MORGAN GRENFELL INVESTMENT TRUST
Institutional Shares
No-Load Open-End Funds
885 Third Avenue
New York, New York 10022
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end management
investment company consisting of a number of investment portfolios. This
Prospectus offers institutional 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,
Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund (each a
"Fund"). Information concerning investment portfolios of the Trust that focus on
international investments (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. The sole objective of Morgan Grenfell Microcap
Fund is to maximize capital appreciation.
Each Fund's primary investments are summarized below:
Morgan Grenfell Fixed Income Fund invests primarily in U.S. dollar-denominated
debt securities, including U.S. and non-U.S. government securities, corporate
debt securities and debentures, mortgage-backed and asset-backed securities and
taxable municipal debt securities, and repurchase agreements with respect to the
foregoing. The Fund expects to maintain a dollar weighted average portfolio
maturity of between five and ten years.
Morgan Grenfell Municipal Bond Fund invests primarily in municipal debt
securities that pay interest exempt from U.S. federal income tax. The Fund
expects to maintain a dollar weighted average portfolio maturity of between five
and ten years.
Morgan Grenfell Short-Term Fixed Income Fund invests in the same types of
securities as Morgan Grenfell Fixed Income Fund, but maintains a dollar weighted
average portfolio maturity of no longer than three years.
Morgan Grenfell Short-Term Municipal Bond Fund invests in the same types of
securities as Morgan Grenfell Municipal Bond Fund, but maintains a dollar
weighted average portfolio maturity of no longer than three years.
(continued on next page)
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Morgan Grenfell Smaller Companies Fund invests primarily in equity and
equity-related securities of small capitalization U.S. companies.
Morgan Grenfell Microcap Fund invests primarily in equity and equity-related
securities of micro capitalization U.S. companies. Micro capitalization or
"microcap" companies are the smallest capitalization U.S. companies.
Morgan Grenfell Large Cap Growth Fund invests primarily in equity and
equity-related securities of large capitalization U.S. companies.
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This Prospectus provides information about the Trust and each of the Funds that
investors should know before investing in institutional 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 March 7, 1997, 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, 1 Freedom Valley Drive, Oaks,
Pennsylvania 19456-0100. The Statement of Additional Information, which is
incorporated by reference into this Prospectus, has been filed with the
Securities and Exchange Commission. Not all of the Funds are available in
certain states. Please call 1-800-550-6426 to determine availability in a
particular state.
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INSTITUTIONAL 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.
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TABLE OF CONTENTS
Page
Expense Information 4
Financial Highlights 6
Microcap Investment Results 8
Introduction to the Funds 10
Risk Factors 11
Investment Objectives and Policies 11
Description of Securities and Investment Techniques
and Related Risks 16
Additional Investment Information 24
Management of the Funds 26
Purchase of Institutional Shares 28
Redemption of Institutional Shares 31
Net Asset Value 32
Dividends, Distributions and Taxes 33
Organization and Shares of the Trust 35
Performance Information 36
Appendix A (Tax Certification Instructions) 38
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EXPENSE INFORMATION
<TABLE>
<CAPTION>
Short-Term Short-Term Smaller Large Cap
Fixed Income Municipal Fixed Income Municipal Companies Microcap Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Fund Fund * Fund *
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases ...................... None None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends ...................... None None None None None None None
Deferred Sales Charge Imposed
on Redemptions + .......................... None None None None None None None
Exchange Fee .............................. None None None None None None None
====================================================================================================================================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Advisory fees ............................. 0.40% 0.40% 0.40% 0.40% 1.00% 1.50% 0.75%
Other Expenses ............................ 0.19% 0.20% 1.05% 0.70% 2.03% 0.66% 0.48%
Reduction of Advisory Fee and Expense
Limitation by Adviser ** .................. ( 0.04)% ( 0.05)% ( 0.90)% ( 0.55)% ( 1.78)% ( 0.41)% ( 0.23)%
Net Fund Operating Expenses (after
advisory fee reduction and expense
limitation) **............................. 0.55% 0.55% 0.55% 0.55% 1.25% 1.75% 1.00%
====================================================================================================================================
</TABLE>
* Microcap Fund and Large Cap Growth Fund were not operational during the
fiscal year ended October 31, 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 E 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 0.36%, Municipal Bond Fund 0.35%, Short-Term Fixed Income
Fund 0%, Short-Term Municipal Bond Fund 0%, Smaller Companies Fund 0.59%,
Microcap Fund 1.09% and Large Cap Growth Fund 0.52%; and the Other Expenses
of each of Short-Term Fixed Income Fund and Short-Term Municipal Bond Fund
and Samller Companies Fund are equal to the respective amounts shown in the
above table as Net Fund Operating Expenses. If the Adviser's voluntary
agreement was not in effect, the Fund Operating Expenses for institutional
shares of each Fund would be as follows: Fixed Income Fund 0.59%, Municipal
Bond Fund 0.60%, Short-Term Fixed Income Fund 1.45%, Short-Term Municipal
Bond Fund 1.10%, Smaller Companies Fund 3.03%, Microcap Fund 2.16% and
Large Cap Growth Fund 1.23%.
+ A fee, currently $10, will be imposed on redemptions by wire.
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Example:
Investors in institutional shares would pay the following expenses on a $1,0001
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 $ 6 $ 18 $ 31 $ 69
Morgan Grenfell Municipal Bond Fund $ 6 $ 18 $ 31 $ 69
Morgan Grenfell Short-Term Fixed Income Fund $ 6 $ 18 $ 31 $ 69
Morgan Grenfell Short-Term Municipal Bond Fund $ 6 $ 18 $ 31 $ 69
Morgan Grenfell Smaller Companies Fund $ 13 $ 40 $ 69 $151
1 3
Year Years
---- -----
Morgan Grenfell Microcap Fund $18 $55
Morgan Grenfell Large Cap Growth Fund $10 $32
1 The minimum initial investment required for institutional shares of each Fund
is $250,000. Exchanges may be made in amounts as low as $50,000. See "Purchase
of Shares--Exchange Privilege."
The purpose of the Expense Information Table and Example is to assist investors
in understanding the various direct and indirect costs and expenses that an
investment in institutional shares of a Fund will bear. "Other Expenses"
included in the Expense Information Table and Example for each Fund other than
Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund are
estimates for the fiscal year ending October 31, 1997 that are based on actual
expenses incurred during the fiscal year ended October 31, 1996, except that the
figures shown assume that new administration and transfer agency fees were in
effect throughout the year ended October 31, 1996. "Other Expenses" for Morgan
Grenfell Large Cap Growth Fund and Morgan Grenfell Microcap Fund are based on
estimated average net assets for the current fiscal year ending October 31,
1997. If the average net assets of either of these Funds exceeds the applicable
estimate for such year, then that Fund's "Other Expenses" (as a percentage of
average net assets) will be lower than the rate shown in the table. Conversely,
if either of these Funds' average net assets are lower than the applicable
estimate for such year, then that Fund's "Other Expenses" (as a percentage of
average 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 fees and other expenses of the
Funds, see "Management of the Funds."
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FINANCIAL HIGHLIGHTS
Selected audited data for an outstanding institutional share of each Fund other
than Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund are
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 Price Waterhouse LLP, the Funds' independent accountants. The
data for periods prior to and ending October 31, 1994 for Morgan Grenfell Fixed
Income Fund and Morgan Grenfell Municipal Bond Fund have been audited by these
Funds' prior independent accountants. 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 are available free of
charge by calling 1-800-550-6426.
No data is shown below for Morgan Grenfell Microcap Fund or Morgan Grenfell
Large Cap Growth Fund because these Funds had not commenced operations on or
prior to October 31, 1996. However, performance data for a composite of microcap
accounts managed by the Adviser is shown below under "Microcap Investment
Results".
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<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
====================================================================================================================================
For an Institutional Share Outstanding Throughout Each Period Ended October 31
Net
Realized
Net Asset Net and Distributions Distributions
Value Investment Unrealized from Net from Realized Net Asset Net Assets
Beginning Income / Gains/ Investment Capital Value End Total End of
Year of Period (Loss) (Losses) Income Gains of Period Return Period (000)
====================================================================================================================================
- ---------------------------------
Fixed Income Fund
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 10.62 $ 0.68 $ (0.04) $ (0.68) $ (0.07) $ 10.51 6.27% $758,003
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)% $239,55
1993 $ 9.92 $ 0.64 $ 1.03 $ (0.64) -- $ 10.95 17.28% $147,917
1992 (1) $ 10.00 $ 0.06 $ (0.08) $ (0.06) -- $ 9.92 (1.61)% $ 25,528
- ---------------------------------
Municipal Bond Fund
- ---------------------------------
1996 $ 10.86 $ 0.60 $ 0.13 $ (0.60) -- $ 10.99 6.90% $252,152
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 (2) $ 10.00 $ 0.60 $ 0.56 $ (0.60) -- $ 10.56 13.42% $ 94,700
- ---------------------------------
Short-Term Fixed Income Fund
- ---------------------------------
1996 $ 10.01 $ 0.60 $ (0.01) $ (0.60) -- $ 10.00 6.09% $ 6,751
1995 (3) $ 10.00 $ 0.37 $ 0.01 $ (0.37) -- $ 10.01 3.82% $ 4,140
- ---------------------------------
Short-Term Municipal Bond Fund
- ---------------------------------
1996 $ 10.13 $ 0.54 $ 0.04 $ (0.54) $ (0.04) $ 10.13 5.90% $ 9,132
1995 (4) $ 10.00 $ 0.30 $ 0.13 $ (0.30) -- $ 10.13 4.39% $ 3,724
- --------------------------------
Smaller Companies Fund
- --------------------------------
1996 $ 10.55 $ (0.02) $ 2.61 $ (0.04) -- $ 13.10 24.58% $ 4,115
1995 (5) $ 10.00 $ 0.03 $ 0.52 -- -- $ 10.55 5.50% $ 2,638
====================================================================================================================================
<CAPTION>
====================================================================================================================================
For an Institutional Share Outstanding Throughout Each Period Ended October 31
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
Average to Average Expense Expense Turnover Commission
Year Net Assets Net Assets Limitations) Limitations) Rate Rate*
================================================================================================================================
- ---------------------------------
Fixed Income Fund
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 0.55% 6.52% 0.61% 6.46% 176% N/A
1995 0.54% 6.81% 0.63% 6.72% 182% N/A
1994 0.54% 6.22% 0.66% 6.10% 251% N/A
1993 0.55% 6.01% 0.72% 5.84% 196% N/A
1992 (1) 0.55% 5.24% 1.66% 4.13% 148% N/A
- ---------------------------------
Municipal Bond Fund
- ---------------------------------
1996 0.55% 5.50% 0.61% 5.44% 66% N/A
1995 0.54% 5.75% 0.62% 5.67% 63% N/A
1994 0.54% 5.60% 0.67% 5.47% 94% N/A
1993 0.55% 5.94% 0.75% 5.74% 160% N/A
1992 (2) 0.55% 6.31% 0.79% 6.07% 143% N/A
- ---------------------------------
Short-Term Fixed Income Fund
- ---------------------------------
1996 0.53% 6.00% 1.29% 5.24% 124% N/A
1995 (3) 0.52% 5.86% 2.84% 3.54% 90% N/A
- ---------------------------------
Short-Term Municipal Bond Fund
- ---------------------------------
1996 0.53% 5.34% 1.58% 4.29% 129% N/A
1995 (4) 0.52% 4.60% 2.16% 2.96% 62% N/A
- ---------------------------------
Smaller Companies Fund
- ---------------------------------
1996 1.25% (0.23)% 2.55% (1.53)% 141% $ 0.0560
1995 (5) 1.25% 0.94% 2.28% (0.09)% 23% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Returns are for the period indicated and have not been annualized.
* Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
(1) Fixed Income Fund commenced operations on 9/18/92. All ratios for the
period have been annualized.
(2) Municipal Bond Fund commenced operations on 12/13/91. All ratios for the
period have been annualized.
(3) Short-Term Fixed Income Fund commenced operations on 3/13/95. All ratios
for the period have been annualized.
(4) Short-Term Municipal Bond Fund commenced operations on 3/6/95. 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.
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<PAGE>
MICROCAP INVESTMENT RESULTS
Set forth below are 10-year investment results for a composite of accounts
managed by the Microcap Equity Team of Morgan Grenfell Capital Management, Inc.
(the "Adviser" or "MGCM") in accordance with the microcap investment strategy
(the "MGCM Microcap Composite"). For comparison purposes, performance
information is also shown for the Russell 2000 (an index of small capitalization
stocks).
Each of the Adviser's discretionary microcap accounts is included in the
MGCM Microcap Composite. These accounts had the same investment objective as
Morgan Grenfell Microcap Fund and were managed using substantially similar,
though not necessarily identical, investment strategies and techniques as those
contemplated for Microcap Fund. See "Investment Objectives and Policies".
Because of the similarities in investment strategies and techniques, the Adviser
believes that the accounts included in the MGCM Microcap Composite are
sufficiently comparable to Microcap Fund to make the performance data listed
below relevant to prospective investors.*
The investment results presented are not intended to predict or suggest the
returns that will be experienced by Microcap Fund or the return an investor may
achieve by investing in shares of the Fund. Most of the accounts included in the
MGCM Microcap Composite were not subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the Investment Company Act of 1940 (the "1940 Act") and the Internal
Revenue Code of 1986, as amended (the "Code"). If more of the accounts had been
subject to these requirements, the performance of the MGCM Microcap Composite
might have been lower.
The investment results of the MGCM Microcap Composite are shown net of
commissions and transaction costs (including custody fees) and net of the
highest investment advisory fee charged to any account included in the Composite
(2.00% for periods prior to October 1, 1993 and 1.50% for subsequent periods).
Microcap Fund's estimated total annual operating expenses are higher than the
highest investment advisory fee charged to any account included in the MGCM
Microcap Composite.
- ----------
* Robert Kern, Audrey Jones and David Baratta are the members of the Adviser's
Microcap Equity Team. Mr. Kern and Ms. Jones have been members of the Team
throughout the ten-year period for which data is shown. Mr. Baratta joined the
Team in September 1994, following the departure of two portfolio managers who
had been members of the Team since at least 1987. In May 1996, a portfolio
manager who had been a member of the Team since at least 1987 left MGCM.
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<PAGE>
Average Annual Total Return
---------------------------
MGCM Microcap
Composite
Year (Net of Fees) Russell 2000
- ---- ------------- ------------
1996 50.49% 16.49%
1995 54.29% 28.44%
1994 (16.71)% (1.81)%
1993 18.15% 18.89%
1992 3.49% 18.42%
1991 74.37% 46.05%
1990 (2.48)% (19.50)%
1989 24.25% 16.24%
1988 14.13% 24.89%
1987 (4.91)% (8.77)%
- --------------------------------------------------------------------------------
MGCM Microcap
Composite
(Net of Fees) Russell 2000
Annualized Total Return For
Period From December 31, 1986
to December 31, 1996 18.42% 12.41%
- --------------------------------------------------------------------------------
Another way to consider the above data is as follows:
$10,000 invested in a private account on December 31, 1986, which achieved a
return based on the MGCM Microcap Composite, would have grown to $54,221,
assuming reinvestment of dividends, by December 31, 1996.
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<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 the Trust's other mutual funds (the
"International Funds"), which invest primarily in non-U.S. securities, is
contained in a separate prospectus that may be obtained by calling
1-800-550-6426.
The Adviser, 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 institutional shares of the Funds. The Funds
offer another class of shares (service shares), which is subject to different
expenses and therefore has different performance than institutional shares.
Information regarding service shares may be obtained by calling 1-800-550-6426.
As of the date of this Prospectus, Morgan Grenfell Large Cap Growth Fund had not
commenced operations and, therefore, had no operating history. There can be no
assurance that any Fund will be able to achieve its investment objectives.
General Portfolio Management Strategies
Fixed Income Investments. In selecting fixed income investments (including
municipal securities) for Fixed Income Fund, Short-Term Fixed Income Fund,
Municipal Bond Fund and Short-Term Municipal Bond Fund, the Adviser seeks to
achieve these Funds' investment objectives by identifying fixed income
securities which it believes to be undervalued relative to the market rather
than forecasting changes in the interest rate environment. Fixed income
securities may be undervalued for a variety of reasons, such as market
inefficiencies relating to lack of market information about particular features
of such securities, supply and demand shifts and lack of market penetration by
some issues.
Equity Investments. In selecting equity investments for Large Cap Growth Fund,
Smaller Companies Fund and Microcap Fund (the "Equity Funds"), the Adviser looks
for companies whose earnings it believes will grow both faster than inflation
and faster than the economy in general. An Equity Fund may invest in such a
company if the Adviser believes that such growth is not yet fully reflected in
the market price of the company's securities. In managing the Smaller Companies
Fund and the Microcap Fund, the Adviser may also consider the fundamental value
of a company, and may invest in a company where it believes that value is not
fully recognized in the marketplace. Fundamental value is determined by taking
into account various factors including earnings per share, the ratio of book
value to market price, and the company's cash flow and dividend yield.
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<PAGE>
In selecting equity investments, the Adviser considers a number of
company-specific factors, including quality of management, a leading or dominant
position in a major product line, a sound financial position, and a relatively
high rate of return on invested capital so that future growth can be financed
from internal sources. The Adviser also considers a company's record of dividend
payments and/or the likelihood that the Company will pay dividends in the
future. However, consistent with their investment objectives, each Equity Fund
may purchase securities of companies that are not expected to pay dividends in
the foreseeable future.
RISK FACTORS
An investment in any of the Funds is neither insured nor guaranteed by the U.S.
Government, or any agency thereof or any other entity. The value of each Fund's
portfolio securities, and thus the net asset value of its shares will fluctuate
as a result of market factors, including interest rate and stock market changes,
such that the value of the shares, when redeemed, may be more or less than their
original cost.
In addition, certain of the Funds may employ investment techniques, including
options and futures contracts and other investments that may be considered
derivative investments. These may entail special risks. For example, there is no
limit on the percentage of assets of an Equity Fund that may be at risk with
respect to futures and related options. See "Investment Objectives and Policies"
and "Description of Securities and Investment Techniques and Related Risks."
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
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<PAGE>
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 three highest rating categories
assigned by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("Standard & Poor's"), Duff & Phelps, Inc. ("Duff") or Fitch
Investors Service, Inc. ("Fitch") or unrated securities determined by the
Adviser to be of comparable quality. However, each Fixed Income Fund may also
invest up to 15% of its assets in fixed income securities that are, at the time
of purchase, either rated within the fourth highest rating category assigned by
Moody's, Standard & Poor's , Duff or Fitch, or unrated but determined by the
Adviser to be of comparable quality. See "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities." In the event
any security held by a Fixed Income Fund is downgraded below the rating
categories set forth above, the Adviser will review the security and determine
whether to retain or dispose of that security, provided that neither Fixed
Income Fund may hold, at any time, more than 5% of its net assets in fixed
income securities that are not investment grade. Fixed income securities rated
in one of the four highest ratings categories and unrated securities determined
by the Adviser to be of comparable quality are referred to herein as "investment
grade fixed income securities." Fixed income securities in the lowest investment
grade category are considered medium grade securities. Such securities have
speculative characteristics, involve greater risk of loss than higher quality
securities, and are more sensitive to changes in the issuer's capacity to pay.
Under normal conditions, each Fixed Income Fund may hold up to 20% of its total
assets in cash or money market instruments in order to maintain liquidity, or in
the event that the Adviser determines that securities meeting the Fund's
investment objective and policies are not otherwise readily available for
purchase. For a definition of money market instruments and the Fixed Income
Funds' policies on temporary defensive investments, see "Description of
Securities and Investment Techniques and Related Risks--Additional Investment
Techniques."
Municipal Bond Fund and Short-Term Municipal Bond Fund
The investment objective of the Municipal Bond Fund and the Short-Term Municipal
Bond Fund (the "Municipal Funds") is to seek a high level of income exempt from
regular federal income tax (i.e., excluded from gross income for federal income
tax purposes), consistent with the preservation of capital. However, there is no
restriction on the percentage of either Municipal Fund's assets that may be
invested in obligations the interest on which is a preference item for purposes
of the federal alternative minimum tax. The Municipal Bond Fund expects to
maintain a dollar weighted average remaining portfolio maturity of 5 to 10
years. The Short-Term Municipal Bond Fund will maintain a dollar weighted
average remaining portfolio maturity of no
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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 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) securities, 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 federal
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 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
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by Moody's, or that are unrated but are determined by the Adviser to be of
comparable quality. The Municipal Funds may purchase other types of tax-exempt
instruments as long as they are of a quality equivalent to the long-term bond or
commercial paper ratings stated above. In the event any security held by either
Municipal Fund is downgraded below the rating categories set forth above, the
Adviser will review the security and determine whether to retain or dispose of
that security, provided that neither Municipal Fund will hold, at any time, more
than 5% of its net assets in securities that are rated below investment grade.
Under normal circumstances, each Municipal Fund may invest up to 20% of its
total assets in certain taxable securities in order to maintain liquidity. In
addition, for temporary defensive purposes during periods when the Adviser
determines that market conditions warrant, each Municipal Fund may invest
without limit in such taxable securities. Such taxable securities include: U.S.
Treasury obligations (including separately traded interest and principal
component parts of U.S. Treasury obligations, transferable through the federal
book-entry system and known as Separately Traded Registered Interest and
Principal Securities or "STRIPS"); other marketable obligations issued or
guaranteed as to principal and interest by agencies or instrumentalities of the
U.S. Government whether or not backed by the full faith and credit of the U.S.
Treasury; short-term instruments of U.S. commercial banks or savings and loan
institutions (not including foreign branches of U.S. banks or U.S. branches of
foreign banks) that are members of the Federal Reserve System or the Federal
Deposit Insurance Corporation and that have total assets of $1 billion or more
as shown on their last published financial statements at the time of investment;
repurchase agreements involving any of the foregoing obligations; and, to the
extent permitted by applicable law, shares of other investment companies
investing solely in the foregoing obligations.
Distributions by a Fund that are derived from income from taxable securities
held by the Fund will generally be taxable to shareholders as ordinary income.
Smaller Companies Fund
The primary investment objective of the Smaller Companies Fund is to maximize
capital appreciation. The Fund seeks current income as its secondary investment
objective. Under normal market conditions, the Fund pursues these objectives by
investing at least 65% of its total assets in equity and equity-related
securities (but not less than 60% directly in stocks) of small capitalization
U.S. companies. Equity securities in which the Fund may invest include common
stocks and preferred stocks, while equity-related securities include warrants,
purchased call options and other rights to acquire stocks. See "Description of
Securities and Investment Techniques and Related Risks."
For purposes of the Fund's investment policies, small capitalization companies
are those ranked (at time of investment) according to market capitalization in
the bottom 20% of the Wilshire 5000 Index. The Adviser believes that investments
in equity and equity-related securities of many small capitalization companies,
although involving greater risk, provide the opportunity for greater capital
growth than investments in larger, better-known companies. For a description of
the risks associated with investing in small capitalization companies, see
"Description of Securities and Investment Techniques and Related Risks--Small
and Micro Capitalization Companies."
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<PAGE>
Up to 35% of the Fund's total assets may be invested in investment grade fixed
income securities (see definition on page 12), cash equivalents and equity and
equity-related securities of medium and large capitalization companies. In the
event any fixed income security held by the Fund is downgraded below investment
grade, the Adviser will review the security and determine whether to retain or
dispose of it. In no event, however, will the Fund hold more than 5% of its net
assets in fixed income securities that are not investment grade. Up to 5% of the
Fund's net assets (measured at time of investment) may be invested in the
securities of non-U.S. issuers of all sizes.
Microcap Fund
The investment objective of the Microcap Fund is to maximize capital
appreciation. Under normal market conditions, the Fund pursues this objective by
investing at least 65% of its total assets in common stocks of micro
capitalization U.S. companies and securities convertible into such stocks. For
purposes of the Fund's investment policies, micro capitalization companies are
those ranked (at the time of investment) according to market capitalization in
the bottom 5% of the U.S. equity market, including both listed and unlisted
companies.
The Adviser believes that investments in many micro capitalization companies,
although involving greater risk, provide the opportunity for greater capital
growth than investments in larger, better-known companies. In particular, the
Adviser believes that the inefficiencies in this sector of the marketplace often
provide opportunities for investment gains. The Fund's investments in securities
of U.S. micro capitalization companies will be limited to securities traded on a
U.S. exchange or in the over-the-counter market. For a description of the risks
associated with investing in micro capitalization companies, see "Description of
Securities and Investment Techniques and Related Risks--Small and Micro
Capitalization Companies."
Up to 25% of the Fund's total assets may be invested in securities of non-U.S.
companies with individual market capitalizations that would place them in the
bottom 5% of the U.S. equity market. For liquidity purposes, the Fund will
normally invest a portion of its assets (no more than 35%) in high quality debt
securities and money market instruments with remaining maturities of one year or
less, including repurchase agreements. In addition, the Fund may invest up to 5%
of its net assets in non-convertible bonds and preferred stocks that are rated,
at the time of purchase, Aaa or Aa by Moody's or AAA or AA by Standard & Poor's
or determined by the Adviser to be of comparable quality.
Large Cap Growth Fund
The primary investment objective of the Large Cap Growth Fund is to maximize
capital appreciation. The Fund seeks current income as its secondary investment
objective. Under normal market conditions, the Fund pursues these objectives by
investing at least 65% of its total assets in equity and equity-related
securities (but not less than 60% directly in stocks) of large capitalization
U.S. companies. The Fund may invest in the same types of equity and
equity-related securities as the Smaller Companies Fund (see above).
For purposes of the Fund's investment policies, large capitalization companies
are those ranked (at time of investment) according to market capitalization in
the top 25% of the Wilshire 5000 Index, a broad-based index that includes nearly
all U.S. public companies. The Adviser believes that the equity and
equity-related securities of many large capitalization companies offer
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<PAGE>
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 12), 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 facilities or projects. The payment of the principal and interest
on such bonds is generally dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
Put Bonds. The Fixed Income Funds and the Municipal Funds may invest in "put"
bonds, which are tax exempt securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Adviser
intends to purchase only those "put" bonds for which the put option is an
integral part of the security as originally issued. The option to "put" the bond
back to the issuer prior to the stated final maturity can cushion the price
decline of the bond in a rising interest rate environment. However, the premium
paid, if any, for an option to put will have the effect of
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<PAGE>
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 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."
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<PAGE>
Zero Coupon Securities. STRIPS and custodial receipts (TRs, TIGRs and CATS) are
sold as zero coupon securities, that is, fixed income securities that have been
stripped of their unmatured interest coupons. Zero coupon securities are sold at
a (usually substantial) discount and redeemed at face value at their maturity
date without interim cash payments of interest or principal. The amount of this
discount is accreted over the life of the security, and the accretion
constitutes the income earned on the security for both accounting and tax
purposes. Because a Fund must distribute the accreted amounts in order to
qualify for favorable tax treatment, it may have to sell portfolio securities to
generate cash to satisfy the applicable distribution requirements. Because of
these features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to
a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
Securities of Foreign Issuers
Each Equity Fund and each Fixed Income Fund may invest to a limited extent in
securities of foreign issuers and supranational entities. Investments in the
securities of foreign issuers and supranational entities may subject the Funds
to investment risks that differ in some respects from those related to
investments in securities of U.S. issuers. Such risks include future adverse
political and economic developments, possible imposition of withholding taxes on
income, possible seizure, nationalization or expropriation of foreign deposits,
possible establishment of exchange controls or taxation at the source or
fluctuation in value due to changes in currency exchange rates. Foreign issuers
of securities often engage in business practices different from those of
domestic issuers of similar securities and there may be less information
publicly available about foreign issuers. In addition, foreign issuers are,
generally speaking, subject to less government supervision and regulation and
different accounting treatment than are those in the United States.
To the extent that they invest in non-U.S. securities, the Equity Funds may
enter into forward currency exchange contracts ("forward contracts") and
currency options to hedge against currency exchange rate fluctuations. Forward
contracts and options may be considered derivative instruments.
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.
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<PAGE>
Mortgage-Backed and Asset-Backed Securities
The Fixed Income Funds and, to a more limited extent, the Municipal Funds may
invest in mortgage-backed securities, which represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. The Fixed Income Funds may also invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such securities are generally issued by trusts and special purpose
corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities because asset-backed securities generally do not have
the benefit of a security interest in collateral that is comparable to mortgage
assets. In addition, there is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities. Many mortgage and asset-backed securities may be considered
derivative instruments. No Fund will invest 25% or more of its total assets in
collateralized mortgage obligations or in asset-backed securities (in each case,
excluding U.S. Government Securities).
Options
Written Options. Each Equity Fund may write (sell) covered put and call options
on equity and fixed income securities and enter into related closing
transactions. A Fund may receive fees (referred to as "premiums") for granting
the rights evidenced by the options. However, in return for the premium for a
written call option, the Fund assumes certain risks. For example, in the case of
a written call option, the Fund forfeits the right to any appreciation in the
underlying security while the option is outstanding. A put option gives to its
purchaser the right to compel the Fund to purchase an underlying security from
the option holder at the specified price at any time during the option period.
In contrast, a call option written by the Fund gives to its purchaser the right
to compel the Fund to sell an underlying security to the option holder at a
specified price at any time during the option period. Upon the exercise of a put
option written by a Fund, the Fund may suffer a loss equal to the difference
between the price at which the Fund is required to purchase the underlying
security and its market value at the time of the option exercise, less the
premium received for writing the option. All options written by a Fund are
covered. In the case of a call option, this means that the Fund will own the
securities subject to the option or an offsetting call option as long as the
written option is outstanding, or will have the absolute and immediate right to
acquire other securities that are the same as those subject to the written
option. In the case of a put option, this means that the Fund will deposit cash
or liquid securities in a segregated account with the custodian with a value at
least equal to the exercise price of the put option.
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<PAGE>
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 securities it ultimately wishes to buy. The
advantage to the purchaser of a put option is that it may hedge against a
decrease in the price of portfolio securities it ultimately wishes to sell.
Each Equity Fund may enter into closing transactions in order to offset an open
option position prior to exercise or expiration by selling an option it has
purchased or by entering into an offsetting option. If a Fund cannot effect
closing transactions, it may have to retain a security in its portfolio it would
otherwise sell, or deliver a security it would otherwise retain.
The Funds may purchase and sell options traded on U.S. exchanges and, to the
extent permitted by law, options traded over-the-counter. The Funds will treat
purchased over-the-counter options as illiquid. 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 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
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<PAGE>
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 a
Fund to perform worse than if such positions had not been taken. The ability to
terminate over-the-counter options is more limited than with exchange traded
options and may involve the risk that the counterparty to the option will not
fulfill its obligations. In accordance with a position taken by the Securities
and Exchange Commission (the "Commission"), each Fund will limit its investments
in illiquid securities to 15% of the Fund's net assets. The Funds will treat
over-the-counter options and the assets used to cover such options as illiquid
securities subject to this limitation, except that, with respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of the illiquid securities may be calculated with reference to the
formula price.
Options and futures transactions are highly specialized activities which involve
investment techniques and risks that are different from those associated with
ordinary portfolio transactions. Gains and losses on investments in options and
futures depend on the Adviser's ability to predict the direction of stock prices
and other economic factors. The loss that may be incurred by a Fund in entering
into futures contracts and written options thereon is potentially unlimited.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain facilities of an options
clearing entity or other entity performing the regulatory and liquidity
functions of an options clearing entity inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. Most futures exchanges limit the amount
of fluctuation permitted in a futures contract's prices during a single trading
day. Once the limit has been reached no further trades may be made that day at a
price beyond the limit. The price limit will not limit potential losses, and may
in fact prevent the prompt liquidation of futures positions, ultimately
resulting in further losses.
Except as set forth above under "Futures Contracts and Options on Futures
Contracts", there is no limit on the percentage of an Equity Fund's assets that
may be at risk with respect to futures contracts and related options. A Fund may
not invest more than 25% of its total assets in purchased protective put
options. 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.
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<PAGE>
Small and Micro Capitalization Companies
Smaller Companies Fund and Microcap Fund invest a significant portion of their
assets in smaller, lesser-known companies which the Adviser believes offer
greater growth potential than larger, more mature, better-known companies.
Investing in the securities of these companies, however, also involves greater
risk and the possibility of greater portfolio price volatility. Among the
reasons for the greater price volatility of these small companies and unseasoned
stocks are the less certain growth prospects of smaller firms, the lower degree
of liquidity in the markets for such stocks and the greater sensitivity of small
companies to changing economic conditions in their geographic region. For
example, securities of these companies involve higher investment risk than that
normally associated with larger firms due to the greater business risks of small
size and limited product lines, markets, distribution channels and financial and
managerial resources.
Many smaller capitalization companies in which Smaller Companies Fund and
Microcap Fund may invest are not well-known to the investing public, do not have
significant institutional ownership and are followed by relatively few
securities analysts. As a result, there may be less publicly available
information concerning these companies than exists for larger capitalization
companies. Also, the securities of smaller capitalization companies traded on
the over-the-counter market may have fewer market makers, wider spreads between
their quoted bid and asked prices and lower trading volumes, resulting in
comparatively greater price volatility and less liquidity than exists for
securities of larger capitalization companies.
Convertible Securities and Preferred Stocks
Subject to its investment objectives and policies, each Equity Fund may invest
in convertible securities, which are ordinarily preferred stock or long-term
securities 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 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 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
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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.
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
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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 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
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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, 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 equity securities. A
high rate of portfolio turnover will also increase the likelihood of net
short-term capital gains (distributions of which are taxable to shareholders as
ordinary income) and, under some circumstances, make it more difficult for the
Fund to qualify as a regulated investment company
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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 September 30, 1996,
MGCM managed approximately $8.5 billion in assets.
Under its Advisory Contracts with the Trust, the Adviser manages each Fund's
business and investment affairs. For these services, the Adviser is entitled to
a monthly fee at an annual rate of each Fund's average daily net assets as
follows:
Annual Rate
Morgan Grenfell Fixed Income Fund 0.40%
Morgan Grenfell Municipal Bond Fund 0.40%
Morgan Grenfell Short-Term Fixed Income Fund 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund 0.40%
Morgan Grenfell Smaller Companies Fund 1.00%
Morgan Grenfell Microcap Fund 1.50%
Morgan Grenfell Large Cap Growth Fund 0.75%
The advisory fees to which the Adviser is entitled for Smaller Companies Fund,
Microcap 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 "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 Microcap Fund and Morgan Grenfell Large Cap Growth Fund,
which were 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 0.34%, 0.34%,
0.00%, 0.00%, and 0.00% of their respective average daily net assets.
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Each Fixed Income Fund and Municipal Fund is managed utilizing a team approach
led by Executive Vice President David W. Baldt. Mr. Baldt has been in the
investment advisory business since 1973 and with the Adviser since 1989. The
rest of the team includes Gary W. Bartlett, Warren S. Davis, Tomas J. Flaherty
and Timothy C. Vile, all Senior Vice Presidents with the Adviser. Mr. Bartlett
has been in the in the investment advisory business since 1982 (with the Adviser
since 1992) and previously managed funds with Provident National Bank. Mr. Davis
has been in the in the investment advisory business since 1986 (with the Adviser
since 1995) and has managed funds with Merrill Lynch and Paine Webber. Mr.
Flaherty has been in the in the investment advisory business since 1985 (with
the Adviser since 1995) and previously managed funds with Prudential Securities.
Mr. Vile has been in the investment advisory business since 1986 (with the
Adviser since 1991) and previously managed funds for Equitable Capital
Management.
The Smaller Companies Fund and Microcap Fund are each managed by a team of three
experienced portfolio managers, Robert Kern, Audrey M. T. Jones and David A.
Baratta. They have all served as members of the Funds'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 September 1994, 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."
Administrator and Distributor
The Trust has entered into an Administration Agreement with SEI Financial
Management Corporation ("SEI Financial Management" or the "Administrator"), 1
Freedom Valley Drive, Oaks, Pennsylvania 19456-0100, 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:
0.12% of aggregate assets under $1 billion
0.08% of next $500 million of aggregate assets
0.06% of next $1 billion of aggregate assets
0.04% of aggregate assets exceeding $2.5 billion
Each Fund pays the Administrator a minimum annual fee of $60,000.
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<PAGE>
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"), 1 Freedom Valley Drive,
Oaks, Pennsylvania 19456-0100, serves as the distributor of institutional shares
of the Funds pursuant to a Distribution Agreement with the Trust and assists in
the sale of institutional shares of the Funds.
Custodians and Transfer Agent
The Trust has entered into a Custodian Agreement with CoreStates Bank, N.A.
("CoreStates"), pursuant to which CoreStates serves as custodian of the assets
of Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond Fund.
The Trust has entered into a Custodian Agreement with The Northern Trust Company
("Northern"), pursuant to which Northern serves as custodian of the assets of
the Equity Funds, Morgan Grenfell Short-Term Fixed Income Fund and Morgan
Grenfell Short-Term Municipal Bond Fund.
DST Systems, Inc. (the "Transfer Agent"), 1004 Baltimore, 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' institutional shares, acts as dividend and
distribution disbursing agent and performs other shareholder servicing
functions.
Additional information regarding the services performed by the Administrator,
the Distributor, the Custodian and the Transfer Agent is provided in the
Statement of Additional Information.
PURCHASE OF INSTITUTIONAL SHARES
Institutional shares of any Fund may be purchased on any Business Day at the net
asset value next determined after receipt of the investor's order in good order
by the Transfer Agent. A "Business Day" means any day on which the New York
Stock Exchange (the "NYSE") is open. Shareholders will be entitled to dividends
payable with respect to their shares of a Fund if they are shareholders of the
Fund on the record date for such dividend. There is no sales charge in
connection with purchases of institutional shares. The Trust reserves the right,
in its sole discretion, to reject any purchase offer and to suspend the offering
of shares.
Payments for institutional shares must be denominated in U.S. dollars. The
minimum initial investment for any record shareholder account with a Fund is
US$250,000 and subsequent investments will be accepted in any amount. The Trust
reserves the right to vary the initial investment minimum and to establish
minimums for additional investments at any time. In addition, the Trust may
waive the minimum initial investment requirement for any investor. The Trust
does not issue share certificates.
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Purchases by Mail
Institutional shares may be purchased initially by completing the Account
Application accompanying this Prospectus and mailing it, together with a check
in the amount of $250,000 or more drawn on a U.S. bank payable to the
appropriate Fund for each account an investor wishes to open, to:
By Regular Mail: By Overnight Mail:
- ---------------- ---------------------------
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
Third party checks, credit card checks and cash will not be accepted.
Subsequent investments in an existing account in any Fund may be made at any
time by sending to the Transfer Agent, at the above address, a check payable to
the appropriate Fund, along with either (i) a subsequent order form which may be
obtained from the Transfer Agent or (ii) a letter stating the amount of the
investment, the name of the Fund and the account number in which the investment
is to be made. Investors should indicate the name of the appropriate Fund and
account number on all correspondence.
Purchases by Wire
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase institutional shares of any Fund by
requesting their bank to transmit funds by wire to:
United Missouri Bank, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-407-7301 to be assigned a wire account number. The
investor may then transmit funds by wire through the wire procedures described
above. The investor's name, account number, social security or other taxpayer
identification number, and address must be specified in the wire. In addition,
investors making initial investments by wire must promptly complete the Account
Application accompanying this Prospectus and forward it to the Transfer Agent
at:
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<PAGE>
By Regular Mail: By Overnight Mail:
- --------------- -----------------
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include the investor's name and
account number.
Reports to Shareholders and Confirmations
Shareholders of each Fund receive an annual report containing audited financial
statements and a semiannual report. All transactions in institutional shares of
a Fund and dividends and distributions paid by a Fund are reflected in
confirmations issued by the Transfer Agent at the time of the transaction and/or
in monthly statements issued by the Transfer Agent. A year-to-date statement
will be provided by the Transfer Agent. Shareholders with inquiries regarding a
Fund may call Morgan Grenfell Investment Trust at 1-800-550-6426 or write to
Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO 64141-6165.
Exchange Privilege
The Funds provide a telephone exchange privilege and a written exchange
privilege. Institutional shares of a Fund may be exchanged in amounts as low as
$50,000 for institutional shares of any other Fund or any institutional
International Fund. A shareholder should obtain and read the prospectus relating
to institutional shares of an International Fund and consider its investment
objective, policies and fees before making an exchange into that fund. Exchanges
will be permitted only in those states in which the relevant fund is available
for sale.
If a shareholder elects the telephone exchange privilege on the Account
Application, the shareholder will be able to effect the exchange of
institutional shares in its account in one Fund for institutional shares in any
other Fund descibed in this Prospectus by telephone, as long as all accounts are
identically registered. A shareholder can exchange shares by telephone by
calling 1-800-407-7301 before 4:00 p.m., Eastern time, on any Business Day.
Shares exchanged will be valued at their respective net asset values next
determined after the telephone exchange request is received. Neither the Funds
nor their agents will be liable for any loss incurred by a shareholder as a
result of following instructions communicated by telephone that they reasonably
believe to be genuine. To confirm that telephone exchange requests are genuine,
the Funds will employ reasonable procedures such as providing written
confirmation of telephone exchange transactions and tape recording of telephone
exchange requests. If a Fund does not employ such reasonable procedures, it may
be liable for any loss incurred by a shareholder due to a fraudulent or other
unauthorized telephone exchange request. The Funds reserve the right to refuse
any request made by any shareholder.
In addition to using the telephone exchange privilege, shareholders in any of
the Funds may exchange their institutional shares for institutional shares in
any other Fund by submitting a written request, in proper form, to the Transfer
Agent. Institutional shares exchanged in this
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<PAGE>
manner will be valued at their respective net asset values next determined after
the receipt of the written exchange request.
An exchange is treated as a sale of the shares exchanged and, therefore, may
produce a gain or loss to the shareholder that is recognizable for tax purposes.
Investors will receive 60 days' written notice prior to any change in a Fund's
exchange procedures.
REDEMPTION OF INSTITUTIONAL SHARES
How To Redeem
Shareholders may redeem institutional shares of a Fund without charge upon
request on any Business Day by placing redemption requests with the Transfer
Agent prior to 4:00 p.m., Eastern Time. Institutional shares are redeemed at the
net asset value next determined after receipt of the redemption request by the
Transfer Agent. Institutional shares subject to a redemption request will earn
any dividends for which the record date is the day the request is received.
Redemption requests may be made by telephoning Morgan Grenfell Investment Trust
at 1-800-407-7301 or by a written request addressed to the Transfer Agent in
accordance with the procedures set forth below. A written request must specify
the number of institutional shares to be redeemed, the Fund from which
institutional shares are being redeemed, the account number, payment
instructions and the exact registration on the account. Signatures must be
guaranteed in accordance with the procedures set forth below under "Payment of
Redemption Proceeds." A shareholder may request redemptions by telephone if the
optional telephone redemption privilege is elected on the Account Application.
In order to verify the authenticity of telephone redemption requests, the
Transfer Agent's telephone representatives will request that the caller provide
certain information unique to the account. If the caller is unable to provide
this information, telephone redemption requests will not be processed and the
redemption will have to be completed by mail. As long as the Transfer Agent's
telephone representatives comply with the procedures described above, neither
the Trust nor the Transfer Agent will be liable for any losses due to fraudulent
or unauthorized transactions. Finally, it may be difficult to implement
telephone redemptions in times of drastic economic or market changes.
Payment of Redemption Proceeds
Redemption proceeds ordinarily will be wired to the bank account designated on
the Account Application, unless payment by check has been requested. For
redemption requests received by the Transfer Agent by 4:00 p.m., Eastern time,
redemption proceeds often will be wired the next Business Day. Normally,
redemption proceeds will be wired within seven days after the Transfer Agent
receives the appropriate redemption request documents, including any additional
documentation that may be required by the Transfer Agent in order to establish
that a redemption request has been properly authorized. In addition, the payment
of redemption proceeds for institutional shares of a Fund recently purchased by
check may be delayed for up to 15 calendar days from the purchase date. After a
wire has been initiated by the Transfer Agent, neither the Transfer Agent nor
the Trust assumes any further responsibility for the performance of
intermediaries or the shareholder's bank in the transfer process. If a problem
with such performance arises, the shareholder should deal directly with such
intermediaries or bank.
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Shareholders may request that redemption payments be made by Federal Reserve
wire or Automated Clearing House (ACH) wire. A Custodian may deduct a wire
charge (curently $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 shareholder's
bank account until the second Business Day following the transaction.
A shareholder may change the bank designated to receive redemption proceeds by
providing written notice to the Transfer Agent which has been signed by the
shareholder or its authorized representative. This signature must be guaranteed
by a bank, a securities broker or dealer, a credit union having authority to
issue signature guarantees, a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association, a
national securities exchange, a registered securities association or a clearing
agency, provided that such institution satisfies standards established by the
Transfer Agent. The Transfer Agent may also require additional documentation in
connection with a request to change a designated bank.
If the Board of Trustees determines that it is appropriate in order to protect
the best interests of a Fund and its shareholders, the Fund, under the limited
circumstances described below, may satisfy all or part of a redemption request
by delivering portfolio securities to a redeeming investor. However, the Trust,
on behalf of each Fund, has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem its shares solely in cash up to the lesser of $250,000 or 1% of the
net asset value of the Fund during any 90-day period for any one shareholder.
Only redemptions in excess of this limit may be paid in kind. In-kind payments
would not have to constitute a cross-section of a Fund's portfolio. Investors
receiving redemption payment in portfolio securities will not have eliminated
their investment exposure by their redemption as would investors receiving their
redemption payment in cash. Instead these investors will be subject to risks
inherent in owning such securities, including market value and currency
fluctuations, difficulties in selling securities in particular markets and
repatriating the sales proceeds, and the political and other risks described
under "Description of Securities and Investment Techniques and Related Risks
Foreign Securities." In addition, a shareholder generally will incur additional
expenses, such as brokerage commissions and, in the case of foreign currency
denominated securities, currency conversion fees or expenses, on the sale or
other disposition of securities received from a Fund. Any portfolio securities
paid or distributed to a redeeming shareholder would be valued as described
under "Net Asset Value."
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 attributable to
such class of the Fund, subtracting liabilities attributable to such
class(including accrued expenses and dividends payable) and dividing the result
by the total number of outstanding shares of the Fund shares of such class.
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For purposes of calculating each Fund's net asset value per share, equity
securities traded on a recognized securities exchange are valued at their last
sale price on the principal exchange on which they are traded on the valuation
day or, if no sale occurs, at the bid price. Unlisted equity securities for
which current market quotations are readily available are valued at their most
recent bid price. Debt securities and other fixed-income investments owned by
the Funds are valued at prices supplied by independent pricing agents, which
prices reflect broker-dealer supplied valuations and electronic data processing
techniques. Short-term obligations maturing in sixty days or less may be valued
at amortized cost, which does not take into account unrealized gains or losses
on portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the security's market value. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by the amortized cost method, may be higher or lower
than the price a Fund would receive if the Fund sold the security. Other assets
and assets whose market value does not, in the opinion of the Adviser, reflect
fair value are valued at fair value using methods determined in good faith by
the Board of Trustees.
Certain portfolio securities held by the Equity Funds and the Fixed Income Funds
may be listed on foreign exchanges which trade on days when the NYSE is closed.
As a result, the net asset value of each class of each Fund may be significantly
affected by such trading on days when shareholders have no ability to redeem
shares of the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Equity Fund declares and pays dividends from net investment income, if any,
and distributes net short-term capital gain, if any, at least annually. Each
Fixed Income Fund and each Municipal Fund distributes substantially all of its
net investment income in the form of dividends declared daily and paid monthly.
Each Fund also distributes at least annually substantially all of the 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
institutional shares of the same Fund or, at the shareholder's election, in
cash. The election to reinvest dividends and distributions or receive them in
cash may be changed at any time upon written notice to the Transfer Agent. If no
election is made, all dividends and capital gain distributions will be
reinvested.
Taxes
Each Fund is treated as a separate entity for federal income tax purposes and
has elected or intends to elect to be treated as a regulated investment company
under Subchapter M of the Code. Each Fund intends to qualify for such treatment
for each taxable year. To qualify as a regulated investment company, each Fund
must satisfy certain requirements relating to the
- --------------------------------------------------------------------------------
Page -33-
<PAGE>
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 and other requirements of the Code.
Dividends paid by a Fund from its net investment income (except for tax-exempt
interest earned by the Municipal Funds), certain net realized foreign exchange
gains, 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 the Equity
Funds from dividends they receive from U.S. domestic corporations may qualify
for the dividends-received deduction for corporate shareholders, subject to
holding period requirements and 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 paid by 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 backup witholding on certain
other payments from a Fund.
A Fund that invests in foreign securities may be subject to foreign withholding
or other foreign taxes on income earned on such securities (possibly including,
in some cases, capital gains). The Funds will not be eligible to pass such taxes
or any associated foreign tax credits or deductions through to their
shareholders, who will therefore not take such taxes directly into account on
- --------------------------------------------------------------------------------
Page -34-
<PAGE>
their own tax returns. Instead, such taxes will reduce the amounts available for
the Funds to distribute to their shareholders.
Investors should consider the tax implications of buying institutional shares
immediately prior to a distribution (other than a daily dividend).Investors who
purchase institutional 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 institutional shares are taxable events on which a
shareholder may recognize a gain or loss.
In addition to federal taxes, a shareholder may be subject to state, local or
foreign taxes on dividends, capital gain distributions, or the proceeds of
redemptions or exchanges. A state income (and possibly local income and/or
intangible property) tax exemption is generally available to the extent a Fund's
distributions are derived from interest on (or, in the case of 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 eleven additional series. Until December 28, 1994, the Fixed
Income Fund and the Municipal Bond Fund were series of The Advisors' Inner
Circle Fund, a business trust organized under the laws of The Commonwealth of
Massachusetts on July 18, 1991. The Declaration of Trust further authorizes the
Trust to classify or reclassify any series or portfolio of shares into one or
more classes. 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
- --------------------------------------------------------------------------------
Page -35-
<PAGE>
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.
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws. See "Trustees and Officers" in the Statement of
Additional Information.
As of January 24, 1997, the Adviser owned 65.55% of the outstanding shares of
the Smaller Companies Fund, Bankers Trust Company owned 44.53% of the
outstanding shares of the Municipal Bond Fund and Deutsche Morgan Grenfell C.J.
Lawrence Inc. owned 62.88% of the outstanding shares of the Microcap Fund.
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and yield for
institutional shares of a Fund, may be quoted in advertisements or in
communications to shareholders. A Fund's total return may be calculated on an
annualized and aggregate basis for various periods (which periods will be stated
in the advertisement). Average annual return reflects the average percentage
change per year in value of an investment in institutional 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
institutional shares. A Fund's yield reflects a Fund's overall rate of income on
portfolio investments as a percentage of the institutional share price. Yield is
computed by annualizing the result of dividing the net investment income per
institutional share over a 30-day period by the net asset value per share on the
last day of that period.
- --------------------------------------------------------------------------------
Page -36-
<PAGE>
For the Municipal Funds, tax-equivalent yield may also be quoted. Tax-equivalent
yield is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after tax equivalent of a
Municipal Fund's yield, assuming certain tax brackets for a shareholder.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss
performance as reported by various financial publications. The performance of a
Fund may be compared in publications to the performance of various indices and
investments for which reliable performance data is available. In addition, the
performance of a Fund may be compared in publications to averages, performance
rankings or other information prepared by recognized mutual fund statistical
services.
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 institutional 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
institutional 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.
- --------------------------------------------------------------------------------
Page -37-
<PAGE>
APPENDIX A - 1
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions and
exchanges be reported to the IRS and that 31% be withheld if you fail to provide
your correct Taxpayer Identification Number (TIN) and the certifications in
Section H or you are otherwise subject to backup withholding. Amounts withheld
and forwarded to the IRS can be credited as a payment of tax when completing
your Federal income tax return.
For most individual taxpayers, the TIN is the social security number. Special
rules apply for certain accounts. For example, for an account established under
the Uniform Gift to Minor's Act, the TIN of the minor should be furnished. If
you do not have a TIN, you may apply for one using forms available at local
offices of the Social Security Administration or the IRS.
Recipients exempt from backup withholding, including corporations and certain
other entities, should provide their TIN and write "exempt" after their
signature in section H of the application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Funds and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Internal Revenue
Code Sections 1441, 1442 and 3406 and /or consult your tax adviser.
- --------------------------------------------------------------------------------
Page -38-
<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Distributor
SEI Financial Services Company
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
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
1004 Baltimore
Kansas City, Missouri 64105
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Hale and Dorr LLP
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 - 1-800-407-7301
Share Price and Performance
Information - 1-800-550-6426
- --------------------------------------------------------------------------------
Page -39-
<PAGE>
SUPPLEMENT DATED MARCH 18, 1997
TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 16, 1997 FOR
INSTITUTIONAL SHARES OF THE FOLLOWING FUNDS:
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Municipal Bond Fund
Morgan Grenfell Short-Term Fixed Income Fund
Morgan Grenfell Short-Term Municipal Bond Fund
Morgan Grenfell Smaller Companies Fund
Morgan Grenfell Microcap Fund
Morgan Grenfell Large Cap Growth Fund
The Trustees of Morgan Grenfell Investment Trust have approved the removal
of the nonfundamental investment restrictions shown as:
(i) restrictions (b), (d), (f), (g), (h), (j) and (k) on pages 24 and
25 of the Statement of Additional Information for each Fund other
than Morgan Grenfell Fixed Income Fund and Morgan Grenfell
Municipal Bond Fund; and
(ii) restriction (2) on page 26 of the Statement of Additional
Information for Morgan Grenfell Fixed Income Fund and Morgan
Grenfell Municipal Bond Fund.
Accordingly, these restrictions no longer apply to the Funds.
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end management
investment company that includes eight diversified investment portfolios that
focus on international equity investing (the "Funds"). 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 equity markets.
The investment objective of each Fund is to maximize capital appreciation.
Information concerning investment portfolios of the Trust that focus on
U.S. investments (the "Domestic Funds") and non-U.S. fixed income investments
(the "Non-U.S. Fixed Income Funds") is contained in separate prospectuses 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 March 7, 1997, 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, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100. The Statement of
Additional Information, which is incorporated by reference into this Prospectus,
has been filed with the Securities and Exchange Commission. Not all of the Funds
are available in certain states. Please call 1-800-550-6426 to determine
availability in a particular state.
- --------------------------------------------------------------------------------
INVESTMENTS IN EMERGING MARKETS CAN INVOLVE SIGNIFICANT RISKS, AND MORGAN
GRENFELL EMERGING MARKETS EQUITY FUND IS DESIGNED FOR AGGRESSIVE INVESTORS.
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 - 1 -
<PAGE>
Each Fund's primary investments are summarized below:
Morgan Grenfell International Equity Fund invests primarily in equity and
equity-related securities of companies in countries other than the United
States.
Morgan Grenfell Global Equity Fund invests primarily in equity and
equity-related securities of companies throughout the world.
Morgan Grenfell European Equity Fund invests primarily in equity and
equity-related securities of companies in Europe.
Morgan Grenfell Pacific Basin Equity Fund invests primarily in equity and
equity-related securities of companies in Pacific Basin countries.
Morgan Grenfell International Small Cap Equity Fund invests primarily in
equity and equity-related securities of small capitalization companies in
countries other than the United States.
Morgan Grenfell Japanese Small Cap Equity Fund invests primarily in equity
and equity-related securities of small capitalization companies in Japan.
Morgan Grenfell European Small Cap Equity Fund invests primarily in equity
and equity-related securities of small capitalization companies in Europe.
Morgan Grenfell Emerging Markets Equity Fund invests primarily in equity
and equity-related securities of companies in countries with emerging securities
markets.
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Page - 2 -
<PAGE>
TABLE OF CONTENTS
Page
Expense Information ..................................................... 4
Financial Highlights .................................................... 7
Introduction to the Funds ............................................... 9
Investment Objectives and Policies ...................................... 12
Description of Securities and Investment Techniques
and Related Risks ..................................................... 16
Additional Investment Information ....................................... 26
Management of the Funds ................................................. 27
Purchase of Service Shares .............................................. 29
Redemption of Service Shares ............................................ 32
Net Asset Value ......................................................... 34
Dividends, Distributions and Taxes ...................................... 34
Organization and Shares of the Trust .................................... 36
Performance Information ................................................. 37
Appendix A .............................................................. 39
Appendix B .............................................................. 43
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Page - 3 -
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
====================================================================================================================================
International Japanese European Emerging
FUND NAME International Global European Pacific Basin Small Cap Small Cap Small Cap Markets
Equity Fund Equity Fund* Equity Fund Equity Fund* Equity Fund Equity Fund* Equity Fund Equity Fund
-------------- ------------ ----------- ------------- ------------ ------------ ----------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases........ None None None None None None None None
Maximum Sales Charge
Imposed on Reinvested
Dividends................... None None None None None None None None
Deferred Sales Charge
Imposed on Redemptions...... None None None None None None None None
Exchange Fee................ None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating
Expenses (as a percentage
of average net assets
after reduction of
advisory fee)
- ------------------------------------------------------------------------------------------------------------------------------------
Advisory fees .............. 0.70% 0.70% 0.70% 0.70% 1.00% 1.00% 1.00% 1.00%
Other Expenses**............ 3.43% 0.95% 0.86% 0.95% 0.65% 0.95% 1.55% 0.69%
Reduction of Advisory
Fee and Expense Limitation
by Adviser ***.............. (2.98)% (0.50)% (0.41)% (0.50)% (0.15)% (0.45)% (1.05)% (0.19)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Fund Operating
Expenses................. 1.15% 1.15% 1.15% 1.15% 1.50% 1.50% 1.50% 1.50%
====================================================================================================================================
</TABLE>
* Global Equity Fund, Pacific Basin Equity Fund and Japanese Small Cap Equity
Fund were not operational during the fiscal year ended October 31, 1996.
** The figure shown as Other Expenses for service shares of each Fund includes
service fees of 0.25% of the Fund's average net assets attributable to service
shares. For more information on service fees and a description of the
circumstances in which service shares will be converted to institutional shares
(another class of Fund shares), see "Management of the Funds -- Service Plans."
.9
*** 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 0.36%, Municipal Bond Fund 0.35%, Short-Term Fixed
Income Fund 0%, Short-Term Municipal Bond Fund 0%, Smaller Companies Fund 0%,
MicroCap Fund 1.09%, and Large Cap Growth Fund 0.52%; and the Other Expenses of
Short-Term Fixed Income Fund, Short-Term Municipal Bond Fund and Smaller
Companies Fund are equal to the respective amounts shown in the above table as
Net Operating Expenses. If the Adviser's voluntary agreement was not in effect,
the Fund Operating Expenses for each Fund would be as follows: Fixed Income Fund
0.84%, Municipal Bond Fund 0.85%, Short-Term Fixed Income Fund 1.70%, Short-Term
Municipal Bond Fund 1.35%, Smaller Companies Fund 3.28%, MicroCap Fund 2.41% and
Large Cap Growth Fund 1.48%.
================================================================================
Page - 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 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Morgan Grenfell International
Equity Fund $12 $37 $63 $140
Morgan Grenfell International
Small Cap Equity Fund $15 $47 $82 $179
Morgan Grenfell European Small
Cap Equity Fund $15 $47 $82 $179
Morgan Grenfell Emerging
Markets Equity Fund $15 $47 $82 $179
1 Year 3 Years
------ -------
Morgan Grenfell Global
Equity Fund $12 $37
Morgan Grenfell European
Equity Fund $12 $37
Morgan Grenfell Pacific Basin
Equity Fund $12 $37
Morgan Grenfell Japanese Small
Cap Equity Fund $15 $47
- -------------
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. For each Fund other
than Morgan Grenfell Global Equity Fund, Morgan Grenfell European Equity Fund,
Morgan Grenfell Pacific Basin Equity Fund and Morgan Grenfell Japanese Small Cap
Equity Fund, "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 year ended October 31, 1996,
except that the figures shown (including figures shown for the other Funds)
assume that (1) the service fees were in effect throughout the year ended
October 31, 1996 and (2) new administration and transfer agency fees were in
effect throughout such year. For the other Funds, "Other Expenses" are based on
estimated average net assets for the current fiscal year ending October 31,
1997. If the average net assets of any of these Funds exceeds the applicable
estimate for such year, then the Fund's "Other Expenses" (as a percentage of
average net assets) will be lower than the rate shown in the table. Conversely,
if any such Fund's average net assets are lower than the estimate for such year,
then its "Other Expenses" (as a percentage of average 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
- --------------------------------------------------------------------------------
Page - 5 -
<PAGE>
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."
- --------------------------------------------------------------------------------
Page - 6 -
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below are selected data for an outstanding institutional share of
each Fund for fiscal periods ended October 31, 1996 and for prior fiscal periods
during which the Fund was operational. The data set forth below has been audited
by Price Waterhouse LLP, 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 1-800-550-6426. No information is presented below for the Funds that had
not commenced operations by October 31, 1996.
- --------------------------------------------------------------------------------
Page - 7 -
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
====================================================================================================================================
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 Gains of Period Return Period (000)
---- --------- ------ -------------- ------ ----- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------
International Equity Fund
- -----------------------------------------------------------------
1996 $ 10.95 $ 0.11 $ 1.25 $ (0.43) -- $ 11.88 12.70% $ 3,423
1995 (1) $ 10.00 $ 0.08 $ 0.87 -- -- $ 10.95 9.50% # $ 2,738
- -----------------------------------------------------------------
European Equity Fund
- -----------------------------------------------------------------
1996 (2) $ 10.00 $ -- $ 0.60 -- -- $ 10.60 6.00% # $ 17,902
- -----------------------------------------------------------------
International Small Cap Equity Fund
- -----------------------------------------------------------------
1996 $ 9.40 $ 0.03 $ 0.57 $ (0.04) -- $ 9.96 6.43% $ 106,709
1995 $ 10.35 $ 0.03 $(0.72) $ (0.04) $ (0.22) $ 9.40 (6.67)% $ 90,917
1994 (3) $ 10.00 $ 0.02 $ 0.33 -- -- $ 10.35 3.50% # $ 68,798
- -----------------------------------------------------------------
European Small Cap Equity Fund
- -----------------------------------------------------------------
1996 $ 11.55 $ 0.12 $ 1.03 $ (0.12) $ (0.04) $ 12.54 10.06% $ 9,856
1995 (4) $ 10.00 $ 0.12 $ 1.44 $ (0.01) -- $ 11.55 15.66% # $ 9,336
- -----------------------------------------------------------------
Emerging Markets Equity Fund
- -----------------------------------------------------------------
1996 $ 8.11 $ 0.06 $ 0.75 $ (0.03) $ (0.09) $ 8.80 10.02% $ 88,279
1995 $ 11.00 $ 0.04 $(2.29) $ (0.02) $ (0.62) $ 8.11 (21.00)% $ 93,288
1994 (5) $ 10.00 $(0.01) $ 1.01 -- -- $ 11.00 10.00% # $ 56,892
<CAPTION>
Ratio of
Ratio of Investment
Expenses Income(Loss)
Ratio of to Average to Average
Ratio of Investment Net Assets Net Assets
Expenses to Income(Loss) (Excluding (Excluding Portfolio Average
Average to Average Expense Expense Turnover Commission
Net Assets Net Assets Limitations) Limitations) Rate Rate*
---------- ---------- ------------ ------------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------
International Equity Fund
- ------------------------------------
1996 0.90% 0.72% 3.59% (1.97)% 39% $ 0.0221
1995 (1) 0.90% 1.55% 2.73% (0.28)% 19% N/A
- ------------------------------------
European Equity Fund
- ------------------------------------
1996 (2) 0.90% (0.41)% 1.40% (0.91)% 5% $ 0.0324
- ------------------------------------
International Small Cap Equity Fund
- ------------------------------------
1996 1.25% 0.35% 1.38% 0.22% 47% $ 0.0170
1995 1.25% 0.41% 1.48% 0.18% 62% N/A
1994 (3) 1.25% 0.34% 1.67% (0.08)% 41% N/A
- ------------------------------------
European Small Cap Equity Fund
- ------------------------------------
1996 1.25% 0.96% 2.50% (0.29)% 49% $ 0.0327
1995 (4) 1.25% 1.25% 2.24% 0.26% 34% N/A
- ------------------------------------
Emerging Markets Equity Fund
- ------------------------------------
1996 1.25% 0.63% 1.52% 0.36% 69% $ 0.0003
1995 1.25% 0.44% 1.55% 0.14% 49% N/A
1994 (5) 1.36% (0.12)% 1.79% (0.55)% 45% N/A
</TABLE>
================================================================================
================================================================================
# - Returns are for the period indicated and have not been annualized.
* Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
(1) International Equity Fund commenced operations on 5/15/95.
(2) European Equity Fund commenced operations on 9/3/96.
(3) International Small Cap Equity Fund commenced operations on 1/3/94.
(4) European Small Cap Equity Fund commenced operations on 11/1/94.
(5) Emerging Markets Equity Fund commenced operations on 2/2/94.
================================================================================
Page - 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 U.S. investments (the "Domestic Funds") and non-U.S. fixed income
investments (the "Non-U.S. Fixed Income Funds") is contained in separate
prospectuses that may be obtained by calling 1-800-550-6426.
Under normal market conditions, the Funds will invest primarily in foreign
equity securities. Investing primarily in foreign equity 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 equity
and fixed income markets.
This Prospectus relates solely to service shares of the Funds. Service
shares may be purchased through financial planners, investment advisers,
broker-dealers and other institutions ("Service Organizations"). Some Service
Organizations may 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. As described below under "Management of the Funds --
Service Plans", all or a portion of a Fund's outstanding service shares will be
converted to institutional shares of the same Fund under certain circumstances.
GEOGRAPHIC AND ISSUER FOCUS
For purposes of each Fund's investment objective and policies, a company is
considered to be located in a particular country if it (1) is organized under
the laws of that country and has a principal place of business in that country
or (2) derives 50% or more of its total revenues from business in that country.
- --------------------------------------------------------------------------------
Page - 9 -
<PAGE>
European Equity Fund, Pacific Basin Equity Fund, Japanese Small Cap Equity
Fund and European Small Cap Equity Fund focus their respective investments in
the particular region or country reflected in their names. In contrast,
International Equity Fund, Global Equity Fund and International Small Cap Equity
Fund may spread their investments across world markets.
International Small Cap Equity Fund, Japanese Small Cap Equity Fund and
European Small Cap Equity Fund focus their investments on equity securities of
companies with market capitalizations that are small relative to the market
capitalizations of other issuers in the same market. Each of these Funds has its
own policy regarding what constitutes a small capitalization company. See
"Investment Objective and Policies." Small capitalization companies may offer
greater opportunities for capital growth than larger, more mature companies, but
investments in small capitalization companies also involve special risks. See
"Description of Securities and Investment Techniques and Related Risks --Small
Capitalization Companies."
Emerging Markets Equity 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 stock market growth.
Certain of the Funds have no operating history and there can be no
assurance that a Fund will achieve its investment objective.
SELECTION OF PORTFOLIO SECURITIES
EQUITY AND EQUITY-RELATED SECURITIES. Equity and equity-related securities
in which the Funds may invest include common stock, preferred stock, and
warrants, purchased call options and other rights to acquire stocks. See
"Description of Securities and Investment Techniques and Related Risks." In
selecting equity and equity-related securities for the Funds' portfolios, the
Adviser will focus on those companies which have earnings growth that, in the
Adviser's view, has not been sufficiently reflected in the market price of the
security. The Funds may also invest in equity and equity-related securities
where the fundamental value of the issuer is believed to be greater than its
current market price. Fundamental value will be 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. While individual
security selection is an important part of the investment process,
macro-economic factors such as prospects for relative economic growth among
countries, regions or geographic areas, expected levels of inflation and
political policies influencing business conditions will also be considered.
FIXED INCOME 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 selecting fixed income investments, 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.
- --------------------------------------------------------------------------------
Page - 10 -
<PAGE>
The fixed income securities in which each Fund may invest may have stated
maturities ranging from overnight to forty years.
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."
FIXED INCOME SECURITIES. To the extent that the Funds invest in fixed
income securities, their net asset values 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."
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."
- --------------------------------------------------------------------------------
Page - 11 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is to maximize
capital appreciation. Under normal circumstances, the Fund pursues this
objective by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of
companies located in countries other than the United States. The Fund will focus
on securities traded in equity markets of the countries represented in the
Morgan Stanley Capital International-Europe Australia Far East Index (the
"EAFE(R) Index") but may decide, on a stock-specific basis, to make investments
in other foreign markets. The EAFE(R) Index includes the equity markets of
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, the Netherlands, New Zealand, Norway,
Singapore, Spain, Sweden, Switzerland and the United Kingdom. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
equity and equity-related securities of companies in at least three foreign
countries.
The Fund may invest more than 25% of its total assets in each of Japan 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of issuers located in the United States.
GLOBAL EQUITY FUND
The investment objective of the Global Equity Fund is to maximize capital
appreciation. Under normal circumstances, the Fund pursues this objective by
investing at least 65% of its total assets in equity and equity-related
securities (but not less than 60% directly in stocks) of companies in at least
three countries. These countries may include Austria, Belgium, Denmark, Finland,
France, Germany, Holland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain,
Sweden, Switzerland, the United Kingdom, the United States, Canada, Mexico,
Japan, Hong Kong, Singapore, Australia, Malaysia, Indonesia, the Philippines,
Thailand, and New Zealand. At the discretion of the Adviser, the Fund may invest
in equity and equity-related securities of companies located in other countries.
The Fund may invest more than 25% of its total assets in each of Japan, the
United States 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
and investment grade fixed income securities (i.e., securities rated BBB, Baa,
or higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser) of issuers
located anywhere in the world.
- --------------------------------------------------------------------------------
Page - 12 -
<PAGE>
EUROPEAN EQUITY FUND
The investment objective of the European Equity Fund is to maximize capital
appreciation. Under normal circumstances, the Fund pursues this objective by
investing at least 65% of its total assets in equity and equity-related
securities (but not less than 60% directly in stocks) of companies located in
European countries, including Austria, Belgium, Denmark, Finland, France,
Germany, Holland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom. At the discretion of the Adviser, the Fund
may invest in equity and equity-related securities of companies located in other
European countries.
The Fund may invest more than 25% of its total assets in each of France,
Germany and the United Kingdom, reflecting the dominance of these countries'
stock markets in Europe. 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of issuers located in non-European countries,
including the United States.
PACIFIC BASIN EQUITY FUND
The investment objective of the Pacific Basin Equity Fund is to maximize
capital appreciation. Under normal circumstances, the Fund pursues this
objective by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of
companies located in Pacific Basin countries, including Japan, Australia,
Malaysia, Singapore, Hong Kong, Thailand, the Philippines, Indonesia, Taiwan,
South Korea and New Zealand. At the discretion of the Adviser, the Fund may
invest in other Pacific Basin countries.
The Fund may invest more than 25% of its total assets in each of Japan and
Hong Kong, reflecting the dominance of these stock markets in the Pacific Basin.
The concentration of the Fund's investments in Japan and Hong Kong will cause
the Fund to be particularly susceptible to the effects of political and economic
developments in Japan, Hong Kong and China. See "Description of Securities and
Investment Techniques and Related Risks--Region and Country Concentration."
Up to 35% of Fund's total assets may be invested in cash equivalents,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of issuers located in countries outside the Pacific
Basin, including the United States.
INTERNATIONAL SMALL CAP EQUITY FUND
The investment objective of the International Small Cap Equity Fund is to
maximize capital appreciation. Under normal circumstances, the Fund pursues this
objective 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 companies located in countries other than the United States.
- --------------------------------------------------------------------------------
Page - 13 -
<PAGE>
Small capitalization companies are those ranked according to market
capitalization in the bottom 25% of issuers listed on a stock exchange and
companies listed on a secondary market (e.g., the Tokyo Stock Exchange Second
Section, the Singapore SESDAQ Market) or over-the-counter market.
The Fund will focus on companies located in countries represented in the
NatWest Euro Pacific Index, but may decide, on a stock-specific basis, to make
investments in companies located outside of these countries. The Nat West Euro
Pacific Index includes the equity markets of Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malasia,
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland,
Thailand and the United Kingdom. Under normal market conditions, the Fund will
invest at least 65% of its total assets in equity and equity-related securities
issued by small capitalization companies in at least three different foreign
countries.
The Fund may invest more than 25% of its total assets in each of Japan 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of large and medium capitalization companies located
outside the United States and companies of any size located in the United
States.
JAPANESE SMALL CAP EQUITY FUND
The investment objective of the Japanese Small Cap Equity Fund is to
maximize capital appreciation. Under normal circumstances, the Fund pursues this
objective 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 companies located in Japan. Small capitalization companies are
those ranked according to market capitalization in the bottom 20% of issuers
listed on the Tokyo Stock Exchange and companies listed on a Japanese secondary
market (e.g., the Tokyo Stock Exchange Second Section) or over-the-counter
market. The concentration of the Fund's investments in Japanese companies will
cause the Fund to be particularly susceptible to the effects of social,
political and economic events that occur in Japan. 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of large and medium capitalization companies located
in Japan and companies of any size located in countries other than Japan,
including the United States.
EUROPEAN SMALL CAP EQUITY FUND
The investment objective of the European Small Cap Equity Fund is to
maximize capital appreciation. Under normal circumstances, the Fund pursues this
objective by investing at least 65% of its total assets in equity and
- --------------------------------------------------------------------------------
Page - 14 -
<PAGE>
equity-related securities (but not less than 60% directly in stocks) of small
capitalization companies located in European countries, including Austria,
Belgium, Denmark, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg,
Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. At the
discretion of the Adviser, the Fund may invest in other European countries.
Small capitalization companies are those ranked according to market
capitalization in the bottom 25% of issuers listed on a European stock exchange
and companies listed on a European secondary market or over-the-counter market.
The Fund may invest more than 25% of its total assets in each of Germany,
France and the United Kingdom, reflecting the dominance of these countries'
stock markets in Europe. 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of large and medium capitalization companies located
in European countries and companies of any size located in non-European
countries, including the United States.
EMERGING MARKETS EQUITY FUND
The investment objective of the Emerging Markets Equity Fund is to maximize
capital appreciation. Under normal circumstances, the Fund pursues this
objective by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of
companies that are located in countries with emerging securities markets; that
is, countries with securities markets that are, in the opinion of the Adviser,
emerging as investment markets but that have yet to reach a level of maturity
associated with developed foreign stock markets, especially in terms of foreign
investor participation. Countries with emerging securities markets include:
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, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay,
Venezuela and Vietnam. At the discretion of the Adviser, the Fund may invest in
other countries with emerging securities markets.
Investments in securities of companies located in countries with emerging
securities markets may offer greater opportunities for capital growth 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."
The Fund may invest more than 25% of its total assets in each of Brazil,
Malaysia and Mexico. 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,
investment grade fixed income securities (i.e., securities rated BBB, Baa, or
- --------------------------------------------------------------------------------
Page - 15 -
<PAGE>
higher by Standard & Poor's, Moody's or comparable rating agency, or, if
unrated, determined to be of comparable quality by the Adviser), and equity and
equity-related securities of issuers traded in developed markets, including the
U.S. securities markets.
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 securities of foreign issuers, including U.S.
dollar-denominated and non-dollar denominated foreign equity and 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 AMERICAN, EUROPEAN, GLOBAL AND INTERNATIONAL DEPOSITORY
RECEIPTS. The Funds may invest in foreign securities in the form of American
Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"), Global
Depository Receipts ("GDRs") or International Depository Receipts ("IDRs"). ADRs
are receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs and
IDRs are receipts issued in Europe typically by non-U.S. banking and trust
companies that evidence ownership of either foreign or U.S. securities. GDRs are
receipts issued by either a U.S. or non-U.S. banking institution evidencing
ownership of the underlying foreign securities. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets and EDRs, GDRs and IDRs,
in bearer form, are designed for use in European securities markets. An ADR,
EDR, GDR or IDR may be denominated in a currency different from the currency in
which the underlying foreign security is denominated.
- --------------------------------------------------------------------------------
Page - 16 -
<PAGE>
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 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.
REGION AND COUNTRY CONCENTRATION. Each Fund may concentrate its investments
in a particular region and/or in one or more foreign countries. Concentration of
a Fund's investments in a particular region or country will subject the Fund, to
a greater extent than if its investments in such region or country were more
limited, to the risks of adverse securities markets, exchange rates and social,
political or economic developments which may occur in that region or 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
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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. 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 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 or interest 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.
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.
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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 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.
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."
SMALL CAPITALIZATION COMPANIES
The Japanese Small Cap Equity Fund, the European Small Cap Equity Fund and
the International Small Cap Equity Fund each invests a significant portion of
its assets in smaller, lesser-known, foreign 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.
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OPTIONS
WRITTEN OPTIONS. Each 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, the Fund assumes
certain risks. For example, in the case of a written call option, the Fund
forfeits the right to any appreciation in the underlying security while the
option is outstanding. A put option gives to its purchaser the right to compel
the Fund to purchase an underlying security from the option holder at the
specified price at any time during the option period. In contrast, a call option
written by the Fund gives to its purchaser the right to compel the Fund to sell
an underlying security to the option holder at a specified price at any time
during the option period. Upon the exercise of a put option written by a Fund,
the Fund may suffer a loss equal to the difference between the price at which
the Fund is required to purchase the underlying security and its market value at
the time of the option exercise, less the premium received for writing the
option. All options written by a Fund are covered. In the case of a call option,
this means that the Fund will own the securities subject to the option or an
offsetting call option as long as the written option is outstanding, or will
have the absolute and immediate right to acquire 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 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.
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STOCK INDEX OPTIONS
The 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
foreign stock indices are the Toronto Stock Exchange Composite 100 and the
Financial Times Stock Exchange 100. 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 a 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 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 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 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 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. 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 and treat over-the-counter options as illiquid
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securities subject to this limitation. With respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of the illiquid
securities may be calculated with reference to the formula price.
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. 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
The Funds may invest in a broad range of U.S. and non-U.S. fixed income
securities. To the extent a Fund invests in fixed income securities, its net
asset value 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.
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 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 agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
Japanese Development Bank, the Asian Development Bank and the InterAmerican
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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.
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.
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
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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.
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 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.
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,
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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.
ADDITIONAL INVESTMENT TECHNIQUES
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.
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.
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.
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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
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<PAGE>
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 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 not exceed 150%. A high rate of portfolio
turnover (i.e., 100% or higher) will result in correspondingly higher
transaction costs to a Fund. A high rate of portfolio turnover also may, under
some circumstances, make it more difficult for the 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 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
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 September 30, 1996, MGIS managed approximately $14.7 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 International Equity Fund 0.70%
Morgan Grenfell Global Equity Fund 0.70%
Morgan Grenfell European Equity Fund 0.70%
Morgan Grenfell Pacific Basin Equity Fund 0.70%
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<PAGE>
Morgan Grenfell International Small Cap Equity Fund 1.00%
Morgan Grenfell Japanese Small Cap Equity Fund 1.00%
Morgan Grenfell European Small Cap Equity Fund 1.00%
Morgan Grenfell Emerging Markets Equity Fund 1.00%
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 International Equity Fund, Morgan Grenfell European Small
Cap Equity Fund, Morgan Grenfell International Small Cap Equity Fund, Morgan
Grenfell Emerging Markets Equity Fund and Morgan Grenfell European Equity Fund
paid advisory fees equal to 0%, 0%, 0.87%, 0.73% and 0.20% of their respective
average daily net assets during such period. The advisory fees to which the
Adviser is entitled for International Small Cap Equity Fund, Japanese Small Cap
Equity Fund, European Small Cap Equity Fund and Emerging Markets Equity Fund are
higher than those for most mutual funds, but the Trustees believe that these
fees are warranted by the resources needed to evaluate and invest in the
particular markets on which these Funds focus.
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
A 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."
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 that have agreements with the Trust, and
are intended to compensate Service Organizations for providing personal services
and/or account maintenance services to their customers who invest in service
shares. 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.
In the event that an agreement between a Service Organization and the Trust
expires or is terminated, service shares beneficially owned by customers of such
Service Organization will convert automatically to institutional shares of the
same Fund. Customers of a Service Organization will receive advance notice of
any such conversion, and any such conversion will be effected on the basis of
the relative net asset values of the two classes of shares involved. Information
regarding institutional shares of the Trust may be obtained by calling
1-800-550-6426.
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<PAGE>
ADMINISTRATOR AND DISTRIBUTOR
The Trust has entered into an Administration Agreement with SEI Financial
Management Corporation ("SEI Financial Management" or the "Administrator"), 1
Freedom Valley Drive, Oaks, Pennsylvania 19456-0100. 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.
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:
0.12% of aggregate assets under $1 billion
0.08% of next $500 million of aggregate assets
0.06% of next $1 billion of aggregate assets
0.04% of aggregate assets exceeding $2.5 billion
Each Fund that offers its shares pays the Administrator a minimum annual
fee that equals $60,000.
SEI Financial Services Company (the "Distributor"), 1 Freedom Valley Drive,
Oaks, Pennsylvania 19456-0100, serves as the distributor of service shares of
the Funds pursuant to a Distribution Agreement with the Trust and assists in the
sale of 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"), 1004 Baltimore, 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. Investors may
invest in service shares through an Omnibus Account maintained by their Service
Organization. Alternatively, investors may invest in service shares by
establishing a shareholder account with the Trust (in addition to the account
with their Service Organization). Investors who invest through Omnibus Accounts
may be subject to minimums established by their Service Organizations for
initial and subsequent investments. Unless waived by the Trust, the minimum
initial investment for Omnibus Accounts and investors who establish shareholder
accounts with the Trust is $250,000.
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<PAGE>
Investors who invest through Omnibus Accounts should submit purchase orders
to their Service Organization. Investors who establish shareholder accounts with
the Trust should submit purchase orders to the Transfer Agent as described
below. Service shares of any Fund may be purchased on any Business Day at the
net asset value next determined after receipt of the order in good order by the
investor's Service Organization or by the Transfer Agent, as the case may be. A
"Business Day" means any day on which the New York Stock Exchange (the "NYSE")
is open. For an investor who invests through an Omnibus Account, the investor's
Service Organization must receive the investor's purchase order before the close
of regular trading on the NYSE (currently 4:00 p.m., Eastern Time) and promptly
forward such order to the Transfer Agent for the investor to receive that day's
net asset value. Service Organizations are responsible for promptly forwarding
such investors' purchase orders to the Transfer Agent. For an investor who has a
shareholder account with the Trust, the Transfer Agent must receive the
investor's purchase order before the close of regular trading on the NYSE for
the investor to receive that day's net asset value.
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 Funds.
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.
For investors who invest through Omnibus Accounts, payment for initial and
subsequent purchases of service shares should be made to the investors' Service
Organizations. These investors should contact their Service Organizations for
further details on how to purchase service shares. For investors who have
shareholder accounts with the Trust, payment for initial and subsequent
purchases of service shares should be made by mail or wire as described below.
PURCHASES BY MAIL
Service shares may be purchased initially by completing the Account
Application accompanying this Prospectus and mailing it, together with a check
in the amount of $250,000 or more drawn on a U.S. bank payable to the
appropriate Fund, to:
By Regular Mail: By Overnight Mail:
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Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O. Box 419165 c/o DST Systems, Inc.
64141-6165 (SEI Kansas City, MO
Division CT-7 Tower)
1004 Baltimore
Kansas City, MO 64105
Third party checks, credit card checks and cash will not be accepted.
Subsequent investments in an existing account in any Fund may be made at
any time by sending to the Transfer Agent, at the above address, a check payable
to the appropriate Fund, along with either (i) a subsequent order form which may
be obtained from the Transfer Agent or (ii) a letter stating the amount of the
investment, the name of the Fund and the account number in which the investment
is to be made. Investors should indicate the name of the appropriate Fund and
account number on all correspondence.
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<PAGE>
PURCHASES BY WIRE
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase service shares of any Fund by requesting
their bank to transmit funds by wire to:
United Missouri Bank, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment in service shares by
wire, an investor must first telephone 1-800-407-7301 to be assigned an account
number. The investor may then transmit funds by wire through the wire procedures
described above. The investor's name, account number, taxpayer identification or
social security number, and address must be specified in the wire. In addition,
investors making initial investments by wire must promptly complete the Account
Application accompanying this Prospectus and forward it to the Transfer Agent
at:
By Regular Mail: By Overnight Mail:
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Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O. Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7 Tower)
1004 Baltimore
Kansas City, MO 64105
Subsequent Purchases: Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number.
REPORTS TO SHAREHOLDERS
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations for information regarding the Funds. Also, shareholders
who have shareholder accounts with the Trust may contact Morgan Grenfell
Investment Trust for account information by calling 1-800-550-6426 or by writing
to Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO
64141-6165.
EXCHANGE PRIVILEGE
A shareholder may exchange service shares of a Fund for service shares of
another Fund or service shares of a Domestic Fund or Non-U.S. Fixed Income Fund,
subject, in the case of shareholders who invest through Omnibus Accounts, to any
restrictions imposed by the Service Organizations that maintain such Accounts. A
shareholder should obtain and read the prospectus relating to service shares of
a Domestic Fund or Non-U.S. Fixed Income Fund and consider its investment
objective, policies and fees before making an exchange into that Fund. Exchanges
will be permitted only in those states in which service shares of the relevant
fund are available for sale. The Funds reserve the right to refuse any exchange
request.
If a shareholder who has a shareholder account with the Trust elects
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<PAGE>
the telephone exchange privilege on the Account Application, the shareholder may
exchange service shares in its accoun in one Fund for service shares in any
other Fund described in this Prospectus by telephone (by calling
1-800-550-6246), as long as all accounts are identically registered. Service
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may exchange service shares in one Fund for service
shares of any other Fund or Domestic Fund or Non-U.S. Fixed Income Fund by
telephone, unless they indicate otherwise in writing to the Trust. For
shareholders who have shareholder accounts with the Trust, the Transfer Agent
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) for the
investor to receive that day's net asset values. Service Organizations are
responsible for promptly forwarding such investors' exchange requests to the
Transfer Agent. For an investor who establishes a shareholder account with the
Trust, the Transfer Agent must receive the investor's exchange request before
the close of regular trading on the NYSE for the investor to receive that day's
net asset values.
Neither the Funds nor their agents will be liable for any loss incurred by
a shareholder as a result of following instructions communicated by telephone
that they reasonably believe to be genuine. To confirm that telephone exchange
requests are genuine, the Funds will employ reasonable procedures such as
providing written confirmation of telephone exchange transactions and tape
recording of telephone exchange requests. If a Fund does not employ such
reasonable procedures, it may be liable for any loss incurred by a shareholder
due to a fraudulent or other unauthorized telephone exchange request.
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 (as long as the Service Organization promptly forwards the
shareholder's redemption request to the Transfer Agent) or, in the case of
shareholders who have shareholder accounts with the Trust, by the Transfer
Agent. For a shareholder who invests through an Omnibus Account, the
shareholder's Service Organization must receive the shareholder's redemption
request before the close of regular trading on the NYSE (currently 4:00 p.m.,
Eastern Time) and promptly forward such request to the Transfer Agent for the
shareholder to receive that day's net asset value. Service Organizations are
responsible for promptly forwarding such shareholders' redemption requests to
the Transfer Agent. For a shareholder who has a shareholder account with the
Trust, the Transfer Agent must receive the shareholder's redemption request
before the close of regular trading on the NYSE for the shareholder to receive
that day's net asset value.
A shareholder who has a shareholder account with the Trust may request
redemptions by telephone (by calling 1-800-407-7301) if the optional telephone
redemption privilege is elected on the Account Application. Service
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may redeem service shares by telephone, unless they
indicate otherwise in writing to the Trust. Alternatively, Service Organizations
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<PAGE>
and shareholders who have shareholder accounts with the Trust may submit
redemption requests in writing. A written redemption request must specify the
number of shares to be redeemed, the shareholder's or Omnibus Account's account
number with the Trust, payment instructions and the exact registration of the
account. Signatures must be guaranteed in accordance with the procedures set
forth below under "Payment of Redemption Proceeds."
In order to verify the authenticity of telephone redemption requests, the
Transfer Agent's telephone representatives will request that the caller provide
certain information unique to the account. If the caller is unable to provide
this information, telephone redemption requests will not be processed and the
redemption will have to be completed by mail. As long as the Transfer Agent's
telephone representatives comply with the procedures described above, neither
the Trust nor the Transfer Agent will be liable for any losses due to fraudulent
or unauthorized transactions. Finally, it may be difficult to implement
telephone redemptions in times of drastic economic or market changes.
PAYMENT OF REDEMPTION PROCEEDS
For shareholders having accounts with the Trust, redemption proceeds
ordinarily will be wired to the bank account designated on the Account
Application, unless payment by check has been requested. For shareholders who
invest through Omnibus Accounts, redemption proceeds will be wired to the
Service Organization that maintains the Account, 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 (or, in the case of shareholders who have shareholder accounts
with the Trust, received by the Transfer Agent before such close of trading),
redemption proceeds often will be wired the next Business Day. Normally,
redemption proceeds will be wired within seven days after the Transfer Agent
receives the appropriate redemption request documents, including any additional
documentation that may be required by the Transfer Agent in order to establish
that a redemption request has been properly authorized. In addition, the payment
of redemption proceeds for service shares of a Fund recently purchased by check
may be delayed for up to 15 calendar days from the purchase date. 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 or shareholder's bank in the transfer process. If
a problem with such performance arises, the Service Organization or shareholder
should deal directly with such intermediaries or bank.
Service Organizations whose customers invest through Omnibus Accounts and
shareholders who have accounts with the Trust may request that redemption
payments be made 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. Shareholders cannot redeem shares of any Fund by
Federal Reserve wire on Federal holidays restricting wire transfers. There is no
charge for ACH wire transactions; however, such transactions will not be posted
to a Service Organization's or a shareholder's bank account until the second
Business Day following the transaction.
A Service Organization or a shareholder who has an account with the Trust
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 such shareholder, or its authorized representative. This
signature must be guaranteed by a bank, a securities broker or dealer, a credit
union having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
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<PAGE>
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, equity securities traded on a
recognized foreign or U.S. securities exchange are valued at their last sale
price on the principal exchange on which they are traded on the valuation day
prior to the time of valuation or, if no sale prior to the time of valuation
occurs, at the bid price. Unlisted equity securities for which current market
quotations are readily available are valued at their most recent bid price prior
to the time of valuation. 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.
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<PAGE>
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 a 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 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 intends to elect 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 and other requirements of the
Code.
Dividends paid by a Fund from its net investment 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 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
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<PAGE>
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 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 dividends and distributions) his or her
proportionate share of the amount of qualified foreign 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 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
eight Funds described in this Prospectus and ten 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.
- --------------------------------------------------------------------------------
Page - 36 -
<PAGE>
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 January 24, 1997, Morgan Grenfell Capital Management, Inc. owned
beneficially 68.70% of the outstanding shares of International Equity Fund; the
Louisiana Municipal Police Employees' Retirement System owned beneficially
94.41% of the outstanding shares of European Equity Fund; the TRW Master Trust
and the Pitney Bowes Retirement Plan owned beneficially 69.89% and 30.09%,
respectively, of the outstanding shares of European Small Cap Equity Fund; and
the Michelin North America Master Trust and the Public Employees' Retirement
Association owned beneficially 25.63% and 27.41%, respectively, of the
outstanding shares of Emerging Markets Equity 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.
As of the date of this Prospectus, the Administrator owned 100% of the
outstanding shares of Global Equity Fund, Pacific Basin Equity Fund and Japanese
Small Cap Equity Fund.
- --------------------------------------------------------------------------------
Page - 37 -
<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.
- --------------------------------------------------------------------------------
Page - 38 -
<PAGE>
APPENDIX A
PORTFOLIO MANAGER INFORMATION
Funds Portfolio Managers
- ----- ------------------
Morgan Grenfell International Equity Fund Patrick Disney
Patrick Deane
Alex Tedder
Graham Bamping
William Thomas
Christopher Getley
Morgan Grenfell Global Equity Fund Patrick Disney
Patrick Deane
Alex Tedder
Graham Bamping
William Thomas
Christopher Getley
David Heape
Morgan Grenfell European Equity Fund Richard Wilson
Julian Johnston
Morgan Grenfell Pacific Basin Equity Fund Graham Bamping
William Thomas
Morgan Grenfell International Small Cap Jonathan Wild
Equity Fund Julian Johnston
Lim Ser Mui
James Pulsford
Christopher Getley
Morgan Grenfell Japanese Small Cap James Pulsford
Equity Fund Atsuhiko Masuda
Morgan Grenfell European Small Cap Julian Johnston
Equity Fund Jonathan Wild
Morgan Grenfell Emerging Markets Richard Lamb
Equity Fund Christopher Getley
Stephanie Scofield
Christopher Turner
- --------------------------------------------------------------------------------
Page - 39 -
<PAGE>
Portfolio Manager Expertise Professional
- ----------------- --------- ------------
Experience
----------
Graham Bamping Pacific Basin Equity Director, MGIS (since
Markets 1987); Portfolio
Manager, Pacific Basin (since
1989); Portfolio Manager,
Singapore (1981-83); Research,
Far East (1980-81); Research, UK
(1978-80).
Patrick Deane UK Equities Fund Manager, MGIS
(since 1994); Fund Manager,
HSBC Asset Management
(1992-94); Fund
Manager, Midland Montague
Asset Management
(1990-92).
Patrick Disney EAFE(R)Markets Managing Director,
MGIS (since 1988);
Director, MGIS
(1987-88); EAFE(R)
Team (since 1981).
Christopher Getley Latin American Portfolio Manager, Latin
African and America and Resource
Australian Markets, MGIS (since 1987).
Equity Markets
David Heape US Equities Director, Morgan Grenfell
International Funds Management
Ltd. ("MGIFM") (since 1994);
Fund Manager, US Equities,
MGIS & MGIFM (since 1989);
Analyst, UK Equities, Morgan
Grenfell & Co., London
(1986-1989).
Julian Johnston European Equity Director, MGIS
Markets (since 1988);
Fidelity International
(1984-88); James
Capel & Co. (1979-84).
Richard Lamb Global Emerging Portfolio Manager,
Markets Equities MGIS (since 1993); Portfolio
Manager, Rothschild Asset
Management (The Chile Fund and
Five Arrows Fund) (1988-93);
Portfolio Manager, Berkeley
Govett and Samual Montagu
(1981-88).
- --------------------------------------------------------------------------------
Page - 40 -
<PAGE>
Portfolio Manager Expertise Professional
- ----------------- --------- ------------
Experience
----------
Atsuhiko Masuda Japanese Equities Fund Manager, DB Morgan
Grenfell Asset Management
Limited, Tokyo (since 1995);
MBA, University of Pennsylvania
(1993-1995); Analyst, Morgan
Grenfell, Tokyo (1990-1993);
Analyst, Morgan Grenfell,
London (1988-1990).
Lim Ser Mui Asia Ex Japan Portfolio Manager, Morgan
Small Cap Grenfell Investment Management
(Asia) Limited, Singapore (since
1991); Manager, Deutsche Bank
Private Banking (1988-1991);
Investment Manager, First City
Investments Pte Ltd. (1986-1988);
Assistant Manager Investments,
Paribas South East Asia
(1985-1986); Assistant Manager,
United Overseas Bank, Investment
Division (1980-1985); Senior
Auditor, Arthur Young
(1978-1980).
James Pulsford Japanese Markets Portfolio Manager,
Japanese Markets,
MGIS (since 1987);
UK research (since
1984).
Stephanie Scofield Pacific Basin & Portfolio Manager, Emerging
Emerging Markets Markets, MGIS (since 1993);
Equities Portfolio Manager, Pacific
Basin, MGIS (since 1992);
Analyst, Japanese equities, MGIS
(1990-1992).
Alex Tedder European Equities Portfolio Manager, Europe, MGIS
(since 1994); Analyst/Portfolio
Manager, Schroder Investment
Management (1990-1994).
William Thomas Japanese Markets Director, MGIS
(since 1988);
Portfolio Manager,
MGIS (technology
investments)
(1984-88); Director,
Extel (UK computing
services company)
(1971-79).
Christopher Turner European Emerging Portfolio Manager, European
Markets Equities Emerging Markets, MGIS (since
1993); Portfolio Manager,
European Markets, MGIFM (since
1990); Analyst/Portfolio Manager,
Equity and Law Life Assurance
Society (1986-1990).
Jonathan Wild International Equity Portfolio Manager,
Markets, MGIS (since 1996);
Small Capitalization Portfolio Manager,
Companies Finsbury Asset
Management (1993- 1995); Manager,
Barclays De Zoette Wedd
(1991-1992); Manager, KPMG Peat
Marwick (1986-1991).
Richard Wilson UK Equities Director, MGIS (since 1996);
Portfolio Manager, UK, MGIS
(since 1993); Portfolio Manager,
HSBC Asset Management
(1992-1993); Portfolio Manager,
Midland Montagu Asset Management
(1988-1992)
- --------------------------------------------------------------------------------
Page - 41 -
<PAGE>
APPENDIX B
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
in Section H or you are otherwise subject to backup withholding. Amounts
withheld and forwarded to the IRS can be credited as a payment of tax when
completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minor's Act, the TIN of the minor should
be furnished. If you do not have a TIN, you may apply for one using forms
available at local offices of the Social Security Administration or the IRS.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and write "exempt" after their
signature in section H of the application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Funds and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Internal Revenue
Code Sections 1441, 1442 and 3406 and/or consult your tax adviser.
- --------------------------------------------------------------------------------
Page - 42 -
<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
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Distributor
SEI Financial Services Company
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Custodian
The Northern Trust Company
Fifty South LaSalle Street
Chicago, Illinois 60675
Transfer Agent
DST Systems, Inc.
1004 Baltimore
Kansas City, Missouri 64105
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Hale and Dorr LLP
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 - 1-800-407-7301
Share Price and Performance
Information - 1-800-550-6426
(or contact your Service Organization)
- --------------------------------------------------------------------------------
Page - 43 -
<PAGE>
SUPPLEMENT DATED MARCH 18, 1997
TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 16, 1997 FOR
SERVICE SHARES OF THE FOLLOWING FUNDS:
Morgan Grenfell Global Equity Fund
Morgan Grenfell International Equity Fund
Morgan Grenfell European Equity Fund
Morgan Grenfell Pacific Basin Equity Fund
Morgan Grenfell International Small Cap Equity Fund
Morgan Grenfell European Small Cap Equity Fund
Morgan Grenfell Japanese Small Cap Equity Fund
Morgan Grenfell Emerging Markets Equity Fund
The Trustees of Morgan Grenfell Investment Trust have approved the removal of
the nonfundamental investment restrictions shown as restrictions (b), (d), (f),
(g), (h), (j) and (k) on pages 19 and 20 of the Statement of Additional
Information. Accordingly, these restrictions no longer apply to the Funds.
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
SERVICE SHARES
885 Third Avenue
New York, New York 10022
March 7, 1997
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,
Morgan Grenfell MicroCap Fund and Morgan Grenfell Large Cap Growth Fund(each a
"Fund"). Information concerning investment portfolios of the Trust that focus on
international investments (the "International Funds") is contained in separate
prospectuses 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, Morgan Grenfell Microcap 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.
(continued on next page)
- --------------------------------------------------------------------------------
Page -1-
<PAGE>
[continued]
Morgan Grenfell Microcap Fund invests primarily in equity and
equity-related securities of micro capitalization U.S. companies.
Morgan Grenfell Large Cap Growth Fund invests primarily in equity and
equity-related securities of large capitalization U.S. companies.
This Prospectus provides information about the Trust and each of the Funds
that investors should know before investing in service shares of the Funds.
Investors should carefully read this Prospectus and retain it for future
reference. For investors se.eking more detailed information, the Statement of
Additional Information dated March 7, 1997, 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, 1 Freedom Valley Drive, Oaks,
Pennsylvania 19456-0100. The Statement of Additional Information, which is
incorporated by reference into this Prospectus, has been filed with the
Securities and Exchange Commission. Not all of the Funds are available in
certain states. Please call 1-800-550-6426 to determine availability in a
particular state.
---------------------------------------------------
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 -2-
<PAGE>
TABLE OF CONTENTS
Page
----
Expense Information 4
Financial Highlights 6
Microcap Investment Results 8
Introduction to the Funds 10
Risk Factors 11
Investment Objectives and Policies 11
Description of Securities and Investment Techniques
and Related Risks 16
Additional Investment Information 24
Management of the Funds 25
Purchase of Service Shares 28
Redemption of Service Shares 31
Net Asset Value 33
Dividends, Distributions and Taxes 33
Organization and Shares of the Trust 35
Performance Information 36
- --------------------------------------------------------------------------------
Page -3-
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Short-Term Smaller Large Cap
Fixed Income Municipal Fixed Income Municipal Companies MicroCap Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Fund Fund * Fund *
---- --------- ---- --------- ---- ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases ........................... None None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends ........................... None None None None None None None
Deferred Sales Charge Imposed
on Redemptions + ............................... None None None None None None None
Exchange Fee ................................... None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (as a
percentage of average net assets after
reduction of advisory fee)
Advisory fees .................................. 0.40% 0.40% 0.40% 0.40% 1.00% 1.50% 0.75%
Other Expenses **............................... 0.44% 0.45% 1.30% 0.95% 2.28% 0.91% 0.73%
Reduction of Advisory Fee and Expense
Limitation by Adviser ***....................... (0.04)% (0.05)% (0.90)% (0.55)% (1.78)% (0.41)% (0.23)%
Net Fund Operating Expenses (after
advisory fee reduction and expense
limitation) .................................... 0.80% 0.80% 0.80% 0.80% 1.50% 2.00% 1.25%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MicroCap Fund and Large Cap Growth Fund were not operational during the fiscal
year ended October 31, 1996.
** The figure shown as other expenses for service shares of each Fund includes
service fee of 0.25% of the Fund's average net assets attributable to service
shares. For more information on service fees and a description of the
circumstances in which service shares will be converted to institutional shares
(another class of Fund shares), see "Management of the Funds--Service Plans."
*** 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 0.36%, Municipal Bond Fund 0.35%, Short-Term Fixed
Income Fund 0%, Short-Term Municipal Bond Fund 0%, Smaller Companies Fund 0%,
Microcap Fund 1.09%, and Large Cap Growth Fund 0.52%; and the Other Expenses of
Short-Term Fixed Income Fund, Short-Term Municipal Bond Fund and Smaller
Companies Fund are equal to the respective amounts shown in the above table as
Net Operating Expenses. If the Adviser's voluntary agreement was not in effect,
the Fund Operating Expenses for each Fund would be as follows: Fixed Income Fund
0.84%, Municipal Bond Fund 0.85%, Short-Term Fixed Income Fund 1.70%, Short-Term
Municipal Bond Fund 1.35%, Smaller Companies Fund 3.28%, Microcap Fund 2.41% and
Large Cap Growth Fund 1.48%.
+ A fee, currently $10, will be imposed on redemptions by wire.
- --------------------------------------------------------------------------------
Page 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 $ 8 $ 26 $ 44 $ 99
Morgan Grenfell Municipal Bond Fund $ 8 $ 26 $ 44 $ 99
Morgan Grenfell Short-Term Fixed Income Fund $ 8 $ 26 $ 44 $ 99
Morgan Grenfell Short-Term Municipal Bond Fund $ 8 $ 26 $ 44 $ 99
Morgan Grenfell Smaller Companies Fund $ 15 $ 47 $ 82 $179
1 3
Year Years
---- -----
Morgan Grenfell Microcap Fund $ 20 $ 63
Morgan Grenfell Large Cap Growth Fund $ 13 $ 40
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 for each Fund other than
Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund are
estimates for the fiscal year ending October 31, 1997 that are based on actual
expenses incurred during the fiscal year ended October 31, 1996, except that the
figures shown (including figures shown for Morgan Grenfell Microcap Fund and
Morgan Grenfell Large Cap Growth Fund) assume that (1) service fees were in
effect throughout the year ended October 31, 1996 and (2) new administration and
transfer agency fees were in effect throughout such year. "Other Expenses" for
Morgan Grenfell Microcap Fund and 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 either of these Funds exceed the
applicable 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 applicable 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."
- --------------------------------------------------------------------------------
Page -5-
<PAGE>
FINANCIAL HIGHLIGHTS
Selected audited data for an outstanding institutional share of each Fund
other than Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth
Fund are 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, have been audited by Price Waterhouse LLP, the Funds' independent
accountants. The data for periods prior to and ending October 31, 1994 for
Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond Fund were
audited by these Funds' prior independent accountants.
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 are shown
below for Morgan Grenfell Large Cap Growth Fund or Morgan Grenfell Microcap Fund
because these Funds had not commenced operations on or prior to October 31,
1996. However, performance data for a composite of microcap accounts managed by
the Adviser is shown below under "Microcap Investment Results".
- --------------------------------------------------------------------------------
Page -6-
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For an Institutional Share Outstanding Throughout Each Period Ended October 31
Net
Realized Distributions
Net Asset Net and Distributions from
Value Investment Unrealized from Net Realized Net Asset Net Assets
Beginning Income / Gains/ Investment Capital Value End Total End of
Year of Period (Loss) (Losses) Income Gains of Period Return Period (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------
Fixed Income Fund
- --------------------------------------------------------
1996 $ 10.62 $ 0.68 $ (0.04) $ (0.68) $ (0.07) $ 10.51 6.27% $ 758,003
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(1) $ 10.00 $ 0.06 $ (0.08) $ (0.06) - $ 9.92 (1.61)% $ 25,528
- --------------------------------------------------------
Municipal Bond Fund
- --------------------------------------------------------
1996 $ 10.86 $ 0.60 $ 0.13 $ (0.60) - $ 10.99 6.90% $ 252,152
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(2) $ 10.00 $ 0.60 $ 0.56 $ (0.60) - $ 10.56 13.42% $ 94,700
- --------------------------------------------------------
Short-Term Fixed Income Fund
- --------------------------------------------------------
1996 $ 10.01 $ 0.60 $ (0.01) $ (0.60) - $ 10.00 6.09% $ 6,751
1995(3) $ 10.00 $ 0.37 $ 0.01 $ (0.37) - $ 10.01 3.82% $ 4,140
- --------------------------------------------------------
Short-Term Municipal Bond Fund
- --------------------------------------------------------
1996 $ 10.13 $ 0.54 $ 0.04 $ (0.54) $ (0.04) $ 10.13 5.90% $ 9,132
1995(4) $ 10.00 $ 0.30 $ 0.13 $ (0.30) - $ 10.13 4.39% $ 3,724
- --------------------------------------------------------
Smaller Companies Fund
- --------------------------------------------------------
1996 $ 10.55 $ (0.02) $ 2.61 $ (0.04 - $ 13.10 24.58% $ 4,115
1995(5) $ 10.00 $ 0.03 $ 0.52 - - $ 10.55 5.50% $ 2,638
<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
Average to Average Expense Expense Turnover Commission
Net Assets Net Assets Limitations) Limitations) Rate Rate*
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------
Fixed Income Fund
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 0.55% 6.52% .61% 6.46% 176% N/A
1995 0.54% 6.81% .63% 6.72% 182% N/A
1994 0.54% 6.22% .66% 6.10% 251% N/A
1993 0.55% 6.01% .72% 5.84% 196% N/A
1992(1) 0.55% 5.24% .66% 4.13% 148% N/A
- ---------------------------------
Municipal Bond Fund
- ---------------------------------
1996 0.55% 5.50% 0.61% 5.44% 66% N/A
1995 0.54% 5.75% 0.62% 5.67% 63% N/A
1994 0.54% 5.60% 0.67% 5.47% 94% N/A
1993 0.55% 5.94% 0.75% 5.74% 160% N/A
1992(2) 0.55% 6.31% 0.79% 6.07% 143% N/A
- ---------------------------------
Short-Term Fixed Income Fund
- ---------------------------------
1996 0.53% 6.00% 1.29% 5.24% 124% N/A
1995(3) 0.52% 5.86% 2.84% 3.54% 90% N/A
- ---------------------------------
Short-Term Municipal Bond Fund
- ---------------------------------
1996 0.53% 5.34% 1.58% 4.29% 129% N/A
1995(4) 0.52% 4.60% 2.16% 2.96% 62% N/A
- ---------------------------------
Smaller Companies Fund
- ---------------------------------
1996 1.25% (0.23)% 2.55% (1.53)% 141% $ 0.0560
1995(5) 1.25% 0.94% 2.28% (0.09)% 23% N/A
</TABLE>
- --------------------------------------------------------------------------------
* Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
# Returns are for the period indicated and have not been annualized
(1) Fixed Income Fund commenced operations on 9/18/92. All ratios for the
period have been annualized.
(2) Municipal Bond Fund commenced operations on 12/13/91. All ratios for the
period have been annualized.
(3) Short-Term Fixed Income Fund commenced operations on 3/13/95. All ratios
for the period have been annualized.
(4) Short-Term Municipal Bond Fund commenced operations on 3/6/95. 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.
- --------------------------------------------------------------------------------
Page -7-
<PAGE>
MICROCAP INVESTMENT RESULTS
Set forth below are 10-year investment results for a composite of
accounts managed by the Microcap Equity Team of Morgan Grenfell Capital
Management, Inc. (the "Adviser" or "MGCM") in accordance with the microcap
investment strategy (the "MGCM Microcap Composite"). For comparison purposes,
performance information is also shown for the Russell 2000 (an index of small
capitalization stocks).
Each of the Adviser's discretionary microcap accounts is included in the
MGCM Microcap Composite. These accounts had the same investment objective as
Morgan Grenfell Microcap Fund and were managed using substantially similar,
though not necessarily identical, investment strategies and techniques as those
contemplated for Microcap Fund. See "Investment Objectives and Policies".
Because of the similarities in investment strategies and techniques, the Adviser
believes that the accounts included in the MGCM Microcap Composite are
sufficiently comparable to Microcap Fund to make the performance data listed
below relevant to prospective investors.*
The investment results presented are not intended to predict or suggest the
returns that will be experienced by Microcap Fund or the return an investor may
achieve by investing in shares of the Fund. Most of the accounts included in the
MGCM Microcap Composite were not subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the Investment Company Act of 1940 (the "1940 Act") and the Internal
Revenue Code of 1986, as amended (the "Code"). If more of the accounts had been
subject to these requirements, the performance of the MGCM Microcap Composite
might have been lower.
The investment results of the MGCM Microcap Composite are shown net of
commissions and transaction costs (including custody fees) and net of the
highest investment advisory fee charged to any account included in the Composite
(2.00% for periods prior to October 1, 1993 and 1.50% for subsequent periods).
Microcap Fund's estimated total annual operating expenses are higher than the
highest investment advisory fee charged to any account included in the MGCM
Microcap Composite.
- ------------
* Robert Kern, Audrey Jones and David Baratta are the members of the
Adviser's Microcap Equity Team. Mr. Kern and Ms. Jones have been members of
the Team throughout the ten-year period for which data is shown. Mr.
Baratta joined the Team in September 1994, following the departure of two
portfolio managers who had been members of the Team since at least 1987. In
May 1996, a portfolio manager who had been a member of the Team since at
least 1987 left MGCM.
- --------------------------------------------------------------------------------
Page -8-
<PAGE>
Average Annual Total Return
---------------------------
MGCM Microcap
Composite
Year (Net of Fees) Russell 2000
- ---- ------------ ------------
1996 50.49 % 16.49 %
1995 54.29 % 28.44 %
1994 (16.71)% (1.81) %
1993 18.15 % 18.89 %
1992 3.49 % 18.42 %
1991 74.37 % 46.05 %
1990 (2.48)% (19.50) %
1989 24.25 % 16.24 %
1988 14.13 % 24.89 %
1987 (4.91)% (8.77) %
- --------------------------------------------------------------------------------
MGCM Microcap
Composite
(Net of Fees) Russell 2000
------------- ------------
Annualized Total Return For
Period From December 31, 1986
to December 31, 1996 18.42 % 12.41 %
- --------------------------------------------------------------------------------
Another way to consider the above data is as follows:
$10,000 invested in a private account on December 31, 1986, which achieved a
return based on the MGCM Microcap Composite, would have grown to $54,221,
assuming reinvestment of dividends, by December 31, 1996.
- --------------------------------------------------------------------------------
Page -9-
<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 investments (the "International Funds") is contained
in separate prospectuses that may be obtained by calling 1-800-550-6426.
The Adviser, 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 financial planners, investment advisers,
broker-dealers and other institutions ("Service Organizations"). Some Service
Organizations 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. As described below under "Management of the Funds
- --Service Plans", all or a portion of a Fund's outstanding service shares will
be converted to institutional shares of the same Fund under certain
circumstances.
Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund
have 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,
Intermediate Municipal Bond Fund and Short-Term Municipal Bond Fund, the Adviser
seeks to achieve these Funds' investment objectives by identifying fixed income
securities which it believes to be undervalued relative to the market rather
than forecasting changes in the interest rate environment. Fixed income
securities may be undervalued for a variety of reasons, such as market
inefficiencies relating to lack of market information about particular features
of such securities, supply and demand shifts and lack of market penetration by
some issues.
Equity Investments. In selecting equity investments for Smaller Companies
Fund, Microcap Fund and Large Cap Growth 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
- --------------------------------------------------------------------------------
Page -10-
<PAGE>
Smaller Companies Fund and MicroCap Fund, the Adviser may also consider the
fundamental value of a company, and may invest in a company where it believes
that value is not fully recognized in the marketplace. Fundamental value is
determined by taking into account various factors including earnings per share,
the ratio of book value to market price, and the company's cash flow and
dividend yield.
In selecting equity investments, the Adviser considers a number of
company-specific factors, including quality of management, a leading or dominant
position in a major product line, a sound financial position, and a relatively
high rate of return on invested capital so that future growth can be financed
from internal sources. The Adviser also considers a company's record of dividend
payments and/or the likelihood that the Company will pay dividends in the
future. However, consistent with 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."
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
- --------------------------------------------------------------------------------
Page -11-
<PAGE>
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 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 Techniques and
Related Risks--Fixed Income Securities." In the event any security held by a
Fixed Income Fund is downgraded below the rating categories set forth above, the
Adviser will review the security and determine whether to retain or dispose of
that security, provided that neither Fixed Income Fund may hold, at any time,
more than 5% of its net assets in fixed income securities that are not
investment grade. Fixed income securities rated in one of the four highest
ratings categories and unrated securities determined by the Adviser to be of
comparable quality are referred to herein as "investment grade fixed income
securities." Fixed income securities in the lowest investment grade category are
considered medium grade securities. Such securities have speculative
characteristics, involve greater risk of loss than higher quality securities,
and are more sensitive to changes in the issuer's capacity to pay.
Under normal conditions, each Fixed Income Fund may hold up to 20% of its
total assets in cash or money market instruments in order to maintain liquidity,
or in the event that the Adviser determines that securities meeting the Fund's
investment objective and policies are not otherwise readily available for
purchase. For a definition of money market instruments and the Fixed Income
Funds' policies on temporary defensive investments, see "Description of
Securities and Investment Techniques and Related Risks--Additional Investment
Techniques."
Municipal Bond Fund and Short-Term Municipal Bond Fund
The investment objective of the Municipal Bond Fund and the Short-Term
Municipal Bond Fund (the "Municipal Funds") is to seek a high level of income
exempt from regular federal income tax (i.e., excluded from gross income for
federal income tax purposes), consistent with the preservation of capital.
However, there is no restriction on the percentage of either Municipal Fund's
assets that may be invested in obligations the interest on which is a preference
item for purposes of the federal alternative minimum tax. The Municipal Bond
- --------------------------------------------------------------------------------
Page -12-
<PAGE>
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 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 federal
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 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.
- --------------------------------------------------------------------------------
Page -13-
<PAGE>
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.
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."
- --------------------------------------------------------------------------------
Page -14-
<PAGE>
Up to 35% of the Fund's total assets may be invested in investment grade
fixed income securities (see definition on page 12), cash equivalents and equity
and equity-related securities of medium and large capitalization companies. In
the event any fixed income security held by the Fund is downgraded below
investment grade, the Adviser will review the security and determine whether to
retain or dispose of it. In no event, however, will the Fund hold more than 5%
of its net assets in fixed income securities that are not investment grade. Up
to 5% of the Fund's net assets (measured at time of investment) may be invested
in the securities of non-U.S. issuers of all sizes.
Microcap Fund
The investment objective of the Microcap Fund is to maximize capital
appreciation. Under normal market conditions, the Fund pursues this objective by
investing at least 65% of its total assets in common stocks of micro
capitalization U.S. companies and securities convertible into such stocks. For
purposes of the Fund's investment policies, micro capitalization companies are
those ranked (at the time of investment) according to market capitalization in
the bottom 5% of the U.S. equity market, including both listed and unlisted
companies.
The Adviser believes that investments in many micro capitalization
companies, although involving greater risk, provide the opportunity for greater
capital growth, than investments in larger, better-known companies. In
particular, the Adviser believes that the inefficiencies in this sector of the
marketplace often provide opportunities for investment gains. The Fund's
investments in securities of U.S. micro capitalization companies will be limited
to securities traded on a U.S. exchange or in the over-the-counter market. For a
description of the risks associated with investment in micro capitalization
companies, see "Description of Securities and Investment Techniques and Related
Risks - Small and Micro Capitalization Companies."
Up to 25% of the Fund's total assets may be invested in securities of
non-U.S. companies with individual market capitalization that would place them
in the bottom 5% of the U.S. equity market. For liquidity purposes, the Fund
will normally invest a portion of its assets (no more than 35%) in high quality
debt securities and money market instruments with remaining maturities of one
year or less, including repurchase agreements. In addition, the Fund may invest
up to 5% of its net assets in non-convertible bonds and preferred stocks that
are rated, at the time of purchase, Aaa or Aa by Moody's or AAA or AA by
Standard & Poor's or determined by the Adviser to be of comparable quality.
Large Cap Growth Fund
The primary investment objective of the Large Cap Growth Fund is to
maximize capital appreciation. The Fund seeks current income as its secondary
investment objective. Under normal market conditions, the Fund pursues these
objectives by investing at least 65% of its total assets in equity and
equity-related securities (but not less than 60% directly in stocks) of large
capitalization U.S. companies. The Fund may invest in the same types of equity
and equity-related securities as the Smaller Companies Fund (see above).
For purposes of the Fund's investment policies, large capitalization
companies are those ranked (at time of investment) according to market
capitalization in the top 25% of the Wilshire 5000 Index, a broad-based index
that includes nearly all U.S. public companies. The Adviser believes that the
equity and equity-related securities of many large capitalization companies
offer significant potential for capital growth, but with less risk than
investments in smaller capitalization companies.
- --------------------------------------------------------------------------------
Page -15-
<PAGE>
Up to 35% of the Fund's total assets may be invested in investment grade
fixed income securities (see definition on page 12), 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 facilities or projects. The payment of the
principal and interest on such bonds is generally dependent solely on the
ability of the facility's user to meet its financial obligations and the pledge,
if any, of real and personal property so financed as security for such payment.
Put Bonds. The Fixed Income Funds and the Municipal Funds may invest in
"put" bonds, which are tax exempt securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Adviser
intends to purchase only those "put" bonds for which the put option is an
integral part of the security as originally issued. The option to "put" the bond
back to the issuer prior to the stated final maturity can cushion the price
decline of the bond in a rising interest rate environment. However, the premium
paid, if any, for an option to put will have the effect of reducing the yield
otherwise payable on the underlying security. For the purpose of determining the
"maturity" of securities purchased subject to an option to put, and for the
purpose of determining the dollar weighted average maturity of a Fund holding
such securities, the Fund will consider "maturity" to be the first date on which
it has the right to demand payment from the issuer of the put although the final
maturity of the security is later than such date.
- --------------------------------------------------------------------------------
Page -16-
<PAGE>
Variable or Floating Rate Instruments and Variable Rate Demand Instruments.
The Fixed Income Funds and the Municipal Funds may invest in variable or
floating rate instruments and variable rate demand instruments, including
variable amount master demand notes. These instruments will normally involve
industrial development or revenue bonds that provide that the rate of interest
is set as a specific percentage of a designated base rate (such as the prime
rate) at a major commercial bank. In addition, the interest rate on these
securities may be reset daily, weekly or on some other reset period and may have
a floor or ceiling on interest rate changes. A Fund holding such an instrument
can demand payment of the obligation at all times or at stipulated dates on
short notice (not to exceed 30 days) at par plus accrued interest.
U.S. Government Securities. The Funds may invest in obligations issued or
guaranteed as to both principal and interest by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported either by (i) the full faith and
credit of the U.S. Government (such as securities of the Small Business
Administration), (ii) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (iii) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association, or (iv) only the credit
of the issuer. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies or instrumentalities in the
future.
The Fixed Income Funds and the Municipal Funds may also invest in
separately traded principal and interest components of securities guaranteed or
issued by the U.S. Government or its agencies, instrumentalities or sponsored
enterprises if such components are traded independently under the Separate
Trading of Registered Interest and Principal of Securities program ("STRIPS") or
any similar program sponsored by the U.S. Government. However, no Fund may
actively trade these instruments. STRIPS are sold as zero coupon securities. See
"Zero Coupon Securities."
Custodial Receipts. Custodial receipts are interests in separately traded
interest and principal component parts of U.S. Government securities that are
issued by banks or brokerage firms and are created by depositing U.S. Government
securities into a special account at a custodian bank. The custodian holds the
interest and principal payments for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of 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
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generate cash to satisfy the applicable distribution requirements. Because of
these features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to
a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
Securities of Foreign Issuers
Each Equity Fund and each Fixed Income Fund may invest to a limited extent
in securities of foreign issuers and supranational entities. Investments in the
securities of foreign issuers and supranational entities may subject the Funds
to investment risks that differ in some respects from those related to
investments in securities of U.S. issuers. Such risks include future adverse
political and economic developments, possible imposition of withholding taxes on
income, possible seizure, nationalization or expropriation of foreign deposits,
possible establishment of exchange controls or taxation at the source or
fluctuation in value due to changes in currency exchange rates. Foreign issuers
of securities often engage in business practices different from those of
domestic issuers of similar securities and there may be less information
publicly available about foreign issuers. In addition, foreign issuers are,
generally speaking, subject to less government supervision and regulation and
different accounting treatment than are those in the United States.
To the extent that they invest in non-U.S. securities, the Equity Funds may
enter into forward currency exchange contracts ("forward contracts") and
currency options to hedge against currency exchange rate fluctuations. Forward
contracts and options may be considered derivative instruments.
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
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the pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying
mortgage-backed and asset-backed securities can be expected to accelerate, and
thus impair a Fund's ability to reinvest the returns of principal at comparable
yields. Accordingly, the market values of such securities will vary with changes
in market interest rates generally and in yield differentials among various
kinds of U.S. Government securities and other mortgage-backed and asset-backed
securities. Asset-backed securities present certain risks that are not presented
by mortgage-backed securities because asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. In addition, there is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments on
these securities. Many mortgage and asset-backed securities may be considered
derivative instruments. No Fund will invest 25% or more of its total assets in
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 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
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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 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
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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.
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. 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 and Micro Capitalization Companies
The Smaller Companies Fund and Microcap Fund invest a significant portion
of their assets in smaller, lesser-known companies which the Adviser believes
offer greater growth potential than larger, more mature, better-known companies.
Investing in the securities of these companies, however, also involves greater
risk and the possibility of greater portfolio price volatility. Among the
reasons for the greater price volatility of these small companies and unseasoned
stocks are the less certain growth prospects of smaller firms, the lower degree
of liquidity in the markets for such stocks and the greater sensitivity of small
companies to changing economic conditions in their geographic region. For
example, securities of these companies involve higher investment risk than that
normally associated with larger firms due to the greater business risks of small
size and limited product lines, markets, distribution channels and financial and
managerial resources.
Many smaller capitalization companies in which Smaller Companies Fund and
Microcap Fund may invest are not well-known to the investing public, do not have
significant institutional ownership and are followed by relatively few
securities analysts. As a result, there may be less publicly available
information concerning these companies than exists for larger capitalization
companies. Also, the securities of smaller capitalization companies traded on
the over-the-counter market may have fewer market makers, wider spreads between
their quoted bid and asked prices and lower trading volumes, resulting in
comparatively greater price volatility and less liquidity than exists for
securities of larger capitalization companies.
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<PAGE>
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 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 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
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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.
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 transferable 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 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
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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--Intermediate 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, 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
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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 equity securities. A
high rate of portfolio turnover will also increase the likelihood of net
short-term capital 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 September 30, 1996,
MGCM managed approximately $8.5 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:
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Annual Rate
-----------
Morgan Grenfell Fixed Income Fund 0.40%
Morgan Grenfell Municipal Bond Fund 0.40%
Morgan Grenfell Short-Term Fixed Income Fund 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund 0.40%
Morgan Grenfell Smaller Companies Fund 1.00%
Morgan Grenfell Microcap Fund 1.50%
Morgan Grenfell Large Cap Growth Fund 0.75%
The advisory fees to which the Advisor is entitled for Smaller Companies
Fund, Microcap 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 "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 Microcap Fund and Morgan Grenfell Large Cap Growth
Fund, which were 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 0.34%, 0.34%,
0.00%, 0.00%, and 0.00% of their respective average daily net assets.
Each Fixed Income Fund and Municipal Fund is managed utilizing a team approach
led by Executive Vice President David W. Baldt. Mr. Baldt has been in the
investment advisory business since 1973 and with the Adviser since 1989. The
rest of the team includes Gary W. Bartlett, Warren S. Davis, Tomas J. Flaherty
and Timothy C. Vile, all Senior Vice Presidents with the Adviser. Mr. Bartlett
has been in the in the investment advisory business since 1982 (with the Adviser
since 1992) and previously managed funds with Provident National Bank. Mr. Davis
has been in the investment advisory business since 1986 (with the Adviser since
1995) and has managed funds with Merrill Lynch and Paine Webber. Mr. Flaherty
has been in the investment advisory business since 1985 (with the Adviser since
1995) and previously managed funds with Prudential Securities. Mr. Vile has been
in the investment advisory business since 1986 (with the Adviser since 1991) and
previously managed funds for Equitable Capital Management.
The Smaller Companies Fund and Microcap Fund are each managed by a team of
three experienced portfolio managers, Robert Kern, Audrey M. T. Jones and David
A. Baratta. They have all served as members of the Funds'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 September 1994, 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
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<PAGE>
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 that have agreements with the Trust, and
are intended to compensate Service Organizations for providing personal services
and/or account maintenance services to their customers who invest in service
shares. 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.
In the event that an agreement between a Service Organization and the Trust
expires or is terminated, service shares beneficially owned by customers of such
Service Organization will convert automatically to institutional shares of the
same Fund. Customers of a Service Organization will receive advance notice of
any such conversion, and any such conversion will be effected on the basis of
the relative net asset values of the two classes of shares involved. Information
regarding institutional shares of the Trust may be obtained by calling
1-800-550-6426.
Administrator and Distributor
The Trust has entered into an Administration Agreement with SEI Financial
Management Corporation ("SEI Financial Management" or the "Administrator"), 1
Freedom Valley Drive, Oaks, Pennsylvania 19456-0100, 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:
0.12% of aggregate assets under $1 billion
0.08% of next $500 million of aggregate assets
0.06% of next $1 billion of aggregate assets
0.04% of aggregate assets exceeding $2.5 billion
Each Fund pays the Administrator a minimum annual fee of $60,000.
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"), 1 Freedom Valley Drive,
Oaks, Pennsylvania 19456-0100, 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
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assets of Morgan Grenfell Fixed Income Fund and Morgan Grenfell Intermediate
Municipal Bond Fund.
The Trust has entered into a Custodian Agreement with The Northern Trust
Company ("Northern"), pursuant to which Northern serves as custodian of the
assets of the Equity Funds, Morgan Grenfell Short-Term Fixed Income Fund and
Morgan Grenfell Short-Term Municipal Bond Fund.
DST Systems, Inc. (the "Transfer Agent"), 1004 Baltimore, 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. Investors may
invest in service shares through an Omnibus Account maintained by their Service
Organization. Alternatively, investors may invest in service shares by
establishing a shareholder account with the Trust (in addition to the account
with their Service Organization). Investors who invest through Omnibus Accounts
may be subject to minimums established by their Service Organizations for
initial and subsequent investments. Unless waived by the Trust, the minimum
initial investment for Omnibus Accounts and investors who establish shareholder
accounts with the Trust in each Fund is $250,000.
Investors who invest through Omnibus Accounts should submit purchase orders
to their Service Organization. Investors who establish shareholder accounts with
the Trust should submit purchase orders to the Transfer Agent as described
below. 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 or by the
Transfer Agent, as the case may be. A "Business Day" means any day on which the
New York Stock Exchange (the "NYSE") is open. For an investor who invests
through an Omnibus Account, the 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 promptly forward such order to the Transfer Agent for
the investor to receive that day's net asset value. Service Organizations are
responsible for promptly forwarding such investors' purchase orders to the
Transfer Agent. For an investor who has a shareholder account with the Trust,
the Transfer Agent must receive the investor's purchase order before the close
of regular trading on the NYSE for the investor to receive that day's net asset
value.
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.
For investors who invest through Omnibus Accounts, payment for initial and
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<PAGE>
subsequent purchases of service shares should be made to the investors' Service
Organizations. These investors should contact their Service Organizations for
further details on how to purchase service shares. For investors who have
shareholder accounts with the Trust, payment for initial and subsequent
purchases of service shares should be made by mail or wire as described below.
Purchases by Mail
Service shares may be purchased initially by completing the Account
Application accompanying this Prospectus and mailing it, together with a check
in the amount of $250,000 or more drawn on a U.S. bank payable to the
appropriate Fund to:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
Third party checks, credit card checks and cash will not be accepted.
Subsequent investments in an existing account in any Fund may be made at
any time by sending to the Transfer Agent, at the above address, a check payable
to the appropriate Fund, along with either (i) a subsequent order form which may
be obtained from the Transfer Agent or (ii) a letter stating the amount of the
investment, the name of the Fund and the account number in which the investment
is to be made. Investors should indicate the name of the appropriate Fund and
account number on all correspondence.
Purchases by Wire
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase service shares of any Fund by requesting
their bank to transmit funds by wire to:
United Missouri Bank, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment in service shares by
wire, an investor must first telephone 1-800-407-7301 to be assigned a wire
account number. The investor may then transmit funds by wire through the wire
procedures described above. The investor's name, account number, social security
or other taxpayer identification number, and address must be specified in the
wire. In addition, investors making initial investments by wire must promptly
complete the Account Application accompanying this Prospectus and forward it to
the Transfer Agent at:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
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<PAGE>
Subsequent Purchases: Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number.
Reports to Shareholders
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations for information regarding the Funds. Also, shareholders
who have shareholder accounts with the Trust may contact Morgan Grenfell
Investment Trust for account information by calling 1-800-550-6426 or by writing
to Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO
64141-6165.
Exchange Privilege
A shareholder may exchange service shares of a Fund for service shares of
an International Fund, subject, in the case of shareholders who invest through
Omnibus Accounts, to any restrictions imposed by the Service Organizations that
maintain such accounts. A shareholder should obtain and read the prospectus
relating to service shares of an International Fund and consider its investment
objective, policies and fees before making an exchange into that fund. Exchanges
will be permitted only in those states in which service shares of the relevant
fund is available for sale. The Funds reserve the right to refuse any exchange
request.
If a shareholder who has a shareholder account with the Trust elects the
telephone exchange privilege on the Account Application, the shareholder may
exchange service shares in its account in one Fund for service shares in any
other Fund described in this Prospectus by telephone (by calling
1-800-407-7301), as long as all accounts are identically registered. Service
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may exchange service shares in one Fund for service
shares of any other Fund or International Fund by telephone, unless they
indicate otherwise in writing to the Trust. For shareholders who have
shareholder accounts with the Trust, the Transfer Agent 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) for the investor to
receive that day's net asset values. Service Organizations are responsible for
promptly forwarding such investors' exchange requests to the Transfer Agent. For
an investor who establishes a shareholder account with the Trust, the Transfer
Agent must receive the investor's exchange request before the close of regular
trading on the NYSE for the investor to receive that day's net asset values.
Neither the Funds nor their agents will be liable for any loss incurred by
a shareholder as a result of following instructions communicated by telephone
that they reasonably believe to be genuine. To confirm that telephone exchange
requests are genuine, the Funds will employ reasonable procedures such as
providing written confirmation of telephone exchange transactions and tape
recording of telephone exchange requests. If a Fund does not employ such
reasonable procedures, it may be liable for any loss incurred by a shareholder
due to a fraudulent or other unauthorized telephone exchange request.
An exchange is treated as a sale of the shares exchanged and, therefore,
may produce a gain or loss to the shareholder that is recognizable for tax
purposes.
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<PAGE>
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 (as long as the Service Organization promptly forwards the
shareholder's redemption request to the Transfer Agent) or, in the case of
shareholders who have shareholder accounts with the Trust, by the Transfer
Agent. For a shareholder who invests through an Omnibus Account, the
shareholder's Service Organization must receive the shareholder's redemption
request before the close of regular trading on the NYSE (currently 4:00 p.m.,
Eastern Time) and promptly forward such request to the Transfer Agent for the
investor to receive that day's net asset value. Service Organizations are
responsible for promptly forwarding such investors' redemption requests to the
Transfer Agent. For a shareholder who has a shareholder account with the Trust,
the Transfer Agent must receive the shareholder's redemption request before the
close of regular trading on the NYSE for the shareholder to receive that day's
net asset value.
A shareholder who has a shareholder account with the Trust may request
redemptions by telephone (by calling 1-800-407-7301) if the optional telephone
redemption privilege is elected on the Account Application. Service
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may redeem service shares by telephone, unless they
indicate otherwise in writing to the Trust. Alternatively, Service Organizations
and shareholders who have accounts with the Trust may submit redemption requests
in writing. A written redemption request must specify the number of shares to be
redeemed, the Fund from which service shares are being redeemed, the
shareholder's or Omnibus Account's account number with the Trust, payment
instructions and the exact registration of the Account. Signatures must be
guaranteed in accordance with the procedures set forth below under "Payment of
Redemption Proceeds".
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
For shareholders having accounts with the Trust, redemption proceeds
ordinarily will be wired to the bank account designated on the Account
Application, unless payment by check has been requested. For shareholders who
invest through Omnibus Accounts, redemption proceeds ordinarily will be wired to
the Service Organization that maintains the Account, unless payment by check has
been requested. For a redemption request received by the redeeming shareholder's
Service Organization (or, in the case of shareholders who have shareholder
accounts with the Trust, by the Transfer Agent) 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
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<PAGE>
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 will be
delayed for up to 15 calendar days from the purchase date. 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 or shareholder's bank in the transfer process. If a
problem with such performance arises, the Service Organization or shareholder
should deal directly with such intermediaries or bank.
Service Organizations whose customers invest through Omnibus Accounts and
shareholders who have accounts with the Trust 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 or shareholder's bank account until the second
Business Day following the transaction.
A Service Organization or a shareholder who has an account with the Trust
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 such shareholder or its authorized representative. This
signature must be guaranteed by a bank, a securities broker or dealer, a credit
union having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies standards established by the Transfer Agent. The Transfer Agent may
also require additional documentation in connection with a request to change a
designated bank.
If the Board of Trustees determines that it is appropriate in order to
protect the best interests of a Fund and its shareholders, the Fund, under the
limited circumstances described below, may satisfy all or part of a redemption
request by delivering portfolio securities to a redeeming investor. However, the
Trust, on behalf of each Fund, has elected, pursuant to Rule 18f-1 under the
1940 Act, to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. Only redemptions in excess of this limit may be paid in kind.
In-kind payments would not have to constitute a cross-section of a Fund's
portfolio. Investors receiving redemption payment in portfolio securities will
not have eliminated their investment exposure by their redemption as would
investors receiving their redemption payment in cash. Instead these investors
will be subject to risks inherent in owning such securities, including market
value and currency fluctuations, difficulties in selling securities in
particular markets and repatriating the sales proceeds, and the political and
other risks described under "Description of Securities and Investment Techniques
and Related Risks - Foreign Securities." In addition, a shareholder generally
will incur additional expenses, such as brokerage commissions and currency
conversion fees or expenses, on the sale or other disposition of securities
received from a Fund. Any portfolio securities paid or distributed to a
redeeming shareholder would be valued as described under "Net Asset Value."
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<PAGE>
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.
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
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.
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<PAGE>
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 and other 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 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 paid by 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
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<PAGE>
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.
A Fund that invests in foreign securities may be subject to foreign
withholding or other foreign taxes on income earned on such securities (possibly
including, in some cases, capital gains). The Funds will not be eligible to pass
such taxes or any associated foreign tax credits or deductions through to their
shareholders, who will therefore not take such taxes directly into account on
their own tax returns. Instead, such taxes will reduce the amounts available for
the Funds to distribute to their shareholders.
Investors should consider the tax implications of buying service shares
immediately prior to a distribution (other than a daily dividend). 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.
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 Intermediate 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,
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<PAGE>
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 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 January 24, 1997, the Adviser owned 65.55% of the outstanding shares
of the Smaller Companies Fund, Bankers Trust Company owned 44.53% of the
outstanding shares of the Municipal Bond Fund and Deutsche Morgan Grenfell C.J.
Lawrence Inc. owned 62.88% of the outstanding shares of the Microcap 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.
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.
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<PAGE>
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.
- --------------------------------------------------------------------------------
Page -37-
<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Distributor
SEI Financial Services Company
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
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
1004 Baltimore
Kansas City, Missouri 64105
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Hale and Dorr LLP
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 - 1-800-407-7301
Share Price and Performance
Information - 1-800-550-6426
(or contact your Service Organization)
- --------------------------------------------------------------------------------
Page -38-
<PAGE>
SUPPLEMENT DATED MARCH 18, 1997
TO STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 16, 1997 FOR
INSTITUTIONAL SHARES OF THE FOLLOWING FUNDS:
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Municipal Bond Fund
Morgan Grenfell Short-Term Fixed Income Fund
Morgan Grenfell Short-Term Municipal Bond Fund
Morgan Grenfell Smaller Companies Fund
Morgan Grenfell Microcap Fund
Morgan Grenfell Large Cap Growth Fund
The Trustees of Morgan Grenfell Investment Trust have approved the
removal of the nonfundamental investment restrictions shown as:
(i) restrictions (b), (d), (f), (g), (h), (j) and (k) on pages 24 and
25 of the Statement of Additional Information for each Fund other
than Morgan Grenfell Fixed Income Fund and Morgan Grenfell
Municipal Bond Fund; and
(ii) restriction (2) on page 26 of the Statement of Additional
Information for Morgan Grenfell Fixed Income Fund and Morgan
Grenfell Municipal Bond Fund.
Accordingly, these restrictions no longer apply to the Funds.
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
March 7, 1997
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") and international equity investments
(the "International Equity Funds") is contained in separate prospectuses 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 March 7, 1997 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, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100. The Statement of
Additional Information, which is incorporated by reference into this Prospectus,
has been filed with the Securities and Exchange Commission. Not all of the Funds
are available in certain states. Please call 1-800-550-6426 to determine
availability in a particular state.
- ------------------------------------------------------------------------------
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 - 1 -
<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.
- --------------------------------------------------------------------------------
Page - 2 -
<PAGE>
TABLE OF CONTENTS
Page
----
Expense Information 4
Financial Highlights 6
Introduction to the Funds 8
Investment Objectives and Polices 10
Description of Securities and Investment Techniques
and Related Risks 13
Additional Investment Information 26
Management of the Funds 27
Purchase of Service Shares 29
Redemption of Service Shares 32
Net Asset Value 34
Dividends, Distributions and Taxes 34
Organization and Shares of the Trust 36
Performance Information 37
Appendix A........................................... 39
Appendix B........................................... 42
Appendix C........................................... 44
- --------------------------------------------------------------------------------
Page - 3 -
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
FUND NAME GLOBAL FIXED INTERNATIONAL EMERGING MARKETS
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% 1.00%
Other Expenses*............................................ 0.54% 0.88% 0.72%
Reduction of Advisory Fee
and Expense Limitation by Adviser **....................... (0.14)% (0.48)% (0.22)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Fund Operating
Expenses**................................................. 0.90% 0.90% 1.50%
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
</TABLE>
* The figure shown as other expenses for service shares of each Fund includes
service fees of 0.25% of the Fund's average net assets attributable to service
shares. For more information on service fees and a description of the
circumstances in which service shares will be converted to institutional shares
(another class of Fund shares), see "Management of the Funds--Service Plans."
*** 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: Global Fixed Income Fund 0.36%, International Fixed Income Fund
0.02%, and Emerging Markets Debt Fund 0.78%. If the Adviser's voluntary
agreement were not in effect, the Fund Operating Expense for service shares of
each Fund would be as follows: Global Fixed Income Fund 1.04%, International
Fixed Income Fund 1.38% and Emerging Markets Debt Fund 1.72%.
- --------------------------------------------------------------------------------
Page - 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 Global Fixed Income Fund $ 9 $29 $50 $111
Morgan Grenfell International Fixed Income Fund $ 9 $29 $50 $111
Morgan Grenfell Emerging Markets Debt Fund $15 $47 $82 $179
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 year ended October 31, 1996, except that the figures shown assume that
(1) the service fees were in effect throughout the year ended October 31, 1996
and (2) new administration and transfer agency fees were in effect throughout
such year. Additionally, the figures shown in the Expense Information Table and
Example reflect the Adviser's voluntary agreement, effective as of October 31,
1996 (March 1, 1997 in the case of Emerging Markets Debt Fund), to limit Fund
Operating Expenses for service shares of Global Fixed Income Fund, International
Fixed Income Fund and Emerging Markets Debt Fund to 0.90%, 0.90% and 1.50%,
respectively, of average net assets. 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."
- --------------------------------------------------------------------------------
Page - 5 -
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below are selected data for 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 years
ended October 31, 1996 and October 31, 1995. Selected data for an outstanding
institutional share of each of the Funds during the period from its inception to
October 31, 1994 are also set forth below. The data set forth below have been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified.
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, which contains further information about the Funds' performance,
are available free of charge by calling 1-800-550-6426.
- --------------------------------------------------------------------------------
Page - 6 -
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
====================================================================================================================================
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)
---- --------- ------ -------------- ---------- ----- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------
Global Fixed Income Fund
- --------------------------------------------------
1996 $ 10.99 $ 0.59 $ 0.12 $ (0.37) $ (0.07) $ 11.26 6.60% $ 149,917
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 $ 11.34 $ 0.86 $ (0.12) $ (0.66) $ (0.12) $ 11.30 6.82% $ 21,155
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 $ 10.55 $ 1.21 $ 2.60 $ (1.00) -- $ 13.36 38.42% $ 102,431
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
- ------------------------------------------------------------------------------------------------------------------------------------
<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
Net Assets Net Assets Limitations) Limitations) Rate
---------- ---------- ------------ ------------ ----
<S> <C> <C> <C> <C> <C>
- ----------------------------------
Global Fixed Income Fund
- ----------------------------------
1996 0.75% 5.39% 0.79% 5.35% 223%
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 0.75% 5.41% 1.03% 5.13% 235%
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 1.50% 10.15% 1.92% 9.73% 227%
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.
- --------------------------------------------------------------------------------
Page - 7 -
<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") and international equity
investments (the "International Equity Funds") is contained in separate
prospectuses 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 through financial planners, investment advisers,
broker-dealers and other institutions ("Service Organizations"). Some Service
Organizations may 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. As described below under "Management of Funds -- Service
Plans", all or a portion of a Fund's outstanding service shares will be
converted to institutional shares of the same Fund under certain circumstances.
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
- --------------------------------------------------------------------------------
Page - 8 -
<PAGE>
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.
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
- --------------------------------------------------------------------------------
Page - 9 -
<PAGE>
special risks. See "Description of Securities and Investment Techniques and
Related Risks--Currency Management Techniques."
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
- --------------------------------------------------------------------------------
Page - 10 -
<PAGE>
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 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."
- --------------------------------------------------------------------------------
Page - 11 -
<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,
Croatia, Cyprus, Czech Republic, Ecuador, Egypt, Greece, Hungary, India,
Indonesia, Ivory Coast, Jordan, Kazahkstan, Malaysia, Mexico, Morocco, Pakistan,
Panama, Peru, the Philippines, Poland, Portugal, Russia, South Africa, 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
forward contracts and 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, Panama, 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
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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 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
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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 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
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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 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 or interest 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
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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
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
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written by the Fund gives to its purchaser the right to compel the Fund to sell
an underlying security to the option holder at a specified price at any time
during the option period. Upon the exercise of a put option written by a Fund,
the Fund may suffer a loss equal to the difference between the price at which
the Fund is required to purchase the underlying security and its market value at
the time of the option exercise, less the premium received for writing the
option. All options written by a Fund are covered. In the case of a call option,
this means that the Fund will own the securities subject to the option or an
offsetting call option as long as the written option is outstanding, or will
have the absolute and immediate right to acquire 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 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
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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 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. 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
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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 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.
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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 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, Panama, 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 December 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
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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. 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
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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.
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.
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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 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
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.
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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 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.
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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.
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.
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.
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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.
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
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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 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 September 30, 1996, MGIS managed approximately $14.7 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
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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 1.00%*
* Prior to March 1, 1997, Morgan Grenfell Emerging Markets Debt Fund's
advisory fee rate was 1.50% of average net assets.
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 0.46%, 0.22% and 1.08% 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 that have agreements with the Trust, and
are intended to compensate Service Organizations for providing personal services
and/or account maintenance services to their customers who invest in service
shares. 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.
In the event that an agreement between a Service Organization and the Trust
expires or is terminated, service shares beneficially owned by customers of such
Service Organization will convert automatically to institutional shares of the
same Fund. Customers of a Service Organization will receive advance notice of
any such conversion, and any such conversion will be effected on the basis of
the relative net asset values of the two classes of shares involved.
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<PAGE>
Information regarding institutional shares of the Trust may be obtained by
calling 1-800-550-6426.
Administrator and Distributor
The Trust has entered into an Administration Agreement with SEI Financial
Management Corporation ("SEI Financial Management" or the "Administrator"), 1
Freedom Valley Drive, Oaks, Pennsylvania 19456-0100. 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.
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:
0.12% of aggregate assets under $1 billion
0.08% of next $500 million of aggregate assets
0.06% of next $1 billion of aggregate assets
0.04% of aggregate assets exceeding $2.5 billion
Each Fund pays the Administrator a minimum annual fee that equals $60,000.
SEI Financial Services Company (the "Distributor"), 1 Freedom Valley Drive,
Oaks, Pennsylvania 19456-0100, 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"), 1004 Baltimore, 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. Investors may
invest in service shares through an Omnibus Account maintained by their Service
Organization. Alternatively, investors may invest in service shares by
establishing a shareholder account with the Trust (in addition to the account
with their Service Organization). Investors who invest through Omnibus Accounts
may be subject to minimums established by their Service Organizations
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for initial and subsequent investments. Unless waived by the Trust, the minimum
initial investment for Omnibus Accounts and investors who establish shareholder
accounts with the Trust in each Fund is $250,000.
Investors who invest through Omnibus Accounts should submit purchase orders
to their Service Organization. Investors who establish shareholder accounts with
the Trust should submit purchase orders to the Transfer Agent as described
below. 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 or by the
Transfer Agent, as the case may be. A "Business Day" means any day on which the
New York Stock Exchange (the "NYSE") is open. For an investor who invests
through an Omnibus Account, the 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 promptly forward such order to the Transfer Agent for
the investor to receive that day's net asset value. Service Organizations are
responsible for promptly forwarding such investors' purchase orders to the
Transfer Agent. For an investor who has a shareholder account with the Trust,
the Transfer Agent must receive the investor's purchase order before the close
of regular trading on the NYSE for the investor to receive that day's net asset
value.
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.
For investors who invest through Omnibus Accounts, payment for initial and
subsequent purchases of service shares should be made to the investors' Service
Organizations. These investors should contact their Service Organizations for
further details on how to purchase service shares. For investors who have
shareholder accounts with the Trust, payment for initial and subsequent shares
should be made by mail or wire as described below.
Purchases by Mail
Service shares may be purchased initially by completing the Account
Application accompanying this Prospectus and mailing it, together with a check
in the amount of $250,000 or more drawn on a U.S. bank payable to the
appropriate Fund to:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
Third party checks, credit card checks and cash will not be accepted.
Subsequent investments in an existing account in any Fund may be made at
any time by sending to the Transfer Agent, at the above address, a check payable
to the appropriate Fund, along with either (i) a subsequent order form which may
be obtained from the Transfer Agent or (ii) a letter stating the amount of the
investment, the name of the Fund and the account number in which
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<PAGE>
the investment is to be made. Investors should indicate the name of the
appropriate Fund and account number on all correspondence.
Purchases by Wire
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase service shares of any Fund by requesting
their bank to transmit funds by wire to:
United Missouri Bank, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment in service shares by
wire, an investor must first telephone 1-800-407-7301 to be assigned a wire
account number. The investor may then transmit funds by wire through the wire
procedures described above. The investor's name, account number, social security
or other taxpayer identification number, and address must be specified in the
wire. In addition, investors making initial investments by wire must promptly
complete the Account Application accompanying this Prospectus and forward it to
the Transfer Agent at:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
Subsequent Purchases: Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number.
Reports to Shareholders
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations for information regarding the Funds. Also, shareholders
who have shareholder accounts with the Trust may contact Morgan Grenfell
Investment Trust for account information by calling 1-800-550-6426 or by writing
to Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO
64141-6165.
Exchange Privilege
A shareholder may exchange service shares of a Fund for service shares of a
Domestic Fund or International Equity Fund, subject, in the case of shareholders
who invest through Omnibus Accounts, to any restrictions imposed by the Service
Organizations that maintain such accounts. A shareholder should obtain and read
the prospectus relating to service shares of a Domestic Fund or International
Equity Fund and consider its investment objective, policies and fees before
making an exchange into that fund. Exchanges will be permitted only in those
states in which service shares of the relevant fund is available for sale. The
Funds reserve the right to refuse any exchange request.
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If a shareholder who has a shareholder account with the Trust elects the
telephone exchange privilege on the Account Application, the shareholder may
exchange service shares in its account in one Fund for service shares in any
other Fund described in this Prospectus by telephone (by calling
1-800-407-7301), as long as all accounts are identically registered. Service
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may exchange service shares in one Fund for service
shares of any other Fund or Domestic Fund or International Equity Fund by
telephone, unless they indicate otherwise in writing to the Trust. For
shareholders who have shareholder accounts with the Trust, the Transfer Agent
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) for the
investor to receive that day's net asset values. Service Organizations are
responsible for promptly forwarding such investors' exchange requests to the
Transfer Agent. For an investor who establishes a shareholder account with the
Trust, the Transfer Agent must receive the investor's exchange request before
the close of regular trading on the NYSE for the investor to receive that day's
net asset values.
Neither the Funds nor their agents will be liable for any loss incurred by
a shareholder as a result of following instructions communicated by telephone
that they reasonably believe to be genuine. To confirm that telephone exchange
requests are genuine, the Funds will employ reasonable procedures such as
providing written confirmation of telephone exchange transactions and tape
recording of telephone exchange requests. If a Fund does not employ such
reasonable procedures, it may be liable for any loss incurred by a shareholder
due to a fraudulent or other unauthorized telephone exchange request.
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. Investors will receive 60 days' written notice prior to any
change in a Fund's exchange procedures.
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 (as long as the Service Organization promptly forwards the
shareholder's redemption request to the Transfer Agent) or, in the case of
shareholders who have shareholder accounts with the Trust, by the Transfer
Agent. For a shareholder who invests through an Omnibus Account, the
shareholder's Service Organization must receive the shareholder's redemption
request before the close of regular trading on the NYSE (currently 4:00 p.m.,
Eastern Time) and promptly forward such request to the Transfer Agent for the
investor to receive that day's net asset value. Service Organizations are
responsible for promptly forwarding such investors' redemption requests to the
Transfer Agent. For a shareholder who has a shareholder account with the Trust,
the Transfer Agent must receive the shareholder's redemption request before the
close of regular trading on the NYSE for the shareholder to receive that day's
net asset value.
A shareholder who has a shareholder account with the Trust may request
redemptions by telephone (by calling 1-800-407-7301) if the optional telephone
redemption privilege is elected on the Account Application. Service
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<PAGE>
Organizations, acting on behalf of their customers who invest in service shares
through Omnibus Accounts, may redeem service shares by telephone, unless they
indicate otherwise in writing to the Trust. Alternatively, Service Organizations
and shareholders who have accounts with the Trust may submit redemption requests
in writing. A written redemption request must specify the number of shares to be
redeemed, the Fund from which service shares are being redeemed, the
shareholder's or Omnibus Account's account number with the Trust, payment
instructions and the exact registration of the Account. Signatures must be
guaranteed in accordance with the procedures set forth below under "Payment of
Redemption Proceeds".
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
For shareholders having accounts with the Trust, redemption proceeds
ordinarily will be wired to the bank account designated on the Account
Application, unless payment by check has been requested. For shareholders who
invest through Omnibus Accounts, redemption proceeds ordinarily will be wired to
the Service Organization that maintains the Account, unless payment by check has
been requested. For a redemption request received by the redeeming shareholder's
Service Organization (or, in the case of shareholders who have shareholder
accounts with the Trust, by the Transfer Agent) before the close of regular
trading on the NYSE (currently 4:00 p.m., Eastern Time) and promptly forwarded
to the Transfer Agent (or, in the case of shareholders who have shareholder
accounts with the Trust, received by the Transfer Agent before such close of
trading), redemption proceeds often will be wired the next Business Day.
Normally, redemption proceeds will be wired within seven days after the Transfer
Agent receives the appropriate redemption request documents, including any
additional documentation that may be required 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
will be delayed for up to 15 calendar days from the purchase date. 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 or shareholder's bank in the transfer process. If a
problem with such performance arises, the Service Organization or shareholder
should deal directly with such intermediaries or bank.
Service Organizations whose customers invest through Omnibus Accounts and
shareholders who have accounts with the Trust 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 or shareholder's bank account until the second
Business Day following the transaction.
A Service Organization or a shareholder who has an account with the Trust
may change the bank designated to receive redemption proceeds by providing
written notice to the Transfer Agent which has been signed by the Service
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<PAGE>
Organization or such shareholder or its authorized representative. This
signature must be guaranteed by a bank, a securities broker or dealer, a credit
union having authority to issue signature guarantees, a savings and loan
association, a building and loan association, a cooperative bank, a federal
savings bank or association, a national securities exchange, a registered
securities association or a clearing agency, provided that such institution
satisfies standards established by the Transfer Agent. The Transfer Agent may
also require additional documentation in connection with a request to change a
designated bank.
If the Board of Trustees determines that it is appropriate in order to
protect the best interests of a Fund and its shareholders, the Fund, under the
limited circumstances described below, may satisfy all or part of a redemption
request by delivering portfolio securities to a redeeming investor. However, the
Trust, on behalf of each Fund, has elected, pursuant to Rule 18f-1 under the
1940 Act, to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder. Only redemptions in excess of this limit may be paid in kind.
In-kind payments would not have to constitute a cross-section of a Fund's
portfolio. Investors receiving redemption payment in portfolio securities will
not have eliminated their investment exposure by their redemption as would
investors receiving their redemption payment in cash. Instead these investors
will be subject to risks inherent in owning such securities, including market
value and currency fluctuations, difficulties in selling securities in
particular markets and repatriating the sales proceeds, and the political and
other risks described under "Description of Securities and Investment Techniques
and Related Risks - Foreign Securities." In addition, a shareholder generally
will incur additional expenses, such as brokerage commissions and 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 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.
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<PAGE>
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 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 and other requirements of the Code.
Dividends paid by a Fund from its net investment income, including original
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 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
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<PAGE>
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 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 dividends and distributions) his or her
proportionate share of the amount of qualified foreign 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 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,
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<PAGE>
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 January 24, 1997, the Wagner Family Trust owned beneficially 35.35%
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.
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
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<PAGE>
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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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.
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.
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<PAGE>
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.
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<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 and/or
Moody's were, on a weighted average basis, as follows*:
Percentage of
Standard & Poor's (Moody's) Ratings Total Investments
- ----------------------------------- -----------------
Not Rated .............................................. 29.3%**
Rated by Standard & Poor's (Moody's):
BBB+, BBB, BBB- ......................................... 6.9%
BB+, BB, BB-, (Ba) ...................................... 38.8%
B+, B, B- (B) ........................................... 23.0%
Cash .................................................... 2.0%
* 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: 18.6%, B+, B, B- (B); and 10.7%, CCC+, CCC, CCC- (Caa).
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<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
David Dowsett
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<PAGE>
Portfolio Manager Expertise Professional Experience
- ----------------- --------- -----------------------
David Dowsett Emerging Markets Debt Portfolio Manager, Emerging Markets
Debt, MGIS (since 1995); Portfolio
Manager, Emerging Markets Debt,
Morgan Grenfell International
Funds Management Ltd. ("MGIFM")
(since 1994); BA, Durham University
(1991-1994).
Annette Fraser Global Fixed Income Fund Manager, Fixed Income Team,
MGIS (since 1992); Fund Manager,
MGIFM (since 1990).
Neil Jenkins, CFA Fixed Income Director and Global and Emerging
Markets Fixed Income Portfolio
Manager, MGIS (since 1996);
Director, 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).
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<PAGE>
APPENDIX C
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
in Section H or you are otherwise subject to backup withholding. Amounts
withheld and forwarded to the IRS can be credited as a payment of tax when
completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minor's Act, the TIN of the minor should
be furnished. If you do not have a TIN, you may apply for one using forms
available at local offices of the Social Security Administration or the IRS.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and write "exempt" after their
signature in section H of the application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Funds and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Internal Revenue
Code Sections 1441, 1442 and 3406 and/or consult your tax adviser.
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<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Investment Services Limited
20 Finsbury Circus
London, England EC2M 1NB
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Distributor
SEI Financial Services Company
1 Freedom Valley Drive
Oaks, Pennsylvania 19456-0100
Custodian
The Northern Trust Company
Fifty South LaSalle Street
Chicago, Illinois 60675
Transfer Agent
DST Systems, Inc.
SEI Division CT-7 Tower
1004 Baltimore
Kansas City, Missouri 64105
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Hale and Dorr LLP
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 - 1-800-407-7301
Share Price and Performance
Information - 1-800-550-6426
(or contact your Service Organization)
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SUPPLEMENT DATED MARCH 18, 1997
TO STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 7, 1997 FOR SERVICE SHARES
OF THE FOLLOWING FUNDS:
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
Effective March 1, 1997, Morgan Grenfell Investment Services Ltd.
agreed to reduce its management fee for Morgan Grenfell Emerging Markets Debt
Fund to an annual rate of 1.00% of that Fund's average daily net assets.
Accordingly, the description of this Fund's management fee rate as 1.50% (the
Fund's prior management fee rate) in the Statement of Additional Information
should be disregarded.
The Trustees of Morgan Grenfell Investment Trust have approved the
removal of the nonfundamental investment restrictions shown as restrictions (b),
(d), (f), (g), (h), (j) and (k) on pages 20 and 21 of the Statement of
Additional Information. Accordingly, these restrictions no longer apply to the
Funds.
