $139,337
1994(1)* $ 10.00 $ 0.25 $(0.40) -- -- $ 9.85 (1.50)% $ 53,915
- ---------------------------------------------------
International Fixed Income Fund
- ---------------------------------------------------
1996
1995 $ 9.94 $ 0.42 $ 1.03 (0.05) -- $ 11.34 14.66% $ 27,603
1994(2)* $ 10.00 $ 0.29 (0.35) -- -- $ 9.94 (0.60)% $ 15,238
- ---------------------------------------------------
Emerging Markets Debt Fund
- ---------------------------------------------------
1996
1995 $ 10.19 $ 0.65 (0.17) (0.11) (0.01) $ 10.55 4.85% $ 84,438
1994(3)* $ 10.00 $ 0.13 $ 0.06 -- -- $ 10.19 1.90% $ 16,248
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Ratio of Investment Net Assets Net Assets
Expenses to Income(Loss) (Excluding (Excluding Portfolio
Average to Average Expense Expense Turnover
Year Net Assets Net Assets Limitations) Limitations) Rate
---- ---------- ---------- ------------ ------------ ----
<C> <C> <C> <C> <C> <C>
- ---------------------------------------------------
Global Fixed Income Fund
- ---------------------------------------------------
1996
1995 0.78% 5.61% 0.87% 5.52% 147%
1994(1)* 0.85% 5.71% 1.28% 5.28% 173%
- ---------------------------------------------------
International Fixed Income Fund
- ---------------------------------------------------
1996
1995 0.78% 5.51% 1.15% 5.14% 187%
1994(2)* 0.85% 5.66% 1.42% 5.09% 130%
- ---------------------------------------------------
Emerging Markets Debt Fund
- ---------------------------------------------------
1996
1995 1.79% 10.97% 2.05% 10.71% 266%
1994(3)* 1.90% 7.04% 2.60% 6.34% 52%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Global Fixed Income Fund commenced operations on 1/3/94.
(2) International Fixed Income Fund commenced operations on 3/15/94.
(3) Emerging Markets Debt Fund commenced operations on 8/4/94.
(4) Distributions from net investment income include distributions of certain
foreign currency gains and losses
* All ratios, excluding total return and portfolio turnover rate for the
period, are annualized.
- --------------------------------------------------------------------------------
-3-
<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
relates solely to the Funds. Information regarding investment portfolios of the
Trust that focus on U.S. investments (the "Domestic Funds") is contained in a
separate prospectus that may be obtained by calling 1-800-550-6426.
Under normal market conditions, the Funds will invest primarily in
foreign fixed income securities. Investing primarily in foreign fixed income
securities and across international borders presents growth opportunities and
potentially higher returns than could be achieved by investing solely in the
United States. International investing permits participation in the economies of
countries with business cycles and stock and bond market performance often
different from that in the United States and, with more than one-half of the
world's stock and bond market value outside the United States, it can help
broaden the investments of a portfolio otherwise solely invested in domestic
securities. International investments also involve certain risks not normally
associated with domestic investments. The Funds are designed for long-term
investors comfortable with the special risk and return characteristics of
investing internationally. See "Description of Securities and Investment
Techniques and Related Risks."
MGIS, which is a fully owned subsidiary of London-based Morgan Grenfell
Asset Management, serves as the investment adviser to each of the Funds. Morgan
Grenfell Asset Management has been managing international investments for over
thirty years and now has over US$ 107 billion of assets under management. Within
the Morgan Grenfell Asset Management group, MGIS has specialized in delivering
international investment management services to U.S. investors in both fixed
income and equity markets.
This prospectus relates solely to service shares of the Funds. Service
shares may be purchased by entities ("Service Organizations") that provide
omnibus accounting services for groups of individuals who beneficially own the
service shares ("Omnibus Accounts"). Omnibus Accounts include pension and
retirement plans (such as 401 (k) plans, 457 plans and 403 (b) plans) and
programs through which Service Organizations provide personal and/or account
maintenance services to groups of individuals, whether or not such individuals
invest on a tax-deferred basis. Investors may only purchase service shares
through Service Organizations. See "Purchase of Service Shares" for further
information.
The Funds offer another class of shares (institutional shares), which
is subject to different expenses and therefore has different performance than
service shares. Information regarding institutional shares may be obtained by
calling 1-800-550-6426.
Investment Focus and Non-Diversification
Emerging Markets Debt Fund seeks to attain its objective by focusing on
what are, in the Adviser's view, the most promising markets and companies in the
world's rapidly developing countries. While emerging markets are highly volatile
and subject to change with political or economic developments, they offer the
opportunity for substantial growth. In contrast to Emerging Markets Debt Fund,
Global Fixed Income Fund and International Fixed Income Fund may spread their
investments across world markets.
-4-
<PAGE>
Each of the Funds is non-diversified under the Investment Company Act
of 1940 (the "1940 Act") and, therefore, may be more susceptible than a more
diversified mutual fund to developments affecting any single issuer of portfolio
securities. See "Description of Securities and Investment Techniques and Related
Risks--Diversification." There can be no assurance that a Fund will achieve its
investment objective.
Selection of Portfolio Securities
Fixed income securities in which the Funds may invest include U.S. and
foreign government securities and corporate fixed income securities. See
"Description of Securities and Investment Techniques and Related Risks--Fixed
Income Securities." In managing the Funds, the Adviser uses a top-down approach
which gives primary emphasis to the relative attractiveness of bond markets and
currencies. Markets are selected after consideration is given to their risk and
return outlook under various economic scenarios. Currencies are evaluated
separately, and the underlying currency mix of each Fund's position in fixed
income securities generally is designed to enhance returns during periods of
relative U.S. dollar weakness and to protect return during periods of relative
U.S. dollar strength. These investment decisions require consideration of
macro-economic factors such as inflation, interest rates, monetary and fiscal
policies, taxation and political climate. The Adviser also considers the
characteristics of individual securities and issuers.
The fixed income securities in which each Fund may invest may have
stated maturities ranging from overnight to forty years. Each Fund's weighted
average maturity will vary based upon the Adviser's assessment of economic and
market conditions.
Investment Techniques and Related Risks
Foreign Securities. Investing in the securities of foreign issuers and
of companies whose securities are principally traded outside the United States
involves considerations and potential risks not typically associated with
investing in the securities of U.S. issuers whose securities are principally
traded in the United States. For example, in many foreign countries, securities
markets are less liquid, more volatile and less subject to governmental
regulation than U.S. securities markets. Also, in many foreign countries, there
is less publicly available information about foreign issuers. Moreover, the
value of the securities of foreign issuers held in a Fund's portfolio will be
affected by changes in currency exchange rates, which may be incurred due to
either changes in securities prices expressed in local currencies or due to
movements in exchange rates, or both. See "Description of Securities and
Investment Techniques and Related Risks--Foreign Securities."
Foreign Currency Transactions. To attempt to manage exposure to
fluctuations in currency exchange rates and, in some circumstances, to seek to
profit from exchange rate fluctuations, each Fund may employ certain currency
management techniques, including forward foreign currency exchange contracts,
options and futures on currencies and currency swaps. These transactions are
considered speculative when entered into for non-hedging purposes. In addition,
each Fund may also employ a variety of active investment management techniques,
including entering into options, futures, options on futures, interest rate
swaps and when-issued and forward commitment transactions in order to hedge its
positions against potential adverse changes in future foreign currency exchange
rates and for non-hedging purposes. Engaging in these transactions entails
special risks. See "Description of Securities and Investment Techniques and
Related Risks--Currency Management Techniques."
-5-
<PAGE>
Fixed Income Securities. The net asset value of the shares of the Funds
will change in response to fluctuations in interest rates and in currency
exchange rates. When interest rates decline, the value of fixed income
securities generally can be expected to rise. Conversely, when interest rates
rise, the value of fixed income securities generally can be expected to decline.
The performance of investments in fixed income securities denominated in a
foreign currency generally can be expected to increase when the value of the
foreign currency appreciates. A rise in foreign interest rates or a decline in
the value of foreign currencies relative to the U.S. dollar generally can be
expected to depress the value of a Fund's investments in securities denominated
in a foreign currency. See "Description of Securities and Investment Techniques
and Related Risks--Fixed Income Securities."
Lower Quality Fixed Income Securities. The Emerging Markets Debt Fund
may invest in fixed income securities which are unrated or rated in the lowest
rating categories by Standard & Poor's Ratings Group ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's") (i.e., ratings of BB or lower by
Standard & Poor's or Ba or lower by Moody's). Securities rated BB or Ba or below
(or comparable unrated securities) are considered speculative, and payments of
principal and interest thereon may be questionable. In some cases, these
securities may be highly speculative, have poor prospects for reaching
investment grade standing and be in default. See "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities." A chart
showing the distribution of Emerging Markets Debt Fund's assets across the
various ratings categories is set forth in Appendix A.
Temporary Defensive Investments. When market conditions warrant, in the
judgment of the Adviser, each Fund may, for temporary defensive purposes, invest
up to 100% of its total assets in U.S. or, subject to tax requirements, Canadian
dollars, U.S. Government securities maturing within one year (including
repurchase agreements collateralized by such securities) and commercial paper of
U.S. or foreign issuers, cash equivalents and certain high grade fixed income
securities. See "Description of Securities and Investment Techniques and Related
Risks--Temporary Defensive Investments."
INVESTMENT OBJECTIVES AND POLICIES
Global Fixed Income Fund
The investment objective of the Global Fixed Income Fund is to maximize
total return, emphasizing current income and, to a lesser extent, providing
opportunities for capital growth consistent with reasonable investment risk.
Under normal circumstances, the Fund pursues this objective by investing at
least 65% of its total assets in fixed income securities of issuers in at least
three countries, which may include: Austria, Belgium, Denmark, Finland, France,
Germany, Holland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States, Canada, Japan, Australia and
New Zealand. At the discretion of the Adviser, the Fund may invest in fixed
income securities of issuers located in other countries.
The fixed income securities in which the Fund invests consist primarily
of high grade debt obligations of foreign governments or their agencies,
instrumentalities, political subdivisions and authorities; debt obligations
issued or guaranteed by international or supranational entities; U.S. Government
securities and high grade fixed income securities of U.S. and foreign corporate
issuers. High grade securities include securities rated within the three highest
grades by Moody's (Aaa, Aa and A), Standard & Poor's (AAA, AA and A) or
comparable rating agency or, if unrated, determined to be of
-6-
<PAGE>
comparable quality by the Adviser. The Fund may invest up to 10% of its total
assets in governmental and corporate fixed income securities that are rated in
the fourth highest grade by Moody's (Baa), Standard & Poor's (BBB) or comparable
rating agency or, if unrated, determined to be of comparable quality by the
Adviser. Securities rated in the fourth highest grade by any of the major rating
agencies have speculative characteristics. See "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities" for a
description of these risks and Appendix A to this Prospectus for a description
of the various ratings categories.
The Fund may invest more than 25% of its total assets in each of Japan,
the United States, Germany and the United Kingdom. The concentration of the
Fund's investments in these countries will cause the Fund to be particularly
susceptible to the effects of political and economic developments in these
countries, See "Description of Securities and Investment Techniques and Related
Risks--Region and Country Concentration."
Up to 35% of the Fund's total assets may be invested in cash
equivalents.
International Fixed Income Fund
The investment objective of the International Fixed Income Fund is to
maximize total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital growth consistent with reasonable investment
risk. Under normal circumstances, the Fund pursues this objective by investing
at least 65% of its total assets in fixed income securities of issuers in at
least three countries other than the United States, including Austria, Belgium,
Denmark, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg, Norway,
Portugal, Spain, Sweden, Switzerland, the United Kingdom, Canada, Japan,
Australia, and New Zealand. At the discretion of the Adviser, the Fund may
invest in fixed income securities of issuers located in other foreign countries.
The fixed income securities in which the Fund invests consist primarily
of high grade debt obligations of foreign governments or their agencies,
instrumentalities, political subdivisions and authorities; debt obligations
issued or guaranteed by international or supranational entities and high grade
fixed income securities of foreign corporate issuers. High grade securities
include securities rated within the three highest grades by Moody's (Aaa, Aa and
A), Standard & Poor's (AAA, AA and A) or comparable rating agency or, if
unrated, determined to be of comparable quality by the Adviser. The Fund may
invest up to 10% of its total assets in governmental and corporate fixed income
securities that are rated in the fourth highest grade by Moody's (Baa), Standard
& Poor's (BBB) or comparable rating agency or, if unrated, determined to be of
comparable quality by the Adviser. Securities rated in the fourth highest grade
by any of the major rating agencies have speculative characteristics. See
"Description of Securities and Investment Techniques and Related Risks--Fixed
Income Securities" for a description of these risks and Appendix A attached to
this Prospectus for a description of the various ratings categories.
The Fund may invest more than 25% of its total assets in each of
Germany, France, Japan, Italy and the United Kingdom. The concentration of the
Fund's investments in these countries will cause the Fund to be particularly
susceptible to the effects of political and economic developments in these
countries. See "Description of Securities and Investment Techniques and Related
Risks--Region and Country Concentration."
-7-
<PAGE>
Up to 35% of the Fund's total assets may be invested in fixed income
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Emerging Markets Debt Fund
The investment objective of the Emerging Markets Debt Fund is to
maximize total return. Under normal circumstances, the Fund pursues this
objective by investing at least 65% of its total assets in fixed income
securities of issuers located in countries with emerging securities markets,
including Algeria, Argentina, Bangladesh, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, Cyprus, Czech Republic, Ecuador, Egypt, Greece, Hungary,
India, Indonesia, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the
Philippines, Poland, Portugal, Russia, Thailand, Turkey, Uruguay, Venezuela and
Vietnam. At the discretion of the Adviser, the Fund may invest in fixed income
securities of issuers in other countries that have emerging securities markets.
Investments in emerging securities markets may offer greater opportunities for
total return than investments in securities traded in developed markets.
However, investing in emerging securities markets also involves risks that are
not present in developed markets. See "Description of Securities and Investment
Techniques and Related Risks--Foreign Securities."
Under normal market conditions, the Fund's investments in emerging
securities markets will consist principally of (i) loans, debt instruments and
fixed income securities issued or guaranteed by sovereign governments or their
agencies and instrumentalities, (ii) sub-participations in such loans, debt
instruments and fixed income securities and (iii) financial instruments, such as
call options, the value of which are dependent on the prices of such loans, debt
instruments and fixed income securities. The loans and debt instruments in which
the Fund may invest may be denominated in a major currency, such as the U.S.
dollar or the German Deutschemark, or in the local currency. The price of loans
and debt instruments denominated in a local currency may be linked to the value
of a major currency. The Fund's investments may include so-called "Brady Bonds,"
which recently have been issued by the governments of Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Equador, Jordan, Mexico, Nigeria,
Poland, Philippines, Uruguay and Venezuela, as well as non-performing or
semi-performing instruments with potential to be converted into securities under
a Brady plan or otherwise to appreciate in value as debt servicing prospects
improve. See "Description of Securities and Investment Techniques and Related
Risks--Fixed Income Securities." The Fund's investments in emerging securities
markets may also include fixed income securities of companies located in
countries with emerging securities markets.
Fixed income securities in which the Fund may invest may be of any
credit quality, including securities not paying interest currently, zero coupon
bonds, securities that pay interest in the form of other securities (i.e., "pay
in kind" or PIK securities) and securities in default. Fixed income securities
having low credit quality involve greater price volatility and risk of loss of
principal and income. For a description of these and other risks of investing in
lower quality fixed income securities, see "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities." See Appendix
A to this Prospectus for a description of the various ratings categories of
Moody's and Standard & Poor's and a chart showing the distribution of the Fund's
assets across the various ratings categories.
The Fund may invest more than 25% of its total assets in each of Mexico
and Brazil. The concentration of the Fund's investments in these countries will
cause the Fund to be particularly susceptible to the effects of political and
economic developments in these countries. See "Description of Securities and
Investment Techniques and Related Risks--Region and Country Concentration."
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Up to 35% of the Fund's total assets may be invested in fixed income
securities issued or guaranteed by the U.S. Government.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS
Foreign Securities
General. Subject to their respective investment objectives and
policies, the Funds may invest in U.S. dollar-denominated and non-dollar
denominated foreign fixed income securities and in certificates of deposit
issued by foreign banks and foreign branches of U.S. banks. While investments in
securities of foreign issuers and non-U.S. dollar denominated securities may
offer investment opportunities not available in the United States, 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 and custody
arrangements abroad may offer less protection to the Funds' investments 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 Funds' investments are denominated in foreign
currencies, the Funds' net asset values 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 a 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 a 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 Funds will incur transaction costs in connection with
conversions between currencies.
Investments in Emerging Markets. Each of the Funds may invest to
varying degrees in one or more countries with emerging securities markets. These
countries are generally located in Latin America, Europe, the Middle East,
Africa and Asia. Political and economic structures in many of these countries
may be undergoing significant evolution and rapid development, and these
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of these countries may have in the past
failed to recognize private property rights and, at times, may have nationalized
or expropriated the assets of private companies. As a result, these risks,
including the risk of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the value of a Fund's investments in these countries, as well as the
availability of additional investments in these countries. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make the Funds'
investments in these countries illiquid and more volatile than investments in
most Western European countries, and the Funds may be required to establish
special custodial or other arrangements before making certain investments in
some of these countries. There may be little
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financial or accounting information available with respect to issuers located in
certain of these countries, and it may be difficult as a result to assess the
value or prospects of an investment in these countries. The laws of some foreign
countries may limit the Funds' ability to invest in securities of certain
issuers located in those countries.
Country Concentration. Each Fund may concentrate its investments in one
or more foreign countries. Concentration of a Fund's investments in a particular
country will subject the Fund, to a greater extent than if its investments in
such country were more limited, to the risks of adverse securities markets,
exchange rates and social, political or economic developments which may occur in
that country.
Currency Management Techniques
General. The performance of foreign currencies relative to that of the
U.S. dollar is an important factor in each Fund's performance and the Adviser
may manage the Fund's exposure to various currencies to seek to take advantage
of the yield, risk and return characteristics that different currencies can
provide. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, a Fund's net asset value to
fluctuate as well, notwithstanding the performance of a Fund's underlying
assets. Currency exchange rates generally are determined by the forces of supply
and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected by intervention, or failure to
intervene, by U.S. or foreign governments or central banks, or by currency
controls or political developments in the United States or abroad. To the extent
that a substantial portion of a Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, is denominated
in the currency of a foreign country, the Fund will be more susceptible to the
risk of adverse economic and political developments in that country.
In an attempt to manage exposure to currency exchange rate
fluctuations, the Funds may enter into forward foreign currency exchange
contracts or currency swap agreements, purchase securities indexed to foreign
currencies, and buy and sell options and futures contracts relating to foreign
currencies and options on such futures contracts. See "Forward Foreign Currency
Transactions," "Interest Rate and Currency Swaps," "Options" and "Futures and
Options on Futures" below. The Funds may use currency hedging techniques in the
normal course of business to lock in an exchange rate in connection with
purchases and sales of securities denominated in foreign currencies. Other
currency management strategies allow the Adviser to hedge portfolio securities,
to shift investment exposure from one currency to another, or to attempt to
profit from anticipated declines in the value of a foreign currency relative to
the U.S. dollar. There is no overall limitation on the amount of assets that any
of the Funds may commit to currency management strategies. Although the Adviser
may attempt to manage currency exchange rate risks, there is no assurance that
the Adviser will do so, or do so at an appropriate time or that the Adviser will
be able to predict exchange rates accurately.
Securities held by a Fund are generally denominated in the currency of
the foreign market in which the investment is made. However, securities held by
a Fund may be denominated in the currency of a country other than the country in
which the security's issuer is located. For example, Emerging Markets Debt Fund
often purchases foreign securities that are denominated in U.S. dollars. The
Funds may also invest in securities denominated in the European Currency Unit
("ECU"), which is a "basket" consisting of specified amounts of the currencies
of certain member countries of the European
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Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community from time to time to
reflect changes in their relative values. In addition, the Funds may invest in
securities denominated in other currency "baskets."
Forward Foreign Currency Transactions. Each of the Funds may conduct
foreign currency exchange transactions on a spot (i.e., cash) basis at the rate
prevailing in the foreign currency exchange market or by entering into forward
currency exchange contracts ("forward currency contracts") to purchase or sell
foreign currencies. A Fund may purchase or sell forward currency contracts for
hedging purposes and also for non-hedging purposes when the Adviser anticipates
that the foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio. When purchased or sold for
non-hedging purposes, forward currency contracts are speculative.
Each Fund may enter into forward currency contracts to purchase foreign
currency to protect against an anticipated rise in the U.S. dollar price of
securities that it intends to purchase. A Fund may enter into contracts to sell
foreign currency 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. Contracts to sell foreign currency
could limit any potential gain which might be realized by a Fund if the value of
the hedged currency increased.
A Fund may sell U.S. dollars and buy foreign currency forward in order
to gain exposure to a currency which is expected to appreciate against the U.S.
dollar. This speculative strategy allows a Fund to benefit from currency
appreciation potential without requiring it to purchase a local fixed income
instrument, for which prospects may be relatively unattractive. It is the
Adviser's intention that each Fund's net U.S. dollar currency exposure generally
will not fall below zero (i.e., that net short positions in the U.S. dollar
generally will not be taken).
If a Fund enters into a forward currency contract to sell foreign
currency for non-hedging purposes or to buy foreign currency for any purpose,
the forward currency contract generally will not have a term greater than one
year. The forecasting of short-term currency market movements is extremely
difficult and there can be no assurance that short-term hedging strategies will
be successful.
When a Fund enters into a forward currency contract to sell foreign
currency for non-hedging purposes or to buy foreign currency for any purpose,
the Fund will be required to place cash, U.S. Government securities or liquid
securities in a segregated account, which will be marked to market daily, in an
amount equal to the value of the total assets committed to the consummation of
the forward currency contract. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account so that the value of the account will equal the amount of the Fund's
commitment with respect to the contract.
Forward currency contracts are subject to the risk that the
counterparty to such contract will default on its obligations. Since a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force a Fund to cover its purchase or sale
commitments, if any, at the current market price. The Funds will not enter into
forward currency contracts unless the credit quality of the unsecured senior
debt or the claims-paying ability of the counterparty is determined to be
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investment grade by the Adviser. The Adviser will monitor the claims-paying
ability of the counterparty on an ongoing basis.
A Fund may also utilize forward foreign currency contracts to establish
a synthetic investment position designed to change the currency characteristics
of a particular security without the need to sell such security. For example, a
Fund wishing to acquire a particular security that is denominated in French
Francs, but wishing to seek exposure to a second currency and not the Franc, may
simultaneously enter into a forward contract to sell an equivalent value of
Francs in exchange for such foreign currency. Synthetic investment positions
will typically involve the purchase of U.S. dollar-denominated securities
together with a forward contract to purchase the currency to which the Fund
seeks exposure and to sell U.S. dollars. This may be done because the range of
highly liquid short-term instruments available in the U.S. may provide greater
liquidity to a Fund than actual purchases of foreign currency-denominated
securities in addition to providing superior returns in some cases. Depending on
(a) each Fund's liquidity needs, (b) the relative yields of securities
denominated in different currencies and (c) spot and forward currency rates, a
significant portion of a Fund's assets may be invested in synthetic investment
positions, subject to compliance with the tax requirements for qualification as
a regulated investment company. See "Taxes."
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of the U.S.
dollar-denominated security is not exactly matched with a Fund's obligation
under a forward currency contract on the date of maturity, the Fund may be
exposed to some risk of loss from fluctuations in the value of the U.S. dollar.
Although the Adviser will attempt to hold such mismatching to a minimum, there
can be no assurance that the Adviser will be able to do so.
Cross-Hedging. At the discretion of the Adviser, each of the Funds may
employ the currency hedging strategy known as "cross-hedging" by using forward
currency contracts, currency options or a combination of both. When engaging in
cross-hedging, a Fund seeks to protect against a decline in the value of a
foreign currency in which certain of its portfolio securities are denominated by
selling that currency forward into a different foreign currency for the purpose
of diversifying the Fund's total currency exposure or gaining exposure to a
foreign currency that is expected to appreciate.
For a description of the Funds' transactions in currency options,
futures and swaps, see "Options--Currency Options," "Futures Contracts and
Options on Futures Contracts" and "Interest Rate and Currency Swaps."
Options
Written Options. Each Fund may write (sell) covered put and call
options on 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, 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
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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 the securities that are subject to the written
option. In the case of a put option, this means that the Fund will deposit cash
or liquid securities or a combination of both in a segregated account with the
custodian with a value at least equal to the exercise price of the put option.
Purchased Options. The Funds may also purchase put and call options on
securities. 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 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 recognized foreign exchanges. The Funds may
also purchase and sell options traded on U.S. exchanges and, to the extent
permitted by law, options traded over-the-counter.
Yield Curve Options. The Funds may enter into options on the yield
spread, or yield differential between two securities. These options are referred
to as yield curve options. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Currency Options. The Funds may purchase and write put and call options
on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter)
to manage portfolio exposure to changes in U.S. dollar exchange rates. Call
options on foreign currency written by a Fund will be covered, which means that
the Fund will own an equal amount of the underlying foreign currency. With
respect to put options on foreign currency written by a Fund, the Fund will
deposit cash or liquid securities or a combination of both in a segregated
account with the custodian in an amount equal to the amount the Fund would be
required to pay upon exercise of the put option.
Futures Contracts and Options on Futures Contracts
When deemed advisable by the Adviser, each of the 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 and purchase and write related options. A Fund may engage in
futures and related options transactions for hedging and non-hedging 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
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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 or currencies, require the
Funds to segregate assets with a value equal to the amount of the Fund's
obligations.
Limitations and Risks Associated With Transactions In Forward Foreign Currency
Exchange Contracts, Options, Futures Contracts and Options on Futures Contracts
Each of the Funds' active management techniques involves (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 and foreign currency fluctuations intended to be hedged,
and (3) market risk that an incorrect prediction of securities prices or
exchange rates 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.
The use of options, futures and forward currency contracts is a highly
specialized activity which involves 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, interest rates, currency movements and
other economic factors. The loss that may be incurred by a Fund in entering into
futures contracts and written options thereon and forward currency contracts 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. Options and futures
traded on foreign exchanges generally are not regulated by U.S. authorities, and
may offer less liquidity and less protection to a Fund in the event of default
by the other party to the contract.
Except as set forth above under "Futures Contracts and Options on
Futures Contracts" there is no limit on the percentage of a Fund's assets that
may be invested in futures contracts and related options or forward currency
contracts. 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, forward
currency contracts, futures 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.
Fixed Income Securities
General. In order to achieve their respective investment objectives,
the Funds may invest in a broad range of U.S. and non-U.S. fixed income
securities. In periods of declining interest rates, a Fund's yield (its income
from portfolio investments over a stated period of time) 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 each Fund from the continuous sale of its shares 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. To the extent a Fund
invests in fixed income securities, its net asset value can
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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. The Funds may invest up to 5% of their
net assets in inverse floating rate securities, which have greater volatility
risk than ordinary fixed income securities.
Risk Factors of Lower Quality Securities. The Emerging Markets Debt
Fund may invest in U.S. and foreign fixed income securities receiving a Standard
& Poor's rating of BBB or lower, a Moody's rating of Baa or lower, or an
equivalent rating. These securities are considered speculative and, while
generally providing greater income than investments in higher quality
securities, involve greater risk of loss of principal and income, including the
possibility of default or bankruptcy of the issuers of such securities, and have
greater price volatility, especially during periods of economic uncertainty or
change. Securities rated D by Standard & Poor's, Moody's or comparable rating
agency are in default. These lower quality fixed income securities tend to be
affected by economic changes and short-term corporate and industry developments
to a greater extent than higher quality securities, which react primarily to
fluctuations in the general level of interest rates. To the extent the Fund
invests in such lower quality securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis. The market
prices of zero coupon and payment-in-kind bonds are affected to a greater extent
by interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash. Increasing rate note securities are
typically refinanced by the issuers within a short period of time. See "Taxes"
in the Statement of Additional Information for special tax considerations
associated with investing in high yield bonds structured as zero coupon,
payment-in-kind, or increasing rate securities.
Lower quality fixed income securities will also be affected by the
market's perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. In the past, economic downturns
or an increase in interest rates have, under certain circumstances, caused a
higher incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The market for
these lower quality fixed income securities is generally less liquid than the
market for investment grade fixed income securities. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult under certain adverse market conditions to sell these lower rated
securities to meet redemption requests, to respond to changes in the market, or
to determine accurately a Fund's net asset value.
If a fixed income security, that at the time of purchase satisfied a
Fund's minimum rating criteria, is subsequently downgraded, the Fund will not be
required to dispose of the security. If such a downgrading occurs, however, the
Adviser will consider what action, including the sale of the security, is in the
best interest of the Fund. No Fund, other than the Emerging Markets Debt Fund,
will continue to hold fixed income securities that have been downgraded below
investment grade if more than 5% of that Fund's net assets would consist of such
securities.
Foreign Government Securities. The foreign government securities in
which the Funds may invest generally consist of debt obligations issued or
guaranteed by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational or quasi-governmental entities. Quasi-governmental and
supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
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agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the Japanese Development Bank, the Asian
Development Bank and the InterAmerican Development Bank. Foreign government
securities also include mortgage-related securities issued or guaranteed by
national, state or provincial governmental instrumentalities, including
quasi-governmental agencies. For a description of the risks associated with all
investments in foreign securities, see "Foreign Securities" above.
The Emerging Markets Debt Fund may also invest in so-called "Brady
Bonds." The Fund may invest in Brady Bonds and other sovereign debt securities
of countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities
issued under the framework of the Brady Plan, an initiative announced by U.S.
Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations
to restructure their outstanding external indebtedness (generally, commercial
bank debt). In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the International Monetary Fund (the
"IMF"). The Brady Plan framework, as it has developed, contemplates the exchange
of commercial bank debt for newly issued bonds (Brady Bonds). The World Bank
and/or the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under
these arrangements with the World Bank and/or the IMF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's ability to service its external obligations and
promote its economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
debt reduction, emphasizing that solutions must be negotiated on a case-by-case
basis between debtor nations and their creditors. The Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment.
Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Equador, Jordan, Mexico, Nigeria, Poland, the
Philippines, Uruguay and Venezuela and may be issued by other countries. Over
$130 billion in principal amount of Brady Bonds have been issued to date, the
largest proportion having been issued by Argentina and Brazil. Brady Bonds may
involve a high degree of risk, may be in default or present the risk of default.
As of October 1, 1996, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors.
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Although Brady Bonds may be collateralized by U.S. Government securities,
repayment of principal and interest is not guaranteed by the U.S. Government.
Registered Loans. The Emerging Markets Debt Fund may invest in loan
obligations issued or guaranteed by sovereign governments or their agencies and
instrumentalities. The ownership of these loans is registered in the books of an
agent bank and/or the borrower and transfers of ownership are effected by
assignment agreements. Documentation for these assignments includes a signed
notice of assignment, which is sent to the agent and/or borrower for
registration shortly after the execution of the assignment agreement. Prior to
the notice of assignment being registered with the agent and/or borrower, the
borrower or its agent will make any payments of principal and interest to the
last registered owner.
Given the volume of secondary market trading in registered loans, the
agent and/or borrower's books may be out of date, making it difficult for the
Fund to establish independently whether the seller of a registered loan is the
owner of the loan. For this reason, the Fund will require a contractual warranty
from the seller to this effect. In addition, to assure the Fund's ability to
receive principal and interest owed to it but paid to a prior holder because of
delays in registration, the Fund will purchase registered loans only from
parties that agree to pay the amount of such principal and interest to the Fund
upon demand after the borrower's payment of such principal and interest to any
prior holder has been established.
Generally, registered loans trade in the secondary market with interest
(i.e., the right to accrued but unpaid interest is transferred to purchasers).
Occasionally, however, the Fund may sell a registered loan and retain the right
to such interest ("sell a loan without interest"). To assure the Fund's ability
to receive such interest, the Fund will make such sales only to parties that
agree to pay the amount of such interest to the Fund upon demand after the
borrower's payment of such interest to any subsequent holder of the loan has
been established. In this rare situation, the Fund's ability to receive such
interest (and, therefore, the value of shareholders' investments in the Fund
attributable to such interest) will depend on the creditworthiness of both the
borrower and the party who purchased the loan from the Fund.
To further assure the Fund's ability to receive interest and principal
on registered loans, the Fund will only purchase registered loans from, and sell
loans without interest to, parties determined to be creditworthy by the Adviser.
For purposes of the Fund's diversification and industry concentration policies,
the Fund will treat the underlying borrower of a registered loan as an issuer of
that loan. Where the Fund sells a loan without interest, it will treat both the
borrower and the purchaser of the loan as issuers for purposes of this policy.
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 ("FNMA")), 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.
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The Funds may also invest in separately traded principal and interest
components of U. S. Government securities 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.
Custodial Receipts. Each Fund may acquire custodial receipts which are
typically issued by a custodian bank or investment brokerage firm. These
receipts represent unmatured interest coupons that have been separated
("stripped") by a custodian bank or investment brokerage firm, and evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government or its agencies or
instrumentalities. For certain securities law purposes, custodial receipts are
not considered U.S. Government securities.
Mortgage-Backed and Asset-Backed Securities
The 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. These include collateralized mortgage
obligations ("CMOs") and various "stripped" mortgage-backed securities ("SMBS").
CMOs are issued in multiple classes, each with a specified fixed or adjustable
interest rate and final maturity date. Principal payments may be made to the
various classes in either a sequential order or simultaneously. SMBS typically
are issued in two classes, with one receiving only interest payments from a pool
of mortgage loans ("IOs") and the other receiving only principal payments
("POs"). The 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.
Interest Rate, Mortgage and Currency Swaps and Interest Rate Caps and Floors
The Funds may enter into interest rate, mortgage and currency swaps for
hedging and non-hedging purposes. The Funds may also enter into other types of
interest rate swap arrangements such as caps and floors. A Fund will typically
use interest rate swaps to adjust the effective duration of its portfolio, to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a future date. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
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receive interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The principal amount,
however, is tied to a reference pool or pools of mortgages. Currency swaps
involve the exchange of rights to make or receive payments in specified
currencies. In a typical cap or floor arrangement, one party agrees to make
payments only under specified circumstances, usually in return for payment of a
fee by the other party. For example, the buyer of an interest rate cap obtains
the right to receive payments to the extent that a specified interest rate
exceeds an agreed upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate falls
below an agreed upon level. Since interest rate and currency swaps and interest
rate caps and floors are individually negotiated, the Funds would enter into
such arrangements in the expectation of achieving an acceptable degree of
correlation between their hedged portfolio investments and their interest rate
and currency swap positions.
The Funds will enter into interest rate and mortgage swaps only on a
net basis, which means that the two payment streams are netted out, with a Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
interest payments that a Fund is contractually obligated to make. If the other
party to an interest rate or mortgage swap defaults, a Fund's risk of loss
consists of the net amount of interest payments that the Fund is contractually
entitled to receive. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate swap,
mortgage swap, and interest rate caps and floors, will be accrued on a daily
basis, and an amount of cash or liquid securities having an aggregate net asset
value at least equal to such accrued excess will be maintained in a segregated
account, which will be marked to market daily, by the Fund's custodian. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The Funds will segregate, in an account maintained by the Funds'
custodian, an amount of cash or liquid securities having an aggregate net asset
value equal to the entire amount of the Fund's obligation in a currency swap.
The use of interest rate, mortgage and currency swaps and interest rate
caps and floors is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates or currency exchange rates, the investment performance of
a Fund may be less favorable than it would have been if these investment
techniques were not used.
Convertible Securities and Preferred Stocks
Subject to their investment policies, the Funds may invest in
convertible securities, which may include corporate notes or preferred stock but
are ordinarily long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all fixed income
securities, 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
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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
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 as the
Fund's investments in non-convertible securities.
Diversification
Each of the Funds is "non-diversified" under the 1940 Act. Accordingly,
they are subject only to certain federal tax diversification requirements and to
the policies adopted by the Adviser. With respect to 50% of its total assets,
each Fund may invest up to 25% of its total assets in the securities of any one
issuer (except that this limitation does not apply to U.S. Government
securities). With respect to the remaining 50% of its total assets, a Fund may
not invest more than 5% of its total assets in the securities of any one issuer
(except U.S. Government securities) nor acquire more than 10% of the outstanding
voting securities of any issuer. These federal tax diversification requirements
apply only at taxable quarter-ends and are subject to certain qualifications and
exceptions. To the extent that a Fund does not meet standards for being
"diversified" under the 1940 Act, it will be more susceptible to developments
affecting any single issuer of portfolio securities.
Temporary Defensive Investments
For temporary defensive purposes, each of the Funds may invest all or
part of its portfolio in U.S. or, subject to tax requirements, Canadian
currencies, U.S. Government securities maturing within one year (including
repurchase agreements collateralized by such securities), commercial paper of
U.S. or foreign issuers, and cash equivalents.
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by U.S. or foreign corporations and finance companies. The
commercial paper purchased by the Funds consists of U.S. dollar-denominated
obligations of domestic or foreign issuers. Each Fund may also invest in
commercial paper which at the date of investment is rated at least A-2 by
Standard & Poor's or P-2 by Moody's, or their equivalent ratings, or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which are rated, at the time of purchase, A or better by Standard &
Poor's or Moody's, or their equivalents, and other debt instruments, including
unrated instruments, not specifically described if such instruments are deemed
by the Adviser to be of comparable quality.
Cash equivalents include obligations of banks which at the date of
investment have capital, surplus and undivided profits (as of the date of their
most recently published financial statements) in excess of US$ 100 million. Bank
obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances and fixed time deposits. Bank obligations also include U.S.
dollar-denominated obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks, all of the same type as domestic bank obligations. A
Fund will invest in the obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks only when the Adviser determines that the credit risk
with respect to the instrument is minimal.
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Additional Investment Technique
Mortgage Dollar Rolls. The Funds may enter into mortgage "dollar rolls"
in which a Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, a
Fund forgoes principal and interest paid on the securities. A Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income as well as by the interest earned on the cash proceeds of the initial
sale. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. The Funds
may enter into both covered and uncovered rolls. For financial reporting and tax
purposes, each Fund treats mortgage dollar rolls as two separate transactions:
one involving the purchase of a security and a separate transaction involving a
sale. The Funds do not currently intend to enter into mortgage dollar rolls that
are accounted for as a financing.
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. 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 securities having a value (determined daily)
at least equal to the amount of the Fund's purchase commitment.
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. These transactions must be fully collateralized at all times, but they
involve some credit risk to a Fund if the other party defaults on its
obligations and the Fund is delayed in or prevented from liquidating the
collateral. A Fund will enter into repurchase agreements only with U.S. or
foreign banks having total assets of at least US$ 100 million (or its foreign
currency equivalent).
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements with banks and domestic broker-dealers. Reverse repurchase
agreements involve sales by a Fund of portfolio securities concurrently with an
agreement by the Fund to repurchase the same securities at a later date at a
fixed price. During the reverse repurchase agreement period, the Fund continues
to receive principal and interest payments on these securities. Each Fund will
deposit cash or liquid securities or a combination of both in a segregated
account, which will be marked to market daily, with its custodian equal in value
to its obligations with respect to reverse repurchase agreements. Reverse
repurchase agreements are considered borrowings, and as such are subject to the
limitations on borrowings by the Funds.
Restricted and Illiquid Securities. Each Fund will not invest more than
15% of its net assets in illiquid securities, which include repurchase
agreements and fixed time deposits maturing in more than seven days and
securities that are not readily marketable. In addition, each Fund will not
invest more than 5% of its net assets in securities that are subject to
restrictions on resale because they are not registered in reliance on the
exemption for non-public offerings ("restricted securities") under the
Securities Act of 1933 (the "1933 Act"). However, this restriction does not
apply to restricted securities
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offered and sold to "qualified institutional buyers" under Rule 144A under the
1933 Act or to securities purchased in accordance with Regulation S under the
1933 Act.
Lending Securities. For the purpose of realizing income, each 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 at all times but 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
Trustees (or the Adviser) are 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 up to 10% of its total
assets, calculated at the time of purchase, in the securities of other
investment companies. 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.
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 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. The Funds generally
purchase and sell foreign securities in foreign countries, since the best
available market for foreign securities is often on foreign markets. In
transactions on foreign markets, brokerage commissions generally are fixed and
are often higher than in the United States where commissions are negotiated. In
the over-the-counter markets, 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 this requirement and the
provisions of Section 28(e) of the Securities Exchange Act of 1934, as amended,
securities may be bought from or sold
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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
brokers with whom it is affiliated. No Fund will effect principal transactions
with an affiliated broker or dealer.
Portfolio Turnover
It is estimated that, under normal circumstances, the portfolio turnover
rate of each of the Funds will be approximately 200% or higher. A high rate of
portfolio turnover (i.e., 100% or higher) will result in correspondingly higher
transaction costs to a Fund. However, these costs generally are lower for funds
that invest in fixed income securities than for funds that invest in equity
securities. A high rate of portfolio turnover also may, under some
circumstances, make it more difficult for a Fund to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended. See
"Financial Highlights" for each Fund's portfolio turnover for the fiscal year
ended October 31, 1996.
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
MGIS, located at 20 Finsbury Circus, London, England, acts as
investment adviser to each Fund pursuant to the terms of an investment advisory
contract between the Trust, on behalf of each Fund, and MGIS (the "Advisory
Contract"). MGIS is registered as an investment adviser with the Commission and
provides a full range of international investment advisory services to
institutional clients. All of the outstanding voting stock of MGIS is owned by
Morgan Grenfell Asset Management, Ltd. ("MGAM"), which is an indirect
wholly-owned subsidiary of Deutsche Bank AG, an international commercial and
investment banking group. As of December 31, 1995, MGIS managed approximately
$12.7 billion in assets.
Under its Advisory Agreement 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 Global Fixed Income Fund 0.50%
Morgan Grenfell International Fixed Income Fund 0.50%
Morgan Grenfell Emerging Markets Debt Fund 1.50%
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As further described in "Expense Information," the Adviser has
voluntarily agreed to reduce its advisory fee and to make arrangements to limit
certain other expenses of each Fund to the extent necessary to limit the Fund's
operating expenses to a specified percentage of its average net assets. For the
fiscal period ended October 31, 1996, this voluntary agreement was in effect,
and Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International
Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund paid advisory
fees equal to - %, - % and - % of their respective average daily net assets
during such period. The advisory fee to which the Adviser is entitled for
Emerging Markets Debt Fund is higher than those for most mutual funds, but the
Trustees believe that this fee is warranted by the resources needed to evaluate
and invest in the particular markets on which this Fund focuses.
Each Fund is managed by a team of MGIS investment professionals with
expertise in the region(s) and types of investments in which the Fund invests.
For a description of the business experience and other credentials of each
investment professional involved in managing the Funds' portfolios, see Appendix
B to this Prospectus.
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 Agreement. The expenses borne by each Fund include service fees,
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 advisory 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 such Fund
by the amount of such excess, but only to the extent of the Fund's advisory fee.
Service Plans
The Trust, on behalf of each Fund, has adopted a service plan pursuant
to which each Fund pays service fees at an aggregate annual rate of up to 0.25%
of the Fund's average daily net assets attributable to service shares. Service
fees are payable to Service Organizations on a quarterly basis, and are intended
to compensate Service Organizations for providing personal services and/or
account maintenance services to their customers who beneficially own service
shares through Omnibus Accounts. Service Organizations that are fiduciaries or
parties in interest to Omnibus Accounts subject to the Employee Retirement
Income Security Act of 1974 (ERISA) should consult with their legal advisers
regarding the receipt of service fees. See the Statement of Additional
Information for further information.
Administrator and Distributor
The Trust has entered into an Administration Agreement with SEI
Financial Management Corporation ("SEI Financial Management" or the
"Administrator"), 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658. 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.
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Pursuant to the Administration Agreement, SEI Financial Management
receives from all series of the Trust (i.e., the Funds and all other active
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
Each Fund pays the Administrator a minimum annual fee that equals
$75,000 ($100,000 in the case of Morgan Grenfell Emerging Markets Debt Fund).
For the fiscal period ended October 31, 1996, the Administrator
received fees from Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
equal to - %, - % and - % of their respective average daily net assets.
SEI Financial Services Company (the "Distributor"), 680 East Swedesford
Road, Wayne, Pennsylvania 19087-1658, serves as the distributor of service
shares of the Funds pursuant to a Distribution Agreement with the Trust and
assists in the sale of service shares of the Funds.
Custodian and Transfer Agent
The Trust has entered into a Custodian Agreement with The Northern
Trust Company ("Northern Trust" or the "Custodian"), pursuant to which Northern
Trust serves as custodian of the Funds' assets. The Custodian is located at
Fifty South LaSalle Street, Chicago, Illinois 60675.
DST Systems, Inc. (the "Transfer Agent"), 210 W. 10th Street, Kansas
City , Missouri 64105, serves as the transfer agent of the Funds. The Transfer
Agent maintains the records of each record shareholder's account, processes
purchases and redemptions of the Funds' service shares, acts as dividend and
distribution disbursing agent and performs other shareholder servicing
functions.
Additional information regarding the services performed by Service
Organizations, the Administrator, the Distributor, the Custodian and the
Transfer Agent is provided in the Statement of Additional Information.
PURCHASE OF SERVICE SHARES
In order to make an initial investment in service shares of a Fund, an
investor must establish an account with a Service Organization that maintains an
Omnibus Account with the Trust for its customers. Investors may be subject to
minimums established by their Service Organizations for initial and subsequent
investments in service shares. Unless waived by the Trust, the minimum initial
investment by an Omnibus Account in each Fund is $250,000.
Service shares of any Fund may be purchased by an investor on any Business
Day at the net asset value next determined after receipt of the investor's order
in good order by the investor's Service Organization. A "Business Day" means any
day on which the New York Stock Exchange (the"NYSE") is open. An investor's
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Service Organization must receive the investor's order before the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern Time), and must
promptly forward such order to the Transfer Agent for the investor to receive
that day's net asset value. The investor's Service Organization is responsible
for promptly forwarding the investor's purchase order to the Transfer Agent.
There is no sales charge in connection with purchases of service
shares. Investors may be subject to transaction and/or account maintenance fees
imposed by their Service Organizations (no part of which will be received by the
Trust or the Adviser). Any such fees will be payable directly by the investor,
and not by the Fund. The Trust reserves the right, in its sole discretion, to
reject any purchase offer and to suspend the offering of service shares. The
Trust does not issue share certificates.
Payment for initial and subsequent purchases of service shares should
be made to the Service Organization that the investor is using to purchase
service shares. Investors should contact their Service Organizations for further
details on how to purchase service shares of the Funds.
Reports to Shareholders and Confirmations
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations with account inquiries and for other information regarding
the Funds.
Exchange Privilege
Subject to any restrictions imposed by Service Organizations, a shareholder
may exchange service shares of a Fund for service shares of another Fund or
service shares of a Domestic Fund. The shareholder's Service Organization must
receive the shareholder's exchange request in proper form before the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern Time) and must
promptly forward the request to the Transfer Agent for the exchange to be valued
at that day's net asset values. The shareholder's Service Organization is
responsible for promptly forwarding an exchange request to the Transfer Agent.
A shareholder should obtain and read the prospectus relating to service
shares of the Domestic Funds and consider the investment objective, policies and
fees of the appropriate Domestic Fund before making an exchange into a Domestic
Fund. Exchanges may be subject to minimums imposed by Service Organization. The
Funds reserve the right to refuse any exchange request.
Service Organizations, acting on behalf of beneficial owners of service
shares, may exchange service shares by telephone, unless they indicate otherwise
in writing to the Trust. Neither the Funds nor their agents will be liable for
any loss incurred by a shareholder or Service Organization 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 or Service Organization due to a
fraudulent or other unauthorized telephone exchange request.
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An exchange is treated as the sale of service shares exchanged and,
therefore, may produce a gain or loss to the shareholder that is recognizable
for tax purposes.
REDEMPTION OF SERVICE SHARES
How to Redeem
A shareholder may redeem service shares of a Fund without charge upon
request on any Business Day at the net asset value next determined after receipt
of the shareholder's redemption request by the shareholder's Service
Organization. A shareholder's Service Organization must receive a redemption
request in proper form before the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern Time), and must promptly forward such request to
the Transfer Agent for the shareholder to receive that day's net asset value.
The shareholder's Service Organization is responsible for forwarding the
shareholder's redemption request to the Transfer Agent.
Service Organizations, acting on behalf of beneficial owners of service
shares, may redeem service shares by telephone, unless they indicate otherwise
in writing to the Trust. Alternatively, Service Organizations may submit
redemption requests in writing. A written redemption request submitted by a
Service Organization must specify the number of service shares to be redeemed,
the Fund from which service shares are being redeemed, the account number of the
Omnibus Account that is making the redemption, payment instructions and the
exact registration on the account of the Omnibus Account.
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 Funds nor their agents 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 will be wired to the redeeming shareholder's
Service Organization, unless the Service Organization has requested payment by
check. For a redemption request received by the redeeming shareholder's Service
Organization before the close of regular trading on the NYSE (currently 4:00
p.m., Eastern Time) and promptly forwarded to the Transfer Agent, 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 from the redeeming investor's Service
Organization, including any additional documentation that may be required in
order to establish that a redemption request has been properly authorized. In
addition, the payment of redemption proceeds for service shares of a Fund
recently purchased by check may 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 Service Organization's bank in the transfer
process. If a problem with such performance arises, the Service Organization
should deal directly with such intermediaries or bank.
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<PAGE>
Service Organizations may request that the Trust make redemption
payments by Federal Reserve wire or Automated Clearing House (ACH) wire. The
Custodian may deduct a wire charge (currently $10) from redemption payments made
by Federal Reserve wire. Redemption payments made by Federal Reserve wire cannot
be made on Federal holidays restricting wire transfers. There is no charge for
ACH wire transactions; however, such transactions will not be posted to a
Service Organization's bank account until the second Business Day following the
transaction.
A Service Organization may change the bank designated to receive
redemption proceeds by providing written notice to the Transfer Agent which has
been signed by the Service Organization 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 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."
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 class of a Fund's shares is
determined by adding the value of all securities, cash and other assets of the
Fund attributable to such class, subtracting liabilities (including accrued
expenses and dividends payable) attributable to such class and dividing the
result by the total number of outstanding Fund shares of such class.
For purposes of calculating net asset value, 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
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<PAGE>
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 each Fund are listed on foreign
exchanges which trade at times and on days when the NYSE is closed. As a result,
the net asset value of each class of any such Fund may be significantly affected
by such trading at times and on days when shareholders have no ability to redeem
shares of the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund declares and pays dividends from net investment income, if
any, and distributes net short-term capital gain, if any, at least annually.
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 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 service 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 to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (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, including
orignial issue discount and market discount income, certain net realized foreign
exchange gains and the excess of net short-term capital gain over net long-term
capital loss 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. 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
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<PAGE>
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 and foreign taxes, if any, passed through to shareholders, as described
below.
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on dividends, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number
and certain certifications or if they are otherwise subject to backup
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 for Form W-8 is on
file, to backup withholding on certain other payments from a Fund.
Because each Fund invests in foreign securities, it may be subject to
foreign withholding or other foreign taxes on income earned on such securities
(possibly including, in some cases, capital gains). In any year in which any of
the Funds qualifies, it may make an election that would generally permit its
shareholders to take a credit or a deduction for their proportionate shares of
qualified foreign income taxes paid by such Fund, subject to applicable
restrictions or limitations under the Code. Each such shareholder would then
treat as additional income (in addition to actual distributions) his or her
proportionate share of the amount of qualified foreign income taxes paid by such
Fund. For some years, a Fund may be unable or may not elect to pass such taxes
and foreign tax credits and deductions with respect to such taxes through to its
shareholders.
Investors should consider the tax implications of buying service 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 service 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
distributions of a Fund are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to) certain
U.S. Government Securities provided in some states that certain thresholds for
holdings of U.S. Government Securities and/or reporting requirements are
satisfied. The Funds 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
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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 three Funds described in this Prospectus and fourteen
additional series. The Declaration of Trust further authorizes the Trust to
classify or reclassify any series or portfolio of shares into one or more
classes. As of the date hereof, the Trustees have established two classes of
shares: service shares and institutional shares.
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidation, except that only service shares bear service fees and
each class may bear other expenses properly attributable to the particular
class. Also, holders of service shares of each Fund have exclusive voting rights
with respect to the service plan adopted by their 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.
As of October 21, 1996, the Wagner Family Trust owned beneficially
33.12% of the outstanding shares of the International Fixed Income Fund.
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.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and
yield for service shares of a Fund, may be quoted in advertisements or in
communications to shareholders. Total return for service shares of a Fund 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 service shares
of 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 service shares. A Fund's yield reflects a Fund's overall rate of
income on portfolio investments as a percentage of the service share price.
Yield is computed by annualizing the result of dividing the net investment
income per service share over a 30-day period by the net asset value per service
share on the last day of that period.
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.
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 service 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
service 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
Description of Ratings Categories of
Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group
Moody's Investors Service, Inc. ("Moody's") describes classifications
of fixed income securities (not including commercial paper) as follows:
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--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
A-1
<PAGE>
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard & Poor's Ratings Group ("Standard & Poor's") describes
classifications of fixed income securities (not including commercial paper) as
follows:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from the AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Debt rated BB, B, CCC or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
D--Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
A-2
<PAGE>
Quality Distribution for Emerging Markets Debt Fund
During the fiscal year ended October 31, 1996, the percentages of
Morgan Grenfell Emerging Market Debt Fund's assets invested in unrated debt
securities and securities rated in particular rating categories by Standard &
Poor's were, on a weighted average basis, as follows*:
Percentage
of
Standard & Poor's (Moody's) Ratings Total Investments
- ----------------------------------- -----------------
Not Rated ..................................................... __%
Rated by Standard & Poor's (Moody's):
BB+, BB, BB-, (Ba) ............................................ __%
B+, B, B- (B) ................................................. __%
Total Investments in Debt Securities .......................... __%
* Based on the average of month-end portfolio holdings during the fiscal year
ended October 31, 1996. Asset composition does not represent actual holdings on
October 31, 1996; nor does it imply that the overall quality of portfolio
holdings is fixed.
** Of this amount, the following percentages of the Fund's assets represent
quality standards attributed by the Adviser to such unrated securities at the
time of purchase: __%, B+, B, B- (B); and __%, CCC+, CCC, CCC- (Caa).
A-3
<PAGE>
APPENDIX B
PORTFOLIO MANAGER INFORMATION
Funds Portfolio Managers
- ----- ------------------
Morgan Grenfell Global Fixed Income Fund Ian Kelson
Neil Jenkins
Annette Fraser
Morgan Grenfell International Fixed Income Fund Ian Kelson
Neil Jenkins
Annette Fraser
Morgan Grenfell Emerging Markets Debt Fund Ian Kelson
Simon Treacher
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<PAGE>
Portfolio Manager Expertise Professional Experience
- ----------------- --------- -----------------------
Annette Fraser Global Fixed Income Fund Manager, Fixed Income
Team, MGIS (since 1992); Fund
Manager, Morgan Grenfell
International Funds Management
Ltd. (since 1990).
Neil Jenkins, CFA Fixed Income Global and Emerging Markets
Fixed Income Portfolio Manager,
MGIS; Director, MGIS (since
1996) and MGIFM (since 1995);
Vice President, the Trust
(since 1993); Director, MGCM
(1991-1996); Morgan Grenfell,
Moscow Office (1988-1990);
Morgan Grenfell & Company Ltd.
(since 1985).
Ian Kelson Fixed Income Markets Director, MGIS (since 1988);
Chief Investment Officer, MGIS
Fixed Income (since 1989);
Portfolio Manager, Bank of
America (multi-currency
accounts) (1981-85).
Simon Treacher Emerging Markets MGIS (since 1994); Portfolio
Manager, Prudential Portfolio
Managers (1992-1993); Portfolio
Manager, Worldinvest Ltd.
(1978-1992); Portfolio Manager,
Bankers Trust Co. (1984-1987);
National Westminster Bank
(1980-1984).
B-2
<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Investment Services Limited
20 Finsbury Circus
London, England EC2M 1NB
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
Custodian
The Northern Trust Company
Fifty South LaSalle Street
Chicago, Illinois 60675
Transfer Agent
DST Systems, Inc.
SEI Division CT-7 Tower
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 -
1-800-550-6426
Telephone Exchanges - 1-800-550-6426
Share Price and Performance
Information - 1-800-550-6426
(or contact your Service Organization)
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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 three separate investment portfolios of the Trust (the "Funds"):
o Morgan Grenfell Global Fixed Income Fund
o Morgan Grenfell International Fixed Income Fund
o Morgan Grenfell Emerging Markets Debt Fund
This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Funds' Service Shares Prospectus
dated December 31, 1996 (the "Prospectus"). A copy of the Service Shares
Prospectus may be obtained without charge from any Service Organization that has
an agreeement with the Trust or from SEI Financial Services Company, the Trust's
Distributor, by calling 1-800-550-6426 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.............................................. 20
Trustees and Officers................................................ 24
Investment Advisory and Other Services............................... 27
Service Plan......................................................... 32
Portfolio Transactions .............................................. 34
Net Asset Value...................................................... 36
Performance Information.............................................. 37
Taxes................................................................ 40
General Information About the Trust.................................. 46
Additional Information............................................... 49
Financial Statements................................................. 49
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 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.
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company currently offering
shares in eighteen separate investment series, including the following three
series:
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
(collectively, the "Funds").
Each Fund is "non-diversified" within the meaning of the Investment Company Act
of 1940, as amended (the "1940 Act").
Morgan Grenfell Investment Services Limited (the "Adviser" or "MGIS") serves as
investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor.
The information contained in this Statement of Additional Information generally
supplements the information contained in the Funds' 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.
Foreign Currency Exchange Contracts
Each of the Funds will exchange currencies in the normal course of managing its
investments and may incur costs in doing so because a foreign exchange dealer
will charge a fee for conversion. A 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. A Fund also may enter into forward 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 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 a Fund may either accept or make delivery
of the currency specified in the contract or, at or prior to maturity, enter
into a closing 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 Funds may enter into forward currency contracts in several circumstances for
both hedging and non-hedging purposes. First, when a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a 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 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 dollars, of the
amount of foreign currency involved in the underlying transactions, a 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.
-4-
<PAGE>
Additionally, when management of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
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 securities 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 or forward contracts entered into for non-hedging
purposes. If the value of the securities placed in the segregated account
declines, additional cash or liquid 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 the 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.
The Funds generally will not enter into a forward currency contract with a term
of greater than one year.
While the Funds may enter into forward currency contracts in an attempt to
reduce currency exchange rate risks, transactions in currency contracts involve
certain other risks. Thus, while the 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 exchange loss.
Each Fund, in addition, may combine forward currency exchange contracts with
investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in the required foreign currency.
A Fund could purchase a U.S. dollar-denominated security and at the same time
enter into a forward currency contract to sell U.S. dollars for the required
foreign currency at a future date. By matching the amount of U.S. dollars to be
exchanged with the anticipated value of the U.S. dollar-denominated security, a
Fund may be able to "lock in" the foreign currency value of the security and
adopt a synthetic
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investment position whereby the Fund's overall investment return from the
combined position is similar to or greater than the return from purchasing a
foreign currency-denominated instrument.
A 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 registered investment company.
Options on Securities and Foreign Currencies
Each of the Funds may write covered put and call options and purchase put and
call options. Such options may relate to particular U.S. or non-U.S. securities,
or to U.S. or non-U.S. currencies. The Funds may write put and call 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. See "Description of
Securities and Investment Techniques and Related Risks -- Options" in the
Prospectus.
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.
A 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 a portfolio 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 liquid securities in such amount as are held
in a segregated account by the Fund's custodian) upon conversion or exchange of
other securities held by it. A call option on a security is also covered if the
Fund holds a call on the same security 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 liquid 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 the net
premium (the premium less the commission paid
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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
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 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 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 Funds may also enter into closing purchase and sale
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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), securities indices, currencies and other financial instruments,
currencies and indices. The 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 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, a 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, a 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 in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the 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 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 the 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 a 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
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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 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 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 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 Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
The Funds may use options on futures contracts solely for hedging or other
non-hedging purposes as described below.
Other Considerations. The Funds will engage in futures and related options
transactions only for 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. A Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities or instruments held by the Fund or
securities or instruments which they expect to purchase. Except as stated below,
the 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
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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 Fund expects that, on 75% or 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 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 Internal Revenue Code
of 1986, as amended (the "Code"), for maintaining its qualification as a
regulated investment company for federal income tax purposes. See "Taxes."
A 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 the Trust's custodian for the benefit of the futures commission
merchant through whom the Fund engages in such futures contracts 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 liquid securities in an
account maintained with the Trust's 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 or option position prior to its maturity or expiration date.
In the event of an imperfect correlation between a futures or options position
and the portfolio position which is intended to be protected, the desired
protection may not be obtained and the 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 a Fund's underlying securities.
The risk that the Funds will be unable to close out a futures or related options
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
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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 15% 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 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 Poor's
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
and other nationally and internationally 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 in the
Prospectus for a description of the ratings provided by recognized statistical
ratings 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 Commission.
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Interest Rate, Mortgage and Currency Swaps and Interest Rate Caps and Floors.
The Funds may enter into interest rate, mortgage and currency swaps and interest
rate caps and floors for hedging purposes and non-hedging purposes. Inasmuch as
these transactions are entered into for good faith hedging purposes or are
offset by a segregated account as described in the Prospectus, the Funds and the
Adviser believe that such obligations do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Funds' borrowing restrictions.
A Fund will not enter into any interest rate, mortgage, or currency swap or
interest rate cap or floor transaction unless the unsecured commercial paper,
senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by the Adviser. If there is a default by the
other party to such a transaction, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. However, the staff of the Commission takes the position
that swaps, caps and floors are illiquid investments that are subject to the
Funds' 15% limitation on such investments.
The federal income tax rules applicable to mortgage dollar rolls (see
prospectus), interest rate, mortgage and currency swaps and interest rate caps
and floors are unclear in certain respects, and a Fund may be required to
account for these instruments under tax rules in a manner that, under certain
circumstances, may limit its transactions in these instruments.
Inverse Floating Rate Securities. The Funds may invest up to 5% of their net
assets in inverse floating rate securities. The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values.
Foreign Government Securities. The Emerging Markets Debt Fund may invest in
so-called "Brady Bonds," which have recently been issued by Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, the
Philippines, Poland, Uruguay and Venezuela and which may be issued by other
countries. Brady Bonds are issued as part of a debt restructuring in which the
bonds are issued in exchange for cash and certain of the country's outstanding
commercial bank loans. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are collateralized in full as to principal by U.S. Treasury zero
coupon bonds that have the same maturity as the stated bonds. Interest payments
on such bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at the time and is adjusted at regular intervals thereafter.
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Zero Coupon and Deferred Interest Bonds. The Funds may invest in zero coupon
bonds and deferred interest bonds. Zero coupon and deferred interest bonds are
debt obligations which are issued at a significant discount from face value. The
original discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds generally provide for a period of delay before
the regular payment of interest begins. Although this period of delay is
different for each deferred interest bond, a typical period is approximately
one-third of the bond's term to maturity. Such investments benefit the issuer by
mitigating its initial need for cash to meet debt service, but some also provide
a higher rate of return to attract investors who are willing to defer receipt of
such cash. Zero coupon and deferred interest bonds are more volatile than
instruments that pay interest regularly. The Funds will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the Funds'
distribution obligations. See "Taxes" below.
Lower Rated High Yield "High Risk" Debt Obligations. As discussed in the
Prospectus, the Emerging Markets Debt Fund seeks high current income and may
invest in high yielding, fixed income securities rated Baa or lower by Moody's,
BBB or lower by Standard & Poor's, or an equivalent rating. The Emerging Markets
Debt Fund may also invest in unrated fixed income securities of comparable
quality. Ratings are based largely on the historical financial condition of the
issuer. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate.
The values of lower rated securities generally fluctuate more than those of
higher rated securities. In addition, the lower rating reflects a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal. The Adviser seeks to
minimize these risks through diversification, investment analysis and attention
to current developments in interest rates and economic conditions. Where the
Emerging Markets Debt Fund invests in securities in lower rated categories, the
achievement of the Fund's goals may be more dependent on the Adviser's ability
than would be the case if the Fund were investing in securities in the higher
rated categories.
As noted in the Prospectus, the Emerging Markets Debt Fund may invest in
pay-in-kind (PIK) securities, which pay interest in either cash or additional
securities, at the issuer's option, for a specified period. The Fund may also
invest in zero coupon bonds. Both types of bonds may be more speculative and
subject to greater fluctuations in value than securities which pay interest
periodically and in cash, due to changes in interest rates. The Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations. See "Taxes" below.
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The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the Emerging
Markets Debt Fund intends to seek protection against early call. Similarly, when
such yields increase, the market value of a portfolio already invested at lower
yields can be expected to decline. The Fund's portfolio may include debt
securities which sell at substantial discounts from par. These securities are
low coupon bonds which, during periods of high interest rates, because of their
lower acquisition cost tend to sell on a yield basis approximating current
interest rates.
Preferred Stock
Each of the 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.
Mortgage-Backed Securities
The Funds may invest in mortgage-backed securities. Mortgage-backed securities
represent direct or indirect participations in or obligations collateralized by
and payable from mortgage loans secured by real property. Each mortgage pool
underlying mortgage-backed securities will consist of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on owner and non-owner
occupied one-unit to four-unit residential properties, multifamily residential
properties, agricultural properties, commercial properties and mixed use
properties.
Agency Mortgage Securities. The Funds may invest in mortgage backed securities
issued or guaranteed by the U.S. Government, foreign governments or any of
their agencies, instrumentalities or sponsored enterprises. Agencies,
instrumentalities or sponsored enterprises of the U.S. Government include but
are not limited to the Government National Mortgage Association, ("Ginnie Mae"),
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac").
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Ginnie Mae securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. Fannie Mae securities and Freddie Mac
securities are not backed by the full faith and credit of the U.S. Government;
however, these enterprises have the ability to obtain financing from the U.S.
Treasury. There are several types of agency mortgage securities currently
available, including, but not limited to, guaranteed mortgage pass-through
certificates and multiple class securities.
Privately Issued Mortgage-Backed Securities. The Funds may also invest in
mortgage-backed securities issued by trusts or other entities formed or
sponsored by private originators of and institutional investors in mortgage
loans and other foreign or domestic non-governmental entities (or representing
custodial arrangements administered by such institutions). These private
originators and institutions include domestic and foreign savings and loan
associations, mortgage bankers, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. Privately
issued mortgage-backed securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
mortgage-backed securities are not guaranteed by an entity having the credit
standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive a high
quality rating, they normally are structured with one or more types of "credit
enhancement." Such credit enhancements fall generally into two categories: (1)
liquidity protection and (2) protection against losses resulting after default
by a borrower and liquidation of the collateral. Liquidity protection refers to
the providing of cash advances to holders of mortgage-backed securities when a
borrower on an underlying mortgage fails to make its monthly payment on time.
Protection against losses resulting after default and liquidation is designed to
cover losses resulting when, for example, the proceeds of a foreclosure sale are
insufficient to cover the outstanding amount on the mortgage. Such protection
may be provided through guarantees, insurance policies or letters of credit,
though various means of structuring the transaction or through a combination of
such approaches.
Mortgage Pass-Through Securities. The Funds may invest in mortgage pass-through
securities, which are fixed or adjustable rate mortgage-backed securities that
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicers of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. The Funds may invest in collateralized mortgage obligations
("CMOs"), which are multiple class mortgage-backed securities. CMOs provide an
investor with a specified interest in the cash flow from a pool of underlying
mortgages or of other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or adjustable interest rate and a final
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no principal
payments will be made on a CMO class until all other classes having an earlier
stated maturity date are paid in full. Sometimes, however, CMO classes are
"parallel pay" (i.e., payments of principal are made to two or more classes
concurrently).
-15-
<PAGE>
Stripped Mortgage-Backed Securities. The Funds may also invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of the interest and principal distributions from a
pool of mortgage loans. If the underlying mortgage loans experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities.
A common type of SMBS will have one class receiving all of the interest from a
pool of mortgage loans ("IOs"), while the other class will receive all of the
principal ("POs"). The market value of POs generally is unusually volatile in
response to changes in interest rates. The yields on IOs are generally higher
than prevailing market yields on other mortgage-backed securities because the
cash flow patterns of IOs are more volatile and there is a greater risk that the
initial investment will not be fully recouped. Because an investment in an IO
consists entirely of a right to an interest income stream and prepayments of
mortgage loan principal amounts can reduce or eliminate such income stream, the
value of IO's can be severely adversely affected by significant prepayments of
underlying mortgage loans. In accordance with a requirement imposed by the staff
of the Commission, the Adviser will consider privately-issued fixed rate IOs and
POs to be illiquid securities for purposes of the Funds' limitation on
investments in illiquid securities. Unless the Adviser, acting pursuant to
guidelines and standards established by the Board of Trustees, determines that a
particular government-issued fixed rate IO or PO is liquid, it will also
consider these IOs and POs to be illiquid.
Asset-Backed Securities
The Funds may invest in asset-backed securities, which represent participations
in, or are secured by and payable from, pools of assets such as motor vehicle
installment sale contracts, installment loan contracts, leases or various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such asset pools are securitized
through the use of privately-formed 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.
Custodial Receipts
Each of the 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.
-16-
<PAGE>
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 ("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,
however. Further, the IRS conclusion 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.
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 for temporary
defensive purposes as described in the Prospectus. A Fund may also invest in
variable rate master demand notes which typically are issued by large corporate
borrowers providing for variable amounts of principal indebtedness and periodic
adjustments in the interest rate according to the terms of the instrument.
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 set forth above for 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
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 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.
-17-
<PAGE>
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.
Non-U.S. bank obligations include Eurodollar Certificates of Deposit ("ECDs"),
which are U.S. dollar-denominated certificates of deposit issued by offices of
non-U.S. and U.S. banks located outside the United States; Eurodollar Time
Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a non-U.S.
branch of a U.S. bank or a non-U.S. bank; Canadian Time Deposits ("CTDs"), which
are essentially the same as ETDs except they are issued by Canadian offices of
major Canadian banks; Yankee Certificates of Deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
non-U.S. bank and held in the United States; and Yankee Bankers' Acceptances
("Yankee BAs"), which are U.S. dollar-denominated bankers' acceptances issued by
a U.S. branch of a non-U.S. bank and held in the United States.
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 certain 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 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.
"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
-18-
<PAGE>
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.
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 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 may fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments then 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 absent unusual market conditions. 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.
Reverse Repurchase Agreements and Other Borrowings
Each Fund may borrow for temporary or emergency purposes. This borrowing may be
unsecured. Among the forms of borrowing in which each Fund may engage is
entering into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of a portfolio security by the Fund, coupled with its
agreement to repurchase the security at a specified time and price. Each Fund
will maintain a segregated account with the Trust's custodian consisting of cash
or liquid securities equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with banks and domestic broker-dealers.
Reverse repurchase agreements involve the risk that the market value of the
securities subject to the reverse repurchase agreement may decline below the
repurchase price at which the Fund is required to repurchase such securities.
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 is
-19-
<PAGE>
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 avoid the potential leveraging effects of a Fund's borrowings, investments
will not be made while borrowings (including reverse repurchase agreements and
dollar rolls) are in excess of 5% of a Fund's total assets. Borrowing may
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 may lend portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, 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 Trust'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 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 following investment restrictions may not be changed with respect to any
Fund without the approval of a "majority" (as defined in the 1940 Act) of the
outstanding shares of such 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
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<PAGE>
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.
Accordingly, the Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (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.
(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 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 portfolio 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 portfolio 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.
-21-
<PAGE>
(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 to the fundamental policies mentioned above, the Board of Trustees
of the Trust has adopted the following nonfundamental policies that may be
changed or amended by action of the Board of Trustees without shareholder
approval.
Accordingly, 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 portfolio
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 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
-22-
<PAGE>
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) Knowingly 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 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 all investment restrictions shall mean the market
value used in determining each Fund's net asset value.
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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.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name, Address & Age With Trust During Past Five Years
- ------------------------- -------------- ---------------------------
<S> <C> <C>
James E. Minnick(1)* President, Chief President, Secretary and
885 Third Avenue Executive Treasurer, Morgan Grenfell
New York, NY 10022 Officer and Capital Management, Inc.
(age 48) Trustee ("MGCM") (since 1990).
Patrick W. W. Disney(1)* Senior Vice Director, MGIS
20 Finsbury Circus President and (since 1988).
London EC2M INB Trustee
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 Realty,
330 Garfield Street Inc. (since 1995); Financial Manager,
Santa Fe, NM 87501 Practice Management Systems
(age 63) (medical information services)
(1988 - 1995); 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 50) 1989).
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<PAGE>
Hugh G. Lynch Trustee Director, International
767 5th Avenue Investments, General Motors
New York, NY 10153 Investment Management
(age 59) Corporation (since September
1990).
Edward T. Tokar Trustee Vice President--Investments,
101 Columbia Road AlliedSignal Inc. (advanced
Morristown, NJ 07962 technology and manufacturer)
(age 49) (since 1985).
John G. Alshefski Treasurer, Director of Fund Operations,
680 East Swedesford Road Principal Accounting SEI/Fund Resources (since January
Wayne, PA 19807-1658 Officer, Chief 1994); Manager, International Fund
(age 30) Financial Officer Operations (1992-94); Senior
Associate, Price Waterhouse
(1988-92).
Neil P. Jenkins (3) Vice President Director, MGCM (since 1991);
885 Third Avenue Morgan Grenfell & Co. Ltd. (since 1985);
New York, NY 10022 Morgan Grenfell International Funds
(age 36) Management (since 1995).
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, Fixed
London EC2M 1NB Income, MGIS (since 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 Officer Financial Control, MGCM
New York, NY 10022 (since 1992); Vice President,
(age 40) Senior Compliance Officer and
other positions, Citibank, N.A.
(to 1992)
</TABLE>
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 October 7, 1996, the Trustees and officers of the Trust owned, as a group,
less than one percent of the outstanding shares of each Fund.
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 $2,000 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, 1996:
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<PAGE>
Pension or
Retirement Benefits
Accrued as Part of Aggregate
Name of Trustee Fund Expenses Compensation from the Trust/Complex*
- ----------------- -------------------- ------------------------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ --
Graham E. Jones $ 0 $ --
William N. Searcy $ 0 $ --
Hugh G. Lynch $ 0 $ --
Edward T. Tokar $ 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.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGIS of London, England acts as investment adviser to each Fund
pursuant to the terms of a Management Contract, dated January 3, 1993, between
the Trust, on behalf of each Fund, and MGIS (the "Management Contract").
Pursuant to the Management Contract, 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 determines on a
continuous basis, the allocation of each Fund's investments among countries. The
Adviser is responsible for the ordinary expenses of offices, if any, for 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 Contract, 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 Global Fixed Income Fund............................ 0.50%
Morgan Grenfell International Fixed Income Fund..................... 0.50%
Morgan Grenfell Emerging Markets Debt Fund.......................... 1.50%
The advisory fees are paid monthly and will be prorated if the Adviser
shall not have acted as a 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."
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For the fiscal period ended October 31, 1994, Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund paid net advisory fees of $41,189, $2,777,
and $25,848, respectively. For the fiscal year ended October 31, 1995, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund paid net advisory fees of
$384,235, $36,927 and $682,004, respectively. For the fiscal year ended October
31, 1996, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid net advisory fees of $______, $______ and $______, respectively. The
foregoing advisory fee payments reflect expense limitations that were in effect
during the indicated periods.
The Management Contract was last approved on November 21, 1996 by a
vote of the Trust's Board of Trustees, including a majority of those Trustees
who were not parties to the Management Contract or "interested persons" of such
parties. The Management Contract was approved by the Trust's initial
shareholder, SEI Financial Management, on January 3, 1994. The Management
Contract will continue in effect 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 Contract or
"interested persons" (as such term is defined in the 1940 Act) of such parties,
or by a vote of a majority of the outstanding shares of each Fund. The
Management Contract is 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
affected Fund, at any time without penalty on 60 days' written notice to the
Adviser. Termination of the Management Contract with respect to a Fund will not
terminate or otherwise invalidate any provision of the Management Contract
between the Adviser and any other Fund. The Adviser may terminate the Management
Contract at any time without penalty on 60 days' written notice to the Trust.
The Management Contract terminates automatically in the event of its assignment
(as such term is defined in the 1940 Act).
The Management Contract provides that the Adviser shall not be liable
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 and
its subsidiaries allocate 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 their 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 arrangement with the Adviser outweighs any disadvantages that may
result from contemporaneous transactions. See "Portfolio Brokerage."
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MGIS is registered with the Commission as an investment adviser and
provides a full range of international investment advisory services to
individual and institutional clients. MGIS is a direct wholly-owned subsidiary
of Morgan Grenfell Asset Management, Ltd., which is an indirect wholly-owned
subsidiary of Deutsche Bank AG, an international commercial and investment
banking group. As of December 31, 1995, MGIS managed approximately $12.7 billion
in assets for various individual and institutional accounts, including the
following registered investment companies to which it acts as a subadviser: Dean
Witter Worldwide Fund, Compass International Fixed Income Fund, RSI
International Equity Fund, SEI European Equity Fund, Dean Witter Pacific Growth
Fund, Dean Witter European Growth Fund, Dean Witter International SmallCap Fund,
Dean Witter Global Asset Allocation Fund and Dean Witter Worldwide Investment
Trust, and Pacific Growth Portfolio and European Growth Portfolio (each a series
of Dean Witter Variable Investment Series); and the following other series of
the Trust for which it acts as investment adviser: Morgan Grenfell International
Equity Fund, Morgan Grenfell International Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund, Morgan Grenfell Emerging Markets Equity
Fund and Morgan Grenfell European Equity Fund.
Portfolio Turnover
The Funds do not expect to trade in securities for short-term gain.
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 year ended
October 31, 1995, the portfolio turnover rates for Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund were 147%, 187% and 266%, respectively. For the
fiscal year ended October 31, 1996, the portfolio turnover rates for Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund were %______, %______ and
%______, 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 (the "Administration Agreement") dated January 3, 1994.
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 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:
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0.15% of the aggregate assets under $300 million
0.12% of the next $200 million of aggregate assets
0.10% of the next $500 million of aggregate assets
0.08% of the aggregate assets exceeding $1 billion
Each Fund pays the Administrator a minimum annual fee that equals
75,000 ($100,000 in the case of Morgan Grenfell Emerging Markets Debt Fund).
For the fiscal period ended October 31, 1994, Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund paid the Administrator administration fees
of $33,625, $19,556, and $5,947, respectively. For the fiscal year ended October
31, 1995, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid the Administrator administration fees of $105,406, $68,750 and $ 69,115,
respectively. For the fiscal year ended October 31, 1996, Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund paid the Administrator administration fees
of $ , $ , and $ , respectively.
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 expenses borne by service shares of the Funds include the service
shares' allocable share of: (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 the
Trust's 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 Fund's
business; and (xvi) expenses of an extraordinary and nonrecurring nature.
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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 record shareholder accounts, and
(ii) makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
The Distributor
The Trust has entered into a distribution agreement (the "Distribution
Agreement") pursuant to which SEI Financial Services Company (the
"Distributor"), as agent, serves as principal underwriter for the continuous
offering of shares (including service shares) of each Fund. The Distributor has
agreed to use 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 Trust are not subject to sales loads or distribution fees. The
Trust is not responsible for payment of any expenses or fees incurred in the
marketing and distribution of shares of the Trust.
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" (as such term is defined in the 1940 Act) of such parties. The
Distribution Agreement was most recently approved on November 21, 1996 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 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, The Northern Trust Company (the
"Custodian"), whose principal business address is Fifty South LaSalle Street,
Chicago, Illinois 60675, maintains custody of each Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement"). Under the Custodian Agreement,
the Custodian (i) maintains a separate account in the name of each Fund, (ii)
holds and transfers portfolio securities on account of each Fund, (iii) accepts
receipts and makes disbursements of money on behalf of each Fund, (iv) collects
and receives all income and other payments and distributions on account of each
Fund's portfolio securities and (v) makes periodic reports to the Trust's Board
of Trustees concerning each Fund's operations. The Custodian is authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Trust.
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<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
service shares which authorizes it to compensate Service Organizations that
provide omnibus accounting services for groups of individuals who beneficially
own service shares ("Omnibus Accounts") for providing certain personal, account
administration and/or shareholder liaison service to participants in the Omnibus
Accounts. Pursuant to the Plans, the Funds may enter into agreements with
Service Organizations that purchase service shares of the Funds ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
Organizations may perform some or all of the following services: (a)
establishing and maintaining Omnibus Accounts with the Funds; (b) establishing
and maintaining subaccounts and subaccount balances for Omnibus Accounts and
their participants ("Participants"); (c) processing orders by Omnibus Accounts
and Participants to purchase, redeem and exchange service shares promptly and in
accordance with the effective prospectus relating to such shares; (d)
transmitting to each Fund (or its agent) on each Business Day a net subscription
or net redemption order reflecting subscription, redemption and exchange orders
received by it with respect to the Omnibus Accounts; (e) receiving and
transmitting funds representing the purchase price or redemption proceeds
relating to such orders; (f) mailing Fund prospectuses, statements of additional
information, periodic reports, transaction confirmations and subaccount
information to Omnibus Accounts and Participants; (g) answering Omnibus Account
and Participant inquiries about the Funds, subaccount balances, distribution
options and such other administrative services for the Omnibus Account and the
Participants as provided for in the Service Agreements; and (h) providing such
statistical and other information as may be reasonably requested by the Funds or
necessary for the Funds to comply with applicable federal or state laws.
As compensation for such services, each Fund will pay each Service
Organization with which it has a Service Agreement a service fee in an amount up
to .25% (on an annualized basis) of the average daily net assets of the Fund's
service shares attributable to or held in the name of such Service Organization.
Service Organizations may from time to time be required to meet certain other
criteria in order to receive service fees. As of October 31, 1996, the Trust's
fiscal year end, service shares of the Funds had not been offered.
In accordance with the terms of the Service Plans, the officers of the
Trust provide to the Trust's Board of Trustees for their review a quarterly
written report of the amounts expended under the Service Plans and the purpose
for which such expenditures were made. In the Trustees' quarterly review of such
reports, they will consider the continued appropriateness and the level of
compensation that the Service Plans provide.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974 ("ERISA") ) may apply to a Service Organization's
receipt of compensation paid by a Fund in connection with the investment of
fiduciary assets in service shares of the Fund. Service Organizations that are
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions
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<PAGE>
are urged to consult their own legal advisers before investing fiduciary assets
in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under a Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standard set forth in part 4 of Title I of ERISA. These
standards are designed to help ensure that the fiduciary's decisions are made in
the best interests of the plan and are not colored by self-interest.
Section 403 (c) (1) of ERISA provides, in part, that the assets of a
plan shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404 (a) sets forth a similar requirement on how
a plan fiduciary must discharge his or her duties with respect to the plan, and
provides further that such fiduciary must act prudently and solely in the
interest of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406 (a) (1) (D) of ERISA prohibits a fiduciary of an ERISA plan
from causing that plan to engage in a transaction if he knows or should know
that the transaction would constitute a direct or indirect transfer to, or use
by or for the benefit of, a party in interest, of any assets of that plan.
Section 3 (14) includes within the definition of "party in interest" with
respect to a plan any fiduciary with respect to that plan. Thus, Section 406 (a)
(1) (D) would not only prohibit a fiduciary from causing the plan to engage in a
transaction which would benefit a third person who is a party in interest, but
it also would prohibit the fiduciary from similarly benefiting himself. In
addition, Section 406 (b) (1) specifically prohibits a fiduciary with respect to
a plan from dealing with the assets of that plan in his own interest or for his
own account. Section 406 (b) (3) supplements these provisions by prohibiting a
plan fiduciary from receiving any consideration for his own personal account
from any party dealing with the plan in connection with a transaction involving
the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under a Service Plan if the fees are used for
the exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which the plan is otherwise responsible for paying). Thus,
the fiduciary duty issues involved in a plan fiduciary's receipt of the service
fee must be assessed on a case-by-case basis by the relevant plan fiduciary.
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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 Advisory Agreement, 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. Consideration may also be given to the broker-dealer's
sale of shares of the Funds and the other series of the Trust. In addition, the
Advisory Agreement authorizes 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
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
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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, 1996, 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"). These brokers may include but are not limited to Morgan
Grenfell Asia and Morgan Grenfell Debt Arbitrage Trading.
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 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 Affiliated Brokers 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,
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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, 1995 and October 31, 1996 no 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 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 ended October 31, 1995 and October 31, 1996,
each of Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International
Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund paid no
brokerage commissions.
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 class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its shares 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 net asset value, 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) prior to the time of
valuation 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 prior to the time of valuation.
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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 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 for 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 in New York and on which a Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the 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 Fund may advertise its yield. Yield is
calculated separately for service shares and institutional shares of a Fund.
Each type of share is subject to different fees and expenses and, consequently,
may have differing yields for the same period. The yield of service shares of a
Fund refers to the annualized income generated by an investment in service
shares of 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:
YIELD = 2 [(a - b +1)6 - 1
-----
cd
Where: a = dividends and interest earned by the
Fund during the period;
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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.
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 service shares 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, 1996, the yields of
institutional shares of Morgan Grenfell Global Fixed Income Fund, Morgan
Grenfell International Fixed Income Fund and Morgan Grenfell Emerging Markets
Debt Fund were - %, - % and - %, respectively. If the expense limitations
described in the Prospectus for these Funds had not been in effect during this
period, the yields of institutional shares of Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund would have been - - %, - % and - %, respectively. No
service shares of the Funds were outstanding during the fiscal year ended
October 31, 1996.
Total Return
Average annual total return is calculated separately for service shares
and institutional shares of a Fund. Each type of share is subject to different
fees and expenses and, consequently, may have differing average annual total
returns for the same period. Each Fund that advertises "average annual total
return" for a class of its shares 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,
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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 "aggregate total return" for a class of its
shares 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 of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
For the fiscal year ended October 31, 1996, the average annual total
returns of institutional shares of Morgan Grenfell Global Fixed Income Fund,
Morgan Grenfell International Fixed Income Fund and Morgan Grenfell Emerging
Markets Debt Fund were - %, - % and - %, respectively. For their respective
periods from commencement of operations to October 31, 1996, the average annual
total returns of institutional shares of Morgan Grenfell Global Fixed Income
Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund were - %, - % and - %, 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 institutional shares
of these Funds for such periods would have been lower than the total return
figures shown in this paragraph. As of October 31, 1996, no service shares of
the Funds had been issued.
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
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Investment Companies Service, Business Week, Changing Times, Financial World,
Forbes, Fortune and Money. In addition, a Fund may from time to time advertise
its 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 any Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
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. Prospective
shareholders are urged to consult their own tax advisers 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 Additional
Statement, which are subject to change.
General
Each Fund is a separate taxable entity and has elected 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 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
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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 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 sale 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 its "investment company taxable
income" (which includes dividends, interest, accrued original issue discount and
market discount income, 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), 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 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 and net capital gain. If for any taxable year a Fund does
not
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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.
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) will
generally be treated as capital gains and losses. Certain futures contracts,
forward contracts and options held by the Funds may 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 (not including certain foreign currency
options, forward contracts, and futures contracts) will be treated as 60%
long-term capital gain or loss and 40% short-short capital gain or loss. As a
result of certain hedging transactions entered into by the Funds, the Funds 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
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 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 a net foreign exchange loss treated as
ordinary loss under Section 988 of the Code were to exceed a Fund's investment
company taxable income (computed without regard to such loss) for a taxable
year, the resulting loss would not be deductible by the Fund or its shareholders
in future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result that either no dividends are paid or a
portion of the Fund's dividends is treated as a return of capital, which is
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nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally gives rise to capital gains.
Each Fund's investments in zero coupon securities, deferred interest
securities, pay-in-kind securities or other securities bearing original issue
discount or, if the Fund elects to include market 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.
The Funds anticipate that they will be subject to foreign taxes on
certain income they derive from foreign securities, possibly including, in some
cases, capital gains from the sale of such securities. Tax conventions between
certain countries and the U.S. may reduce or eliminate such taxes in some cases.
If more than 50% of a Fund's total assets at the close of any taxable year
consists of stock or securities of foreign corporations, a Fund may file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to (i) include in ordinary gross income (in addition to
taxable dividends and distributions they actually receive) their pro rata shares
of qualified foreign taxes paid by the Fund even though not actually received,
and (ii) treat such respective pro rata portions as foreign taxes paid by them.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by a Fund,
although such shareholders will be required to include their shares of such
taxes in gross income. Shareholders who claim a foreign tax credit for such
foreign taxes may be required to treat a portion of dividends received from a
Fund as a separate category of income for purposes of computing the limitations
on the foreign tax credit. Tax-exempt shareholders will ordinarily not benefit
from this election. Each year that a Fund files the election described above,
its shareholders will be notified of the amount of (i) each shareholder's pro
rata share of qualified foreign taxes paid by the Fund and (ii) the portion of
Fund dividends which represents income from each foreign country. If a Fund does
not make this election, it may deduct such taxes in computing the amount of
income it must distribute to shareholders.
If a 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. Each
Fund may limit
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and/or manage its holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
The federal income tax rules applicable to currency and interest rate
swaps, mortgage dollar rolls, and interest rate floors and caps are unclear in
certain respects, and the Funds may be required to account for those instruments
under tax rules in a manner that may affect the amount, timing and character of
income, gain or loss from such instruments and that may, under certain
circumstances, limit their transactions in these instruments.
The Emerging Markets Debt Fund may invest in debt obligations that are
in the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest as well as issuers who are in default.
Investments in debt obligations that are at risk of or in default present
special tax issues for the Funds. Tax rules are not entirely clear about issues
such as when a Fund may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Funds, in the event they invest in such securities, in order to
reduce the risk of their distributing insufficient income to preserve their
status as regulated investment companies and seek to avoid becoming subject to
federal income or excise tax.
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, 1996, Emerging Markets Debt
Fund had capital loss carryforwards of approximately $_____, expiring (if not
previously used) in the fiscal year ended ______________.
U.S. Shareholders -- Distributions
For U.S. federal income tax purposes, distributions by the 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 for the
year will be taxable as ordinary income. Distributions to corporate shareholders
designated as derived from a Fund's dividend income, 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, it is unlikely that any significant portion of
any Fund's distributions will 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
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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), 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 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.
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. If, however, a shareholder receives a capital gain dividend with
respect to shares and such shares have a tax holding period of six months or
less at the time they are sold, redeemed or otherwise disposed of, then any loss
the shareholder realizes on the disposition will be treated as a long-term
capital loss to the extent of such capital gain dividend. Additionally, any loss
realized on a sale, redemption or other disposition of shares of a Fund may 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.
The Funds may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from 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
Internal Revenue Service 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 U.S. federal income tax
liability.
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
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subject to U.S. withholding tax at the rate of 30% on distributions treated as
ordinary income unless the tax rate is reduced 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
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.
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.
Each service share and institutional share of a Fund is entitled to one
vote per share, however, separate votes will be taken by each Fund or class (or
by more than one Fund or class voting as a single class if similarly affected)
on matters affecting only the Fund or class (or those affected Funds or classes)
or as otherwise required by law. Shares are freely transferable and have no
preemptive, subscription or
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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.
As of October 21, 1996, the following shareholders owned the following
respective percentages of the outstanding shares of the indicated Funds:
Global Fixed Income Fund:
- -------------------------
Capital Region Health Care Corporation Endowment, 250 Pleasant Street, Concord,
NH 03301 (6.11%)
The American University in Cairo, 866 United Nations Plaza, Suite 517, New York,
NY 10017 (9.82%)
Wofford College c/o Nationsbank of NC NA Cust, P.O. box 831575 Attn:
SAS/07010066786073, Dallas, TX 75283-1575 (5.92%)
New Hampshire Charitable Foundation, 37 Pleasant Street, Concord, NH 03301
(6.72%)
Toldeo Hospital c/o National City Bank Northwest Cust, PO Box 94777, Cleveland,
OH 44101 (10.35%)
Trustees of Clark University, 950 Main Street, Worcester, MA 01610-1400 (13.74%)
International Fixed Income Fund:
- --------------------------------
Gilman School Inc., c/o Mercantile Safe Deposit & Turst Co., P.O. Box 1101,
Baltimore, MD 21203-1101 (15.46%)
Harvey Wagner TTEE, FBO Wagner Family Trust, P.O. Box 7370, Incline Village, NV
89452 (33.12%)
Bay City Policemen & Firemen Retirement System, Defined Benefit Pension Plan,
c/o Deanna Ledesma, 301 Washington Ave, Bay City, MI 48708-5837 (10.82%)
NBD Bank Custodian Graphic Communications Union #2, PO Box 771072, Detroit, MI
48277 (14.01%)
Holland Community Hospital Non-Pension, One Financial Center, Holland, MI 49423
(21.98%)
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Emerging Markets Debt Fund
- --------------------------
IBM Retirement Plan Trust, c/o Chase Manhattan Bank, 3 Chase Metrotech Center,
Brooklyn, NY 11245 (20.56%)
TRW Master Trust, c/o Boston Safe Deposit & Trust Company, One Cabot Road,
Medford, MA 02155 (6.31%)
Hewlett Packard Deferred Profit Sharing Plan & Retirement Fund, 3000 Hanover
Streeet, Palo Alto, CA 94304 (7.51%)
Iowa Public Employees Retirement System, 600 E. Court Avenue, Des Moines, IA
50309 (19.47%)
Dallas Police & Fire Pension System, 2777 Stemmons Freeway, Dallas, TX 75207
(5.78%)
Municipal Fire & Police Retirement System of Iowa, 950 Office Park Road Suite
321, Des Moines, IA 50265 (9.28%)
Los Angeles City Employees Retirement System, 360 E 2nd St, 8th floor, Los
Angeles, CA 90012-4207 (8.01%)
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 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
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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
____________________, 1177 Avenue of the Americas, New York, New York
10036, serves as the Trust's 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.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October
31, 1996 are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of ___________________, the
Trust's independent accountants, as experts in accounting and auditing.
-49-
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
December 31, 1996
Morgan Grenfell Investment Trust (the "Trust") is an open-end
management investment company consisting of a number of investment portfolios.
This Prospectus offers service shares of 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
and Morgan Grenfell Large Cap Growth Fund(each a "Fund"). Information concerning
investment portfolios of the Trust that focus on international fixed income
investments (the "International Funds") is contained in a separate prospectus
that may be obtained by calling 1-800-550-6426.
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.
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.
Morgan Grenfell Large Cap Growth Fund invests primarily in equity and
equity-related securities of large capitalization U.S. companies.
___________________________ (continued on next page)
-1-
<PAGE>
[continued]
This Prospectus provides information about the Trust and each of the
Funds that investors should know before investing in service shares of 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 December 31, 1996, as amended or supplemented from
time to time, is available upon request without charge by calling 1-800-550-6426
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.
---------------------------------------------------
SERVICE 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 16
Additional Investment Information 26
Management of the Funds 28
Purchase of Service Shares 31
Redemption of Service Shares 33
Net Asset Value 35
Dividends, Distributions and Taxes 36
Organization and Shares of the Trust 38
Performance Information 40
-3-
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
Short-Term Short-Term Smaller Large Cap
Fixed Income Municipal Fixed Income Municipal Companies Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Fund Fund *
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends None None None None None None
Deferred Sales Charge Imposed
on Redemptions + None None None None None None
Exchange Fee 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% 0.75%
Service Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses __% __% __% __% __% 0.48%
Reduction of Advisory Fee and Expense (__)% (__)% (__)% (__)% (__)% (0.23)%
Limitation by Adviser **
Net Fund Operating Expenses (after
advisory fee reduction and expense
limitation) ** 0.80% 0.80% 0.80% 0.80% 1.50% 1.25%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Large Cap Growth Fund was not operational during the fiscal year ended
October 31, 1996.
** 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 Fund 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 after October 31, 1997. 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. After giving effect to the Adviser's voluntary
agreement, each Fund's advisory fee is as follows: Fixed Income Fund __%,
Municipal Bond Fund __%, Short-Term Fixed Income Fund __%, Short-Term
Municipal Bond Fund __%, Smaller Companies Fund __%, and Large Cap Growth
Fund __%; and the Other Expenses of each of Short-Term Fixed Income Fund and
Short-Term Municipal Bond Fund is __%. If the Adviser's voluntary agreement
was not in effect, the Fund Operating Expenses for each Fund would be as
follows: Fixed Income Fund __%, Municipal Bond Fund __%, Short-Term Fixed
Income Fund __%, Short-Term Municipal Bond Fund __%, Smaller Companies Fund
-%, and Large Cap Growth Fund 1.48%.
+ A fee, currently $10, will be imposed on redemptions by wire.
-4-
<PAGE>
Example:
Investors in service shares would pay the following expenses
on a $1,000 investment assuming (1) a 5% annual return and (2) redemption at the
end of each time period:
1 3 5 10
Year Years Years Years
---- ----- ----- -----
Morgan Grenfell Fixed Income Fund $__ $__ $__ $__
Morgan Grenfell Municipal Bond Fund $__ $__ $__ $__
Morgan Grenfell Large Cap Growth Fund $__ $__ $__ $__
Morgan Grenfell Short-Term Fixed Income Fund $__ $__ $__ $__
Morgan Grenfell Short-Term Municipal Bond Fund $__ $__ $__ $__
Morgan Grenfell Smaller Companies Fund $__ $__ $__ $__
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 each Fund other than Morgan Grenfell Large Cap
Growth Fund are based on expenses incurred during the fiscal year ended October
31, 1996, except that the figures shown (including figures shown for Morgan
Grenfell Large Cap Growth Fund) assume that service fees were in effect
throughout the year ended October 31, 1996. "Other Expenses" for Morgan Grenfell
Large Cap Growth Fund are based on estimated average net assets for the current
fiscal year ending October 31, 1997. If the average net assets of this Fund
exceeds the estimate for such year, then its "Other Expenses" (as a percentage
of average net assets) will be lower than the rate shown in the table.
Conversely, if the Fund's average net assets are lower than the estimate for
such year, then its "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 service fees and other
expenses of the Funds, see "Management of the Funds."
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
Selected audited data for an outstanding institutional share of each
Fund other than Morgan Grenfell Large Cap Growth Fund is presented for periods
prior to and ending October 31, 1996. This data, insofar as it relates to the
periods ended October 31, 1995 and October 31, 1996, has been audited by
______________, 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 ____________ 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, 1996 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 is available free of charge by calling 1-800-550-6426.
No data is shown below for service shares of the Funds because no
service shares were outstanding on or prior to October 31, 1996. Also, no data
is shown below for Morgan Grenfell Large Cap Growth Fund because this Fund had
not commenced operations on or prior to October 31, 1996.
-6-
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For an Institutional Share Outstanding Throughtout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions
Value Investment and from Net from Realized Net Asset Net Assets
Beginning Income / Unrealized Investment Capital Value End Total End of
Year of Period (Loss) Gains/(Losses) Income Gains of Period Return Period (000)
- ---------------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ -- $ -- $ -- $ -- -- $ -- --% $ --
1995 $ 10.37 $ 0.61 $ 0.49 $ (0.61) -- $ 10.86 10.90% $ 221,058
1994 $ 11.36 $ 0.60 $ (0.61) $ (0.60) $(0.38) $ 10.37 (0.15)% $ 165,677
1993 $ 10.56 $ 0.67 $ 0.84 $ (0.67) $(0.04) $ 11.36 14.68% $ 148,022
1992 (1) $ 10.00 $ 0.60 $ 0.56 $ (0.60) -- $ 10.56 13.42% $ 94,700
- ------------------------------------
Fixed Income Fund
- ------------------------------------
1996 $ -- $ -- $ -- $ -- $ -- $ -- --% $ --
1995 $ 9.93 $ 0.70 $ 0.69 $ (0.70) -- $ 10.62 14.53% $ 494,221
1994 $ 10.95 $ 0.64 $(0.91) $ (0.64) $(0.11) $ 9.93 (2.58)% $ 239,556
1993 $ 9.92 $ 0.64 $ 1.03 $ (0.64) -- $ 10.95 17.28% $ 147,917
1992 (2) $ 10.00 $ 0.06 $(0.08) $ (0.06) -- $ 9.92 (1.61)% $ 25,528
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Ratio of Expenses Income(Loss)
Net to Average to Average
Ratio of Investment Net Assets Net Assets
Expenses to Income(Loss) (Excluding (Excluding Portfolio
Average to Average Expense Expense Turnover
Year Net Assets Net Assets Limitations) Limitations) Rate
- ------------------------------------------------------------------------------------------
Municipal Bond Fund
- ------------------------------------
<C> <C> <C> <C> <C> <C>
1996 --% --% --% --% --%
1995 0.54% 5.75% 0.62% 5.67% 63%
1994 0.54% 5.60% 0.67% 5.47% 94%
1993 0.55% 5.94% 0.75% 5.74% 160%
1992 (1) 0.55% 6.31% 0.79% 6.07% 143%
- ------------------------------------
Fixed Income Fund
- ------------------------------------
1996 --% --% --% --% --%
1995 0.54% 6.81% 0.63% 6.72% 182%
1994 0.54% 6.22% 0.66% 6.10% 251%
1993 0.55% 6.01% 0.72% 5.84% 196%
1992 (2) 0.55% 5.24% 1.66% 4.13% 148%
- -----------------------------------------------------------------------------------------
</TABLE>
[END RESTUBBED TABLE]
* 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.
(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.
-7-
<PAGE>
<TABLE>
<CAPTION>
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>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Ratio of
Net
Ratio of Investment
Ratio of Expenses Income(Loss)
Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio
to Average Expense Expense Turnover
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>
[END OF RESTUBBED TABLE
* 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.
(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
relates solely to the Funds. Information regarding investment portfolios of the
Trust that focus on international fixed income investments (the "International
Funds") is contained in a separate prospectus that may be obtained by calling
1-800-550-6426.
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 Morgan Grenfell Asset Management. Together with the Adviser and its
other investment management subsidiaries, Morgan Grenfell Asset Management now
has over US$107 billion under management.
This prospectus relates solely to service shares of the Funds. Service
shares may be purchased through entities ("Service Organizations") that provide
omnibus accounting services for groups of individuals who beneficially own the
service shares ("Omnibus Accounts"). Omnibus Accounts include pension and
retirement plans (such as 401(k) plans, 457 plans and 403(b) plans) and programs
through which Service Organizations provide personal and/or account maintenance
services to groups of individuals, whether or not such individuals invest on a
tax-deferred basis. Investors may only purchase service shares through Service
Organizations. See "Purchase of Service Shares" for further information.
The Funds offer another class of shares (institutional shares), which
is subject to different expenses and therefore has different performance than
service shares. Information regarding this other class of shares may be obtained
by calling 1-800-550-6426.
Morgan Grenfell Large Cap Growth Fund has 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.
-9-
<PAGE>
Equity Investments. In selecting equity investments for Large Cap
Growth Fund and Smaller Companies 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 Companies
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 its 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, S&P, Duff or Fitch, or unrated but
determined by the Adviser to be of comparable quality. See "Description of
Securities and Investment echniques 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
-12-
<PAGE>
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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<PAGE>
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
investments or transactions (including repurchase agreements) 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 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.
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
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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.
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.
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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 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
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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 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
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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.
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
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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 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 the 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 liquid securities 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
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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. 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 liquid securities 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 non-hedging purposes as defined in regulations of
the Commodity Futures
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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 liquid securities with a value equal to
the amount of the Fund's obligations.
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 the 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.
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.
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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
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 Capitalization Companies
The Smaller Companies Fund invests a significant portion of its 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.
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 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
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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 securities having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitment. Although each Fund will 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.
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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-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
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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 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,
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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 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
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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 a 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, 1996.
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 two 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,
which 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 Large Cap Growth Fund 0.75%
The advisory fees to which the Advisor is entitled for Smaller
Companies Fund and Large Cap Growth 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
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"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 year ended October 31, 1996, this voluntary agreement was in effect for
each Fund (other than Morgan Grenfell Large Cap Growth Fund, which was not in
operation during such year). During this year, 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 -%, -%, -%, -%, and -% 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.
The Smaller Companies Fund is managed by a team of three experienced
portfolio managers, Robert Kern, Audrey M.T. Jones, and David A. Baratta. They
all have served as members of the Fund's portfolio management team since the
Fund's inception. Mr. Kern has been in the investment advisory business since
1965 (with MGCM since 1986) and has managed investments in small capitalization
companies since 1970. Ms. Jones has been employed by MGCM as a portfolio manager
since 1986. Prior to joining MGCM 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 service fees,
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."
Service Plans
The Trust, on behalf of each Fund, has adopted a service plan pursuant to which
each Fund pays service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to service shares. Service fees are
payable to Service Organizations on a quarterly basis, and are intended to
compensate Service Organizations for providing personal services and/or account
maintenance services to
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their customers who beneficially own service shares through Omnibus Accounts.
Service Organizations that are fiduciaries or parties in interest to Omnibus
Accounts subject to the Employee Retirement Income Security Act of 1974 (ERISA)
should consult with their legal advisers regarding the receipt of service fees.
See the Statement of Additional Information for further information.
Administrator and Distributor
The Trust has entered into an Administration Agreement 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 all other active 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
Each Fund pays the Administrator a minimum annual fee of $50,000. For
the fiscal period ended October 31, 1996, 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
- -%, -%, -%, -% and -% 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 service
shares of the Funds pursuant to a Distribution Agreement with the Trust and
assists in the sale of service 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
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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. The Transfer
Agent maintains the records of each record shareholder's account, processes
purchases and redemptions of the Funds' service shares, acts as dividend and
distribution disbursing agent and performs other shareholder servicing
functions.
Additional information regarding the services performed by Service
Organizations, the Administrator, the Distributor, the Custodians and the
Transfer Agent is provided in the Statement of Additional Information.
PURCHASE OF SERVICE SHARES
In order to make an initial investment in service shares of a Fund, an
investor must establish an account with a Service Organization that maintains an
Omnibus Account with the Trust for its customers. Investors may be subject to
minimums established by their Service Organizations for initial and subsequent
investments in service shares. Unless waived by the Trust, the minumum initial
investment by an Omnibus Account in each Fund is $250,000.
Service Shares of any Fund may be purchased by an investor on any
Business Day at the net asset value next determined after receipt of the
investor's order in good order by the investor's Service Organization. A
"Business Day" means any day on which the New York Stock Exchange (the "NYSE")
is open. An investor's Service Organization must receive the investor's order
before the close of regular trading on the NYSE (currently 4:00 p.m., Eastern
Time), and must promptly forward such order to the Transfer Agent for the
investor to receive that day's net asset value. The investor's Service
Organization is responsible for promptly forwarding the investor's purchase
order to the Transfer Agent.
There is no sales charge in connection with purchases of service
shares. Investors may be subject to transaction and/or account maintenance fees
imposed by their Service Organizations (no part of which will be received by the
Trust or the Adviser). Any such fees will be payable directly by the investor,
and not by the Fund. The Trust reserves the right, in its sole discretion, to
reject any purchase offer and to suspend the offering of service shares. The
Trust does not issue share certificates.
Payment for initial and subsequent purchases of service shares should
be made to the Service Organization that the investor is using to purchase
service shares. Investors should contact their Service Organizations for further
details on how to purchase service shares of the Funds.
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Reports to Shareholders and Confirmations
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations with shareholder account inquiries and for other
information regarding the Funds.
Exchange Privilege
Subject to any restrictions imposed by Service Organizations, a
shareholder may exchange service shares of a Fund for service shares of another
Fund or service shares of a International Fund. The shareholder's Service
Organization must receive the shareholder's exchange request in proper order
before the close of regular trading on the NYSE (currently 4:00 p.m., Eastern
Time) and must promptly forward the request to the Transfer Agent for the
exchange to be valued at that day's net asset value. The shareholder's Service
Organization is responsible for promptly forwarding an exchange request to the
Transfer Agent.
A shareholder should obtain and read the prospectus relating to the
service shares of the International Funds and consider the investment objective,
policies and fees of the appropriate International Fund before making an
exchange into an International Fund. Exchanges may be subject to minimums
imposed by Service Organization. The Funds reserve the right to refuse any
exchange request.
Service Organizations, acting on behalf of beneficial owners of service
shares, may exchange service shares by telephone, unless they indicate otherwise
in writing to the Trust. Neither the Funds nor their agents will be liable for
any loss incurred by a shareholder or service organization 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 or Service Organization due to a
fraudulent or other unauthorized telephone exchange request.
An exchange is treated as a sale of the service shares exchanged and,
therefore, may produce a gain or loss to the shareholder that is recognizable
for tax purposes.
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REDEMPTION OF SERVICE SHARES
How To Redeem
A shareholder may redeem service shares of a Fund without charge upon
request on any Business Day at the net asset value next determined after receipt
of the shareholder's redemption request by the shareholder's Service
Organization. A shareholder's Service Organization must receive redemption
requests in proper form before the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern Time), and must promptly forward such request to
the Transfer Agent for the investor to receive that day's net asset value. The
shareholder's Service Organization is responsible for promptly forwarding the
investor's redemption request to the Transfer Agent.
Service Organizations, acting on behalf of beneficial owners of service
shares, may redeem service shares by telephone, unless they indicate otherwise
in writing to the Trust. Alternatively, Service Organizations may submit
redemption requests in writing. A written redemption request submitted by a
Service Organization must specify the number of shares to be redeemed, the Fund
from which service shares are being redeemed, the Omnibus Account's account
number with the Fund, payment instructions and the exact registration of the
Omnibus Account.
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 Funds nor their agents 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 redeeming
shareholder's Service Organization, unless payment by check has been requested.
For a redemption request received by the redeeming shareholder's Service
Organization before the close of regular trading on the NYSE (currently 4:00
p.m., Eastern Time) and promptly forwarded to the Transfer Agent, 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 from the redeeming investor's Service
Organization, including any additional documentation that may be required in
order to establish that a redemption request has been properly authorized. In
addition, the payment of redemption proceeds for service shares of a
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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 Service Organization's bank in the transfer
process. If a problem with such performance arises, the Service Organization
should deal directly with such intermediaries or bank.
Service Organizations may request that the Trust make redemption
payments by Federal Reserve Wire or Automated Clearing House (ACH) wire. The
custodian may deduct a wire charge (currently $10.00) from redemption payments
made by Federal Reserve wire. Redemption payments by Federal Reserve wire cannot
be made on Federal holidays restricting wire transfers. There is no charge for
ACH wire transactions; however, such transactions will not be posted to a
Service Organization's bank account until the second Business Day following the
transaction.
A Service Organization may change the bank designated to receive
redemption proceeds by providing written notice to the Transfer Agent which has
been signed by the Service Organization 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
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Related Risks - Foreign Securities." In addition, a shareholder generally will
incur additional expenses, such as brokerage commissions and 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."
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 class of a Fund's shares is
determined by adding the value of all securities, cash and other assets of the
Fund attributable to such class, subtracting liabilities (including accrued
expenses and dividends payable) attributable to such class and dividing the
result by the total number of outstanding shares of such class.
For purposes of calculating net asset value , 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 class of any such Fund
may be significantly affected by such trading on days when shareholders have no
ability to redeem shares of the Fund.
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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 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 service 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, in the case of the Large Cap Growth Fund, 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, including
original issue discount and market discount income (except for tax-exempt
interest , including tax-exempt original issue discount, earned by the Municipal
Funds), certain net realized foreign exchange gains, and the excess of net
short-term capital gain over net long-term capital loss 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 either Equity Fund from dividends
they receive from U.S. domestic corporations may qualify for the
dividends-received
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deduction for corporate shareholders, subject to holding period requirements and
debt-financing 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
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 for Form W-8 is on file, to back-up witholding on certain
other payments from a Fund.
Investors should consider the tax implications of buying service shares
immediately prior to a distribution (other than a distribution of daily income
dividends). Investors who purchase shares shortly before the record date for
such 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 service shares are taxable events on which
a shareholder may recognize a gain or loss.
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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 intangible
property 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 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 twelve 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. As of the date hereof, the Trustees have established
two classes of shares: service shares and institutional shares.
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidations, except that only service shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of service shares of each Fund have exclusive voting rights
with respect to the service plan adopted by their 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
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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.
As of October 21, 1996, the Adviser owned 79.79% of the outstanding
shares of the Smaller Companies Fund and Bankers Trust Company owned 37.08% and
44.94% of the outstanding shares of the Short-Term Fixed Income Fund and the
Municipal Bond Fund, respectively.
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.
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PERFORMANCE INFORMATION
From time to time, performance information, such as total return and
yield for service shares of a Fund, may be quoted in advertisements or in
communications to shareholders. Total return for service shares of a Fund 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 service shares
of 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 service shares. A Fund's yield reflects a Fund's overall rate of
income on portfolio investments as a percentage of the service share price.
Yield is computed by annualizing the result of dividing the net investment
income per service share over a 30-day period by the net asset value per service
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 and other information prepared by
recognized mutual fund statistical services.
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 service 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
service 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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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 Tower
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 - 1-800-550-6426
Telephone Exchanges - 1-800-550-6426
Share Price and Performance
Information - 1-800-550-6426
(or contact your Service Organization)
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
December 31, 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"):
o Morgan Grenfell Fixed Income Fund
o Morgan Grenfell Municipal Bond Fund
o Morgan Grenfell Short-Term Fixed Income Fund
o Morgan Grenfell Short-Term Municipal Bond Fund
o Morgan Grenfell Smaller Companies Fund
o 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' Service Shares Prospectus
dated December 31, 1996, as amended or supplemented from time to time (the
"Prospectus"). A copy of the Prospectus may be obtained without charge from any
Service Organization that has an agreement with the Trust or SEI Financial
Services Company, the Trust's Distributor, by calling 1-800-550-6426 or writing
to 680 East Swedesford Road, Wayne, Pennsylvania 19087-1658.
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TABLE OF CONTENTS
Page
----
Introduction .............................................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks .......................................... 4
Investment Restrictions ................................................... 30
Trustees and Officers ..................................................... 36
Investment Advisory and Other Services .................................... 40
Service Plan .............................................................. 46
Portfolio Transactions .................................................... 48
Net Asset Value ........................................................... 51
Performance Information ................................................... 53
Taxes ..................................................................... 56
General Information About the Trust ....................................... 66
Additional Information .................................................... 70
Financial Statements ...................................................... 70
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.
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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 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 obligation,
the financial condition of the issuer, the size of the offering,
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the maturity of the obligation and the ratings of the issue. The ratings of
Standard and Poors Ratings Group ("Standard & Poor's"), Moody's Investors
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 a 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 conclusion noted above is contained only in a
general counsel memorandum,
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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
Subject to their investment objectives, the Equity Funds 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, 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. An Equity
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. Warrants acquired by a Fund in
units or attached to other securities shall
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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 may be issued in a variety of forms, including commercial
paper, fixed,
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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 "non-appropriation" clauses that
relieve the governmental issuer of any
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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
financial institution. Such participations provide a Fund with the right to
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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. These limitations
include a prohibition against acquiring more than 3% of the
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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 privately-formed
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.
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Foreign Securities
Subject to their respective investment objectives and policies, the
Equity Funds and the Fixed Income Funds may invest in securities of foreign
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 an Equity Fund's investments are denominated in foreign
currencies, the net asset values of such Fund 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 the 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 the 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 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 issued or guaranteed by the Asian Development Bank, the
Inter-American Development Bank, the International Bank for Reconstruction and
Development (the "World Bank"), the
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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 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
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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 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 the 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 securities 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 liquid
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the 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 Fund's ability to
utilize forward currency contracts may be restricted. In addition, a particular
forward currency contract and assets used to cover such contract may be
illiquid.
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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 either 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
the 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 contracts, currency
futures contracts and related options and currency options (see below) may be
limited by the requirements of Subchapter M of 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 Equity 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 multiple. A put option on
a currency gives its holder the right to sell an
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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 Equity 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.
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 liquid 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 liquid
securities 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 liquid securities in a segregated account with the Fund's
custodian. A call option on currency written by the Fund is covered if the Fund
owns an equal amount of the underlying currency.
When an Equity 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 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 a Fund expires
unexercised, the Fund realizes a loss equal to the premium paid.
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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 a 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 a 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 a 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
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.
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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 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
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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 the
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
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,
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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 the 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 the Fund against an increase in
the price of securities (or the currency in which they are denominated) that the
Fund intends to purchase. As evidence of this hedging intent, each Equity Fund
expects that, on 75% or 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.
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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 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. Each
Equity 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 the Fund
to purchase securities, require the Fund to segregate cash or liquid 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.
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
Equity 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
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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 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
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<PAGE>
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.
"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
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<PAGE>
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 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 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
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<PAGE>
standpoint to sell securities at that time. To limit the potential leveraging
effects of a Fund's borrowings, the Equity Funds, 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 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
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<PAGE>
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 emcumbrance 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), (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.
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<PAGE>
(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.
(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.
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<PAGE>
(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 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
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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 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
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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
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
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<PAGE>
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 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
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<PAGE>
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.
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.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name and Address and Age With Trust During Past Five Years
- ------------------------ ---------- ----------------------
<S> <C> <C>
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,
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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 50) 1989).
Hugh G. Lynch Trustee Director, International
767 Fifth Avenue Investments, General Motors
New York, NY 10153 Investment Management
(age 59) 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).
John Alshefski Treasurer, Director of Fund Operations
680 East Swedesford Road Principal SEI/Fund Resources (since
Wayne, PA 19087-1658 Accounting January 1994); Manager,
(age 30) Officer, Chief International Fund Operations
Financial Officer (1992-1994);
Senior Associate, Price
Waterhouse (1988-1992).
Neil P. Jenkins(3) Vice President Director, MGCM (since
885 Third Avenue 1991), Morgan Grenfell
New York, NY 10022 International Funds
(age 36) Management, (since 1995), and
Morgan Grenfell & Co., Ltd.
(since 1985).
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<PAGE>
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 Executive Vice President
1435 Walnut Street MGCM (since 1996); Senior
Philadelphia, PA 19102 Vice President GT Global
(age 45) Financial (since 1990).
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)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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,
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accounting records, internal accounting controls and the functions performed by
the Trust's custodian, administrator and transfer agent.
As of October 21, 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, 14.81% of the outstanding shares of
Morgan Grenfell Short-Term Municipal Bond Fund.
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 $2,000 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, 1996:
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 $ --
Graham E. Jones $ 0 $ --
William N. Searcy $ 0 $ --
Hugh G. Lynch $ 0 $ --
Edward T. Tokar $ 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.
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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 the Funds pursuant to the terms of two Management Contracts, each
dated December 28, 1994 (the "Management Contracts"). One Management Contract is
between MGCM and the Trust, on behalf of the Fixed Income Fund and Municipal
Bond Fund. The other Management Contract is between MGCM and the Trust, on
behalf of the Equity Funds and Short-Term Fixed Income Fund and Short-Term
Municipal Bond Fund. 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 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%
Morgan Grenfell Smaller Companies Fund.............................. 1.00%
Morgan Grenfell Large Cap Growth Fund............................... 0.75%
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."
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan
Grenfell Fixed Income Fund paid the Adviser net advisory fees of $_______,
$1,150,707 and $532,189 respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Adviser net advisory fees of $______, $595,795 and
$444,910 respectively. For the fiscal year ended October 31, 1996, Morgan
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Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond
Fund and Morgan Grenfell Smaller Companies Fund paid the Adviser net advisory
fees of $____, $____, and $_____ respectively. For the fiscal period ended
October 31, 1995, these Funds 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 was not in operation during the indicated periods and therefore 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 21, 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 Contract between MGCM and the Trust, on behalf of the Fixed Income
Fund and the Municipal Bond Fund, was approved on November 21, 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,
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 either 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
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.
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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 an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. As of December 31, 1995,
MGCM managed approximately $8.0 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. MGCM also acts as investment subadviser to Fremont U.S. Micro-Cap Fund,
a registered open-end investment company.
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, 1996 and 1995, the portfolio turnover rates for Morgan
Grenfell Fixed Income Fund were ____% and 182%, respectively. For the same
periods, the portfolio turnover rates for Morgan Grenfell Municipal Bond Fund
were ____% and 63% respectively. For the fiscal year ended October 31, 1996, 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 $____, $____ and $____, respectively. 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.
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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, 1996, 1995 and 1994, Morgan
Grenfell Fixed Income Fund paid the Administrator administration fees of $____,
$455,614 and $259,094, respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Administrator administration fees of $____,
$227,872 and $231,957, respectively. For the fiscal year ended October 31, 1996,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund paid the
Administrator fees of $____, $____, and $____, 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 the Administrator administration fees of $12,500, $12,500
and $4,167, respectively.
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
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The expenses borne by service shares of the Funds include the service
shares' allocable share of: (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 organiza tions; (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 the
Trust's 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 record 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
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 (including service 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
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distribution fees. The Trust is not 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 on December 28, 1994. The Distribution Agreement was
most recently approved on November 21, 1996 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 are authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Funds.
SERVICE PLAN
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Each Fund has adopted a service plan (the "Plan") with respect to its
service shares which authorizes it to compensate Service Organizations that
provide omnibus accounting services for groups of individuals who beneficially
own service shares ("Omnibus Accounts") for providing certain personal, account
administration and/or shareholder liason service to participants in the Omnibus
Accounts. Pursuant to the Plans, the Funds may enter into agreements with
Service Organizations that purchase service shares of the Funds ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
Organizations may perform some or all of the following services: (a)
establishing and maintaining Omnibus Accounts with the Funds; (b) establishing
and maintaining subaccounts and subaccount balances for Omnibus Accounts and
their participants (the Participants"); (c) processing orders by Omnibus
Accounts and Participants to purchase, redeem and exchange service shares
promptly and in accordance with the effective prospectus relating to such
shares; (d) transmitting to each Fund (or its agent) on each Business Day a net
subscription or net redemption order reflecting subscriptions, redemption and
exchange orders received by it with respect to the Omnibus Accounts; (e)
receiving and transmitting funds representing the purchase price or redemption
proceeds relating to such orders; (f) mailing Fund prospectuses, statements of
additional information, periodic reports, transaction confirmations and
subaccount information to Omnibus Accounts and Participants; (g) answering
Omnibus Account and Participant inquiries about the Funds, subaccount balances,
distribtuion options and such other administrative services for the Omnibus
Account and the Participants as provided for in the Service Agreements; and (h)
providing such statistical and other information as may be reasonably requested
by the Funds or necessary for the Funds to comply with applicable federal or
state laws.
As compensation for such services, each Fund will pay each Service
Organization with which it has a Service Agreement a service fee in an amount up
to .25% (on an annualized basis) of the average daily net assets of the Fund's
service shares attributable to or held in the name of such Service Organization.
Service Organizations may from time to time be required to meet certain other
criteria in order to receive service fees. As of October 31, 1996, the Trust's
fiscal year end, service shares of the Funds had not been offered.
In accordance with the terms of the Service Plans, the officers of the
Trust provide to the Trust's Board of Trustees for their review a quarterly
written report of the amounts expended under the Service Plans and the purpose
for which such expenditures were made. In the Trustees' quarterly review of such
reports, they will consider the continued appropriateness and the level of
compensation that the Service Plans provide.
Conflict of interest restrictions (including the Employee Retirement
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Income Security Act of 1974 ("ERISA") may apply to a Service Organization's
receipt of compensation paid by a Fund in connection with the investment of
fiduciary assets in service shares of the Fund. Service Organizations that are
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions are urged to consult their own legal advisers before
investing fiduciary assets in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under a Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of Title I of ERISA.
Those standards are designed to help ensure that the fidcuiary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
and provides further that such fiduciary must act prudently and solely in the
interests of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan
from causing that plan to engage in a transaction if he knows or should know
that the transaction would constitute a direct or indirect transfer to, or use
by or for the benefit of, a party in interest, of any assets of that plan.
Section 3(14) includes within the definition of "party in interest" with respect
to a plan any fiduciary with respect to that plan. Thus, Section 406(a)(1)(D)
would not only prohibit a fiduciary from causing the plan to engage in a
transaction which would benefit a third person who is a party in interest, but
it would also prohibit the fiduciary from similarly benefitting himself. In
addition, Section 406(b)(1) specifically prohibits a fiduciary with respect to a
plan from dealing with the assets of that plan in his own interest or for his
own account. Section 406(b)(3) supplements these provisions by prohibiting a
plan fiduciary from receiving any consideration for his own personal account
from any party dealing with the plan in connection with a transaction involving
the assets of the plan.
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In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under a Service Plan if the fees are used for
the exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
whichthe plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which plan is otherwise responsible for paying). Thus, the
fiduciary duty issues involved in a plan fiduciary's receipt of the service fee
must be assessed on a case-by-case basis by the relevant plan fiduciary.
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 Advisory Agreements, 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
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for the specific transaction and on a continuing basis. In addition, the
Advisory Agreements 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
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, 1996, 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.
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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 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...."
Transactions would not be placed with Affiliated Brokers 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, 1994, 1995 and 1996, neither the Fixed Income Fund nor the Municipal
Bond Fund paid any brokerage commissions to any Affiliated Broker. During the
fiscal periods ended
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October 31, 1995 and October 31, 1996, 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 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, 1996, 1995 and 1994, 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 periods ended October 31, 1996 and
October 31, 1995, Morgan Grenfell Smaller Companies Fund paid aggregate
brokerage commissions of $____ and $3,778, respectively.
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 class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its shares 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 net asset value, 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
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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 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 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
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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 tax-equivalent
yield. Yield and tax-equivalent yield are calculated separately for service
shares and institutional shares of a Fund. Each type of share is subject to
differing yields for the same period. The yield of service shares of a Fund
refers to the annualized income generated by an investment in the service shares
of 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:
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 service shares
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, 1996, the yields of the
institutional shares of Fixed Income Fund, the Municipal Bond Fund, the
Short-Term Fixed Income Fund and the Short-Term Municipal Bond Fund were
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____%, ____%, ____% and ____%, respectively. If the expense limitations
described in the Prospectus for these Funds had not been in effect during this
period, the yields of institutional shares of these Funds would have been ____%,
____%, ____% and ____%, respectively. For the same period, the tax-equivalent
yields of institutional shares of the Municipal Bond Fund and the Short-Term
Municipal Bond Fund were ____% and ____%, 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 institutional shares of these Funds would
have been ____% and ____%, respectively, assuming the same Federal Income Tax
bracket. No service shares of the Funds were outstanding during the fiscal year
ended October 31, 1996.
Total Return
Average annual total return is calculated separately for service shares
and institutional shares of a Fund. Each type of share is subject to different
fees and expenses and, consequently, may have differing average annual total
returns for the same period. Each Fund that advertises "average annual total
return" for a class of its shares 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 "aggregate total return" for a class of its
shares 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
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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 of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period. For the fiscal year ended October 31, 1996 and for the period
from December 13, 1991 (commencement of the Municipal Bond Fund's operations)
through October 31, 1996, the total return for institutional shares of such Fund
was ____% and ____%, respectively. For their respective periods from
commencement of operations to October 31, 1996, the average annual total returns
of institutional shares of Morgan Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller Companies
Fund were ____%, ____% and ____%, respectively. For the fiscal year ended
October 31, 1996 and for the period from September 18, 1992 (commencement of the
Fixed Income Fund's operations) through October 31, 1996, the total return for
institutional shares of such Fund was ____% and ____%, 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. As of October 31, 1996, no service shares of the Funds had been
issued.
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
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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 Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be 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
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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 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
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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 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
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certain foreign currency options, forward contracts and futures contracts)
entered into by an Equity Fund will generally be treated as capital gains and
losses. Certain of the futures contracts, forward contracts and options held by
an Equity Fund may 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 Fund's 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-short
capital gain or loss. As a result of certain hedging transactions entered into
by an Equity 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 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 the 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 an
Equity Fund 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 an Equity
Fund. 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
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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 in some cases. 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
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.
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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 return 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.
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
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result in federal income tax liability to the applicable Fund and, accordingly,
would generally not be distributed to shareholders. At October 31, 1996,
Municipal Bond Fund had capital loss carryforwards of approximately $_______ and
Smaller Companies Fund had capital loss carryforwards of approximately $_____,
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-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
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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 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.
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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
disallowed to the extent of any exempt-interest dividends received with respect
to such shares and, to the extent in excess of any disallowed amount, will be
treated as a long-term capital loss to the extent of any capital gain dividend
received with respect to such shares. Additionally, any loss realized on a sale,
redemption or other disposition of shares of a 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
Internal Revenue Service 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
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income unless the tax rate is reduced 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
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
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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.
Each service share and institutional share of a Fund is entitled to one
vote per share; however, separate votes will be taken by each Fund or class (or
by more than one Fund or class voting on a single class if similarly affected)
on matters affecting only the Fund or class (or those affected Funds or classes)
or as otherwise required by law. 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.
As of October 21, 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 9.25%
680 E. Swedesford Road
Wayne, PA 19087
BATRUS & Co. 6.37%
c/o Bankers Trust Company
PO Box 9005
Church Street Station
New York, NY 10006
San Mateo County Employees 8.62%
Retirement Association
2317 Broadway St STE 115
Redwood City, CA 94063-1613
Municipal Bond Fund:
- --------------------
SEI Trust Company 11.23%
680 E. Swedesford Road
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Wayne, PA 19087
Batrus & Co., (New York Corporation) 44.94%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
INFID & Co. 11.36%
c/o Bankers Trust Co.
PO Box 9005 Church Street Station
New York, NY 10008
Short-Term Municipal Bond Fund:
- -------------------------------
SEI Trust Company 10.27%
680 E. Swedesford Road
Wayne, PA 19087
Emily Kingsbury 6.72%
610 New Albany Road
Moorestown, NJ 08057
Wilmington Trust Company 9.69%
FBO David Baldt
1100 N. Market Street
Wilmington, DE 19890
Timothy Mather 10.86%
4901 S. Franklin St
Englewood, CO 80110
National Financial Services Corp 8.65%
200 Liberty St
1 World Financial Center
New York, NY 10281
Jay R. Brinsfield 8.12%
18625 SE Village Circle
Tequesta, FL 33469
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<PAGE>
Harris Bank FBO Steve Miller/ Maureen Eisenberg 6.71%
111 W Monroe St
Chicago, IL 60603-4004
Short-Term Fixed Income Fund:
- -----------------------------
BATRUS & Co., (New York Corporation) 37.08%
c/o Bankers Trust
PO Box 9005 Church Street Station
New York, NY 10006
SEI Trust Company 23.55%
680 E. Swedesford Road
Wayne, PA 19087
Infid & Co. 9.05%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
MAC & Co. 10.09%
PO Box 3198
Pittsburgh, PA 15230-3198
Harris Trust FBO National Sporting Goods Assn 7.47%
111 W. Monroe Street
Chicago, IL 60603
Smaller Companies Fund:
- -----------------------
Morgan Grenfell Capital Management, Inc. 79.79%
(Delaware Corporation)
885 Third Avenue Suite 3200
New York, NY 10022
Deutsche Morgan Grenfell 17.45%
CJ Lawrence
1290 Avenue of the Americas
New York, NY 10104
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under Delaware
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<PAGE>
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 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
-69-
<PAGE>
shareholder.
ADDITIONAL INFORMATION
Independent Accountants
________________________, 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.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October
31, 1996 are included in this Statement of Additional Information in reliance
upon the report of ____________________, the Trust's independent accountants, as
experts in accounting and auditing.
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<PAGE>
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
The financial highlights for institutional shares of the Registrant are
included in Part A of the Registration Statement for periods ending on
or prior to October 31, 1995.
(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.
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<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). 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.
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<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 Debt Fund, 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, Morgan Grenfell Short-Term Municipal Bond
Fund and Morgan Grenfell Microcap Fund.
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.
9(c). 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, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Microcap Fund.
10. Not Applicable.
11. Not Applicable.
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<PAGE>
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. Not Applicable.
***18. Amended Rule 18f-3 Plan (previously filed with the SEC on
August 27, 1996 pursuant to Post-Effective Amendment No. 11
to Registrant's Registration Statement).
**19(a). 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.
19(b). Power of Attorney of John G. Alshefski.
----------
* Previously filed with the SEC on June 11, 1996 and incorporated by
reference herein.
** 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.
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
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<PAGE>
European Equity Fund, Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell Japanese Small Cap Equity Fund and Morgan Grenfell Microcap 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 August 16, 1996, the number of record holders of shares of each
series of the Registrant was as follows:
Number of
Fund Record Holders
- ---- --------------
Morgan Grenfell International Equity Fund
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 22
Morgan Grenfell Japanese Small Cap Equity Fund 1
Morgan Grenfell European Small Cap Equity Fund 9
Morgan Grenfell Emerging Markets Equity Fund 33
Morgan Grenfell Global Fixed Income Fund 90
Morgan Grenfell International Fixed Income Fund 20
Morgan Grenfell Emerging Markets Debt Fund 39
Morgan Grenfell Fixed Income Fund 223
Morgan Grenfell Municipal Bond Fund 148
Morgan Grenfell Short-Term Fixed Income Fund 15
Morgan Grenfell Short-Term Municipal Bond Fund 36
Morgan Grenfell Smaller Companies Fund 15
Morgan Grenfell Microcap Fund 0
Morgan Grenfell Large Cap Growth Fund 0
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.
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<PAGE>
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(trademark), The PBHG Funds, Inc.,
Marquis Funds(trademark), The Achievement Funds Trust, Bishop
Street Funds, CrestFunds, Inc., STI Classic Variable Trust, ARK
Funds, Monitor Funds, FMB Funds, Inc., SEI Asset Allocation
Trust, Turner Funds, SEI Institutional Investments Trust and
First American Strategy Fund Inc. 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, December 27, 1994, January 27, 1995, March 1, 1995,
August 18, 1995, November 1, 1995, January 11, 1996, March 1,
1996, April 1, 1996, April 30, 1996, June 14, 1996 and October
1, 1996, respectively.
(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
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<PAGE>
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
Steven Kramer 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
Managing Director None
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 Senior Vice President None
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 S. Ludwig Vice President and Team Leader None
Vicki Malloy Vice President and Team Leader None
Robert Aller Vice President None
W. Kelso Morrill Vice President None
C-7
<PAGE>
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
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
Marc H. Cahn Vice President and None
Assistant Secretary
- ---------------------------
* 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.
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
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<PAGE>
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 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-9
<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 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
30th day of October 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. 12 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/ John G. Alshefski ) Oct. 30, 1996
- --------------------- )
John G. Alshefski 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: October 30, 1996
*By:/s/ Mark G. Arthus
-----------------
Mark G. Arthus, Attorney-in-Fact, pursuant to powers of attorney.
<PAGE>
Exhibit Index
-------------
Exhibit
Number Document Title
- ------- --------------
5(d). Management Contract between Morgan Grenfell Capital Management, Inc.
and Registrant, on behalf of Morgan Grenfell Microcap Fund.
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 Debt Fund, 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, Morgan Grenfell Short-Term Municipal Bond
Fund and Morgan Grenfell Microcap Fund.
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.
9(c). 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, Morgan Grenfell
Short-Term Municipal Bond Fund and Morgan Grenfell Microcap Fund.
19(b). Power of Attorney of John G. Alshefski.
INVESTMENT MANAGEMENT CONTRACT
AGREEMENT made as of the 23rd day of August, 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 personnel
-1-
<PAGE>
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 Sectiony28(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 Sectionsy1 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.
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<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 Sectiony5 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 Sectiony3 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 Ruley31a-1 and Ruley31a-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.
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<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 Paragraphy9, 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)yby 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)yby the Trustees of
the Trust or by vote of a majority of the outstanding voting
securities of each Portfolio; provided, however, that if the
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<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 Sectiony12, 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 885yThird
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
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<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: /s/ Mark G. Arthus
---------------------------
Mark G. Arthus
Secretary
Attest: /s/ Robert Frederick, Jr.
---------------------------
MORGAN GRENFELL CAPITAL MANAGEMENT INCORPORATED
By: /s/ James E. Minnick
---------------------------
James E. Minnick
President
Attest: /s/ Robert Frederick, Jr.
---------------------------
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<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 Articley3, 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
ADMINISTRATION AGREEMENT
MORGAN GRENFELL INVESTMENT TRUST
THIS AGREEMENT is made as of this 29th day of December 1993, by and between
Morgan Grenfell Investment Trust (the "Trust"), a Delaware business trust, and
SEI Financial Management Corporation (the "Administrator"), a Delaware
corporation.
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"),
consisting of several series of shares; and
WHEREAS, the Trust desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such portfolios of the Trust as the Trust and the Administrator may agree on
(the "Portfolios") and as listed on the schedules attached hereto (the
"Schedules") and made a part of this Agreement, on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Administrator hereby agree as follows:
ARTICLE 1. Retention of the Administrator. The Trust hereby retains the
Administrator to act as the administrator of the Portfolios and to furnish the
Portfolios with the management and administrative services set forth below. The
Administrator hereby accepts such employment and agrees to perform the duties
set forth below.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trust in any way and shall
not be deemed an agent of the Trust.
ARTICLE 2. Administrative Services. The Administrator shall perform or
supervise the performance by others of administrative services in connection
with the operations of the Portfolios, and, on behalf of the Trust, shall
investigate, assist in the selection of and conduct relations with custodians,
depositories, transfer agents, accountants, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and persons in any other capacity deemed
to be necessary or desirable for the Portfolios' operations. The Administrator
shall provide the Trustees of the Trust with such reports regarding investment
performance as they
<PAGE>
may reasonably request but shall have no responsibility for supervising the
performance by any investment adviser or sub-adviser of its responsibilities.
The Administrator shall provide the Trust with regulatory reporting, fund
accounting and related portfolio accounting services, all necessary office
space, equipment, personnel compensation and facilities (including facilities
for Shareholders' and Trustees' meetings) for handling the affairs of the
Portfolios and such other services as the Administrator shall, from time to
time, determine to be necessary to perform its obligations under this Agreement.
The Administrator shall make reports to the Trust's Trustees concerning the
performance of its obligations hereunder; furnish advice and recommendations
with respect to other aspects of the business and affairs of the Portfolios as
the Trust and the Administrator shall determine desirable; and shall provide the
Portfolios' Shareholders with the reports described in the Portfolios' then
current prospectuses.
The Administrator shall calculate the daily net asset value of the
Portfolios in accordance with the procedures prescribed in the Trust's
Registration Statement and such other procedures as may be established by the
Trustees of the Trust.
Also, the Administrator will perform other services for the Trust as agreed
from time to time, including, but not limited to, preparation and mailing of
appropriate Federal income tax forms and returns to the Internal Revenue Service
and other appropriate taxing authorities; mailing the annual reports of the
Portfolios; preparing an annual list of Shareholders; furnishing the Trust with
such reports regarding the sale and redemption of Shares as may be required in
order to comply with Federal and state securities law; and mailing notices of
Shareholders' meetings, proxies and proxy statements, for all of which the Trust
will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. Allocation of Charges and Expenses.
(A) The Administrator. The Administrator shall furnish at its own expense
the accounting, administrative, executive, supervisory and clerical personnel
necessary to perform its obligations under this Agreement. The Administrator
shall also provide the items which it is obligated to provide under this
Agreement, and shall pay all compensation, if any, of officers of the Trust as
well as all Trustees of the Trust who are affiliated persons of the
Administrator or any affiliated corporation; provided, however, that unless
otherwise specifically provided, the Administrator shall not be obligated to pay
the compensation
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<PAGE>
of any employee of the Trust retained by the Trustees of the Trust to perform
services on behalf of the Trust.
(B) The Trust. The Trust assumes and shall pay or cause to be paid all
other expenses of the Trust not otherwise allocated herein, including, without
limitation, organizational costs, taxes, expenses for legal and auditing
services provided by the Trust's own legal counsel and independent accountants,
the expenses of preparing (including typesetting), printing and mailing reports,
prospectuses, statements of additional information, proxy solicitation material
and notices to existing Shareholders, all expenses incurred in connection with
issuing and redeeming Shares, the costs of custodial services, the cost of
initial and ongoing registration of the Shares under Federal and state
securities laws, fees and out-of-pocket expenses of Trustees who are not
affiliated persons of the Administrator or any affiliated corporation,
insurance, interest, brokerage costs, litigation and other extraordinary or
nonrecurring expenses, and all fees and charges of investment advisers to the
Trust.
ARTICLE 4. Compensation of the Administrator.
(A) Administration Fee. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Trust shall pay to the Administrator compensation at an annual
rate specified in the Schedules. Such compensation shall be calculated and
accrued daily, and paid to the Administrator monthly. The Trust shall also
reimburse the Administrator for its reasonable out-of-pocket expenses, including
the travel and lodging expenses incurred by officers and employees of the
Administrator in connection with attendance at Board meetings.
If this Agreement becomes effective subsequent to the first day of a month
or terminates before the last day of a month, the Administrator's compensation
for that part of the month in which this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees as set forth
above. Payment of the Administrator's compensation for the preceding month shall
be made promptly.
(B) Compensation from Transactions. The Trust hereby authorizes any entity
or person associated with the Administrator which is a member of a national
securities exchange to effect any transaction on the exchange for the account of
the Trust which is permitted by Section 11 (a) of the Securities Exchange Act of
1934 and the Trust hereby consents to the retention of compensation for such
transactions in accordance therewith.
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<PAGE>
(C) Survival of Compensation Rates. All rights to compensation under this
Agreement for services performed before the termination of this Agreement shall
survive the termination of this Agreement.
ARTICLE 5. Limitation of Liability of the Administrator.
The duties of the Administrator shall be confined to those expressly set
forth herein, and no implied duties are assumed by or may be asserted against
the Administrator hereunder. Except as otherwise provided herein, the
Administrator 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
("Disqualifying Conduct"), or by reason of reckless disregard of its obligations
and duties hereunder, except as may otherwise be provided under provisions of
applicable law which cannot be waived or modified hereby. (As used in this
Article 5, the term "Administrator" shall include directors, officers, employees
and other corporate agents of SEI Financial Management Corporation as well as
that corporation itself.)
So long as the Administrator acts in good faith and with due diligence and
without gross negligence, the Trust shall indemnify the Administrator and hold
it harmless from and against any and all actions, suits and claims (whether
groundless or otherwise) and any and all losses, damages, costs, charges,
reasonable counsel fees and disbursements, payments, expenses and liabilities
(including reasonable investigation expenses) arising directly or indirectly out
of the performance of administration services to the Trust or any other service
rendered to the Trust hereunder; provided however, that in no event will the
foregoing indemnity be deemed to protect the Administrator unless the
Administrator shall have notified the Trust in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the Administrator, but failure to
notify the Trust of any such claim shall not relieve the Trust from any
liability that it may have to the Administrator otherwise than on account of the
indemnity provided for in this Article 5. The Trust shall be entitled to
participate, at its own expense, in the defense of any suit brought to enforce
any such liability. The Administrator shall use all reasonable care to identify
and notify the Trust promptly of any situation that presents, or appears likely
to present, the probability of a claim for indemnification by the Administrator
against the Trust hereunder, but failure to do so in good faith shall not affect
the rights provided for herein.
The Administrator shall indemnify the Trust against and hold it harmless
from any and all actions, suits and claims and any and
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<PAGE>
all losses, damages, costs, charges, reasonable counsel fees and disbursements,
payments, expenses and liabilities (including reasonable investigation expenses)
arising directly or indirectly out of Disqualifying Conduct on the part of the
Administrator. The notice, defense and reimbursement provisions described in the
preceding paragraph shall also apply to the Administrator's indemnity. The
indemnity and defense provisions set forth herein shall survive the termination
of this Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited.
The Administrator may apply to the Trust at any time for instructions and
may consult counsel for the Trust or its own counsel and with accountants and
other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instruction or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator shall not be held to have
notice of any change of authority of any officers, employee or agent of the
Trust until receipt of written notice thereof from the Trust.
ARTICLE 6. Activities of the Administrator. The services of the
Administrator rendered to the Trust are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that Trustees, officers employees and
Shareholders of the Trust are or may be or become interested in the
Administrator, as directors, officers, employees and shareholders or otherwise
and that directors, officers, employees and shareholders of the Administrator
and its counsel are or may be or become similarly interested in the Trust, and
that the Administrator may be or become interested in the Trust as a Shareholder
or otherwise.
ARTICLE 7. Duration of this Agreement. The Term of this Agreement shall be
as specified in the Schedules.
This Agreement shall not be assignable by either party without the written
consent of the other party.
ARTICLE 8. Amendments. This Agreement may be amended by the parties hereto
only if such amendment is specifically approved (i)
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<PAGE>
by the vote of a majority of the Trustees of the Trust, and (ii) by the vote of
a majority of the Trustees of the Trust who are not parties to this Agreement or
interested persons of any such party, cast in person at a Board of Trustees
meeting called for the purpose of voting on such approval.
For special cases, the parties hereto may amend such procedures set forth
herein as may be appropriate under the circumstances, and the Administrator may
conclusively assume that any special procedure which has been approved by the
Trust does not conflict with or violate any requirements of its Agreement and
Declaration of Trust, By-Laws or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
ARTICLE 9. Certain Records. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Trust shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Trust and will be made available
to or surrendered promptly to the Trust on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Trust and follow the Trust's
instructions as to permitting or refusing such inspection; provided that the
Administrator may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so, unless
(in cases involving potential exposure only to civil liability) the Trust has
agreed to indemnify the Administrator against such liability.
ARTICLE 10. Definitions of Certain Terms. The terms "interested person" and
"affiliated person,' when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 11. Notice. 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.
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<PAGE>
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 Administrator, at:
SEI Financial Management Corporation
680 East Swedesford Road
Wayne, PA 19087
Attention: General Counsel
ARTICLE 12. 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.
ARTICLE 13. 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 14. 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
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
MORGAN GRENFELL INVESTMENT TRUST
By: /s/ James E. Minnick
--------------------
Attest: /s/ Mark G. Arthus
------------------
SEI FINANCIAL MANAGEMENT CORPORATION
By: /s/ Kevin Robins
----------------
Attest: /s/ Mary Jane Maloney
---------------------
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<PAGE>
SCHEDULE DATED DECEMBER 29,1993
TO THE ADMINISTRATION AGREEMENT
DATED DECEMBER 29,1993
BETWEEN
MORGAN GRENFELL INVESTMENT TRUST
THE ADVISORS' INNER CIRCLE FUND
ON BEHALF OF MORGAN GRENFELL FIXED INCOME FUND
AND MORGAN GRENFELL MUNICIPAL BOND FUND
AND SEI FINANCIAL MANAGEMENT CORPORATION
Fees:
Pursuant to Article 4, Section A and subject to the minimum fees
described below, for its services to the currently existing series of
Morgan Grenfell Investment Trust and Morgan Grenfell Fixed Income Fund
and Morgan Grenfell Municipal Bond Fund, each a series of the Advisors'
Inner Circle Fund (each of such thirteen series, a "Fund"), under the
above noted Agreements, the Administrator is entitled to an aggregate
fee from such Funds, which fee shall be calculated and allocated (as
described below) daily and paid monthly, at an annual rate of (i) 0.15%
of the aggregate net assets of the Funds up to $300 million, (ii) 0.12%
of the aggregate net assets of the Funds above $300 million and up to
$500 million, (iii) 0.10% of the aggregate net assets of the Funds
above $500 million and up to $1 billion, and (iv) 0.08% of the
aggregate net assets of the Funds above $ 1 billion. The aggregate fee
shall be allocated among the Funds so that the portion thereof payable
by each Fund bears the same proportion to such Fund's net assets as the
portion of such aggregate fee payable by each other Fund bears to its
respective net assets; provided, that in no event shall the fee paid by
a Fund fall below the following applicable minimum annual
administrative fee (calculated and accrued on a daily basis): $75,000
for each of Morgan Grenfell International Equity Fund, Morgan Grenfell
European Equity Fund, Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell Global Equity Fund, Morgan Grenfell Global Fixed Income Fund
and Morgan Grenfell International Fixed Income Fund; $100,000 for each
of 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 and Morgan
Grenfell Emerging Markets Fixed Income Fund; and $50,000 for each of
Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond
Fund. The minimum administrative fees for all Funds other than Morgan
Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond Fund
shall be phased in over one year so that the minimum fee shall be (i)
25% of the above
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<PAGE>
minimums for the first four months of a Fund's operations, (ii) 50% of
the above minimums for the next four months, (iii) 75% of the above
minimums for the next four months and (iv) 100% of the above minimums
thereafter.
Term:
Pursuant to Article 9 of the above noted Agreement between Morgan
Grenfell Investment Trust and SEI Financial Management Corporation, the
term of such Agreement shall commence on December 29, 1993 and shall
remain in effect until October 31, 1996 (the "Initial Term") and on an
annual basis thereafter; unless terminated by either party on not less
than ninety days' prior written notice prior to the last day of the
Initial Term or any annual renewal term. In the event of a material
breach of such agreement by either party, the non-breaching party may
terminate the agreement immediately upon the delivery of written notice
by the non-breaching party of such breach and termination to the
breaching party.
Accepted and Agreed to:
Morgan Grenfell Investment Trust
By: /s/ James E. Minnick
----------------------------
SEI Financial Management Corporation
By: /s/ Kevin Robins
----------------------------
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<PAGE>
SCHEDULE DATED DECEMBER 28, 1994
TO THE ADMINISTRATION AGREEMENT
DATED DECEMBER 29, 1993
BETWEEN
MORGAN GRENFELL INVESTMENT TRUST
AND
SEI FINANCIAL MANAGEMENT CORPORATION
Fees: Pursuant to Article 4, Section A and subject to the minimum fees
described below, the Trust shall pay the Administrator a fee as
compensation for services rendered to the Morgan Grenfell International
Equity Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell
Pacific Basin Equity Fund, Morgan Grenfell Global Equity Fund, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed
Income 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 Emerging Markets Fixed Income Fund, Morgan
Grenfell Fixed Income Fund, Morgan Grenfell Municipal Bond Fund, Morgan
Grenfell Large Cap Growth Fund, Morgan Grenfell Smaller Companies Fund,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell
Short-Term Municipal Bond Fund (the "Funds"). Such fee shall be
calculated and allocated (as described below) daily and paid monthly,
at an annual rate of (i) 0.15% of the aggregate net assets of the Funds
up to $300 million, (i) 0.12% of the aggregate net assets of the Funds
above $300 million and up to $500 million, (iii) 0.10% of the aggregate
net assets of the Funds above $500 million and up to $1 billion, and
(iv) .08% of the aggregate net assets of the Funds above $1 billion.
The aggregate fee shall be allocated among the Funds so that the
portion thereof payable by each Fund bears the same proportion to such
Fund's net assets as the portion of such aggregate fee payable by each
other Fund bears to its respective net assets; provided that in no
event shall the fee paid by a Fund fall below the following applicable
minimum annual administrative fee (calculated and accrued on a daily
basis): $50,000 for each of the Morgan Grenfell Large Cap Growth Fund,
Morgan Grenfell Smaller Companies Fund, Morgan Grenfell Short-Term
Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund,
Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond
Fund; $75,000 for each of Morgan Grenfell International Equity Fund,
Morgan Grenfell European Equity Fund, Morgan Grenfell Pacific Basin
Equity Fund,
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<PAGE>
Morgan Grenfell Global Equity Fund, Morgan Grenfell Global Fixed Income
Fund and Morgan Grenfell International Fixed Income Fund; and $100,000
for each of the 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 and Morgan Grenfell Emerging Markets Fixed Income Fund. The
minimum administrative fee for all Funds shall be phased in over one
year so that the minimum fee shall be (i) 25% of the above minimums for
the first four months of a Fund's operations, (ii) 50% of the above
minimums for the next four months, (iii) 75% of the above minimums for
the next four months, and (iv) 100% of the above minimums thereafter.
Term: Pursuant to Article 9, the term of this Agreement shall commence on
December 29, 1993 and shall remain in effect until October 31,1996 (the
"Initial Term") and on an annual basis thereafter; unless terminated by
either party on not less than ninety days' prior written notice prior
to the last day of the Initial Term or any annual renewal term. In the
event of a material breach of such agreement by either party, the non-
breaching party may terminate the agreement immediately upon the
delivery of written notice by the non-breaching party of such breach
and termination to the breaching party.
Accepted and Agreed to:
Morgan Grenfell Investment Trust
By: /s/ Mark G. Arthus
----------------------------
SEI Financial Management Corporation
By: /s/ Kevin Robins
----------------------------
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TRANSFER AGENCY AGREEMENT
Agreement made as of the 30th day of December, 1993 between Morgan Grenfell
Investment Trust, (the "Trust") a Delaware business trust, having its principal
office and place of business at 885 Third Avenue, New York, New York 10022 and
Supervised Service Company Inc., ("SSC") a Delaware corporation having its
principal offi ce and place of business at 120 South LaSalle, Chicago IL 60603
(hereinafter referred to as the "Transfer Agent").
WITNESSETH:
That for and in consideration of the mutual promises hereinafter set forth, the
parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the
following meanings:
1. "Approved Institution" shall mean an entity so named in a Certificate.
From time to time the Trust may amend a previously delivered Certificate by
delivering to the Transfer Agent a Certificate naming an additional entity or
deleting any entity named in a previously delivered Certificate.
2. The "Board of Trustees" shall mean the Board of Trustees of the Trust.
3. "Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to the Transfer
Agent by the Trust which is signed by any Officer, as hereinafter defined, and
actually received by the Transfer Agent.
<PAGE>
4. "Custodian" shall mean the financial institution appointed as custodian
under the terms and conditions of the Custody Agreement between the financial
institution and the Trust, or its successor(s).
5. "Trust Business Day" shall be deemed to be each day on which the New
York Stock Exchange, Inc. is open for trading.
6. "Officer" shall be deemed to be the Trust's President, any Vice
President of the Trust, the Trust's Secretary, the Trust's Treasurer, the
Trust's Controller, any Assistant Controller of the Trust, any Assistant
Treasurer of the Trust and any Assistant Secretary of the Trust, and any other
person duly authorized by the Board of Trustees to execute any Certificate,
instruction, notice or other instrument on behalf of the Trust and named in the
Certificate annexed hereto as Appendix A, as such Certificate may be amended
from time to time, and any person reasonably believed by the Transfer Agent to
be such a person.
7. "Out-of-Pocket Expenses" means amounts reasonably necessary and actually
incurred by Transfer Agent in the provision of Transfer Agent services or
pursuant to this Agreement for the following purposes: postage (and first class
mail insurance in connection with mailing share certificates), envelopes, check
forms, continuous forms, forms for reports and statements, stationery, and other
similar items, telephone and telegraph charges incurred in answering inquiries
from dealers or shareholders, microfilm used to record transactions in
shareholder accounts and computer tapes used for permanent storage of records
and cost of insertion of materials in mailing envelopes by outside
<PAGE>
firms. Transfer Agent may, at its option, arrange to have various service
providers submit invoices directly to the Trust for payment of out-of-pocket
expenses reimbursable hereunder; and such other expenses paid or incurred by
Transfer Agent at the request of the Trust. Any charges associated with special
or exception processing shall also be considered Out-of-Pocket Expenses.
8. "Prospectus" shall mean the most recent Trust prospectus actually
received by the Transfer Agent from the Trust with respect to which the Trust
has indicated a registration statement under the federal Securities Act of 1933
has becomes effective, including the Statement of Additional Information,
incorporated by reference therein.
9. "Shares" shall mean all or any part of each class of the shares of
beneficial interest of the Trust or any series thereof listed in the Certificate
as to which the Transfer Agent acts as transfer agent hereunder, as may be
amended from time to time, which are authorized and/or issued by the Trust.
10. "Transfer Agent" shall mean Supervised Service Company, Inc., ("SSC"),
as transfer agent and dividend disbursing agent under the terms and conditions
of this Agreement, its successor(s) or assign(s).
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Trust hereby constitutes and appoints the Transfer Agent as transfer
agent of the Trust and as dividend disbursing agent during the period of this
Agreement.
<PAGE>
2. The Transfer Agent hereby accepts appointment as transfer agent and
dividend disbursing agent and agrees to perform duties thereof as hereinafter
set forth.
3. In connection with such appointment, the Trust upon the request of the
Transfer Agent, shall deliver the following documents to the Transfer Agent:
(i) A copy of the Agreement and Declaration of Trust of the Trust and
all amendments thereto (the "Declaration") certified by the Secretary of the
Trust;
(ii) A copy of the By-Laws of the Trust certified by the Secretary of
the Trust;
(iii) A copy of a resolution of the Board of Trustees of the Trust
certified by the Secretary of the Trust appointing the Transfer Agent and
authorizing the execution of this Transfer Agency Agreement;
(iv) A Certificate signed by the Secretary of the Trust specifying:
the number of authorized Shares or, if applicable, the fact that the number of
authorized Shares is unlimited, the number of such authorized Shares issued, the
number of such authorized Shares issued and currently outstanding; the names and
specimen signatures of the Officers of the Trust; and the name and address of
the legal counsel for the Trust;
(v) Specimen Share certificates, if any, for each series or class of
Shares in the form approved by the Board of Trustees of the Trust (and in a
format compatible with the Transfer Agent's system), together with a Certificate
signed by the Secretary of the Trust as to such approval;
<PAGE>
(vi) Copies of the Trust's Registration Statement, as amended to date,
and the most recently filed Post-Effective Amendment thereto, filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and under the Investment Company Act of 1940, as amended, together with
any applications filed in connection therewith; and
(vii) Opinion of counsel for the Trust with respect to the validity of
the authorized and outstanding Shares, whether such Shares are fully paid and
non-assessable and the status of such Shares under the Securities Act of 1933,
as amended, and any other applicable federal law or regulation (i.e., if subject
to registration, that they have been registered and that the Registration
Statement has become effective or, if exempt, the specific grounds therefor.)
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. Unless the Trust has authorized an unlimited number of Shares, the Trust
shall deliver to the Transfer Agent the following documents on or before the
effective date of any increase or decrease in the total number of Shares
authorized to be issued:
(a) A certified copy of any amendment to the Declaration giving effect
to such increase or decrease;
(b) In the case of an increase, an opinion of counsel for the Trust
with respect to the validity of the Shares of the Trust and the status of such
Shares under the Securities Act of 1933, as amended, and any other applicable
federal law or
<PAGE>
regulation (i.e., if subject to registration, that they have been registered and
that the Registration Statement has become effective or, if exempt, the specific
grounds therefor); and
(c) In the case of an increase, if the appointment of the Transfer
Agent was theretofore expressly limited, a certified copy of a resolution of the
Board of Trustees of the Trust increasing the authority of the Transfer Agent.
2. Unless the Trust has authorized an unlimited number of Shares, prior to
the issuance of any additional Shares of the Trust pursuant to share dividends
or share splits, etc., and prior to any reduction in the number of shares
outstanding, the Trust shall deliver the following documents to the Transfer
Agent:
(a) A certified copy of the resolution(s) adopted by the Board of
Trustees and/or the shareholders of the Trust authorizing such issuance of
additional Shares of the Trust or such reduction, as the case may be, and
(b) An opinion of counsel for the Trust with respect to the validity
of the Shares of the Trust and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable federal law or regulation
(i.e., if subject to registration, that they have been registered and that the
Registration Statement has become effective, or, if exempt, the specific grounds
therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
1. In the case of any negative share split, recapitalization or other
capital adjustment requiring a change in
<PAGE>
the form of any Share certificates of the Trust, the Transfer Agent will issue
Share certificates in the new form in exchange for, or upon transfer of,
outstanding Share certificates in the old form, upon receiving:
(a) A Certificate authorizing the issuance of the Share certificates
in the new form;
(b) A certified copy of any amendment to the Declaration with respect
to the change;
(c) Specimen Share certificates for each class of Shares in the new
form approved by the Board of Trustees of the Trust, with a Certificate signed
by the Secretary of the Trust as to such approval; and
(d) An opinion of counsel for the Trust with respect to the validity
of the Shares in the new form and the status of such Shares under the Securities
Act of 1933, as amended, and any other applicable federal law or regulation
(i.e., if subject to registration, that the Shares have been registered and that
the Registration Statement has become effective or, if exempt, the specific
grounds therefor.)
2. The Trust at its expense shall furnish the Transfer Agent with a
sufficient supply of blank Share certificates in the new form and from time to
time will replenish such supply upon the request of the Transfer Agent. Such
blank Share certificates shall be compatible with the Transfer Agent's system
and shall be properly signed by facsimile or otherwise by Officers of the Trust
authorized by law or by the By-Laws to sign Share certificates and, if required
shall bear the corporate Seal or facsimile
<PAGE>
thereof. The Trust agrees to indemnify and exonerate, save and hold the Transfer
Agent harmless, from and against any and all claims or demands that may be
asserted against the Transfer Agent with respect to the genuineness of any Share
certificate supplied to the Transfer Agent pursuant to this section.
ARTICLE V
ISSUANCE,
REDEMPTION AND TRANSFER OF SHARES
1. (a) The Transfer Agent acknowledges that it has received a copy of the
Trust's prospectus and statement of additional information, which prospectus and
statement of additional information describe how sales and redemption of Shares
of the Trust shall be made, and the Transfer Agent agrees to accept purchase
orders and redemption requests with respect to Shares of the Trust on each Trust
Business Day in accordance with such prospectus and statement of additional
information. The Trust agrees to provide the Transfer Agent with sufficient
advance notice to enable the Transfer Agent to effect any changes in the
procedures set forth in the prospectus and statement of additional information
regarding such purchase and redemption procedure; provided, however, that in no
event will such advance notice be less than 30 days.
(b) The Transfer Agent shall also accept with respect to each Trust
Business Day, at such times as are agreed upon from time to time by the Transfer
Agent and the Trust, a computer tape or electronic data transmission consistent
in all respects with the Transfer Agent's tape layout package, as amended from
time to
<PAGE>
time, which is believed by the Transfer Agent to be furnished by or on behalf of
any Approved Institution. The Transfer Agent shall not be liable for any losses
or damages to the Trust or its shareholders in the event that a computer tape or
electronic data transmission from an Approved Institution is unable to be
processed for any reason beyond the control of the Transfer Agent, or if any of
the information on such tape or transmission is found to be incorrect.
2. On each Trust Business Day the Transfer Agent shall, as of the time at
which the Trust computes the net asset value of each series of the Trust, issue
to and redeem from the accounts specified in a purchase order, redemption
request, or computer tape or electronic data transmission, which in accordance
with the Prospectus is effective on such Trust Business Day, the appropriate
number of full and fractional Shares based on the net asset value per Share of
each series of the Trust specified in an advice received on such Trust Business
Day from the Trust. The Transfer Agent shall be responsible for verifying that
the amounts provided to the Transfer Agent by or on behalf of the Trust are
consistent with the number of shares issued or redeemed, based upon the
applicable per share net asset value. Notwithstanding the foregoing, if a
redemption specified in a computer tape or electronic data transmission is for a
dollar value of Shares in excess of the dollar value of uncertificated Shares in
the specified account, the Transfer Agent shall not effect such redemption in
whole or in part and shall within twenty-four hours
<PAGE>
orally advise the Approved Institution which supplied such tape of the
discrepancy.
3. In connection with a reinvestment of a dividend or distribution of
Shares of a series of the Trust, the Transfer Agent shall as of each Trust
Business Day, as specified in a Certificate or resolution described in paragraph
1 of succeeding Article VI, issue Shares of such series based on the net asset
value per Share of such series specified in an advice received from the Trust on
such Trust Business Day.
4. On each Trust Business Day the Transfer Agent shall supply the Trust
with a statement specifying with respect to the immediately preceding Trust
Business Day: the total number of Shares of each series of the Trust (including
fractional Shares) issued and outstanding at the opening of business on such
day; the total number of Shares of each series of the Trust sold on such day,
pursuant to preceding paragraph 2 of this Article; the total number of Shares of
each series of the Trust redeemed from Shareholders by the Transfer Agent on
such day; the total number of Shares of each series of the Trust, if any, sold
on such day pursuant to preceding section 3 of this Article, and the total
number of Shares of each series of the Trust issued and outstanding.
5. In connection with each purchase and each redemption of Shares, the
Transfer Agent shall send such statements as are prescribed by the federal
Securities laws applicable to transfer agents or as described in the Prospectus.
If the Prospectus indicates that certificates for Shares are available and if
<PAGE>
specifically requested in writing by any shareholder, or if otherwise required
hereunder, the Transfer Agent will countersign, issue and mail to such
shareholder at the address set forth in the records of the Transfer Agent a
Share certificate for any full Share requested.
6. As of each Trust Business Day the Transfer Agent shall furnish the Trust
with an advice setting forth the number and dollar amount of Shares of each
series of the Trust to be redeemed on such Trust Business Day in accordance with
paragraph 2 of this Article.
7. Upon receipt of a proper redemption request and moneys paid to it by the
Custodian in connection with a redemption of Shares, the Transfer Agent shall
cancel the redeemed Shares and after making appropriate deduction for any
withholding of taxes required of it by applicable law (a) in the case of a
redemption of Shares pursuant to a redemption described in preceding paragraph
1(a) of this Article, make payment in accordance with the Trust's redemption and
payment procedures described in the Prospectus, and (b) in the case of a
redemption of Shares pursuant to a computer tape or electronic data transmission
described in preceding paragraph 1(b) of this Article, make payment by directing
a federal funds wire order to the account previously designated by the Approved
Institution specified in said computer tape or electronic data transmission.
8. The Transfer Agent shall not be required to issue any Shares after it
has received from an Officer of the Trust or from an appropriate federal or
state authority written notification
<PAGE>
that the sale of Shares has been suspended or discontinued, and the Transfer
Agent shall be entitled to rely upon such written notification.
9. Upon the issuance of any Shares in accordance with this Agreement, the
Transfer Agent shall not be responsible for the payment of any original issue or
other taxes required to be paid by the Trust in connection with such issuance of
any Shares.
10. The Transfer Agent shall accept a computer tape or electronic data
transmission consistent with the Transfer Agent's tape layout package, as
amended from time to time, which is reasonably believed by the Transfer Agent to
be furnished by or on behalf of any Approved Institution and is represented to
be instructions with respect to the transfer of Shares from one account of such
Approved Institution to another such account, and shall effect the transfers
specified in said computer tape or electronic data transmission. The Transfer
Agent shall not be liable for any losses to the Trust or its shareholders in the
event that a computer tape or electronic data transmission from an Approved
Institution is unable to be processed for any reason beyond the control of the
Transfer Agent, or if any of the information on such tape or transmission is
found to be incorrect.
11. (a) Except as otherwise provided in paragraph (b) of this Section 11
and in Section 13 of this Article, Shares will be transferred or redeemed upon
presentation to the Transfer Agent of Share certificates or instructions
properly endorsed for transfer or redemption, accompanied by such documents as
the Transfer Agent deems necessary to evidence the authority of the person
making
<PAGE>
such transfer or redemption, and bearing satisfactory evidence of the payment of
share transfer taxes. In the case of small estates where no administration is
contemplated, the Transfer Agent may, when furnished with an appropriate surety
bond, and without further approval of the Trust, transfer or redeem Shares
registered in the name of a decedent where the current market value of the
Shares being transferred does not exceed such amount as may from time to time be
prescribed by various states. The Transfer Agent reserves the right to refuse to
transfer or redeem Shares until it is satisfied that the endorsement on the
share certificate or instructions is valid and genuine, and for that purpose it
will require, unless otherwise instructed by an authorized officer of the Trust,
a guarantee of signature by an "Eligible Guarantor Institution" as that term is
defined by SEC Rule 17Ad-l5. The Transfer Agent also reserves the right to
refuse to transfer or redeem Shares until it is satisfied that the requested
transfer or redemption is legally authorized, and it shall incur no liability
for the refusal, in good faith, to make transfers or redemptions which the
Transfer Agent, in its judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to such transfer or
redemption. The Transfer Agent may, in effecting transfers and redemptions of
Shares, rely upon those provisions of the Uniform Act for the Simplification of
Fiduciary Security Transfers or the Uniform Commercial Code, as the same may be
amended from time to time, applicable to the transfer of securities, and the
Trust shall indemnify the Transfer Agent for any act done or omitted by
<PAGE>
it in good faith in reliance upon such laws, except that in no event will the
Trust indemnify the Transfer Agent against any liability arising directly or
indirectly out of any willful misfeasance, bad faith or negligence by the
Transfer Agent or reckless disregard by the Transfer Agent of its duties
hereunder.
(b) Notwithstanding the foregoing or any other provision contained in
this Agreement to the contrary, the Transfer Agent shall be fully protected by
the Trust in not requiring any instruments, documents, assurances, endorsements
or guarantees, including, without limitation, any signature guarantees, in
connection with a redemption, or transfer, of Shares whenever the Transfer Agent
reasonably believes that requiring the same would be inconsistent with the
transfer and redemption procedures as described in the Prospectus.
12. Notwithstanding any provision contained in this agreement to the
contrary, the Transfer Agent shall not be required or expected to require, as a
condition to any transfer of any Shares pursuant to Section 11 of this Article
or any redemption of any Shares pursuant to a computer tape or electronic data
transmission described in this Agreement, any documents, including, without
limitation, any documents of the kind described in paragraph (a) of Section 11
of this Article, to evidence the authority of the person requesting the transfer
or redemption and/or the payment of any stock transfer taxes, and shall be fully
protected in acting in accordance with the applicable provisions of this
Article.
<PAGE>
13. (a) As used in this Agreement, the terms "computer tape" or electronic
data transmission and "computer tape believed by the Transfer Agent to be
furnished by an Approved Institution", shall include any tapes generated by the
Transfer Agent to reflect information believed by the Transfer Agent to have
been input by an Approved Institution, via a remote terminal or other similar
link, into a data processing, storage, or collection system, or similar system
(the "System"), located on the Transfer Agent's premises. For purposes of
Section 1 of this Article, such a computer tape or electronic data transmission
shall be deemed to have been furnished at such times as are agreed upon from
time to time by the Transfer Agent and the Trust only if the information
reflected thereon was input to the System at such times as are agreed upon from
time to time by the Transfer Agent and the Trust.
(b) Nothing contained in this Agreement shall constitute any agreement
or representation by the Transfer Agent to permit, or to agree to permit, any
Approved Institution to input information to a System.
(c) The Transfer Agent reserves the right to approve, in advance, any
Approved Institution, such approval not to be unreasonably withheld. The
Transfer Agent also reserves the right to terminate any and all automated data
communications, at its discretion, upon a reasonable attempt to notify the Trust
when in the opinion of the Transfer Agent continuation of such communications
would jeopardize the accuracy and/or integrity of the Trust's records on the
System.
<PAGE>
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
1. The Trust shall furnish to the Transfer Agent a copy of a resolution of
its Board of Trustees or of its Dividend committee, as the case may be,
certified by the Secretary or any Assistant Secretary of the Trust, either (i)
setting forth the date of the declaration of a dividend or distribution, the
date of accrual or payment, as the case may be, thereof, the record date as of
which Shareholders entitled to payment, or accrual, as the case may be, shall be
determined, the amount per Share of such dividend or distribution, the payment
date on which all previously accrued and unpaid dividends are to be paid, and
the total amount, if any, payable to the Transfer Agent on such payment date, or
(ii) authorizing the declaration of dividends and distributions on a daily or
other periodic basis and authorizing the Transfer Agent to rely on a Certificate
setting forth the information described in clause (i) of this Section.
2. Upon the mail date specified in such Certificate or resolution, as the
case may be, the Trust shall, in the case of a cash dividend or distribution,
cause the Custodian to deposit in an account in the name of the Transfer Agent
on behalf of the applicable series of the Trust an amount of cash, if any,
sufficient for the Transfer Agent to make the payment, as of the mail date,
specified in such Certificate or resolution, as the case may be, to the
shareholders who were of record on the record date. The Transfer Agent will,
upon receipt of any such cash, make payment of such cash dividends or
distributions to the
<PAGE>
shareholders of record as of the record date by: (i) mailing a check, payable to
the registered shareholder, to the address of record or dividend mailing
address, or (ii) wiring such amounts to the accounts previously designated by an
Approved Institution, as the case may be. The Transfer Agent shall not be liable
for any improper payments made in good faith and without negligence, in
accordance with a Certificate or resolution described in the preceding
paragraph. If the Transfer Agent shall not receive from the Custodian sufficient
cash to make payments of any cash dividend or distribution to all shareholders
of the Trust or applicable series of the Trust as of the record date, the
Transfer Agent shall, upon notifying the Trust, withhold payment to all
shareholders of record as of the record date until sufficient cash is provided
to the Transfer Agent.
3. It is understood that the Transfer Agent shall in no way be responsible
for the determination of the rate or form of dividends or capital gain
distributions due to the shareholders. It is expressly agreed and understood
that the Transfer Agent is not liable for any loss as a result of processing a
distribution based on information provided in the Certificate that is incorrect.
The Trust agrees to pay the Transfer Agent for any and all costs, both direct
and out-of-pocket expenses, incurred in such corrective work as necessary to
remedy such error.
4. It is understood that the Transfer Agent shall file such appropriate
information returns concerning the payment of dividend and capital gain
distributions with the proper federal, state and local authorities as are
required by law to be filed by the Trust
<PAGE>
but shall in no way be responsible for the collection or withholding of taxes
due on such dividends or distributions due to shareholders, except and only to
the extent, required by applicable law.
ARTICLE VII
CONCERNING THE TRUST
1. The Trust represents to the Transfer Agent that:
(a) It is a business trust duly organized and existing under the laws
of the State of Delaware.
(b) It is empowered under applicable laws and by its Declaration and
By-Laws to enter into and, perform this Agreement.
(c) All requisite action has been taken to authorize it to enter into
and perform this Agreement.
(d) It is an investment company registered under the Investment
Company Act of 1940, as amended.
(e) A registration statement under the Securities Act of 1933, as
amended, with respect to the Shares is effective. The Trust shall notify the
Transfer Agent if such registration statement or any state securities
registrations have been terminated or a stop order has been entered with respect
to the Shares.
2. The Trust shall promptly deliver to the Transfer Agent written notice of
any change in the Officers authorized to sign Share Certificates, notifications
or requests, together with a specimen signature of each new Officer. In the
event any Officer who shall have signed manually or whose facsimile signature
shall have been affixed to blank Share certificates shall die, resign or
<PAGE>
be removed prior to issuance of such Share certificates, the Transfer Agent may
issue such Share certificates of the Trust notwithstanding such death,
resignation or removal, and the Trust shall promptly deliver to the Transfer
Agent such approval, adoption or ratification as may be required by law.
3. It shall be the sole responsibility of the Trust to deliver to the
Transfer Agent the Trust's currently effective Prospectus and, for purposes of
this Agreement, the Transfer Agent shall not be deemed to have notice of any
information contained in such Prospectus until a reasonable time after it is
actually received by the Transfer Agent.
ARTICLE VIII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent represents and warrants to the Trust that:
(a) It is a corporation duly organized and existing under the laws of
the State of Delaware.
(b) It is empowered under applicable law and by its Charter and
By-laws to enter into and perform this Agreement.
(c) All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
(d) It is duly registered as a transfer agent under Section l7A of the
Securities Exchange Act of 1934, as amended.
2. The Transfer Agent shall not be liable and shall be indemnified in
acting upon any computer tape or electronic data transmission, writing or
document reasonably believed by it to be genuine and to have been signed or made
by an Officer of the Trust
<PAGE>
or person designated by the Trust and shall not be held to have any notice of
any change of authority of any person until receipt of written notice thereof
from the Trust or such person. It shall also be protected in processing Share
certificates which bear the proper countersignature of the Transfer Agent and
which it reasonably believes to bear the proper manual or facsimile signature of
the Officers of the Trust.
3. The Transfer Agent upon notice to the Trust may establish such
additional procedures, rules and regulations governing the transfer or
registration of Share certificates as it may deem advisable and consistent with
such rules and regulations generally adopted by mutual fund transfer agents.
4. The Transfer Agent shall keep such records as are specified in Schedule
II hereto in the form and manner, and for such period, as it may deem advisable
and is agreeable to the Trust but not inconsistent with the rules and
regulations of appropriate government authorities, in particular Rules 31a-2
and 31a-3 under the Investment Company Act of 1940, as amended. The Transfer
Agent acknowledges that such records are the property of the Trust. The Transfer
Agent may deliver to the Trust from time to time at its discretion, for
safekeeping or disposition by the Trust in accordance with law, such records,
papers, documents accumulated in the execution of its duties as such Transfer
Agent, as the Transfer Agent may deem expedient, other than those which the
Transfer Agent is itself required to maintain pursuant to applicable laws and
regulations. The Trust shall assume all responsibility for any failure
thereafter to produce any record,
<PAGE>
paper, cancelled Share certificate, or other document so returned, if and when
required. The records specified in Schedule II hereto maintained by the Transfer
Agent pursuant to this Section 4, which have not been previously delivered to
the Trust pursuant to the foregoing provisions of this Section 4, shall be
considered to be the property of the Trust, shall be made available upon request
for inspection by the officers, employees, and auditors of the Trust, and
records shall be delivered to the Trust upon request and in any event upon the
date of termination of this Agreement, as specified in Article IX of this
Agreement, in the form and manner kept by the Transfer Agent on such date of
termination or such earlier date as may be requested by the Trust.
5. The Transfer Agent shall not be liable for any loss or damage, including
counsel fees, resulting from its actions or omissions to act or otherwise,
except for any loss or damage arising out of its bad faith, negligence, willful
misfeasance, gross negligence or reckless disregard of its duties under this
Agreement.
6a. The Trust shall indemnify and exonerate, save and hold harmless the
Transfer Agent from and against any and all claims (whether with or without
basis in fact or law), demands, expenses (including reasonable attorney's fees)
and liabilities of any and every nature which the Transfer Agent may sustain or
incur or which may be asserted against the Transfer Agent by any person by
reason of or as a result of any action taken or omitted to be taken by any prior
transfer agent of the Trust or as a result of any action taken or omitted to be
taken by the Transfer Agent,
<PAGE>
without negligence or willful misconduct, in good faith reliance upon (i) any
provision of this Agreement; (ii) the Prospectus; (iii) any instruction or order
including, without limitation, any computer tape or electronic data transmission
reasonably believed by the Transfer Agent to have been received from an Approved
Institution; (iv) any instrument, order or Share certificate reasonably believed
by it to be genuine and to be signed, countersigned or executed by any duly
authorized Officer of the Trust; (v) any Certificate or other instructions of an
Officer; or (vi) any opinion of legal counsel for the Trust or the Transfer
Agent. The Trust shall indemnify and exonerate, save and hold the Transfer Agent
harmless from and against any and all claims (whether with or without basis in
fact or law), demands, expenses (including reasonable attorney's fees) and
liabilities of any and every nature which the Transfer Agent may sustain or
incur or which may be asserted against the Transfer Agent by any person by
reason of or as a result of any action taken or omitted to be taken by the
Transfer Agent in connection with its appointment hereunder and in good faith
reliance upon any law, act, regulation or any interpretation of the same even
though such law, act or regulation may thereafter be altered, changed, amended
or repealed.
6b. The Transfer Agent shall not settle any claim, demand, expense or
liability for which it may seek indemnity pursuant to Section 6(a) above (each,
an "Indemnifiable Claim") without the express written consent of the President
of the Trust. The Transfer Agent shall notify the Trust within 15 days of
receipt of
<PAGE>
notification of an Indemnifiable Claim, provided that the failure by the
Transfer Agent to furnish such notification shall not impair its right to seek
indemnification from the Trust unless the Trust is unable to adequately defend
the Indemnifiable Claim as a result of such failure, and further provided, that
if as a result of the Transfer Agent's failure to provide the Trust with timely
notice of the institution of litigation a judgment by default is entered, prior
to seeking indemnification from the Trust the Transfer Agent, at its own cost
and expense, shall open such judgment. The Trust shall have the right to defend
any Indemnifiable Claim at its own expense, provided that such defense shall be
conducted by counsel selected by the Trust and reasonably acceptable to the
Transfer Agent. The Transfer Agent may join in such defense at its own expense,
but to the extent that it shall so desire the Trust shall direct such defense.
The Trust shall not settle any Indemnifiable Claim without the express written
consent of the Transfer Agent if the Transfer Agent determines that such
settlement would have an adverse effect on the Transfer Agent beyond the scope
of this Agreement. In such event, each of the Trust and the Transfer Agent shall
be responsible for their own defense at their own cost and expense, and such
claim shall not be deemed an Indemnifiable Claim hereunder. If the Trust shall
fail or refuse to defend an Indemnifiable Claim, the Transfer Agent may provide
its own defense at the cost and expense of the Trust. Anything in this Agreement
to the contrary notwithstanding, the Trust shall not indemnify the Transfer
Agent against any liability or expense arising out of the Transfer
<PAGE>
Agent's willful misfeasance, bad faith, negligence or reckless disregard of its
duties and obligations under this Agreement. The Transfer Agent shall indemnify
and hold the Trust harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to any action or failure or omission to act by the Transfer Agent
as a result of the Transfer Agent's willful misfeasance, lack of good faith,
negligence, gross negligence or reckless disregard of its duties and obligations
under this Agreement.
7. The Transfer Agent shall not be liable to the Trust with respect to any
redemption draft on which the signature of the drawer is forged and which the
Trust's Custodian or Cash Management bank has advised the Transfer Agent to
honor the redemption; nor shall Transfer Agent be liable for any material
alteration or absence or forgery of any endorsement, it being understood that
the Transfer Agent's sole responsibility with respect to inspecting redemption
drafts is to use reasonable care to verify the drawer's signature against
signatures on file.
8. There shall be excluded from the consideration of whether the Transfer
Agent has been negligent or has breached this Agreement, any period of time, and
only such period of time, during which the Transfer Agent's performance is
materially affected, by reason of circumstances beyond its control including,
without limitation (except as provided below), mechanical breakdowns of
equipment (including any alternative power supply and operating systems
software), flood or catastrophe, acts of
<PAGE>
God, failures of transportation, communication or power supply, strikes,
lockouts, work stoppages or other similar circumstances.
9. At any time the Transfer Agent may apply to an Officer of the Trust for
written instructions with respect to any matter arising in connection with the
Transfer Agent's duties and obligations under this Agreement, and the Transfer
Agent shall not be liable for any action taken or permitted by it in good faith
in accordance with such written instructions. Such application by the Transfer
Agent for written instructions from an Officer of the Trust may set forth in
writing any action proposed to be taken or omitted by the Transfer Agent with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken. The Transfer Agent shall not be liable
for any action taken or omitted in accordance with a proposal included in any
such application on or after the date specified therein unless, prior to taking
or omitting any such action, the Transfer Agent has received written
instructions in response to such application specifying the action to be taken
or omitted. The Transfer Agent may consult counsel of the Trust, or upon notice
to the Trust, its own counsel, at the expense of the Trust and shall be fully
protected with respect to anything done or omitted by it in good faith in
accordance with the advice or opinion of counsel to the Trust or its own
counsel.
10. The Transfer Agent may issue new Share certificates in place of
certificates represented to have been lost, stolen, or destroyed upon receiving
written instructions from the shareholder accompanied by proof of an indemnity
or surety bond issued by a
<PAGE>
recognized insurance institution specified by the Trust or the Transfer Agent.
The Transfer Agent may also reissue certificates which are represented as lost,
stolen, or destroyed without requiring a surety bond provided that the
notification is in writing and accompanied by an indemnification signed on
behalf of a member firm of the New York Stock Exchange and signed by an officer
of said firm with the signature guaranteed. Notwithstanding the foregoing, the
Transfer Agent will reissue a certificate upon written authorization from an
Officer of the Trust.
11. In case of any requests or demands for the inspection of the
shareholder records of the Trust, the Transfer Agent will endeavor to notify the
Trust promptly and to secure instructions from an Officer as to such inspection.
The Transfer Agent reserves the right, however, to exhibit the shareholder
records to any person whenever it receives an opinion from its counsel that
there is a reasonable likelihood that the Transfer Agent will be held liable for
the failure to exhibit the shareholder records to such person; provided,
however, that in connection with any such disclosure the Transfer Agent shall
promptly notify the Trust that such disclosure has been made or is to be made.
12. At the request of an Officer of the Trust the Transfer Agent will
address and mail such appropriate notices to shareholders as the Trust may
direct.
13. Notwithstanding any of the foregoing provisions of this Agreement, the
Transfer Agent shall be under no duty or obligation to inquire into, and shall
not be liable for:
<PAGE>
(a) The legality of the issue or sale of any Shares, the sufficiency
of the amount to be received therefor (provided, however, that nothing contained
in this paragraph (a) shall relieve the Transfer Agent of its obligations set
forth in Article V, Section 2), or the authority of the Approved Institution or
of the Trust, as the case may be, to request such sale or issuance;
(b) The legality of a transfer of Shares, or of a redemption of any
Shares, the propriety of the amount to be paid therefor (provided, however, that
nothing contained in this paragraph (b) shall relieve the Transfer Agent of its
obligations set forth in Article V, Section 2), or the authority of the Approved
Institution or of the Trust, as the case may be, to request such transfer or
redemption;
(c) The legality of the declaration of any dividend by the Trust, or
the legality of the issue of any Shares in payment of any stock dividend; or
(d) The legality of any recapitalization or readjustment of Shares.
14. The Transfer Agent shall be entitled to receive and the Trust hereby
agrees to pay to the Transfer Agent for its performance hereunder, including its
performance of the duties and functions set forth in Schedule I hereto, (i) its
reasonable out-of-pocket expenses (including reasonable legal expenses and
attorney's fees) incurred in connection with its performance hereunder and (ii)
such compensation as may be agreed upon in writing from time to time by the
Transfer Agent and the Trust.
<PAGE>
15. The Transfer Agent shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Transfer Agent.
16. Purchase and Prices of Services.
(a) The Trust will compensate the Transfer Agent for, and Transfer
Agent will provide, beginning on the execution date of this Agreement and
continuing until the termination of this Agreement as provided hereinafter, the
Services set forth in Schedule I.
(b) The current unit prices for the Services are set forth in Schedule
III (the "Schedule III Fee Schedule"). The Schedule III Fees may be amended by
the mutual agreement of the Trust and the Transfer Agent. Notwithstanding the
foregoing, the Transfer Agent may increase prices due to changes in legal or
regulatory requirements subject to the approval of the Trust, which approval
shall not be unreasonably withheld.
17. Billing and Payment.
(a) The Transfer Agent shall bill the Trust as follows: (i) monthly in
arrears for Accounts maintained and in arrears for any Out-of-Pocket Expenses
incurred by the Transfer Agent, provided, however, that with respect to
Out-of-Pocket Expenses the Transfer Agent shall provide the Trust monthly with
an amount to be advanced to the Transfer Agent for estimated postage expenses
for the following month. Documentation to support reconciliation of actual
postal charges will be provided to the Trust monthly.
<PAGE>
The Transfer Agent may from time to time request the Trust to make additional
advances when appropriate.
(b) The Trust shall pay the Transfer Agent in immediately available
funds at United Missouri Bank in Kansas City, Missouri within thirty (30) days
of the date of the bill.
ARTICLE IX
TERMINATION
Either of the parties hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than ninety (90) days after the date of receipt of such
notice. In the event such notice is given by the Trust, it shall be accompanied
by a copy of a resolution of the Board of Trustees of the Trust, certified by
its Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating the successor transfer agent or transfer agents. In the event
such notice is given by the Transfer Agent, the Trust, on or before the
termination date, shall deliver to the Transfer Agent a copy of a resolution of
its Board of Trustees certified by the Secretary or any Assistant Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Trust, the Trust shall upon the date specified in the
notice of termination of this Agreement and delivery of the records maintained
hereunder, be deemed to be its own transfer agent and the Transfer Agent shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement.
<PAGE>
In the event this Agreement is terminated as provided herein, the Transfer
Agent, upon the written request of the Trust, shall deliver the records of the
Trust on electromagnetic media to the Trust or its successor transfer agent. The
Trust shall be responsible to the Transfer Agent for the reasonable costs and
expenses associated with the preparation and delivery of such media.
ARTICLE X
MISCELLANEOUS
1. The Trust agrees that prior to effecting any change in the Prospectus
which would increase or alter the duties and obligations of the Transfer Agent
hereunder, it shall advise the Transfer Agent of such proposed change at least
30 days prior to the intended date of the same, and shall proceed with such
change only if it shall have received the written consent of the Transfer Agent
thereto, which shall not be unreasonably withheld.
2. Any notice required or permitted to be given hereunder shall be deemed
given either: (a) when sent by registered or certified mail, postage prepaid,
addressed to the party to whom 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; or (b) upon receipt by the party to whom 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 via overnight delivery.
<PAGE>
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, Esq.
If to the Transfer Agent, at:
Supervised Service Company
120 South LaSalle Street
Chicago, IL 60603
Attention: Robert J. Engling
With a copy to:
Supervised Service Company
811 Main Street
Kansas City, MO 64105
Attention: Robert W. Ciarlelli
3. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the formality of this Agreement.
4. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns. This Agreement shall not be
assignable by either party without the written consent of the other party,
except that the Transfer Agent may assign this Agreement to a corporate
affiliate with advance written notice to, and advance written consent by, the
Trust, which consent shall not be unreasonably withheld.
5. This Agreement shall be governed by and construed in accordance with the
laws of the State of Illinois.
<PAGE>
6. This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
7. The provisions of this Agreement are intended to benefit only the
Transfer Agent and the Trust, and no rights shall be granted to any other person
by virtue of this Agreement.
8. (a) The Transfer Agent will endeavor to assist in resolving shareholder
inquiries and errors relating to the period during which prior transfer agents
acted as such for the Trust. Any such inquiries or errors which cannot be
expediently resolved by the Transfer Agent will be referred to the Trust.
(b) The Transfer Agent shall be responsible for the safekeeping and
maintenance of only those transfer agency records, cancelled certificates and
correspondence of the Trust created or produced prior to the time of conversion
which are under its control and acknowledged in a writing to the Trust to be in
its possession. Any expenses or liabilities incurred by the Transfer Agent as a
result of shareholder inquiries, regulatory compliance or audits related to such
records and not caused as a result of Transfer Agent's bad faith, willful
malfeasance or negligence shall be the responsibility of the Trust as provided
in Article VIII herein.
10. The Trust and the Transfer Agent 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
<PAGE>
assets and property of the Trust, as provided in the Declaration. The execution
and delivery of this Agreement have 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 the Trustees nor the execution
and delivery by the officer will be deemed to have been made by them or any
shareholder of the Trust personally, but will bind only the property of the
Trust as provided in the Declaration. No series of the Trust will be liable for
any claims against any other series of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officer, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as the day and year
first above written.
Supervise Service Company, Inc. Morgan Grenfell Investment
Trust
By:/s/ Douglas L. Anderson By:/s/ James E. Minnick
----------------------- --------------------
(Signature) (Signature)
Douglas L. Anderson James E. Minnick
----------------------- --------------------
(Name) (Name)
Vice President President
----------------------- --------------------
(Title) (Title)
1/6/94 Jan. 3, 1994
----------------------- --------------------
(Date Signed) (Date Signed)
<PAGE>
SCHEDULE I
DESCRIPTION OF SERVICES
In consideration of the fees to be paid in such manner and at such times as
the Trust and Transfer Agent may agree, Transfer Agent will provide the services
set forth below:
Examine and Process New Accounts, Subsequent Payments, Liquidations,
Exchanges, Telephone Transactions, Check Redemptions, Automatic Withdrawals,
Certificate Issuance, Wire Order Trades, Dividends, Dividend Statements, Dealer
Statements.
DAILY ACTIVITY
- --------------
Maintain the following shareholder information in such a manner as the
Transfer Agent shall determine:
Name and Address, including Zip Code
Balance of Uncertificated Shares
Balance of Certificated Shares
Certificate number, number of shares, issuance date of each certificate
outstanding and cancellation date for each certificate date for each
certificate no longer outstanding, if issued
Balance of dollars available for redemption
Dividend code (daily accrual, monthly reinvest, monthly cash or quarterly
cash)
Type of account code
Establishment date indicating the date an account was opened, carrying
forward pre-conversion data as available
Original establishment date for accounts opened by exchange
W-9 withholding status and periodic reporting
State of residence code
Social Security or taxpayer identification number, and indication of
certification
Historical transactions on the account for the most recent 18 months, or
other period as mutually agreed to from time-to-time
<PAGE>
Indication as to whether phone transactions can be accepted for this
account. Beneficial owner code, i.e. male, female, joint tenant, etc.
An alternate or "secondary" account number issued by a dealer (or bank,
etc.) to a customer for use, inquiry and transaction input by "remote
accessors"
FUNCTIONS
- ---------
Answer investor and dealer telephone and/or written inquiries, except those
concerning Trust policy, or requests for investment advice which will be
referred to the Trust, or those which the Trust chooses to answer
Deposit Trust share certificates into accounts upon receipt of instructions
from the investor or other authorized person, if issued
Examine and process transfers of shares insuring that all transfer
requirements and legal documents have been supplied
Process and confirm address changes
Process standard account record changes as required, i.e. Dividend Codes,
etc.
Microfilm source documents for transactions, such as account applications
and correspondence
Perform backup withholding for those accounts which federal government
regulations indicate is necessary
Perform withholdings on liquidations, if applicable, for employee benefit
plans. Prepare and mail 5498s and 1099R's
Solicit missing taxpayer identification numbers
Provide remote access inquiry to Trust records via Trust supplied hardware
(Trust responsible for connection line and monthly fee)
REPORTS PROVIDED
- ----------------
Daily Journals Reflecting all shares and
dollar activity for the
previous day
Blue Sky Report Supply information monthly for
Trust's preparation of Blue
Sky Reporting
<PAGE>
N-SAR Report Supply monthly correspondence,
redemption and liquidation
information for use in Trust's
N-SAR Report
Additionally, monthly average daily balance reports will be provided at the
Trust's request to the Trust at no charge.
Prepare and mail copies of summary statements to dealers and investment
advisers
Generate and mail confirmation statements for financial transactions
DIVIDEND ACTIVITY
- -----------------
Reinvest or pay in cash including reinvesting in other funds within the
fund group serviced by the Transfer Agent as described in the Trust's
prospectus
Distribute capital gains simultaneously with income dividends
DEALER SERVICES
- ---------------
Prepare and mail confirmation statements to dealers daily
Prepare and mail copies of statements to dealers, same frequency as
investor statements
SHAREHOLDER MEETINGS
- --------------------
Assist Trust in obtaining a qualified service to: address and mail proxies
and related material, tabulate returned proxies and supply daily reports
when sufficient proxies have been received
Prepare certified list of stockholders, hard copy or microform
PERIODIC ACTIVITIES
- -------------------
Mail transaction confirmation statements daily to investors
Address and mail four (4) periodic financial reports (material must be
adaptable to Transfer Agent's mechanical equipment as reasonably specified
by the Transfer Agent)
Mail periodic statements to investors
Compute, prepare and furnish all necessary reports to Governmental
authorities: Forms 1099R, 1099DIV, 1099B, 1042 and 1042S
<PAGE>
Enclose various marketing material as designated by the Trust in statement
mailings, i.e. monthly and quarterly statements (material must be adaptable
to mechanical equipment as reasonably specified by the Transfer Agent)
<PAGE>
SCHEDULE II
RECORDS MAINTAINED BY TRANSFER AGENT
- - Account applications
- - Cancelled certificates plus stock powers and supporting documents
- - Checks including check registers, reconciliation records, any adjustment
records and tax withholding documentation
- - Indemnity bonds for replacement of lost or missing share certificates and
checks
- - Liquidation, redemption, withdrawal and transfer requests including stock
powers, signature guarantees and any supporting documentation
<PAGE>
SCHEDULE III
FEE SCHEDULE
MORGAN GRENFELL INVESTMENT TRUST
Annual Fee Minimum Annual
Per Account Fee per Series
International Equity Fund $25.00 $10,000
Global Equity Fund $25.00 $10,000
European Equity Fund $25.00 $10,000
Pacific Basin Equity Fund $25.00 $10,000
International Small Cap Equity
Fund $25.00 $10,000
Japanese Small Cap Equity Fund $25.00 $10,000
European Small Cap Equity Fund $25.00 $10,000
Emerging Markets Equity Fund $25.00 $10,000
Global Fixed Income Fund $25.00 $10,000
Internal Fixed Income Fund $25.00 $10,000
Emerging Markets Fixed Income
Fund $25.00 $10,000
TRANSFER AGENCY AGREEMENT
Agreement made as of the 28th day of December, 1994, between Morgan Grenfell
Investment Trust, (the "Trust") a Delaware business trust, having its principal
office and place of business at 885 Third Avenue, New York, New York 10022 and
Supervised Service Company Inc., ("SSC") a Delaware corporation having its
principal office and place of business at 120 South LaSalle, Chicago It 60603
(hereinafter referred to as the "Transfer Agent").
WITNESSETH:
That for and in consideration of the mutual promises hereinafter set forth, the
parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have the
following meanings:
1. Approved Institution" shall mean an entity so named in a
Certificate. From time to time the Trust may amend a previously delivered
Certificate by delivering to the Transfer Agent a Certificate naming an
additional entity or deleting any entity named in a previously delivered
Certificate.
<PAGE>
2. The "Board of Trustees" shall mean the Board of Trustees of the
Trust.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Transfer Agent by the Trust which is signed by any Officer, as hereinafter
defined, and actually received by the Transfer Agent.
4. "Custodian" shall mean the financial institution appointed as
custodian under the terms and conditions of the Custody Agreement between the
financial institution and the Trust, or its successor(s).
5. "Trust Business Day" shall be deemed to be each day on which the
New York Stock Exchange, Inc. is open for trading.
6. "Officer" shall be deemed to be the Trust's President, any Vice
President of the Trust, the Trust's Secretary, the Trust's Treasurer, the
Trust's Controller, any Assistant Controller of the Trust, any Assistant
Treasurer of the Trust and any Assistant Secretary of the Trust, and any other
person duly authorized by the Board of Trustees to execute any Certificate,
instruction, notice or other instrument on behalf of the Trust and named in the
Certificate annexed hereto as Appendix A, as such Certificate may be amended
from time to time, and any person reasonably believed by the Transfer Agent to
be such a person.
7. "Out-of-Pocket Expenses" means amounts reasonably necessary and
actually incurred by Transfer Agent in the provision
-2-
<PAGE>
of Transfer Agent services or pursuant to this Agreement for the following
purposes: postage (and first class mail insurance in connection with mailing
share certificates), envelopes, check forms, continuous forms, forms for reports
and statements, stationery, and other similar items, telephone and telegraph
charges incurred in answering inquiries from dealers or shareholders, microfilm
used to record transactions in shareholder accounts and computer tapes used for
permanent storage of records and cost of insertion of materials in mailing
envelopes by outside firms. Transfer Agent may, at its option, arrange to have
various service providers submit invoices directly to the Trust for payment of
out-of-pocket expenses reimbursable hereunder; and such other expenses paid or
incurred by Transfer Agent at the request of the Trust. Any charges associated
with special or exception processing shall also be considered Out-of-Pocket
Expenses.
8. "Prospectus" shall mean the most recent Trust prospectus actually
received by the Transfer Agent from the Trust with respect to which the Trust
has indicated a registration statement under the federal Securities Act of 1933
has becomes effective, including the Statement of Additional Information,
incorporated by reference therein.
9. "Shares" shall mean all or any part of each class of the shares of
beneficial interest of the Trust or any series thereof listed in the Certificate
as to which the Transfer Agent acts as
-3-
<PAGE>
transfer agent hereunder, as may be amended from time to time, which are
authorized and/or issued by the Trust.
10. "Transfer Agent" shall mean Supervised Service Company, Inc.,
("SSC"), as transfer agent and dividend disbursing agent under the terms and
conditions of this Agreement, its successor(s) or assign(s).
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Trust hereby constitutes and appoints the Transfer Agent as
transfer agent of the Trust and as dividend disbursing agent during the period
of this Agreement.
2. The Transfer Agent hereby accepts appointment as transfer agent and
dividend disbursing agent and agrees to perform duties thereof as hereinafter
set forth.
3. In connection with such appointment, the Trust upon the request of
the Transfer Agent, shall deliver the following documents to the Transfer Agent:
(i) A copy of the Agreement and Declaration of Trust of the Trust
and all amendments thereto (the "Declaration") certified by the Secretary of the
Trust;
(ii) A copy of the By-Laws of the Trust certified by the Secretary
of the Trust;
(iii) A copy of a resolution of the Board of Trustees of the Trust
certified by the Secretary of the Trust appointing the
-4-
<PAGE>
Transfer Agent and authorizing the execution of this Transfer Agency Agreement;
(iv) A Certificate signed by the Secretary of the Trust
specifying: the number of authorized Shares or, if applicable, the fact that the
number of authorized Shares is unlimited, the number of such authorized Shares
issued, the number of such authorized Shares issued and currently outstanding;
the names and specimen signatures of the Officers of the Trust; and the name and
address of the legal counsel for the Trust;
(v) Specimen Share certificates, if any, for each series or class
of Shares in the form approved by the Board of Trustees of the Trust (and in a
format compatible with the Transfer Agent's system), together with a Certificate
signed by the Secretary of the Trust as to such approval;
(vi) Copies of the Trust's Registration Statement, as amended to
date, and the most recently filed Post-Effective Amendment thereto, filed by
the Trust with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and under the Investment Company Act of 1940, as amended,
together with any applications filed in connection therewith; and
(vii) Opinion of counsel for the Trust with respect to the
validity of the authorized and outstanding Shares, whether such Shares are fully
paid and non-assessable and the status of such Shares under the Securities Act
of 1933, as amended, and any other applicable federal law or regulation (i.e.,
if subject to
-5-
<PAGE>
registration, that they have been registered and that the Registration Statement
has become effective or, if exempt, the specific grounds therefor.)
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. Unless the Trust has authorized an unlimited number of Shares, the
Trust shall deliver to the Transfer Agent the following documents on or before
the effective date of any increase or decrease in the total number of Shares
authorized to be issued:
(a) A certified copy of any amendment to the Declaration giving
effect to such increase or decrease;
(b) In the case of an increase, an opinion of counsel for the Trust
with respect to the validity of the Shares of the Trust and the status of such
Shares under the Securities Act of 1933, as amended, and any other applicable
federal law or regulation (i.e., if subject to registration, that they have been
registered and that the Registration Statement has become effective or, if
exempt, the specific grounds therefor); and
(c) In the case of an increase, if the appointment of the Transfer
Agent was theretofore expressly limited, a certified copy of a resolution of the
Board of Trustees of the Trust increasing the authority of the Transfer Agent.
2. Unless the Trust has authorized an unlimited number of Shares,
prior to the issuance of any additional Shares of the
-6-
<PAGE>
Trust pursuant to share dividends or share splits, etc., and prior to any
reduction in the number of shares outstanding, the Trust shall deliver the
following documents to the Transfer Agent:
(a) A certified copy of the resolution(s) adopted by the Board
of Trustees and/or the shareholders of the Trust authorizing such issuance of
additional Shares of the Trust or such reduction, as the case may be, and
(b) An opinion of counsel for the Trust with respect to the
validity of the Shares of the Trust and the status of such Shares under the
Securities Act of 1933, as amended, and any other applicable federal law or
regulation (i.e., if subject to registration, that they have been registered
and that the Registration Statement has become effective, or, if exempt, the
specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
1. In the case of any negative share split, recapitalization or other
capital adjustment requiring a change in the form of any Share certificates of
the Trust, the Transfer Agent will issue Share certificates in the new form in
exchange for, or upon transfer of, outstanding Share certificates in the old
form, upon receiving:
(a) A Certificate authorizing the issuance of the Share
certificates in the new form;
-7-
<PAGE>
(b) A certified copy of any amendment to the Declaration with
respect to the change;
(c) Specimen Share certificates for each class of Shares in the
new form approved by the Board of Trustees of the Trust, with a Certificate
signed by the Secretary of the Trust as to such approval; and
(d) An opinion of counsel for the Trust with respect to the
validity of the Shares in the new form and the status of such Shares under the
Securities Act of 1933, as amended, and any other applicable federal law or
regulation (i.e., if subject to registration, that the Shares have been
registered and that the Registration Statement has become effective or, if
exempt, the specific grounds therefor.)
2. The Trust at its expense shall furnish the Transfer Agent with a
sufficient supply of blank Share certificates in the new form and from time to
time will replenish such supply upon the request of the Transfer Agent. Such
blank Share certificates shall be compatible with the Transfer Agent's system
and shall be properly signed by facsimile or otherwise by Officers of the Trust
authorized by law or by the By-Laws to sign Share certificates and, if required
shall bear the corporate Seal or facsimile thereof. The Trust agrees to
indemnify and exonerate, save and hold the Transfer Agent harmless, from and
against any and all claims or demands that may be asserted against the Transfer
Agent
-8-
<PAGE>
with respect to the genuineness of any Share certificate supplied to the
Transfer Agent pursuant to this section.
ARTICLE V
ISSUANCE,
REDEMPTION AND TRANSFER OF SHARES
1. (a) The Transfer Agent acknowledges that it has received a copy of
the Trust's prospectus and statement of additional information, which prospectus
and statement of additional information describe how sales and redemption of
Shares of the Trust shall be made, and the Transfer Agent agrees to accept
purchase orders and redemption requests with respect to Shares of the Trust on
each Trust Business Day in accordance with such prospectus and statement of
additional information. The Trust agrees to provide the Transfer Agent with
sufficient advance notice to enable the Transfer Agent to effect any changes in
the procedures set forth in the prospectus and statement of additional
information regarding such purchase and redemption procedure; provided, however,
that in no event will such advance notice be less than 30 days.
(b) The Transfer Agent shall also accept with respect to each
Trust Business Day, at such times as are agreed upon from time to time by the
Transfer Agent and the Trust, a computer tape or electronic data transmission
consistent in all respects with the Transfer Agent's tape layout package, as
amended from time to time, which is believed by the Transfer Agent to be
furnished by
-9-
<PAGE>
or on behalf of any Approved Institution. The Transfer Agent shall not be liable
for any losses or damages to the Trust or its shareholders in the event that a
computer tape or electronic data transmission from an Approved Institution is
unable to be processed for any reason beyond the control of the Transfer Agent,
or if any of the information on such tape or transmission is found to be
incorrect.
2. On each Trust Business Day the Transfer Agent shall, as of the time
at which the Trust computes the net asset value of each series of the Trust,
issue to and redeem from the accounts specified in a purchase order, redemption
request, or computer tape or electronic data transmission, which in accordance
with the Prospectus is effective on such Trust Business Day, the appropriate
number of full and fractional Shares based on the net asset value per Share of
each series of the Trust specified in an advice received on such Trust Business
Day from the Trust. The Transfer Agent shall be responsible for verifying that
the amounts provided to the Transfer Agent by or on behalf of the Trust are
consistent with the number of shares issued or redeemed, based upon the
applicable per share net asset value. Notwithstanding the foregoing, if a
redemption specified in a computer tape or electronic data transmission is for a
dollar value of Shares in excess of the dollar value of uncertificated Shares in
the specified account, the Transfer Agent shall not effect such redemption in
whole or in part and shall within twenty-four hours
-10-
<PAGE>
orally advise the Approved Institution which supplied such tape of the
discrepancy.
3. In connection with a reinvestment of a dividend or distribution of
Shares of a series of the Trust, the Transfer Agent shall as of each Trust
Business Day, as specified in a Certificate or resolution described in paragraph
1 of succeeding Article VI, issue Shares of such series based on the net asset
value per Share of such series specified in an advice received from the Trust on
such Trust Business Day.
4. On each Trust Business Day the Transfer Agent shall supply the
Trust with a statement specifying with respect to the immediately preceding
Trust Business Day: the total number of Shares of each series of the Trust
(including fractional Shares) issued and outstanding at the opening of business
on such day; the total number of Shares of each series of the Trust sold on
such day, pursuant to preceding paragraph 2 of this Article; the total number
of Shares of each series of the Trust redeemed from Shareholders by the Transfer
Agent on such day; the total number of Shares of each series of the Trust, if
any, sold on such day pursuant to preceding section 3 of this Article, and the
total number of Shares of each series of the Trust issued and outstanding.
5. In connection with each purchase and each redemption of Shares, the
Transfer Agent shall send such statements as are prescribed by the federal
Securities laws applicable to transfer
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agents or as described in the Prospectus. If the Prospectus indicates that
certificates for Shares are available and if specifically requested in writing
by any shareholder, or if otherwise required hereunder, the Transfer Agent will
countersign, issue and mail to such shareholder at the address set forth in the
records of the Transfer Agent a Share certificate for any full Share requested.
6. As of each Trust Business Day the Transfer Agent shall furnish the
Trust with an advice setting forth the number and dollar amount of Shares of
each series of the Trust to be redeemed on such Trust Business Day in accordance
with paragraph 2 of this Article.
7. Upon receipt of a proper redemption request and moneys paid to it
by the Custodian in connection with a redemption of Shares, the Transfer Agent
shall cancel the redeemed Shares and after making appropriate deduction for any
withholding of taxes required of it by applicable law (a) in the case of a
redemption of Shares pursuant to a redemption described in preceding paragraph
1(a) of this Article, make payment in accordance with the Trust's redemption and
payment procedures described in the Prospectus, and (b) in the case of a
redemption of Shares pursuant to a computer tape or electronic data transmission
described in preceding paragraph 1(b) of this Article, make payment by directing
a federal funds wire order to the account previously
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designated by the Approved Institution specified in said computer tape or
electronic data transmission.
8. The Transfer Agent shall not be required to issue any Shares after
it has received from an Officer of the Trust or from an appropriate federal or
state authority written notification that the sale of Shares has been suspended
or discontinued, and the Transfer Agent shall be entitled to rely upon such
written notification.
9. Upon the issuance of any Shares in accordance with this Agreement,
the Transfer Agent shall not be responsible for the payment of any original
issue or other taxes required to be paid by the Trust in connection with such
issuance of any Shares.
10. The Transfer Agent shall accept a computer tape or electronic data
transmission consistent with the Transfer Agent's tape layout package, as
amended from time to time, which is reasonably believed by the Transfer Agent to
be furnished by or on behalf of any Approved Institution and is represented to
be instructions with respect to the transfer of Shares from one account of such
Approved Institution to another such account, and shall effect the transfers
specified in said computer tape or electronic data transmission. The Transfer
Agent shall not be liable for any losses to the Trust or its shareholders in the
event that a computer tape or electronic data transmission from an Approved
Institution is unable to be processed for any reason
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beyond the control of the Transfer Agent, or if any of the information on such
tape or transmission is found to be incorrect.
11. (a) Except as otherwise provided in paragraph (b) of this Section
11 and in Section 13 of this Article, Shares will be transferred or redeemed
upon presentation to the Transfer Agent of Share certificates or instructions
properly endorsed for transfer or redemption, accompanied by such documents as
the Transfer Agent deems necessary to evidence the authority of the person
making such transfer or redemption, and bearing satisfactory evidence of the
payment of share transfer taxes. In the case of small estates where no
administration is contemplated, the Transfer Agent may, when furnished with an
appropriate surety bond, and without further approval of the Trust, transfer or
redeem Shares registered in the name of a decedent where the current market
value of the Shares being transferred does not exceed such amount as may from
time to time be prescribed by various states. The Transfer Agent reserves the
right to refuse to transfer or redeem Shares until it is satisfied that the
endorsement on the share certificate or instructions is valid and genuine, and
for that purpose it will require, unless otherwise instructed by an authorized
officer of the Trust, a guarantee of signature by an "Eligible Guarantor
Institution" as that term is defined by SEC Rule 17Ad- 15. The Transfer Agent
also reserves the right to refuse to transfer or redeem Shares until it is
satisfied that the requested transfer or redemption is legally authorized, and
it
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shall incur no liability for the refusal, in good faith, to make transfers or
redemptions which the Transfer Agent, in its judgment, deems improper or
unauthorized, or until it is satisfied that there is no basis to any claims
adverse to such transfer or redemption. The Transfer Agent may, in effecting
transfers and redemptions of Shares, rely upon those provisions of the Uniform
Act for the Simplification of Fiduciary Security Transfers or the Uniform
Commercial Code, as the same may be amended from time to time, applicable to the
transfer of securities, and the Trust shall indemnify the Transfer Agent for any
act done or omitted by it in good faith in reliance upon such laws, except that
in no event will the Trust indemnify the Transfer Agent against any liability
arising directly or indirectly out of any willful misfeasance, bad faith or
negligence by the Transfer Agent or reckless disregard by the Transfer Agent of
its duties hereunder.
(b) Notwithstanding the foregoing or any other provision contained
in this Agreement to the contrary, the Transfer Agent shall be fully protected
by the Trust in not requiring any instruments, documents, assurances,
endorsements or guarantees, including, without limitation, any signature
guarantees, in connection with a redemption, or transfer, of Shares whenever the
Transfer Agent reasonably believes that requiring the same would be inconsistent
with the transfer and redemption procedures as described in the Prospectus.
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12. Notwithstanding any provision contained in this agreement to the
contrary, the Transfer Agent shall not be required or expected to require, as a
condition to any transfer of any Shares pursuant to Section 11 of this Article
or any redemption of any Shares pursuant to a computer tape or electronic data
transmission described in this Agreement, any documents, including, without
limitation, any documents of the kind described in paragraph (a) of Section 11
of this Article, to evidence the authority of the person requesting the transfer
or redemption and/or the payment of any stock transfer taxes, and shall be fully
protected in acting in accordance with the applicable provisions of this
Article.
13. (a) As used in this Agreement, the terms "computer tape" or
electronic data transmission and "computer tape believed by the Transfer Agent
to be furnished by an Approved Institution", shall include any tapes generated
by the Transfer Agent to reflect information believed by the Transfer Agent to
have been input by an Approved Institution, via a remote terminal or other
similar link, into a data processing, storage, or collection system, or similar
system (the "System"), located on the Transfer Agent's premises. For purposes of
Section 1 of this Article, such a computer tape or electronic data transmission
shall be deemed to have been furnished at such times as are agreed upon from
time to time by the Transfer Agent and the Trust only if the information
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reflected thereon was input to the System at such times as are agreed upon from
time to time by the Transfer Agent and the Trust.
(b) Nothing contained in this Agreement shall constitute any
agreement or representation by the Transfer Agent to permit, or to agree to
permit, any Approved Institution to input information to a System.
(c) The Transfer Agent reserves the right to approve, in advance,
any Approved Institution, such approval not to be unreasonably withheld. The
Transfer Agent also reserves the right to terminate any and all automated data
communications, at its discretion, upon a reasonable attempt to notify the Trust
when in the opinion of the Transfer Agent continuation of such communications
would jeopardize the accuracy and/or integrity of the Trust's records on the
System.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
1. The Trust shall furnish to the Transfer Agent a copy of a
resolution of its Board of Trustees or of its Dividend committee, as the case
may be, certified by the Secretary or any Assistant Secretary of the Trust,
either (i) setting forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, thereof, the
record date as of which Shareholders entitled to payment, or accrual, as the
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case may be, shall be determined, the amount per Share of such dividend or
distribution, the payment date on which all previously accrued and unpaid
dividends are to be paid, and the total amount, if any, payable to the Transfer
Agent on such payment date, or (ii) authorizing the declaration of dividends and
distributions on a daily or other periodic basis and authorizing the Transfer
Agent to rely on a Certificate setting forth the information described in clause
(i) of this Section.
2. Upon the mail date specified in such Certificate or resolution, as
the case may be, the Trust shall, in the case of a cash dividend or
distribution, cause the Custodian to deposit in an account in the name of the
Transfer Agent on behalf of the applicable series of the Trust an amount of
cash, if any, sufficient for the Transfer Agent to make the payment, as of the
mail date, specified in such Certificate or resolution, as the case may be, to
the shareholders who were of record on the record date. The Transfer Agent will,
upon receipt of any such cash, make payment of such cash dividends or
distributions to the shareholders of record as of the record date by: (i)
mailing a check, payable to the registered shareholder, to the address of record
or dividend mailing address, or (ii) wiring such amounts to the accounts
previously designated by an Approved Institution, as the case may be. The
Transfer Agent shall not be liable for any improper payments made in good faith
and without negligence, in accordance with a Certificate or resolution described
in the
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preceding paragraph. If the Transfer Agent shall not receive from the Custodian
sufficient cash to make payments of any cash dividend or distribution to all
shareholders of the Trust or applicable series of the Trust as of the record
date, the Transfer Agent shall, upon notifying the Trust, withhold payment to
all shareholders of record as of the record date until sufficient cash is
provided to the Transfer Agent.
3. It is understood that the Transfer Agent shall in no way be
responsible for the determination of the rate or form of dividends or capital
gain distributions due to the shareholders. It is expressly agreed and
understood that the Transfer Agent is not liable for any loss as a result of
processing a distribution based on information provided in the Certificate that
is incorrect. The Trust agrees to pay the Transfer Agent for any and all costs,
both direct and out-of-pocket expenses, incurred in such corrective work as
necessary to remedy such error.
4. It is understood that the Transfer Agent shall file such
appropriate information returns concerning the payment of dividend and capital
gain distributions with the proper federal, state and local authorities as are
required by law to be filed by the Trust but shall in no way be responsible for
the collection or withholding of taxes due on such dividends or distributions
due to shareholders, except and only to the extent, required by applicable law.
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ARTICLE VII
CONCERNING THE TRUST
1. The Trust represents to the Transfer Agent that:
(a) It is a business trust duly organized and existing under the
laws of the State of Delaware.
(b) It is empowered under applicable laws and by its
Declaration and By-Laws to enter into and perform this Agreement.
(c) All requisite action has been taken to authorize
it to enter into and perform this Agreement.
(d) It is an investment company registered under the Investment
Company Act of 1940, as amended.
(e) A registration statement under the Securities Act of 1933,
as amended, with respect to the Shares is effective. The Trust shall notify the
Transfer Agent if such registration statement or any state securities
registrations have been terminated or a stop order has been entered with respect
to the Shares.
2. The Trust shall promptly deliver to the Transfer Agent written
notice of any change in the Officers authorized to sign Share Certificates,
notifications or requests, together with a specimen signature of each new
Officer. In the event any Officer who shall have signed manually or whose
facsimile signature shall have been affixed to blank Share certificates shall
die, resign or be removed prior to issuance of such Share certificates, the
Transfer Agent may issue such Share certificates of the Trust
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notwithstanding such death, resignation or removal, and the Trust shall promptly
deliver to the Transfer Agent such approval, adoption or ratification as may be
required by law.
3. It shall be the sole responsibility of the Trust to deliver to the
Transfer Agent the Trust's currently effective Prospectus and, for purposes of
this Agreement, the Transfer Agent shall not be deemed to have notice of any
information contained in such Prospectus until a reasonable time after it is
actually received by the Transfer Agent.
ARTICLE VIII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent represents and warrants to the Trust that:
(a) It is a corporation duly organized and existing under the laws
of the State of Delaware.
(b) It is empowered under applicable law and by its Charter and
By-laws to enter into and perform this Agreement.
(c) All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
(d) It is duly registered as a transfer agent under Section 17A of
the Securities Exchange Act of 1934, as amended.
2. The Transfer Agent shall not be liable and shall be indemnified in
acting upon any computer tape or electronic data transmission, writing or
document reasonably believed by it to be genuine and to have been signed or made
by an Officer of the Trust
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or person designated by the Trust and shall not be held to have any notice of
any change of authority of any person until receipt of written notice thereof
from the Trust or such person. It shall also be protected in processing Share
certificates which bear the proper countersignature of the Transfer Agent and
which it reasonably believes to bear the proper manual or facsimile signature of
the Officers of the Trust.
3. The Transfer Agent upon notice to the Trust may establish such
additional procedures, rules and regulations governing the transfer or
registration of Share certificates as it may deem advisable and consistent with
such rules and regulations generally adopted by mutual fund transfer agents.
4. The Transfer Agent shall keep such records as are specified in
Schedule II hereto in the form and manner, and for such period, as it may deem
advisable and is agreeable to the Trust but not inconsistent with the rules and
regulations of appropriate government authorities, in particular Rules 31a- 2
and 31a-3 under the Investment Company Act of 1940, as amended. The Transfer
Agent acknowledges that such records are the property of the Trust. The Transfer
Agent may deliver to the Trust from time to time at its discretion, for
safekeeping or disposition by the Trust in accordance with law, such records,
papers, documents accumulated in the execution of its duties as such Transfer
Agent, as the Transfer Agent may deem expedient, other than those which the
Transfer Agent is itself required to maintain pursuant to
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applicable laws and regulations. The Trust shall assume all responsibility for
any failure thereafter to produce any record, paper, cancelled Share
certificate, or other document so returned, if and when required. The records
specified in Schedule II hereto maintained by the Transfer Agent pursuant to
this Section 4, which have not been previously delivered to the Trust pursuant
to the foregoing provisions of this Section 4, shall be considered to be the
property of the Trust, shall be made available upon request for inspection by
the officers, employees, and auditors of the Trust, and records shall be
delivered to the Trust upon request and in any event upon the date of
termination of this Agreement, as specified in Article IX of this Agreement, in
the form and manner kept by the Transfer Agent on such date of termination or
such earlier date as may be requested by the Trust.
5. The Transfer Agent shall not be liable for any loss or damage,
including counsel fees, resulting from its actions or omissions to act or
otherwise, except for any loss or damage arising out of its bad faith,
negligence, willful misfeasance, gross negligence or reckless disregard of its
duties under this Agreement.
6a. The Trust shall indemnify and exonerate, save and hold harmless the
Transfer Agent from and against any and all claims (whether with or without
basis in fact or law), demands, expenses (including reasonable attorney's fees)
and liabilities of any and every nature which the Transfer Agent may sustain or
incur or
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which may be asserted against the Transfer Agent by any person by reason of or
as a result of any action taken or omitted to be taken by any prior transfer
agent of the Trust or as a result of any action taken or omitted to be taken by
the Transfer Agent, without negligence or willful misconduct, in good faith
reliance upon (i) any provision of this Agreement; (ii) the Prospectus; (iii)
any instruction or order including, without limitation, any computer tape or
electronic data transmission reasonably believed by the Transfer Agent to have
been received from an Approved Institution; (iv) any instrument, order or Share
certificate reasonably believed by it to be genuine and to be signed,
countersigned or executed by any duly authorized Officer of the Trust; (v) any
Certificate or other instructions of an Officer; or (vi) any opinion of legal
counsel for the Trust or the Transfer Agent. The Trust shall indemnify and
exonerate, save and hold the Transfer Agent harmless from and against any and
all claims (whether with or without basis in fact or law), demands, expenses
(including reasonable attorney's fees) and liabilities of any and every nature
which the Transfer Agent may sustain or incur or which may be asserted against
the Transfer Agent by any person by reason of or as a result of any action taken
or omitted to be taken by the Transfer Agent in connection with its appointment
hereunder and in good faith reliance upon any law, act, regulation or any
interpretation of the same even though such law, act or
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regulation may thereafter be altered, changed, amended or repealed.
6b. The Transfer Agent shall not settle any claim, demand, expense or
liability for which it may seek indemnity pursuant to Section 6(a) above (each,
an "Indemnifiable Claim") without the express written consent of the President
of the Trust. The Transfer Agent shall notify the Trust within 15 days of
receipt of notification of an Indemnifiable Claim, provided that the failure by
the Transfer Agent to furnish such notification shall not impair its right to
seek indemnification from the Trust unless the Trust is unable to adequately
defend the Indemnifiable Claim as a result of such failure, and further
provided, that if as a result of the Transfer Agent's failure to provide the
Trust with timely notice of the institution of litigation a judgment by default
is entered, prior to seeking indemnification from the Trust the Transfer Agent,
at its own cost and expense, shall open such judgment. The Trust shall have the
right to defend any Indemnifiable Claim at its own expense, provided that such
defense shall be conducted by counsel selected by the Trust and reasonably
acceptable to the Transfer Agent. The Transfer Agent may join in such defense at
its own expense, but to the extent that it shall so desire the Trust shall
direct such defense. The Trust shall not settle any Indemnifiable Claim without
the express written consent of the Transfer Agent if the Transfer Agent
determines that such settlement would have an adverse effect on the Transfer
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Agent beyond the scope of this Agreement. In such event, each of the Trust and
the Transfer Agent shall be responsible for their own defense at their own cost
and expense, and such claim shall not be deemed an Indemnifiable Claim
hereunder. If the Trust shall fail or refuse to defend an Indemnifiable Claim,
the Transfer Agent may provide its own defense at the cost and expense of the
Trust. Anything in this Agreement to the contrary notwithstanding, the Trust
shall not indemnify the Transfer Agent against any liability or expense arising
out of the Transfer Agent's willful misfeasance, bad faith, negligence or
reckless disregard of its duties and obligations under this Agreement. The
Transfer Agent shall indemnify and hold the Trust harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by the Transfer Agent as a result of the Transfer Agent's willful
misfeasance, lack of good faith, negligence, gross negligence or reckless
disregard of its duties and obligations under this Agreement.
7. The Transfer Agent shall not be liable to the Trust with respect to
any redemption draft on which the signature of the drawer is forged and which
the Trust's Custodian or Cash Management bank has advised the Transfer Agent to
honor the redemption; nor shall Transfer Agent be liable for any material
alteration or absence or forgery of any endorsement, it being
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understood that the Transfer Agent's sole responsibility with respect to
inspecting redemption drafts is to use reasonable care to verify the drawer's
signature against signatures on file.
8. There shall be excluded from the consideration of whether the
Transfer Agent has been negligent or has breached this Agreement, any period of
time, and only such period of time, during which the Transfer Agent's
performance is materially affected, by reason of circumstances beyond its
control including, without limitation (except as provided below), mechanical
breakdowns of equipment (including any alternative power supply and operating
systems software), flood or catastrophe, acts of God, failures of
transportation, communication or power supply, strikes, lockouts, work stoppages
or other similar circumstances.
9. At any time the Transfer Agent may apply to an Officer of the Trust
for written instructions with respect to any matter arising in connection with
the Transfer Agent's duties and obligations under this Agreement, and the
Transfer Agent shall not be liable for any action taken or permitted by it in
good faith in accordance with such written instructions. Such application by the
Transfer Agent for written instructions from an Officer of the Trust may set
forth in writing any action proposed to be taken or omitted by the Transfer
Agent with respect to its duties or obligations under this Agreement and the
date on and/or after which such action shall be taken. The Transfer Agent shall
not be liable for any action taken or omitted in accordance with a
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proposal included in any such application on or after the date specified therein
unless, prior to taking or omitting any such action, the Transfer Agent has
received written instructions in response to such application specifying the
action to be taken or omitted. The Transfer Agent may consult counsel of the
Trust, or upon notice to the Trust, its own counsel, at the expense of the Trust
and shall be fully protected with respect to anything done or omitted by it in
good faith in accordance with the advice or opinion of counsel to the Trust or
its own counsel.
10. The Transfer Agent My issue new Share certificates in place of
certificates represented to have been lost, stolen, or destroyed upon receiving
written instructions from the shareholder accompanied by proof of an indemnity
or surety bond issued by a recognized insurance institution specified by the
Trust or the Transfer Agent. The Transfer Agent may also reissue certificates
which are represented as lost, stolen, or destroyed without requiring a surety
bond provided that the notification is in writing and accompanied by an
indemnification signed on behalf of a member firm of the New York Stock Exchange
and signed by an officer of said firm with the signature guaranteed.
Notwithstanding the foregoing, the Transfer Agent will reissue a certificate
upon written authorization from an Officer of the Trust.
11. In case of any requests or demands for the inspection of the
shareholder records of the Trust, the Transfer Agent will
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endeavor to notify the Trust promptly and to secure instructions from an Officer
as to such inspection. The Transfer Agent reserves the right, however, to
exhibit the shareholder records to any person whenever it receives an opinion
from its counsel that there is a reasonable likelihood that the Transfer Agent
will be held liable for the failure to exhibit the shareholder records to such
person; provided, however, that in connection with any such disclosure the
Transfer Agent shall promptly notify the Trust that such disclosure has been
made or is to be made.
12. At the request of an Officer of the Trust the Transfer Agent will
address and mail such appropriate notices to shareholders as the Trust may
direct.
13. Notwithstanding any of the foregoing provisions of this Agreement,
the Transfer Agent shall be under no duty or obligation to inquire into, and
shall not be liable for:
(a) The legality of the issue or sale of any Shares, the
sufficiency of the amount to be received therefor (provided, however, that
nothing contained in this paragraph (a) shall relieve the Transfer Agent of its
obligations set forth in Article V, Section 2), or the authority of the Approved
Institution or of the Trust, as the case may be, to request such sale or
issuance;
(b) The legality of a transfer of Shares, or of a redemption of
any Shares, the propriety of the amount to be paid therefor (provided, however,
that nothing contained in this
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paragraph (b) shall relieve the Transfer Agent of its obligations set forth in
Article V, Section 2), or the authority of the Approved Institution or of the
Trust, as the case may be, to request such transfer or redemption;
(c) The legality of the declaration of any dividend by the Trust,
or the legality of the issue of any Shares in payment of any stock dividend; or
(d) The legality of any recapitalization or readjustment of
Shares.
14. The Transfer Agent shall be entitled to receive and the Trust
hereby agrees to pay to the Transfer Agent for its performance hereunder,
including its performance of the duties and functions set forth in Schedule I
hereto, (i) its reasonable out- of-pocket expenses (including reasonable legal
expenses and attorney's fees) incurred in connection with its performance
hereunder and (ii) such compensation as may be agreed upon in writing from time
to time by the Transfer Agent and the Trust.
15. The Transfer Agent shall have no duties or responsibilities
whatsoever except such duties and responsibilities as are specifically set forth
in this Agreement, and no covenant or obligation shall be implied in this
Agreement against the Transfer Agent.
16. Purchase and Prices of Services.
(a) The Trust will compensate the Transfer Agent for, and Transfer
Agent will provide, beginning on the execution date
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of this Agreement and continuing until the termination of this Agreement as
provided hereinafter, the Services set forth in Schedule I.
(b) The current unit prices for the Services are set forth in
Schedule III (the "Schedule III Fee Schedule"). The Schedule III Fees may be
amended by the mutual agreement of the Trust and the Transfer Agent.
Notwithstanding the foregoing, the Transfer Agent may increase prices due to
changes in legal or regulatory requirements subject to the approval of the
Trust, which approval shall not be unreasonably withheld.
17. Billing and Payment.
(a) The Transfer Agent shall bill the Trust as follows: (i)
monthly in arrears for Accounts maintained and in arrears for any Out-of- Pocket
Expenses incurred by the Transfer Agent, provided, however, that with respect to
Out-of-Pocket Expenses the Transfer Agent shall provide the Trust monthly with
an amount to be advanced to the Transfer Agent for estimated postage expenses
for the following month. Documentation to support reconciliation of actual
postal charges will be provided to the Trust monthly. The Transfer Agent may
from time to time request the Trust to make additional advances when
appropriate.
(b) The Trust shall pay the Transfer Agent in immediately available
funds at United Missouri Bank in Kansas City, Missouri within thirty (30) days
of the date of the bill.
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ARTICLE IX
TERMINATION
Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of receipt of such
notice. In the event such notice is given by the Trust, it shall
be accompanied by a copy of a resolution of the Board of Trustees of the Trust,
certified by its Secretary or any Assistant Secretary, electing to terminate
this Agreement and designating the successor transfer agent or transfer agents.
In the event such notice is given by the Transfer Agent, the Trust, on or before
the termination date, shall deliver to the Transfer Agent a copy of a resolution
of its Board of Trustees certified by the Secretary or any Assistant Secretary
designating a successor transfer agent or transfer agents. In the absence of
such designation by the Trust, the Trust shall upon the date specified in the
notice of termination of this Agreement and delivery of the records maintained
hereunder, be deemed to be its own transfer agent and the Transfer Agent shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement.
In the event this Agreement is terminated as provided herein, the
Transfer Agent, upon the written request of the Trust, shall deliver the records
of the Trust on electromagnetic media to the Trust or its successor transfer
agent. The Trust shall be
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responsible to the Transfer Agent for the reasonable costs and expenses
associated with the preparation and delivery of such media.
ARTICLE X
MISCELLANEOUS
1. The Trust agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of the
Transfer Agent hereunder, it shall advise the Transfer Agent of such proposed
change at least 30 days prior to the intended date of the same, and shall
proceed with such change only if it shall have received the written consent of
the Transfer Agent thereto, which shall not be unreasonably withheld.
2. Any notice required or permitted to be given hereunder shall be
deemed given either: (a) when sent by registered or certified mail, postage
prepaid, addressed to the party to whom 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; or (b) upon receipt by the party to whom 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 via overnight delivery.
If to the Trust, at:
Morgan Grenfell Investment Trust
885 Third Avenue
New York, NY 10022
Attention: James E. Minnick
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With a copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attention: Ernest V. Klein, Esq.
If to the Transfer Agent, at:
Supervised Service Company
120 South LaSalle Street
Chicago, IL 60603
Attention: Robert J. Engling
With a copy to:
Supervised Service Company
811 Main Street
Kansas City, MO 64105
Attention: Robert W. Ciarlelli
3. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the formality of this
Agreement.
4. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns. This Agreement
shall not be assignable by either party without the written consent of the
other party, except that the Transfer Agent may assign this Agreement to a
corporate affiliate with advance written notice to, and advance written consent
by, the Trust, which consent shall not be unreasonably withheld.
5. This Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois.
6. This Agreement My be executed in any number of counterparts each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
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7. The provisions of this Agreement are intended to benefit only the
Transfer Agent and the Trust, and no rights shall be granted to any other person
by virtue of this Agreement.
8. (a) The Transfer Agent will endeavor to assist in resolving
shareholder inquiries and errors relating to the period during which prior
transfer agents acted as such for the Trust. Any such inquiries or errors which
cannot be expediently resolved by the Transfer Agent will be referred to the
Trust.
(b) The Transfer Agent shall be responsible for the safekeeping and
maintenance of only those transfer agency records, cancelled certificates and
correspondence of the Trust created or produced prior to the time of conversion
which are under its control and acknowledged in a writing to the Trust to be in
its possession. Any expenses or liabilities incurred by the Transfer Agent as a
result of shareholder inquiries, regulatory compliance or audits related to
such records and not caused as a result of Transfer Agent's bad faith, willful
malfeasance or negligence shall be the responsibility of the Trust as provided
in Article VIII herein.
10. The Trust and the Transfer Agent 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 Declaration.
-35-
<PAGE>
The execution and delivery of this Agreement have 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 the
Trustees nor the execution and delivery by the officer will be deemed to have
been made by them or any shareholder of the Trust personally, but will bind only
the property of the Trust as provided in the Declaration. No series of the Trust
will be liable for any claims against any other series of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officer, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as the day and year
first above written.
Supervised Service Company, Inc. Morgan Grenfell Investment Trust
By: /s/ Thomas M. Blodget By: /s/ James E. Minnick
--------------------- --------------------
(Signature) (Signature)
/s/ Thomas M. Blodget James E. Minnick
--------------------- --------------------
(Name) (Name)
SVP President
--------------------- --------------------
(Title) (Title)
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<PAGE>
SCHEDULE I
DESCRIPTION OF SERVICES
In consideration of the fees to be paid in such manner and at such
times as the Trust and Transfer Agent may agree, Transfer Agent will provide the
services set forth below:
Examine and Process New Accounts, Subsequent Payments, Liquidations,
Exchanges, Telephone Transactions, Check Redemptions, Automatic Withdrawals,
Certificate Issuance, Wire Order Trades, Dividends, Dividend Statements, Dealer
Statements.
DAILY ACTIVITY
- --------------
Maintain the following shareholder information in such a manner as the
Transfer Agent shall determine:
Name and Address, including Zip Code
Balance of Uncertificated Shares
Balance of Certificated Shares
Certificate number, number of shares, issuance date of each certificate
outstanding and cancellation date for each certificate date for each
certificate no longer outstanding, if issued
Balance of dollars available for redemption
Dividend code (daily accrual, monthly reinvest, monthly cash
or quarterly cash)
Type of account code
Establishment date indicating the date an account was
opened, carrying forward pre-conversion data as available
Original establishment date for accounts opened by exchange
W-9 withholding status and periodic reporting
State of residence code
Social Security or taxpayer identification number, and
indication of certification
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<PAGE>
Historical transactions on the account for the most recent 18 months,
or other period as mutually agreed to from time-to-time
Indication as to whether phone transactions can be accepted
for this account. Beneficial owner code, i.e. male,
female, joint tenant, etc.
An alternate or "secondary" account number issued by a
dealer (or bank, etc.) to a customer for use, inquiry and
transaction input by "remote accessors"
FUNCTIONS
- ---------
Answer investor and dealer telephone and/or written inquiries, except
those concerning Trust policy, or requests for investment advice which
will be referred to the Trust, or those which the Trust chooses to
answer
Deposit Trust share certificates into accounts upon receipt of
instructions from the investor or other authorized person, if issued
Examine and process transfers of shares insuring that all transfer
requirements and legal documents have been supplied
Process and confirm address changes
Process standard account record changes as required, i.e.
Dividend Codes, etc.
Microfilm source documents for transactions, such as account
applications and correspondence
Perform backup withholding for those accounts which federal
government regulations indicate is necessary
Perform withholdings on liquidations, if applicable, for
employee benefit plans. Prepare and mail 5498s and 1099R's
Solicit missing taxpayer identification numbers
Provide remote access inquiry to Trust records via Trust supplied
hardware (Trust responsible for connection line and monthly fee)
-38-
<PAGE>
REPORTS PROVIDED
- ----------------
Daily Journals Reflecting all shares and
dollar activity for the
previous day
Blue Sky Report Supply information monthly
for Trust's preparation of
Blue Sky Reporting
N-SAR Report Supply monthly correspondence,
redemption and liquidation
information for use in Trust's
N-SAR Report
Additionally, monthly average daily balance reports will be provided at
the Trust's request to the Trust at no charge.
Prepare and mail copies of summary statements to dealers and
investment advisers
Generate and mail confirmation statements for financial
transactions
DIVIDEND ACTIVITY
- -----------------
Reinvest or pay in cash including reinvesting in other funds within the
fund group serviced by the Transfer Agent as described in the Trust's
prospectus
Distribute capital gains simultaneously with income dividends
DEALER SERVICES
- ---------------
Prepare and mail confirmation statements to dealers daily
Prepare and mail copies of statements to dealers, same
frequency as investor statements
SHAREHOLDER MEETINGS
- --------------------
Assist Trust in obtaining a qualified service to: address and mail
proxies and related material, tabulate returned proxies and supply
daily reports when sufficient proxies have been received Prepare
certified list of stockholders, hard copy or microform
-39-
<PAGE>
PERIODIC ACTIVITIES
- -------------------
Mail transaction confirmation statements daily to investors
Address and mail four (4) periodic financial reports (material must be
adaptable to Transfer Agent's mechanical equipment as reasonably
specified by the Transfer Agent)
Mail periodic statements to investors
Compute, prepare and furnish all necessary reports to
Governmental authorities: Forms 1099R, 1099DIV, 1099B, 1042
and 1042S
Enclose various marketing material as designated by the Trust in
statement mailings, i.e. monthly and quarterly statements (material
must be adaptable to mechanical equipment as reasonably specified by
the Transfer Agent)
-40-
<PAGE>
SCHEDULE II
RECORDS MAINTAINED BY TRANSFER AGENT
-- Account applications
-- Cancelled certificates plus stock powers and supporting documents
-- Checks including check registers, reconciliation records, any
adjustment records and tax withholding documentation
-- Indemnity bonds for replacement of lost or missing share
certificates and checks
-- Liquidation, redemption, withdrawal and transfer requests including
stock powers, signature guarantees and any supporting documentation
-41-
<PAGE>
SCHEDULE III
FEE SCHEDULE
MORGAN GRENFELL INVESTMENT TRUST
Annual Fee Minimum Annual
Per Account Fee per Series
Morgan Grenfell Large Cap $25.00 $10,000
Growth Fund
Morgan Grenfell Smaller $25.00 $10,000
Companies Fund
Morgan Grenfell Fixed $25.00 $10,000
Income Fund
Morgan Grenfell Short-Term $25.00 $10,000
Fixed Income Fund
Morgan Grenfell Municipal $25.00 $10,000
Bond Fund
Morgan Grenfell Short-Term $25.00 $10,000
Municipal Bond Fund
Morgan Grenfell Microcap $25.00 $10,000
Fund
-42-
POWER OF ATTORNEY
-----------------
I, the undersigned officer of Morgan Grenfell Investment Trust, a
Delaware business trust, do hereby constitute and appoint James E. Minnick and
Mark G. Arthus and each of them acting singly, to be my true, sufficient and
lawful attorneys, with full power to each of them, and each of them acting
singly, to sign for me, in my name and in the capacities indicated below, the
Registration Statement on Form N-1A of Morgan Grenfell Investment Trust and any
and all amendments to said Registration Statement to be filed by Morgan Grenfell
Investment Trust under the Investment Company Act of 1940, as amended, and under
the Securities Act of 1933, as amended, with respect to the offering of its
shares of beneficial interest, and any and all other documents and papers
relating thereto, and generally to do all such things in my name and on my
behalf in the capacities indicated below to enable Morgan Grenfell Investment
Trust to comply with the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by said attorneys or either of them to any and all amendments
to said Registration Statement.
IN WITNESS WHEREOF, I have hereunto set my hand on this 30th day of
October 1996.
/s/ John G. Alshefski
---------------------
John G. Alshefski
Treasurer and Chief
Financial Officer
