As filed with the Securities and Exchange Commission on February 11, 1997
1933 Act Registration No. 33-68704
1940 Act Registration No. 811-8006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
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Pre-Effective Amendment No. ___ / /
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----
Post-Effective Amendment No. 16 / X /
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT ____
OF 1940 / /
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Amendment No. 18 / X /
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(Check appropriate box or boxes)
MORGAN GRENFELL INVESTMENT TRUST
(Exact name of registrant as specified in Charter)
885 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices)
Registrant's Telephone Number,
including Area Code: 212-230-2600
Copy to:
James E. Minnick Ernest V. Klein, Esq.
Morgan Grenfell Capital Management, Inc. Hale and Dorr
885 Third Avenue Sixty State Street
New York, New York 10022 Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X on March 7, 1997 or as soon thereafter as is possible pursuant to Rule
--- 461 or, if acceleration is not granted, on April 14, 1997 pursuant to
paragraph (a)(1) of Rule 485.
Registrant has registered an indefinite number of shares pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended. Registrant filed a Rule
24f-2 Notice for its fiscal year ended October 31, 1996 on December 23, 1996.
<PAGE>
CROSS REFERENCE SHEET FOR PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
COVERING INSTITUTIONAL SHARES OF MORGAN GRENFELL INVESTMENT TRUST
(as required by Rule 495)
Morgan Grenfell Investment Trust
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment Objectives and
Policies; Description of Securities and
Investment Techniques and Related
Risks; Additional Investment
Information; Organization and Shares of
the Trust
Item 5. Management of the Fund Management of the Funds; Microcap
Investment Results
Item 6. Capital Stock and Other Securities Dividends, Distributions and Taxes;
Organization and Shares of the Trust;
Purchase of Institutional Shares
Item 7. Purchase of Securities Being Purchase of Institutional Shares;
Offered Net Asset Value
Item 8. Redemption or Repurchase Redemption of Institutional Shares
Item 9. Pending Legal Proceedings Not Applicable
Part B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
<PAGE>
<CAPTION>
N-1A Item No. Location
- ------------- ---------
<S> <C> <C>
Item 13. Investment Objectives and Policies Additional Information on Fund
Investments and Strategies and Related
Risks; Investment Restrictions;
Investment Advisory and Other Services
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers;
Holders of Securities General Information About
The Trust
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services; Additional Information
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices
Item 18. Capital Stock and Other General Information About
Securities the Trust
Item 19. Purchase, Redemption and Net Asset Value
Pricing of Securities Being
Offered
Item 20. Tax Status Taxes
Item 21. Underwriters Investment Advisory and Other Services
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
-2-
<PAGE>
CROSS REFERENCE SHEET FOR PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION
COVERING SERVICE SHARES OF MORGAN GRENFELL INVESTMENT TRUST
(as required by Rule 495)
Morgan Grenfell Investment Trust
<TABLE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment Objectives and
Policies; Description of Securities and
Investment Techniques and Related
Risks; Additional Investment
Information; Organization and Shares of
the Trust
Item 5. Management of the Fund Management of the Funds; Microcap
Investment Results (only for prospectus
covering Morgan Grenfell Microcap Fund)
Item 6. Capital Stock and Other Securities Dividends, Distributions and Taxes;
Organization and Shares of the Trust;
Purchase of Service Shares
Item 7. Purchase of Securities Being Purchase of Service Shares;
Offered Net Asset Value
Item 8. Redemption or Repurchase Redemption of Service Shares
Item 9. Pending Legal Proceedings Not Applicable
Part B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
-3-
<PAGE>
<CAPTION>
N-1A Item No. Location
- ------------- --------
<S> <C> <C>
Item 13. Investment Objectives and Policies Additional Information on Fund
Investments and Strategies and Related
Risks; Investment Restrictions;
Investment Advisory and Other Services
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers;
Holders of Securities General Information About
The Trust
Item 16. Investment Advisory and Investment Advisory and
Other Services Other Services; Additional Information
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices
Item 18. Capital Stock and Other General Information About
Securities the Trust
Item 19. Purchase, Redemption and Net Asset Value
Pricing of Securities Being
Offered
Item 20. Tax Status Taxes
Item 21. Underwriters Investment Advisory and Other Services
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
-4-
<PAGE>
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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Page -1-
<PAGE>
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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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 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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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)
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.
- --------------------------------------------------------------------------------
Page -4-
<PAGE>
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."
- --------------------------------------------------------------------------------
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, 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 1-800-814-3401.
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 -6-
<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.
- --------------------------------------------------------------------------------
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 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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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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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 11), cash equivalents and equity and
equity-related securities of medium and large capitalization companies. In the
event any fixed income security held by the Fund is downgraded below investment
grade, the Adviser will review the security and determine whether to retain or
dispose of it. In no event, however, will the Fund hold more than 5% of its net
assets in fixed income securities that are not investment grade. Up to 5% of the
Fund's net assets (measured at time of investment) may be invested in the
securities of non-U.S. issuers of all sizes.
Microcap Fund
The investment objective of the Microcap Fund is to maximize capital
appreciation. Under normal market conditions, the Fund pursues this objective by
investing at least 65% of its total assets in common stocks of micro
capitalization U.S. companies and securities convertible into such stocks. For
purposes of the Fund's investment policies, micro capitalization companies are
those ranked (at the time of investment) according to market capitalization in
the bottom 5% of the U.S. equity market, including both listed and unlisted
companies.
The Adviser believes that investments in many micro capitalization companies,
although involving greater risk, provide the opportunity for greater capital
growth than investments in larger, better-known 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 11), cash equivalents and equity and
equity-related securities of small and medium capitalization companies. In the
event any fixed income security held by the Fund is downgraded below investment
grade, the Adviser will review the security and determine whether to retain or
dispose of it. In no event, however, will the Fund hold more than 5% of its net
assets in fixed income securities that are not investment grade. Up to 5% of the
Fund's net assets (measured at time of investment) may be invested in the
securities of non-U.S. issuers of all sizes.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS
Fixed Income Securities
General. Each Fund may invest in fixed income securities. In periods of
declining interest rates, the yield (income from portfolio investments over a
stated period of time) of a Fund that invests in fixed income securities may
tend to be higher than prevailing market rates, and in periods of rising
interest rates, the yield of the Fund may tend to be lower. Also, when interest
rates are falling, the inflow of net new money to such a Fund will likely be
invested in portfolio instruments producing lower yields than the balance of the
Fund's portfolio, thereby reducing the yield of the Fund. In periods of rising
interest rates, the opposite can be true. The net asset value of a Fund
investing in fixed income securities can generally be expected to change as
general levels of interest rates fluctuate. The value of fixed income securities
in a Fund's portfolio generally varies inversely with changes in interest rates.
Prices of fixed income securities with longer effective maturities are more
sensitive to interest rate changes than those with shorter effective maturities.
Private Activity and Industrial Development Bonds. The Fixed Income Funds and
the Municipal Funds may invest in private activity and industrial development
bonds, which are obligations issued by or on behalf of public authorities to
raise money to finance various privately owned or operated facilities for
business and manufacturing, housing, sports and pollution control. These bonds
are also used to finance public facilities such as airports, mass transit
systems, ports, parking or sewage or solid waste disposal facilities, as well as
certain other 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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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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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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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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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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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
nor more than 5% of its total assets in purchased options other than protective
put options. A Fund's transactions in options, futures contracts and options on
futures contracts may be limited by the requirements for qualification of the
Fund as a regulated investment company for tax purposes. See "Taxes" in the
Statement of Additional Information. Options, futures contracts and options on
futures contracts are derivative instruments.
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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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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 1-800-814-3401 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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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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<PAGE>
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
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<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
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<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
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<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.
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<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.
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<PAGE>
APPENDIX A - 1
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions and
exchanges be reported to the IRS and that 31% be withheld if you fail to provide
your correct Taxpayer Identification Number (TIN) and the certifications in
Section H or you are otherwise subject to backup withholding. Amounts withheld
and forwarded to the IRS can be credited as a payment of tax when completing
your Federal income tax return.
For most individual taxpayers, the TIN is the social security number. Special
rules apply for certain accounts. For example, for an account established under
the Uniform Gift to Minor's Act, the TIN of the minor should be furnished. If
you do not have a TIN, you may apply for one using forms available at local
offices of the Social Security Administration or the IRS.
Recipients exempt from backup withholding, including corporations and certain
other entities, should provide their TIN and write "exempt" after their
signature in section H of the application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Funds and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Internal Revenue
Code Sections 1441, 1442 and 3406 and /or consult your tax adviser.
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Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
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
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<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Institutional Shares
885 Third Avenue
New York, NY 10022
STATEMENT OF ADDITIONAL INFORMATION
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of eighteen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following investment portfolios of the Trust (each, a "Fund"):
o Morgan Grenfell Fixed Income Fund
o Morgan Grenfell Municipal Bond Fund
o Morgan Grenfell Short-Term Fixed Income Fund
o Morgan Grenfell Short-Term Municipal Bond Fund
o Morgan Grenfell Smaller Companies Fund
o Morgan Grenfell Microcap Fund
o Morgan Grenfell Large Cap Growth Fund
This Statement of Additional Information is not a prospectus, and should be read
only in conjunction with the Funds' Institutional Shares Prospectus dated
March 7, 1997, as amended or supplemented from time to time (the
"Prospectus"). A copy of the Prospectus may be obtained without charge from SEI
Financial Services Company, the Trust's Distributor, by calling 1-800-550-6426
or writing to 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100
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<PAGE>
TABLE OF CONTENTS
Page
Introduction .......................................................... 3
Additional Information on Fund Investments
and Strategies and Related Risks .................................... 4
Investment Restrictions ............................................... 22
Trustees and Officers ................................................. 27
Investment Advisory and Other Services ................................ 30
Portfolio Transactions ................................................ 34
Net Asset Value ....................................................... 37
Performance Information ............................................... 38
Taxes ................................................................. 40
General Information About the Trust ................................... 47
Additional Information ................................................ 51
Financial Statements .................................................. 51
Appendix A--Description of Ratings .................................... 52
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or its Distributor. The Prospectus does not
constitute an offering by the Trust or by the Distributor in any jurisdiction in
which such offering may not lawfully be made. Shares of the Funds are not
available in certain states. Please call 1-800-550-6426 to determine
availability in your state.
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INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of eighteen separate investment portfolios. This Statement of Additional
Information relates to the following seven separate investment portfolios of the
Trust (the "Funds"):
Morgan Grenfell Smaller Companies Fund
Morgan Grenfell Microcap Fund
Morgan Grenfell Large Cap Growth Fund
(collectively, the "Equity Funds")
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Short-Term Fixed Income Fund
(collectively, the "Fixed Income Funds")
Morgan Grenfell Municipal Bond Fund
Morgan Grenfell Short-Term Municipal Bond Fund
(collectively, the "Municipal Funds")
The Funds are classified as "diversified" within the meaning of the Investment
Company Act of 1940 (the "1940 Act").
Morgan Grenfell Capital Management, Inc. (the "Adviser" or "MGCM") serves as
investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor. SEI
Financial Management Corporation serves as the Funds' administrator.
The information contained in this Statement of Additional Information generally
supplements the information contained in the Prospectus. No investor should
invest in institutional shares of a Fund without first reading the Prospectus.
Capitalized terms used herein and not otherwise defined have the same meaning
ascribed to them in the Prospectus.
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ADDITIONAL INFORMATION ON FUND INVESTMENTS AND STRATEGIES
AND RELATED RISKS
The following supplements the information contained in the Prospectus concerning
the investment objectives and policies of each Fund.
Fixed Income Securities
Variable and Floating Rate Instruments. Debt instruments purchased by a Fund may
be structured to have variable or floating interest rates. These instruments may
include variable amount master demand notes that permit the indebtedness to vary
in addition to providing for periodic adjustments in the interest rates. The
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instrument is
subject to a demand feature, will continuously monitor their financial ability
to meet payment on demand. Where necessary to ensure that a variable or floating
rate instrument is equivalent to the quality standards applicable to a Fund's
fixed income investments, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. Any bank providing such a bank letter, line of
credit, guarantee or loan commitment will meet the Fund's investment quality
standards relating to investments in bank obligations. A Fund will invest in
variable and floating rate instruments only when the Adviser deems the
investment to involve minimal credit risk. The Adviser will also continuously
monitor the creditworthiness of issuers of such instruments to determine whether
a Fund should continue to hold the investments.
The absence of an active secondary market for certain variable and floating rate
notes could make it difficult to dispose of the instruments, and a Fund could
suffer a loss if the issuer defaults or during periods in which a Fund is not
entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to the
Fund's limitation on investments in illiquid securities when a reliable trading
market for the instruments does not exist and the Fund may not demand payment of
the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard and Poors
Ratings Group ("Standard & Poor's"), Moody's Investor Service, Inc. ("Moody's")
and other recognized rating organizations represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality or value. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. See Appendix A for a description of the ratings provided by
Standard & Poor's, Moody's and certain other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. The Board of Trustees or the Adviser, pursuant to guidelines established
by the Board of Trustees, will consider such an
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<PAGE>
event in determining whether the Fund should continue to hold the security in
accordance with the interests of the Fund and applicable regulations of the
Securities and Exchange Commission (the "Commission"). In no event, however,
will a Fund hold more than 5% of its net assets in fixed income securities that
are not investment grade.
Custodial Receipts. Each of the Fixed Income Funds may acquire U.S. Government
Securities and their unmatured interest coupons that have been separated
("stripped") by their holder, typically a custodian bank or investment brokerage
firm. Having separated the interest coupons from the underlying principal of the
U.S. Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are generally held in book-entry form
at a Federal Reserve Bank. Counsel to the underwriters of these certificates or
other evidences of ownership of U.S. Treasury securities have stated that, in
their opinion, purchasers of the stripped securities most likely will be deemed
the beneficial holders of the underlying U.S. Government Securities for federal
tax and securities purposes. In the case of CATS and TIGRS, the Internal Revenue
Service ( the "IRS") has reached this conclusion for the purpose of applying the
tax diversification requirements applicable to regulated investment companies
such as the Funds. CATS and TIGRS are not considered U.S. Government Securities
by the staff of the Commission. Further, the IRS conclusion noted above is
contained only in a general counsel memorandum, which is an internal document of
no precedential value or binding effect, and a private letter ruling, which also
may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
Preferred Stock
Each of the Equity Funds, subject to its investment objectives, may purchase
preferred stock. Preferred stocks are equity securities, but possess certain
attributes of debt securities and are generally considered fixed income
securities. Holders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
in such cases all cumulative dividends usually must be paid prior to dividend
payments to common stockholders. Because of this preference, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stocks. However, preferred stocks are equity securities in that they do
not represent a liability of the issuer and therefore do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer. See "Convertible Securities and Preferred Stocks" in the Prospectus
for a description of certain characteristics of convertible preferred stock.
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Warrants
As stated in the Prospectus, each of the Equity Funds may purchase warrants,
which are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a specified
price during a specified period of time. The purchase of warrants involves a
risk that a Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its net assets, taken at market value, in warrants,
or more than 2% of its net assets, taken at market value, in warrants not listed
on a recognized securities exchange. Warrants acquired by a Fund in units or
attached to other securities shall not be included in determining compliance
with these percentage limitations. See "Investment Restrictions."
Municipal Securities
As stated in the Prospectus, the Municipal Funds and, to a more limited extent,
the Fixed Income Funds may invest in municipal securities. Municipal securities
consist of bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from regular federal income tax (i.e., excluded from
gross income for federal income tax purposes but not necessarily exempt from the
federal alternative minimum tax or from state and local taxes). Municipal
securities may also be issued on a taxable basis (i.e., the interest on such
securities is not exempt from regular federal income tax).
Municipal securities are often issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal securities
may be issued include refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal securities also include "private
activity" or industrial development bonds, which are issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct or
equip facilities within a municipality for privately or publicly owned
corporations.
The two principal classifications of municipal securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest although the characteristics and enforcement of general obligations may
vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer may also be
backed by a letter of credit, guarantee or insurance. General obligations and
revenue obligations may be issued in a variety of forms, including commercial
paper, fixed, variable and floating rate securities, tender option bonds,
auction rate bonds and capital appreciation bonds.
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In addition to general obligations and revenue obligations, there is a variety
of hybrid and special types of municipal securities. There are also numerous
differences in the credit backing of municipal securities both within and
between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the identification
of the issuer of a municipal security which is not a general obligation is made
by the Adviser based on the characteristics of the municipal security, the most
important of which is the source of funds for the payment of principal and
interest on such securities.
An entire issue of municipal securities may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike some securities that are not publicly
offered, a secondary market exists for many municipal securities that were not
publicly offered initially and such securities can be readily marketable.
The obligations of an issuer to pay the principal of and interest on a municipal
security are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the Federal Bankruptcy
Act, and laws, if any, that may be enacted by Congress or state legislatures
extending the time for payment of principal or interest or imposing other
constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a municipal
security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
Interests. A municipal lease is an obligation in the form of a lease or
installment purchase contract which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance (as well as regular
Federal income tax). Municipal leases frequently involve special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Thus, a Fund's
investment in municipal leases will be subject to the special risk that the
governmental issuer may not appropriate funds for lease payments.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in an unsatisfactory or delayed recoupment
of a Fund's original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase contracts or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase contracts.
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Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease obligations
and certificates of participation, the Adviser will consider a variety of
factors including: (1) the willingness of dealers to bid for the security; (2)
the number of dealers willing to purchase or sell the obligation and the number
of other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund. No Fund may invest more than 5% of its net assets in municipal leases.
Each Municipal Fund and each Fixed Income Fund may purchase participations in
municipal securities held by a commercial bank or other financial institution.
Such participations provide a Fund with the right to a pro rata undivided
interest in the underlying municipal securities. In addition, such
participations generally provide a Fund with the right to demand payment, on not
more than seven days notice, of all or any part of the Fund's participation
interest in the underlying municipal security, plus accrued interest.
Municipal Notes. Municipal securities in the form of notes generally are used to
provide for short-term capital needs, in anticipation of an issuer's receipt of
other revenues or financing, and typically have maturities of up to three years.
Such instruments may include Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Tax and Revenue Anticipation Notes and Construction
Loan Notes. Tax Anticipation Notes are issued to finance the working capital
needs of governments. Generally, they are issued in anticipation of various tax
revenues, such as income, sales, property, use and business taxes, and are
payable from these specific future taxes. Revenue Anticipation Notes are issued
in expectation of receipt of other kinds of revenue, such as federal revenues
available under federal revenue sharing programs. Bond Anticipation Notes are
issued to provide interim financing until long-term bond financing can be
arranged. In most cases, the long-term bonds then provide the funds needed for
repayment of the notes. Tax and Revenue Anticipation Notes combine the funding
sources of both Tax Anticipation Notes and Revenue Anticipation Notes.
Construction Loan Notes are sold to provide construction financing. These notes
are secured by mortgage notes insured by the Federal Housing Authority; however,
the proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a
default. The obligations of an issuer of municipal notes are generally secured
by the anticipated revenues from taxes, grants or bond financing. An investment
in such instruments, however, presents a risk that the anticipated revenues will
not be received or that such revenues will be insufficient to satisfy the
issuer's payment obligations under the notes or that refinancing will be
otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with
long-term debt. In most cases, tax-exempt commercial paper is backed by
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letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on municipal
securities that have been pre-refunded are no longer paid from the original
revenue source for the securities. Instead, after pre-refunding the source of
such payments is typically an escrow fund consisting of obligations issued or
guaranteed by the U.S. Government. The assets in the escrow fund are derived
from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded municipal securities. Issuers of municipal securities use this
advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or are
redeemed by the issuer. Pre-refunded municipal securities are usually purchased
at a price which represents a premium over their face value.
Tender Option Bonds. A tender option bond is a municipal security (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the agreement
of a third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate.
However, an institution will not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrade in the credit rating
assigned to the issuer of the bond. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. Each Municipal Fund intends to invest only in
tender option bonds the interest on which will, in the opinion of bond counsel,
counsel for the issuer of interests therein or counsel selected by the Adviser,
be exempt from regular federal income tax. However, because there can be no
assurance that the IRS will agree with such counsel's opinion in any particular
case, there is a risk that a Municipal Fund will not be considered the owner of
such tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the proper tax treatment of tender
option bonds and the associated fees, in relation to various regulated
investment company tax provisions is unclear. Each Municipal Fund intends to
manage its portfolio in a manner designed to eliminate or minimize any adverse
impact from the tax rules applicable to these investments.
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Auction Rate Securities. Auction rate securities consist of auction rate
municipal securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by "Dutch" auction in which bids are made by
broker-dealers and other institutions for a certain amount of securities at a
specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
value, there is the risk that an auction will fail due to insufficient demand
for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund may
be designated as exempt from federal income tax to the extent they are
attributable to tax-exempt interest income earned by the fund on the securities
in its portfolio and distributed to holders of the preferred securities,
provided that the preferred securities are treated as equity securities for
federal income tax purposes and the closed-end fund complies with certain
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of complying with the 20% limitation on each Municipal Fund's
investments in taxable investments, auction rate preferred securities will be
treated as taxable investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Each Fund's investments in auction rate preferred securities of closed-end funds
are subject to limitations on investments in other investment companies, which
limitations are prescribed by the 1940 Act and certain state securities
regulations. These limitations include a prohibition against acquiring more than
3% of the voting securities of any other investment company, and investing more
than 5% of the Fund's assets in securities of any one investment company or more
than 10% of its assets in securities of all investment companies. A Fund will
indirectly bear its proportionate share of any management fees paid by such
closed-end funds in addition to the advisory fee payable directly by the Fund.
Private Activity Bonds. Certain types of municipal securities, generally
referred to as industrial development bonds (and referred to under current tax
law as private activity bonds), are issued by or on behalf of public authorities
to obtain funds for privately-operated housing facilities, airport, mass transit
or port facilities, sewage disposal, solid waste disposal or hazardous waste
treatment or disposal facilities and certain local facilities for water supply,
gas or electricity. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place substantial limitations
on the size of such issues. The interest from certain private activity bonds
owned by a Fund (including a Municipal Fund's distributions attributable to such
interest) may be a preference item for purposes of the alternative minimum tax.
Mortgage-Backed Securities
As stated in the Prospectus, the Fixed Income Funds and the Municipal Funds may
invest in mortgage-backed securities, including derivative instruments.
Mortgage-backed securities represent direct or indirect participations in or
obligations collateralized by and payable from mortgage loans secured by real
property. Each Fixed Income Fund and each Municipal Fund may invest in
mortgage-backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities such as the Government National Mortgage Association ("GNMA"),
the
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Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith
and credit of the U.S. Government. Obligations of FNMA and FHLMC are not backed
by the full faith and credit of the U.S. Government but are considered to be of
high quality since they are considered to be instrumentalities of the United
States. The market value and yield of these mortgage-backed securities can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of Federally insured
mortgage loans with a maximum maturity of 30 years. The scheduled monthly
interest and principal payments relating to mortgages in the pool will be
"passed through" to investors. Government mortgage-backed securities differ from
conventional bonds in that principal is paid back to the certificate holders
over the life of the loan rather than at maturity. As a result, there will be
monthly scheduled payments of principal and interest.
Only the Fixed Income Funds may invest in mortgage-backed securities issued by
non-governmental entities including collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduits ("REMICs"). CMOs are securities
collateralized by mortgages, mortgage pass-throughs, mortgage pay-through bonds
(bonds representing an interest in a pool of mortgages where the cash flow
generated from the mortgage collateral pool is dedicated to bond repayment), and
mortgage-backed bonds (general obligations of the issuers payable out of the
issuers' general funds and additionally secured by a first lien on a pool of
single family detached properties). Many CMOs are issued with a number of
classes or series which have different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the unscheduled prepayments of principal
up to a predetermined portion of the total CMO obligation. Until that portion of
such CMO obligation is repaid, investors in the longer maturities receive
interest only. Accordingly, the CMOs in the longer maturity series are less
likely than other mortgage pass-throughs to be prepaid prior to their stated
maturity. Although some of the mortgages underlying CMOs may be supported by
various types of insurance, and some CMOs may be backed by GNMA certificates or
other mortgage pass-throughs issued or guaranteed by U.S. Government agencies or
instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities, including "regular" interests
and "residual" interests. The Funds do not intend to acquire residual interests
in REMICs under current tax law, due to certain disadvantages for regulated
investment companies that acquire such interests.
Mortgage-backed securities are subject to unscheduled principal payments
representing prepayments on the underlying mortgages. Although these securities
may offer yields higher than those available from other types of securities,
mortgage-backed securities may be less effective than other types of securities
as a means of "locking in" attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, the value of these
securities likely will not rise as much as comparable debt securities due to the
prepayment feature. In addition, these prepayments can cause the price of a
mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Adviser believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment, it will be deemed
to have a
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remaining maturity of three years or less if the average life, as estimated by
the Adviser, is three years or less at the time of purchase of the security by a
Fund. An average life estimate is a function of an assumption regarding
anticipated prepayment patterns. The assumption is based upon current interest
rates, current conditions in the relevant housing markets and other factors. The
assumption is necessarily subjective, and thus different market participants
could produce somewhat different average life estimates with regard to the same
security. Although the Adviser will monitor the average life of the portfolio
securities of each Fixed Income Fund and Municipal Fund and make needed
adjustments to comply with the Funds' policy as to average dollar weighted
portfolio maturity, there can be no assurance that the average life of portfolio
securities as estimated by the Adviser will be the actual average life of such
securities.
As stated in the Prospectus, no Fund will invest 25% or more of its total assets
in CMOs (other than U.S. Government Securities).
Asset-Backed Securities
As stated in the Prospectus, the Fixed Income Funds may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, pools of assets including company receivables, truck and auto loans,
leases and credit card receivables. The asset pools that back asset-backed
securities are securitized through the use of privately-formed trusts or special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Certain asset backed securities may be considered derivative instruments. As
stated in the Prospectus, no Fund will invest 25% or more of its total assets in
asset-backed securities.
Foreign Securities
Subject to their respective investment objectives and policies, the Equity Funds
and the Fixed Income Funds may invest in securities of foreign issuers. While
the Equity Funds' non-U.S. investments may be denominated in any currency, the
Fixed Income Funds' investments in foreign securities may be denominated only in
the U.S. dollar. Foreign securities may offer investment opportunities not
available in the United States, but such investments also involve significant
risks not typically associated with investing in domestic securities. In many
foreign countries, there is less publicly available information about foreign
issuers, and there is less government regulation and supervision of foreign
stock exchanges, brokers and listed companies. Also, in many foreign countries,
companies are not subject to uniform accounting, auditing, and financial
reporting standards comparable to those applicable to domestic issuers. Security
trading practices differ and there may be difficulty in enforcing legal rights
outside the United States. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the United States, which could
affect the liquidity of the Funds' portfolios. Additionally, in some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of securities, property, or other Fund assets,
political or social instability or diplomatic developments which could affect
investments in foreign securities.
To the extent the Equity Funds' investments are denominated in foreign
currencies, the net asset values of such Funds may be affected favorably or
unfavorably by fluctuations in currency exchange rates and by changes in
exchange control regulations. For example, if the Adviser increases an Equity
Fund's exposure to a foreign currency, and that currency's value
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subsequently falls, the Adviser's currency management may result in increased
losses to the Fund. Similarly, if the Adviser hedges an Equity Fund's exposure
to a foreign currency, and that currency's value rises, the Fund will lose the
opportunity to participate in the currency's appreciation. The Equity Funds will
incur transaction costs in connection with conversions between currencies.
Foreign Government Securities. The foreign government securities in which the
Fixed Income Funds and the Equity Funds may invest generally consist of debt
obligations issued or guaranteed by national, state or provincial governments or
similar political subdivisions. The Fixed Income Funds and the Equity Funds may
invest in foreign government securities in the form of American Depositary
Receipts. Foreign government securities also include debt securities of
supranational entities. Currently, each Fixed Income Fund intends to invest only
in obligations issues or guaranteed by the Asian Development Bank, the
Inter-American Development Bank, the International Bank for Reconstruction and
Development (the "World Bank"), the African Development Bank, the European Coal
and Steel Community, the European Economic Community, the European Investment
Bank and the Nordic Investment Bank. Foreign government securities also include
mortgage-related securities issued or guaranteed by national, state or
provincial governmental instrumentalities, including quasi-governmental
agencies.
Forward Foreign Currency Exchange Contracts
Each of the Equity Funds may exchange currencies in the normal course of
managing its investments in foreign securities and may incur costs in doing so
because a foreign exchange dealer will charge a fee for conversion. An Equity
Fund may conduct foreign currency exchange transactions on a "spot" basis (i.e.,
for prompt delivery and settlement) at the prevailing spot rate for purchasing
or selling currency in the foreign currency exchange market. An Equity Fund also
may enter into forward foreign currency exchange contracts ("forward currency
contracts") or other contracts to purchase and sell currencies for settlement at
a future date. A foreign exchange dealer, in that situation, will expect to
realize a profit based on the difference between the price at which a foreign
currency is sold to the Equity Fund and the price at which the dealer will cover
the purchase in the foreign currency market. Foreign exchange transactions are
entered into at prices quoted by dealers, which may include a mark-up over the
price that the dealer must pay for the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract, an Equity Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Equity Funds may enter into forward currency contracts only for the
following hedging purposes. First, when an Equity Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when an Equity Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire
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to "lock in" the U.S. dollar price of the security or the U.S. dollar equivalent
of such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars,
of the amount of foreign currency involved in the underlying transactions, the
Fund will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when management of an Equity Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may cause the Fund to enter into a forward contract to sell, for a
fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures.
Using forward currency contracts in an attempt to protect the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which a Fund can achieve at some future point in
time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or liwuid securities will be placed
in the account on a daily basis so that the value of the account will equal the
amount of a Fund's commitments with respect to such contracts. The segregated
account will be marked-to-market on a daily basis. Although forward currency
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. In such event, the Funds' ability to utilize forward currency
contracts may be restricted. In addition, a particular forward currency contract
and assets used to cover such contract may be illiquid.
The Equity Funds generally will not enter into a forward currency contract with
a term of greater than one year.
While the Equity Funds will enter into forward currency contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the Equity Funds may benefit from currency
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be an imperfect correlation between a Fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. Such imperfect correlation may cause
a Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign currency exchange loss. Forward
currency contracts may be considered derivative instruments.
Each Equity Fund's activities in forward currency exchange contracts, currency
futures contracts and related options and currency options (see below) may be
limited by the requirements of subchapter M of the Code), for qualification as a
regulated investment company.
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<PAGE>
Options on Securities, Securities Indices and Foreign Currencies
Each of the Equity Funds may write covered put and call options and purchase put
and call options. Such options may relate to particular securities, to various
stock indices, or to currencies. The Funds may write call and put options which
are issued by the Options Clearing Corporation (the "OCC") or which are traded
on U.S. and non-U.S. exchanges and over-the-counter. These instruments may be
considered derivative instruments. See "Description of Securities and Investment
Techniques and Related Risks--Options" in the Prospectus.
A call option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index exceeds the option's exercise price. Conversely, a put option
on a securities index provides the holder with the right to receive a cash
payment upon exercise of the option if the market value of the underlying index
is less than the option's exercise price. The amount of any payment to the
option holder will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
U.S. dollars or a foreign currency, times a specified multiple. A put option on
a currency gives its holder the right to sell an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration. Conversely, a call option on a
currency gives its holder the right to purchase an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration.
The Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the OCC, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options. OTC options and the assets used
to cover such options will be deemed illiquid for purposes of each Equity Fund's
15% limitation on investments in illiquid securities, except that with respect
to options written with primary dealers in U.S. Government securities pursuant
to an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the staff of the Commission.
An Equity Fund will write call options only if they are "covered." In the case
of a call option on a security, the option is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or liquid securities in such amount are held in
a segregated account by the Fund's custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if the Fund maintains with the Fund's custodian cash or liquid
securities equal to the contract value. A call option on a security or an index
is also covered if the Fund holds a call on the same security or index as the
call written by the Fund where the exercise price of the call held is (i) equal
to or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in cash or liquid securities in a segregated account with the Fund's
custodian. A call option on currency written by a Fund is covered if the Fund
owns an equal amount of the underlying currency.
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<PAGE>
When a Fund purchases a put option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission paid by the Fund) received by the Fund
is included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be marked-to-market on an ongoing basis to reflect the current value of the
option purchased or written. The current value of a traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by the Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received,
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on securities,
securities indices and currencies. For example, there are significant
differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which the
underlying securities and currencies are traded. To the extent that the options
markets close before the markets for the underlying securities and currencies,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
The risks described above also apply to options on futures, which are discussed
below.
Futures Contracts and Related Options
To hedge against changes in interest rates or securities prices and for certain
non-hedging purposes, the Equity Funds may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. The Equity Funds may also enter into closing purchase and
sale transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
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<PAGE>
securities), indices, currencies and other financial instruments. The Equity
Funds will engage in futures and related options transactions only for bona fide
hedging or other non-hedging purposes as defined in regulations promulgated by
the CFTC. All futures contracts entered into by the Equity Funds are traded on
U.S. exchanges or boards of trade that are licensed and regulated by the CFTC or
on foreign exchanges approved by the CFTC.
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell a particular financial instrument for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract). Futures contracts
obligate the long or short holder to take or make delivery of a specified
quantity of a commodity or financial instrument, such as a security or the cash
value of a securities index, during a specified future period at a specified
price.
When interest rates are rising or securities prices are falling, an Equity Fund
can seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, an Equity Fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Equity Funds may instead make, or take, delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures on securities
are traded guarantees that, if still open, the sale or purchase will be
performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price and rate of return on portfolio
securities and securities that a Fund proposes to acquire. The Equity Funds may,
for example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates or a
decline in market prices that would adversely affect the value of a Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by a Fund or securities with characteristics
similar to those of the Fund's portfolio securities. If, in the opinion of the
Adviser, there is a sufficient degree of correlation between price trends for an
Equity Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, the Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Adviser will attempt
to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Equity Funds may take a "long" position by purchasing
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
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<PAGE>
Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give the Equity Funds the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium, to sell a futures
contract (if the option is exercised), which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium which may partially offset an increase in the price of
securities that a Fund intends to purchase. However, a Fund becomes obligated to
purchase a futures contract (if the option is exercised) which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Equity
Funds' ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
The Equity Funds may use options on futures contracts solely for bona fide
hedging or other non-hedging purposes as described below.
Other Considerations. The Equity Funds will engage in futures and related
options transactions only for bona fide hedging or non-hedging purposes as
permitted by CFTC regulations which permit principals of an investment company
registered under the 1940 Act to engage in such transactions without registering
as commodity pool operators. Each Equity Fund will determine that the price
fluctuations in the futures contracts and options on futures used by it for
hedging purposes are substantially related to price fluctuations in securities
or instruments held by the Fund or securities or instruments which it expects to
purchase. Except as stated below, the Equity Funds' futures transactions will be
entered into for traditional hedging purposes--i.e., futures contracts will be
sold to protect against a decline in the price of securities (or the currency in
which they are denominated) that a Fund owns or futures contracts will be
purchased to protect a Fund against an increase in the price of securities (or
the currency in which they are denominated) that a Fund intends to purchase. As
evidence of this hedging intent, each Equity Fund expects that, on 75% or more
of the occasions on which it takes a long futures or option position (involving
the purchase of futures contracts), the Fund will have purchased, or will be in
the process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a CFTC
regulation now permits a Fund to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish
non-hedging positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such
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<PAGE>
options were in-the-money at the time of purchase. A Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company. See "Taxes."
Each Equity Fund will be required, in connection with transactions in futures
contracts and the writing of options on futures contracts, to make margin
deposits, which will be held by its custodian for the benefit of the futures
commission merchant through whom the Fund engages in such futures and option
transactions. These transactions involve brokerage costs, require margin
deposits and, in the case of futures contracts and options obligating a Fund to
purchase securities, require a Fund to segregate cash or liquid securities in an
account maintained with its custodian to cover such contracts and options
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures position prior to its maturity date.
In the event of an imperfect correlation between a futures position and
portfolio position which is intended to be protected, the desired protection may
not be obtained and an Equity Fund may be exposed to risk of loss. The risk of
imperfect correlation may be minimized by investing in contracts whose price
behavior is expected to resemble that of the Fund's underlying securities. The
Funds will attempt to minimize the risk that they will be unable to close out
futures positions by entering into such transactions on a national exchange with
an active and liquid secondary market.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a U.S
or non-U.S issuer. Each of the Funds may purchase commercial paper as described
in the Prospectus. Each Fund may also invest in variable rate master demand
notes which typically are issued by large corporate borrowers and which provide
for variable amounts of principal indebtedness and periodic adjustments in the
interest rate. Demand notes are direct lending arrangements between a Fund and
an issuer, and are not normally traded in a secondary market. A Fund, however,
may demand payment of principal and accrued interest at any time. In addition,
while demand notes generally are not rated, their issuers must satisfy the same
criteria as those that apply to issuers of commercial paper. The Adviser will
consider the earning power, cash flow and other liquidity ratios of issuers of
demand notes and continually will monitor their financial ability to meet
payment on demand. See also "Fixed Income Securities--Variable and Floating Rate
Instruments."
Bank Obligations
As stated in the Prospectus, each Fund's investments in money market instruments
may include certificates of deposit, time deposits and bankers' acceptances.
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated
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<PAGE>
interest rates. Bankers' acceptances are time drafts drawn on commercial banks
by borrowers usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and examined by
the Comptroller of the Currency and are required to be members of the Federal
Reserve System and to be insured by the Federal Deposit Insurance Corporation
(the "FDIC"). U.S. banks organized under state law are supervised and examined
by state banking authorities but are members of the Federal Reserve System only
if they elect to join. Most state banks are insured by the FDIC (although such
insurance may not be of material benefit to a Fund, depending upon the principal
amount of CDs of each bank held by the Fund) and are subject to federal
examination and to a substantial body of federal law and regulation. As a result
of governmental regulations, U.S. branches of U.S. banks, among other things,
generally are required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described in the
Prospectus.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For other purposes, it is not clear whether a court would consider
such an obligation as being owned by the Fund or as being collateral for a loan
by the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the obligation before its
repurchase, under the repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Such delays may result in a
loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below an amount equal to 102% of the repurchase price (including accrued
interest), the seller of the obligation will be required to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis
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<PAGE>
only with the intention of completing the transaction and actually purchasing
the securities. If deemed appropriate by the Adviser, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a gain or
loss, and distributions attributable to any such gain would be taxable to
shareholders.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the separate account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitments. The market value of a
Fund's net assets will generally fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because a Fund's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Fund expects that its commitments to purchase
when-issued securities and forward commitments will not exceed 33% of the value
of its total assets. When a Fund engages in "when-issued" and forward commitment
transactions, it relies on the other party to the transaction to consummate the
trade. Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest or dividends on the securities it has committed to
purchase until the settlement date.
Borrowing
Each Fund may borrow for temporary or emergency purposes, although borrowings by
the Fixed Income Fund and the Municipal Bond Fund may not exceed 10% of the
value of their respective net assets. This borrowing may be unsecured. The 1940
Act requires a Fund to maintain continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the asset coverage should decline below 300% as a result of
market fluctuations or for other reasons, a Fund will be required to sell some
of its portfolio securities within three days to reduce its borrowings and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. To limit the potential
leveraging effects of a Fund's borrowings, each Equity Fund, the Short-Term
Fixed Income Fund and the Short-Term Municipal Bond Fund will not make
investments while borrowings are in excess of 5% of total assets. The Fixed
Income Fund and the Municipal Bond Fund may not make additional investments
while they have any borrowings outstanding. Borrowing generally will exaggerate
the effect on net asset value of any increase or decrease in the market value of
the portfolio. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. See "Investment Restrictions."
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<PAGE>
Lending Portfolio Securities
Each Fund, other than Fixed Income Fund and Municipal Bond Fund, may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made by a Fund, may not exceed 33 1/3% of the value of
the Fund's total assets. A Fund's loans of securities will be collateralized by
cash, cash equivalents or U.S. Government securities. The cash or instruments
collateralizing the Fund's loans of securities will be maintained at all times
in a segregated account with the Fund's custodian, in an amount at least equal
to the current market value of the loaned securities. From time to time, a Fund
may pay a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and is acting as a "placing broker". No fee will be paid to
affiliated persons of the Fund. The Board of Trustees will make a determination
that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by continuing to
receive amounts equal to the interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as amounts equal to the dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower except
that, if a material event will occur affecting the investment in the loaned
securities, the Fund must terminate the loan in time to vote the securities on
such event.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be changed with
respect to a Fund without the approval of a "majority" (as defined in the 1940
Act) of the outstanding shares of that Fund. For the purposes of the 1940 Act,
"majority" means the lesser of (a) 67% or more of the shares of the Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the shares of
the Fund.
Investment restrictions that involve a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a Fund
with the exception of borrowings permitted by fundamental investment restriction
(2) listed below for Short-Term Fixed Income Fund, Short-Term Municipal Bond
Fund and the Equity Funds and fundamental investment restriction (3) listed
below for Fixed Income Fund and Municipal Bond Fund.
The nonfundamental investment restrictions set forth below may be changed or
amended by the Trust's Board of Trustees without shareholder approval.
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<PAGE>
Investment Restrictions That Apply to Short-Term Fixed Income Fund, Short-Term
Municipal Bond Fund and the Equity Funds Fundamental Investment Restrictions.
The Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6)
and (7) below. For purposes of this restriction, the issuance of
shares of beneficial interest in multiple classes or series, the
purchase or sale of options, futures contracts and options on futures
contracts, forward commitments, forward foreign exchange contracts,
repurchase agreements and reverse repurchase agreements entered into
in accordance with the Fund's investment policy, and the pledge,
mortgage or hypothecation of the Fund's assets within the meaning of
paragraph (3) below are not deemed to be senior securities, if
appropriately covered.
(2) Borrow money (i) except from banks as a temporary measure for
extraordinary emergency purposes and (ii) except that the Fund may
enter into reverse repurchase agreements and dollar rolls, if
appropriately covered, with banks, broker-dealers and other parties;
provided that, in each case, the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For the purposes of this
investment restriction, short sales, transactions in currency, forward
contracts, swaps, options, futures contracts and options on futures
contracts, and forward commitment transactions shall not constitute
borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and to the extent
related to the segregation of assets in connection with the writing of
covered put and call options and the purchase of securities or
currencies on a forward commitment or delayed-delivery basis and
collateral and initial or variation margin arrangements with respect
to forward contracts, options, futures contracts and options on
futures contracts.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of Fund securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of
corporate or governmental entities secured by real estate or
marketable interests therein or securities issued by companies (other
than real estate limited partnerships) that invest in real estate or
interests therein.
(6) Make loans, except that the Fund may lend Fund securities in
accordance with the Fund's investment policies and may purchase or
invest in repurchase agreements, bank certificates of deposit, all or
a portion of an issue of bonds, bank loan participation agreements,
bankers' acceptances, debentures or other securities, whether or not
the purchase is made upon the original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options
on securities, securities indices, currency and other financial
instruments, futures contracts on securities, securities indices,
currency and other financial instruments and options on such futures
contracts, forward foreign currency exchange contracts, forward
commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment
policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This
restriction does not apply to investments in obligations of the U.S.
Government or any of its agencies or instrumentalities.
- --------------------------------------------------------------------------------
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<PAGE>
In addition, each Fund will adhere to the following fundamental
investment restriction:
With respect to 75% of its total assets, a Fund may not purchase
securities of an issuer (other than the U.S. Government, or any of its
agencies or instrumentalities, or other investment companies), if (a)
such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such issuer,
or (b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
NonFundamental Investment Restrictions. The Trust may not, on behalf of a Fund:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of
marketable Fund securities with other accounts under the management of
the Adviser to save commissions or to average prices among them is not
deemed to result in a securities trading account.
(b) Purchase securities on margin or make short sales unless by virtue of
its ownership of other securities, the Fund has the right to obtain,
without payment of additional consideration, securities equivalent in
kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except that a
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities and in connection with
transactions involving forward foreign currency exchange transactions,
options, futures and options on futures.
(c) Purchase securities of other investment companies, except in the open
market where no commission or profit to a sponsor or dealer results
from the purchase other than the customary broker's commission and as
permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.
(d) Purchase securities of any issuer which, together with any
predecessor, has a record of less than three years' continuous
operations prior to the purchase if such purchase would cause
investments of the Fund in all such issuers to exceed 5% of the value
of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management of any
company.
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's net assets would be invested
in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange or more than 5% of the value of the net assets
of the Fund would be invested in warrants generally, whether or not so
listed. For these purposes, warrants are to be valued at the lesser of
cost or market, but warrants acquired by the Fund in units with or
attached to debt securities shall be deemed to be without value.
(g) Purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or directors or officers of the
Adviser or any investment management subsidiary of the Adviser
individually owns beneficially more than 0.5% and together own
beneficially more than 5% of the securities of such issuer.
(h) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of
oil, gas or other minerals.
(i) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is illiquid, if more than 15% of the net
assets of the Fund, taken at market value, would be invested in such
securities.
- --------------------------------------------------------------------------------
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<PAGE>
(j) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933; provided, however, that no more
than 15% of the Fund's total assets may be invested in restricted
securities including restricted securities eligible for resale under
Rule 144A.
(k) Write covered calls or put options with respect to more than 25% of
the value of its total assets or invest more than 5% of its total
assets in puts, calls, spreads, or straddles, other than protective
put options.
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include such
investments in determining compliance with the 15% limitation on investments in
illiquid securities. Restricted securities (including commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933, which the Board of
Trustees has determined are readily marketable will not be deemed to be illiquid
for purposes of such restriction.
"Value" for the purposes of the foregoing investment restrictions shall mean the
market value used in determining each Fund's net asset value.
Investment Restrictions That Apply to the Fixed Income Fund And the Municipal
Bond Fund
Fundamental Investment Restrictions. The Trust may not, on behalf of the Fixed
Income Fund or the Municipal Bond Fund:
(1) Acquire more than 10% of the voting securities of any one issuer.
(2) Invest in companies for the purpose of exercising control.
(3) Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of its total assets. Any borrowing
will be done from a bank and to the extent that such borrowing exceeds 5%
of the value of a Fund's assets, asset coverage of at least 300% is
required. In the event that such asset coverage shall at any time fall
below 300%, a Fund shall, within three days thereafter or such longer
period as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included for temporary liquidity or emergency purposes. All
borrowings will be repaid before making investments and any interest paid
on such borrowings will reduce income.
(4) Make loans, except that a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies, and a Fund may enter
into repurchase agreements.
(5) Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed 10% of
total assets taken at current value at the time of the incurrence of such
loan.
(6) Purchase or sell real estate, real estate limited partnership interests,
futures contracts, commodities or commodities contracts and interests in a
pool of securities that are secured by interests in real estate. However,
subject to the permitted investments of the Fund, a Fund may invest in
municipal securities or other obligations secured by real estate or
interests therein.
(7) Make short sales of securities, maintain a short position or purchase
securities on margin, except that a Fund may obtain short-term credits as
necessary for the clearance of security transactions.
(8) Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
- --------------------------------------------------------------------------------
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<PAGE>
(9) Purchase securities of other investment companies except as permitted by
the Investment Company Act of 1940 and the rules and regulations
thereunder.
(10) Issue senior securities (as defined in the Investment Company Act of 1940)
except in connection with permitted borrowings as described above or as
permitted by rule, regulation or order of the Securities and Exchange
Commission.
(11) Purchase or retain securities of an issuer if an officer, trustee, partner
or director of the Fund or any investment adviser of the Fund owns
beneficially more than 1/2 of 1% of the shares or securities of such issuer
and all such officers, trustees, partners and directors owning more than
1/2 of 1% of such shares or securities together own more than 5% of such
shares or securities.
(12) Invest in interests in oil, gas or other mineral exploration or development
programs and oil, gas or mineral leases.
(13) Write or purchase puts, calls, options or combinations thereof or invest in
warrants, except that a Fund may purchase "put" bonds as described in the
Prospectus.
Nonfundamental Investment Restrictions.
(1) A Fund may not invest in illiquid securities in an amount exceeding,
in the aggregate, 10% of the Municipal Bond Fund's total assets and
15% of the Fixed Income Fund's net assets. An illiquid security is a
security that cannot be disposed of promptly (within seven days) and
in the usual course of business without a loss, and includes
repurchase agreements maturing in excess of seven days, time deposits
with a withdrawal penalty, non-negotiable instruments and instruments
for which no market exists.
(2) A Fund may not purchase securities of any issuer which, together with
any predecessor, has a record of less than three years' continuous
operations prior to the purchase if such purchase would cause
investments of the Fund in all such issuers to exceed 15% of the value
of the total assets of the Fund and the Fund may not invest more than
5% of its total assets in restricted securities, excluding restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933; provided, however, that no more than 15% of
the Fund's total assets may be invested in restricted securities
including restricted securities eligible for resale under Rule 144A.
(3) A Fund may not purchase securities of other investment companies
except in the open market where no commission or profit to a sponsor
or dealer results from the purchase other than the customary broker's
commission and as permitted by the Investment Company Act of 1940 and
the rules and regulations thereunder.
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<PAGE>
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set forth
below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- ------------------------ ---------- ----------------------
<S> <C> <C>
James E. Minnick (1)(3)* President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer, and (since 1990).
New York, NY 10022 Trustee
(age 48)
Patrick W.W. Disney (1)(3)* Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee Services Limited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 40)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 46)
Graham E. Jones (2) Trustee Senior Vice President, BGK Realty Inc.
330 Garfield Street since 1995); Financial Manager, Practice
Santa Fe, NM 87501 Management Systems (medical information
(age 63) services) (1988- 95); Director, 12 closed-
end funds managed by Morgan Stanley
Asset Management; Trustee, 10 open-end
mutual funds managed by Weiss, Peck &
Greer.
William N. Searcy (2) Trustee Pension & Savings Trust Officer, Sprint
2330 Shawnee Mission Pkwy Corporation (telecommunications) (since
Westwood, KS 66205 1989).
(age 50)
Hugh G. Lynch Trustee Director, International Investments,
767 Fifth Avenue General Motors Investment Management
New York, NY 10153 Corporation (since September 1990).
(age 59)
Edward T. Tokar* Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc., (advanced technology and manu-
Morristown, NJ 07962 facturer, (since 1985).
(age 49)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
John G. Alshefski Treasurer, Principal Director of Fund Operations, SEI/ Fund
530 East Swedesford Road Accounting Officer, Resources (since January 1994); Manager
Wayne, PA 19087-1658 Chief Financial Officer International Fund Operations (1992-1994);
(age 30) Senior Associate, Price Waterhouse (1988-
1991).
Neil P. Jenkins (3) Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 36) (since 1985).
David W. Baldt Vice President Executive Vice President and Director of
1435 Walnut Street Fixed Income Investments, MGCM (since
Philadelphia, PA 19102 1989).
(age 47)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income, since
London EC2M 1NB 1989).
England
(age 40)
James Grifo Vice President Executive Vice President and Director
1435 Walnut Street MGCM (since 1996); Senior Vice
Philadelphia, PA 19102 President, GT Global Financial (since
(age 45) 1990).
Martin Hall Vice President Portfolio Manager, Fixed Income Team
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 38)
Mark G. Arthus Secretary and Director, Compliance and Financial Control,
885 Third Avenue Compliance Officer MGCM (since 1992); Vice President, Senior
New York, NY 10022 Compliance Officer and other positions,
(age 40) Citibank, N.A. (to 1992)
</TABLE>
---------------
1 Member of the Trust's Valuation and Dividend Committees.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
4 Member of the Trust's Valuation Committee.
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained
- --------------------------------------------------------------------------------
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<PAGE>
in United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
Messrs. Jones, Freeman and Searcy are members of the Audit Committee of the
Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the Trust
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent.
As of January 24, 1997, the Trustees and officers of the Trust owned, as a
group, less than one percent of the outstanding shares of each Fund other than
Morgan Grenfell Short-Term Municipal Bond Fund. On such date, the Trustees and
officers of the Trust owned, as a group, 9.39% of the outstanding shares of
Morgan Grenfell Short-Term Municipal Bond Fund.
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an annual fee
of $15,000 provided that they attend each regular Board meeting during the year.
Members of the Audit Committee also receive $1,000 for each Audit Committee
meeting attended. The Chairman of the Audit Committee receives an additional
$1,000 per Audit Committee meeting attended. The Trustees are also reimbursed
for out-of-pocket expenses incurred by them in connection with their duties as
Trustees.
The following table sets forth the compensation paid by the Trust to the
Trustees for the fiscal year of the Trust ended October 31, 1996:
Pension or
Retirement Aggregate
Benefits Accrued Compensation from
as Part of Fund the Trust/
Name of Trustees Expenses Complex*
- ---------------- ---------------- -----------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ 18,000
Graham E. Jones $ 0 $ 18,000
William N. Searcy $ 0 $ 21,000
Hugh G. Lynch $ 0 $ 15,000
Edward T. Tokar $ 0 $ 7,500
---------------
* The Trustees listed above do not serve on the Board of any other
investment company that may be considered to belong to the same
complex as the Trust.
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as the investment adviser to
each Fund other than Microcap Fund pursuant to the terms of two Management
Contracts, each dated December 28, 1994. MGCM acts as the investment adviser to
Microcap Fund pursuant to the terms of a Management Contract dated August 7,
1996 (referred to collectively herein with the Management Contracts referred to
in the preceding sentence as the "Management Contracts"). Pursuant to the
Management Contracts, the Adviser supervises and assists in the management of
the assets of each Fund and furnishes each Fund with research, statistical,
advisory and managerial services. The Adviser pays the ordinary office expenses
of the Trust and the compensation, if any, of all officers and employees of the
Trust and all Trustees who are "interested persons" (as defined in the 1940 Act)
of the Adviser.
Under the Management Contracts, the Trust, on behalf of each Fund is obligated
to pay the Adviser a monthly fee at an annual rate of each Fund's average daily
net assets as follows:
Annual Rate
Morgan Grenfell Large Cap Growth Fund.................. 0.75%
Morgan Grenfell Smaller Companies Fund................. 1.00%
Morgan Grenfell Microcap Fund ......................... 1.50%
Morgan Grenfell Fixed Income Fund...................... 0.40%
Morgan Grenfell Short-Term Fixed Income Fund........... 0.40%
Morgan Grenfell Municipal Bond Fund.................... 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund......... 0.40%
Each Fund's advisory fees are paid monthly and will be prorated if the Adviser
shall not have acted as the Fund's investment adviser during the entire monthly
period. The Adviser has temporarily agreed, under certain circumstances, to
reduce or not impose its management fee and to make arrangements to limit
certain other expenses as described in the Prospectus under "Expense
Information."
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan Grenfell
Fixed Income Fund paid the Adviser net advisory fees of $2,041,053, $1,150,707
and $532,189, respectively. For the same years, Morgan Grenfell Municipal Bond
Fund paid the Adviser net advisory fees of $791,321, $595,795, and $444,910,
respectively. For the fiscal years ended October 31, 1996 and 1995, Morgan
Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond
Fund and Morgan Grenfell Smaller Companies Fund paid no advisory fees to the
Adviser. The foregoing advisory fee payments and non-payments reflect expense
limitations that were in effect during the indicated periods. Morgan Grenfell
Large Cap Growth Fund and Morgan Grenfell Microcap Fund were not in operation
during any of the indicated periods and, accordingly, paid no advisory fees
during such periods.
The Management Contract between MGCM and the Trust, on behalf of the Equity
Funds, the Short-Term Fixed Income Fund and the Short-Term Municipal Bond Fund,
was most recently approved on November 21, 1996 by a vote of the Trust's Board
of Trustees, including a majority of those Trustees who were not parties to such
Management Contract or "interested persons" of any such parties. The Management
Contract between MGCM and the Trust, on behalf of the
- --------------------------------------------------------------------------------
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<PAGE>
Fixed Income Fund and the Municipal Bond Fund, was approved on November 21, 1996
by a vote of the Trust's Board of Trustees, including a majority of those
Trustees who were not parties to such Management Contract or "interested
persons" of any such parties.
The Management Contract between MGCM and the Trust, on behalf of Microcap Fund,
was approved on May 16, 1996 by a vote of the Trust's Board of Trustees,
including a majority of those Trustees who were not parties to such Management
Contract or "interested persons" of any such parties.
The Management Contracts will remain in effect until November 30, 1997 (August
23, 1998, in the case of the Management Contract for Microcap Fund), and will
continue in effect thereafter, with respect to each Fund, only if such
continuance is specifically approved annually by the Trustees, including a
majority of the Trustees who are not parties to the Management Contracts or
"interested persons" of any such parties, or by a vote of a majority of the
outstanding shares of each Fund. The Management Contracts are terminable by vote
of the Board of Trustees, or, with respect to a Fund, by the holders of a
majority of the outstanding shares of the Fund, at any time without penalty on
60 days' written notice to the Adviser. Termination of a Management Contract
(that covers more than one fund) with respect to a Fund will not terminate or
otherwise invalidate any provision of either such Management Contract with
respect to any other Fund. The Adviser may terminate any Management Contract at
any time without penalty on 60 days' written notice to the Trust. Each
Management Contract terminates automatically in the event of its "assignment"
(as such term is defined in the 1940 Act).
Each Management Contract provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust or any
Fund in connection with the performance of the Adviser's obligations under the
Management Contract with the Trust, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
In the management of the Funds and its other accounts, the Adviser allocates
investment opportunities to all accounts for which they are appropriate subject
to the availability of cash in any particular account and the final decision of
the individual or individuals in charge of such accounts.
Where market supply is inadequate for a distribution to all such accounts,
securities are allocated based on a Fund's pro rata portion of the amount
ordered. In some cases this procedure may have an adverse effect on the price or
volume of the security as far as a Fund is concerned. However, it is the
judgment of the Board that the desirability of continuing the Trust's advisory
arrangements with the Adviser outweighs any disadvantages that may result from
contemporaneous transactions. See "Portfolio Brokerage."
MGCM is registered with the Commission as an investment adviser and provides a
full range of investment advisory services to institutional clients. MGCM is a
direct wholly-owned subsidiary of Morgan Grenfell Asset Management, Ltd., which
is a wholly-owned subsidiary of Deutsche Morgan Grenfell Group plc. Deutsche
Morgan Grenfell Group plc is an indirect wholly-owned subsidiary of Deutsche
Bank AG, an international commercial and investment banking group. As of April
30, 1996, MGCM managed approximately $8.05 billion in assets for various
individual and institutional accounts, including the Morgan Grenfell SMALLCap
Fund, Inc., a registered, closed-end investment company for which it acts as
investment adviser. MGCM also acts as investment subadviser to Fremont U.S.
Micro-Cap Fund, a registered open-end investment company.
- --------------------------------------------------------------------------------
Page - 31 -
<PAGE>
Portfolio Turnover
Each Fund's portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal periods
ended October 31, 1996 and 1995, the portfolio turnover rates for Morgan
Grenfell Fixed Income Fund were 176% and 182%, respectively. For the same
periods, the portfolio turnover rates for Morgan Grenfell Municipal Bond Fund
were 66% and 63%, respectively. For the fiscal yeat ended October 31, 1996, the
portfolio turnover rates for Morgan Grenfell Short-Term Fixed Income Fund,
Morgan Grenfell Short-Term Municipal Bond Fund and the Morgan Grenfell Smaller
Companies Fund were 124%, 129% and 141%, respectively. For the fiscal period
ended October 31, 1995, the portfolio turnover rates for Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and
Morgan Grenfell Smaller Companies Fund were 90%, 62% and 23%, respectively.
The Administrator
As described in the Prospectus, SEI Financial Management Corporation (the
"Administrator") serves as the Trust's administrator pursuant to an
administration agreement between the Administrator and the Trust, on behalf of
the Funds (the "Administration Agreement"). Pursuant to the Administration
Agreement, the Administrator has agreed to furnish statistical and research
data, clerical services, and stationery and office supplies; prepare and file
various reports with the appropriate regulatory agencies including the
Commission and state securities commissions; and provide accounting and
bookkeeping services for the Funds, including the computation of each Fund's net
asset value, net investment income and net realized capital gains, if any.
For its services under the Administration Agreement, the Administrator receives
from all series of the Trust an aggregate monthly fee at the following annual
rates of the aggregate average daily net assets ("aggregate assets") of such
series:
0.12% 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.
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan Grenfell
Fixed Income Fund paid the Administrator administration fees of $655,936,
$455,614,and $259,094 respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Administrator administration fees of $253,839,
$227,872,and $231,957 respectively. For the fiscal period ended October 31,
1996, Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund paid the
Administrator administration fees of $45,833, $45,833 and $37,500, respectively.
For the fiscal period ended October 31, 1995, Morgan Grenfell Short-Term Fixed
Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell
Smaller Companies Fund paid
- --------------------------------------------------------------------------------
Page - 32 -
<PAGE>
the Administrator administration fees of $12,500, $12,500 and $4,167,
respectively. The administration fees shown in this paragraph were paid pursuant
to a fee schedule that provided for higher fees than does the fee schedule that
is in effect for the current fiscal year ending October 31, 1997.
The Administration Agreement provides that the Administrator shall not be liable
under the Administration Agreement except for bad faith or gross negligence in
the performance of its duties or from the reckless disregard by it of its duties
and obligations thereunder.
Expenses of the Trust
The expenses borne by institutional shares of the Funds include: (i) fees and
expenses of any investment adviser and any administrator of the Funds;
(ii) fees and expenses incurred by the Funds in connection with membership in
investment company organizations; (iii) brokers' commissions; (iv) payment for
portfolio pricing services to a pricing agent, if any; (v) legal expenses
(including an allocable portion of the cost of the Trust's employees rendering
legal services to the Funds); (vi) interest, insurance premiums, taxes or
governmental fees; (vii) the fees and expenses of the transfer agent of the
Funds; (viii) clerical expenses of issue, redemption or repurchase of shares of
the Funds; (ix) the expenses of and fees for registering or qualifying shares of
the Funds for sale and of maintaining the registration of the Funds and
registering the Funds as a broker or a dealer; (x) the fees and expenses of
Trustees who are not affiliated with the Adviser; (xi) the cost of preparing and
distributing reports and notices to shareholders, the Commission and other
regulatory authorities; (xii) the fees or disbursements of custodians of the
Funds' assets, including expenses incurred in the performance of any obligations
enumerated by the Declaration of Trust or By-Laws of the Trust insofar as they
govern agreements with any such custodian; (xiii) costs in connection with
annual or special meetings of shareholders, including proxy material
preparation, printing and mailing; (xiv) charges and expenses of the Trust's
auditor; (xv) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's business; and (xvi)
expenses of an extraordinary and nonrecurring nature.
Transfer Agent
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105 (the "Transfer
Agent") serves as the transfer and dividend disbursing agent for the Funds
pursuant to a transfer agency agreement (the "Transfer Agency Agreement"), under
which the Transfer Agent (i) maintains record shareholder accounts, and (ii)
makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
The Distributor
The Trust, on behalf of the Funds, has entered into a distribution agreement
(the "Distribution Agreement") pursuant to which SEI Financial Services Company,
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100 (the "Distributor"), as
agent, serves as principal underwriter for the continuous offering of shares,
including institutional shares, of each Fund. The Distributor has agreed to use
its best efforts to solicit orders for the purchase of shares of each Fund,
although it is not obligated to sell any particular amount of shares. Shares of
the Funds are not subject to sales loads or distribution fees. The Adviser, and
not the Trust, is responsible for
- --------------------------------------------------------------------------------
Page - 33 -
<PAGE>
payment of any expenses or fees incurred in the marketing and distribution of
shares of the Funds.
The Distribution Agreement will remain in effect for one year from its effective
date and will continue in effect thereafter only if such continuance is
specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" of such parties. The Distribution Agreement was approved by the initial
shareholder of each Fund other than Microcap Fund on December 28, 1994. The
Distribution Agreement was approved by the initial shareholder of Microcap Fund
on August 5, 1996. The Distribution Agreement was most recently approved on
November 21, 1996 by a vote of the Trust's Board of Trustees, including a
majority of those Trustees who were not parties to the Distribution Agreement or
"interested persons" of any such parties. The Distribution Agreement is
terminable, as to a Fund, by vote of the Board of Trustees, or by the holders of
a majority of the outstanding shares of the Fund, at any time without penalty on
60 days' written notice to the Trust and Adviser. The Distributor may terminate
the Distribution Agreement at any time without penalty on 90 days' written
notice to the Trust.
Custodian
As described in the Prospectus, CoreStates Bank, N.A. ("CoreStates"), whose
principal business address is Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, PA 19101 maintains custody of the assets of Morgan Grenfell Fixed
Income Fund and Morgan Grenfell Municipal Bond Fund. As described in the
Prospectus, The Northern Trust Company ("Northern"), whose principal business
address is Fifty South LaSalle Street, Chicago, Illinois 60675, maintains
custody of the assets of the other Funds.
Under their custody agreements with the Trust, CoreStates and Northern (i)
maintain separate accounts in the name of each Fund, (ii) hold and transfer
portfolio securities on account of each Fund, (iii) accept receipts and make
disbursements of money on behalf of each Fund, (iv) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities and (v) make periodic reports to the Trust's Board of Trustees
concerning each Fund's operations. CoreStates and Northern are authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Funds.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions
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<PAGE>
directly with the issuer of the instrument. Some fixed income securities are
purchased and sold on an exchange or in over-the-counter transactions conducted
on an agency basis involving a commission.
Pursuant to the Management Contracts, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In addition, the Management Contracts authorize the
Adviser, subject to the periodic review of the Trust's Board of Trustees, to
cause a Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser to the Fund. Such brokerage and research
services may consist of pricing information, reports and statistics on specific
companies or industries, general summaries of groups of bonds and their
comparative earnings and yields, or broad overviews of the securities markets
and the economy.
Supplemental research information utilized by the Adviser is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable to the Adviser. The Trustees will periodically
review the commissions paid by the Funds to consider whether the commissions
paid over representative periods of time appear to be reasonable in relation to
the benefits inuring to the Funds. It is possible that certain of the
supplemental research or other services received will primarily benefit one or
more other investment companies or other accounts of the Adviser for which
investment discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. During the
fiscal period ended October 31, 1996, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts managed by
the Adviser are made independently of each other in the light of differing
conditions. However, the same investment decision may be made for two or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect on the price or value of the security as far as
a Fund is concerned, in other cases it is believed to be beneficial to a Fund.
To the extent permitted by law, the Adviser may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers").
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<PAGE>
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
A transaction would not be placed with an Affiliated Broker if a Fund would have
to pay a commission rate less favorable than their contemporaneous charges for
comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two or
more funds or customers on the same day, each fund or customer pays the average
price and commissions paid are allocated in direct proportion to the number of
shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement setting
forth the total amount of all compensation retained by them or any associated
person of them in connection with effecting transactions for the account of the
Funds, and the Board reviews and approves all the Funds' portfolio transactions
on a quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal years ended October 31, 1994, 1995 and
1996, neither the Fixed Income Fund nor the Municipal Bond Fund paid any
brokerage commissions to any Affiliated Broker. During the fiscal year ended
October 31, 1996 and the fiscal period ended October 31, 1995, neither
Short-Term Fixed Income Fund, Short-Term Municipal Bond Fund nor Smaller
Companies Fund paid any brokerage commissions to any affiliated broker.
Affiliated Brokers do not knowingly participate in commissions paid by the Funds
to other brokers or dealers and do not seek or knowingly receive any reciprocal
business as the result of the payment of such commissions. In the event that an
Affiliated Broker learns at any time that it has knowingly received reciprocal
business, it will so inform the Board.
For the fiscal years ended October 31, 1996, 1995, and 1994, Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund paid no brokerage
commissions. For fiscal years ended October 31, 1996 and 1995, Morgan Grenfell
Short-Term Fixed Income Fund and Morgan Grenfell Short-Term Municipal Bond Fund
paid no brokerage commissions. For the fiscal year ended October 31, 1996 and
the fiscal period ended October 31, 1995, Morgan Grenfell Smaller Companies Fund
paid aggregate brokerage commissions of $7,708 and $3,778, respectively.
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<PAGE>
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its sharesat the close of
such regular trading, which is normally 4:00 p.m. Eastern time, on each day on
which the New York Stock Exchange ("NYSE") is open (a "Business Day"). The NYSE
is closed on Saturdays and Sundays as well as the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For purposes of calculating net asset value for each class of its shares, equity
securities traded on a recognized U.S. or foreign securities exchange or the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
are valued at their last sale price on the principal exchange on which they are
traded or NASDAQ (if NASDAQ is the principal market for such securities) on the
valuation day or, if no sale occurs, at the bid price. Unlisted equity
securities for which market quotations are readily available are valued at the
most recent bid price.
Debt securities and other fixed income investments of the Funds are valued at
prices supplied by independent pricing agents, which prices reflect
broker-dealer supplied valuations and electronic data processing techniques.
Short-term obligations maturing in sixty days or less may be valued at amortized
cost, which method does not take into account unrealized gains or losses on such
portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets in which market quotations are not readily available are
valued at fair value using methods determined in good faith by the Board of
Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the 4:00 P.M.
(Eastern Time) close of business on each Business Day. In addition, European or
Far Eastern securities trading generally or in a particular country or countries
may not take place on all Business Days. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Business Days and on which the Funds' net asset values are not
calculated. Such calculation may not take place contemporaneously with the
determination of the prices of certain portfolio securities used in such
calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
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<PAGE>
PERFORMANCE INFORMATION
Yield
From time to time, each Fixed Income Fund and each Municipal Fund may advertise
its yield and (in the case of the Municipal Funds) its tax-equivalent yield.
Yield and tax-equivalent yield are calculated separately for service shares and
institutional shares of a Fund. Each type of share is subject to differing
yields for the same period. The yield of institutional shares of the Fund refers
to the annualized income generated by an investment in the Fund over a specified
30-day period. The yield is calculated by assuming that the income generated by
the investment during that period is generated for each like period over one
year and is shown as a percentage of the investment. In particular, yield will
be calculated according to the following formula:
YIELD = 2 [(a - b +1)(6) - 1]
------
cd
Where: a = dividends and interest earned by the
Fund during the period;
b = net expenses accrued for the period;
c = average daily number of shares outstanding during the
period entitled to receive dividends; and
d = maximum offering price per share on
the last day of the period.
Tax-equivalent yield is computed by dividing the portion of the yield that is
tax exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the yield that is not tax exempt.
Actual yields will depend on such variables as asset quality, average asset
maturity, the type of instruments a Fund invests in, changes in interest rates
on money market instruments, changes in the expenses of the Fund and other
factors.
Yields are one basis upon which investors may compare the Funds with other
mutual funds; however, yields of other mutual funds and other investment
vehicles may not be comparable because of the factors set forth above and
differences in the methods used in valuing portfolio instruments.
For the 30-day period ended October 31, 1996, the yields for institutional
shares of the Fixed Income Fund, the Municipal Bond Fund, the Short-Term Fixed
Income Fund and the Short-Term Municipal Bond Fund were 6.38%, 5.23%, 5.94% and
5.07%, respectively. If the expense limitations described in the Prospectus for
these Funds had not been in effect during this period, the yields for
institutional shares of these
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<PAGE>
Funds would have been 6.32%, 5.17%, 5.18% and 4.02%, respectively. For the same
period, the tax-equivalent yields for institutional shares of the Municipal Bond
Fund and the Short-Term Municipal Bond Fund were 8.66% and 8.39%, respectively,
assuming the highest Federal Income Tax bracket for individuals (39.6%). If the
expense limitations described in the Prospectus for these Funds had not been in
effect during this period, the tax-equivalent yields for institutional shares of
these Funds would have been 8.56% and 6.66%, respectively, assuming the same
Federal Income Tax bracket.
Total Return
Average annual total return is calculated separately for service shares and
institutional shares of a Fund. Each type of share is subject to different fees
and expenses and, consequently, may have differing average annual total returns
for the same period. Each Fund that advertises "average annual total return" for
a class of its shares computes such return by determining the average annual
compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment according to
the following formula:
ERV
T = [(-----) 1/n - 1]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year (or other) periods at the end of the
applicable period (or a fractional portion thereof);
P = hypothetical initial payment of
$1,000; and
n = period covered by the computation,
expressed in years.
Each Fund that advertises "aggregate total return" for a class of its shares
computes such returns by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The above calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date,
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<PAGE>
(2) all recurring fees charged to all shareholder accounts are included, and (3)
for any account fees that vary with the size of the account, a mean (or median)
account size in the Fund during the periods is reflected. The ending redeemable
value (variable "ERV" in the formula) is determined by assuming complete
redemption of the hypothetical investment after deduction of all nonrecurring
charges at the end of the measuring period. For the fiscal year ended October
31, 1996, the average annual total return of institutional shares of Morgan
Grenfell Fixed Income Fund, Morgan Grenfell Municipal Bond Fund, Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and
Morgan Grenfell Smaller Companies Fund were 6.27%, 6.90%, 6.09%, 5.90% and
24.58%, respectively. For their respective periods from commencement of
operations to October 31, 1996, the average annual total returns of
institutional shares of Morgan Grenfell Fixed Income Fund, Morgan Grenfell
Municipal Bond Fund, Morgan Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller Companies
Fund were 8.29%, 8.93%, 6.09%, 6.24% and 22.69%, respectively. If the expense
limitations described in the Prospectus for the above Funds had not been in
effect during the indicated periods, the total returns for institutional shares
of these Funds for such periods would have been lower than the total return
figures shown in this paragraph.
The Funds may from time to time advertise comparative performance as measured by
various independent sources, including, but not limited to, Barron's, The Wall
Street Journal, Weisenberger Investment Companies Service, Business Week,
Changing Times, Financial World, Forbes, Fortune and Money. In addition, the
Funds may from time to time advertise their performance relative to certain
indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which measure total return and average current yield for
the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry); (C)
the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Shearson Lehman Brothers Aggregate Bond Index or its component indices (the
Aggregate Bond Index measures the performance of Treasury, U.S. Government
agency, corporate, mortgage and Yankee bonds); (f) the Standard & Poor's Bond
Indices (which measure yield and price of corporate, municipal and U.S.
Government bonds); and (g) historical investment data supplied by the research
departments of Goldman Sachs, Shearson Lehman Hutton, First Boston Corporation,
Morgan Stanley, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette
or other providers of such data. The composition of the investments in such
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of the Funds' portfolios.
These indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the Funds to calculate their performance figures.
TAXES
The following is a summary of the principal U.S. federal income, and certain
state and local, tax considerations regarding the purchase, ownership and
disposition of shares in the Funds. This summary does not address special tax
rules applicable to certain classes of investors, such as tax-exempt entities,
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign
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<PAGE>
tax consequences of investing in the Funds. The summary is based on the laws in
effect on the date of this Statement of Additional Information, which are
subject to change.
General
Each Fund is a separate taxable entity. Each Fund has elected or intends to
elect to be treated, and intends to qualify for each taxable year, as a
regulated investment company under Subchapter M of the Code.
Qualification of any Fund as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities or foreign currencies, or other income
(including but not limited to gains from options, futures, and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% gross income test"); (b) the Fund derive less
than 30% of its gross income for its taxable year from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities; (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies); and (iii) foreign
currencies and foreign currency options, futures and forward contracts that are
not directly related to the Fund's principal business of investing in stock or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (C) the Fund diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market value
of its total (gross) assets is comprised of cash, cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the value of the Fund's total assets and to not more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from the
sale or other disposition of foreign currencies (or options, futures or forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities will be treated as gains from the
disposition of investments held for less than three months under the short-short
test (even though characterized as ordinary income for some purposes) if such
currencies or instruments were held for less than three months. In addition,
future Treasury regulations could provide that qualifying income under the 90%
gross income test will not include gains from foreign currency transactions or
derivatives that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures or forward contracts for purposes other than hedging currency
risk with respect to securities in a Fund's portfolio or anticipated to be
acquired may not qualify as "directly-related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which the
Fund distributes at least 90% of the sum of (i) its "investment company taxable
income" (which includes dividends, taxable interest, taxable accrued original
issue discount, recognized market discount income, income from securities
lending, any net short-term capital gain in excess of net long-term capital loss
and certain net realized foreign exchange gains and is reduced by deductible
expenses) and
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(ii) the excess of its gross tax-exempt interest, if any, over certain
disallowed deductions ("net tax-exempt interest"), the Fund (but not its
shareholders) will be relieved of federal income tax on any income of the Fund,
including long-term capital gains, distributed to shareholders. However, if a
Fund retains any investment company taxable income or net capital gain (the
excess of net long-term capital gain over net short-term capital loss), it will
be subject to federal income tax at regular corporate rates on the amount
retained.
If a Fund retains any net capital gain, the Fund may designate the retained
amount as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Fund
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities.
For U.S. federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal under current law to
65% of the amount of undistributed net capital gains included in the
shareholder's gross income. Each Fund intends to distribute at least annually to
its shareholders all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, any net tax-exempt interest may be subject to alternative minimum tax,
and its distributions to shareholders will be taxable as ordinary dividends to
the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed in such year and on which no federal income tax was
paid by the Fund. For federal income tax purposes, dividends declared by a Fund
in October, November or December to shareholders of record on a specified date
in such a month and paid during January of the following year are treated as
distributed by the Fund and are taxable to such shareholders as if received on
December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and futures
contracts, options thereon and certain forward contracts (except certain foreign
currency options, forward contracts and futures contracts) entered into by the
Equity Funds will generally be treated as capital gains and losses. Certain of
the futures contracts, forward contracts and options held by the Funds will be
required to be "marked-to-market" for federal income tax purposes, that is,
treated as having been sold at their fair market value on the last day of the
Funds' taxable year. As a result, a Fund may be required to recognize income or
gain without a concurrent receipt of cash. Any gain or loss recognized on actual
or deemed sales of these futures contracts, forward contracts, or options
(except for certain foreign currency options, forward contracts, and futures
contracts) will be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. As a result of certain hedging transactions
entered into by a Fund, such Fund may be required to defer the recognition of
losses on futures or forward contracts and options or underlying securities or
foreign currencies to the extent of any unrecognized gains on related positions
and the characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options, futures and
forward contracts may affect the amount, timing and character of a Fund's
distributions to shareholders. The short-short test
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<PAGE>
described above may limit a Fund's ability to use options, futures and forward
transactions as well as its ability to engage in short sales. Certain tax
elections may be available to the Funds to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions and instruments that may affect the amount, timing and
character of income, gain or loss recognized by the Equity Funds. Under these
rules, foreign exchange gain or loss realized with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment.
If an Equity Fund or a Fixed Income Fund acquires stock (including, under
proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain non-U.S. corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The applicable Funds may
limit and/or manage their holdings in passive foreign investment companies to
minimize their tax liability or maximize their return from these investments.
A Fund that invests in foreign securities may be subject to foreign withholding
or other foreign taxes on certain income (possibly including, in some cases,
capital gains) from such securities. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The Funds will
not be entitled to pass through such foreign taxes to their shareholders, who
consequently will not be entitled to any U.S. tax credits or deductions for such
taxes.
Each Fund's investments in zero coupon securities or other securities bearing
original issue discount or, if the Fund elects to include market discount in
income currently, market discount will generally cause it to realize income
prior to the receipt of cash payments with respect to these securities. Options,
futures or forward contracts subject to the mark to market rules described above
may have the same result if recognized mark to market gains exceed recognized
mark to market losses. In order to obtain cash to distribute this income or
gain, maintain its qualification as a regulated investment company, and avoid
federal income or excise taxes, a Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
Each Municipal Fund purchases tax-exempt municipal securities which are
generally accompanied by an opinion of bond counsel to the effect that interest
on such securities is not included in gross income for federal income tax
purposes. It is not economically feasible to, and the Municipal Funds therefore
do not, make any additional independent inquiry into whether such securities are
in fact tax-exempt. Bond counsels' opinions will generally be based in part upon
covenants by the issuers and related parties regarding continuing compliance
with federal tax requirements. Tax laws, especially those enacted during the
last decade, not only limit the
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<PAGE>
purposes for which tax-exempt bonds can be issued and the supply of such bonds,
but also contain numerous and complex requirements that must be satisfied on a
continuing basis in order for bonds to be and remain tax-exempt. If the issuer
of a bond or a user of a bond-financed facility fails to comply with such
requirements at any time, interest on the bond could become taxable, retroactive
to the date the obligation was issued. In that event, a portion of a Municipal
Fund's distributions attributable to interest such Fund received on such bond
for the current year and for prior years could be characterized or
recharacterized as taxable income.
Each Fixed Income Fund and each Municipal Fund may purchase municipal securities
together with the right to resell the securities to the seller at an agreed upon
price or yield within a specified period prior to the maturity date of the
securities. Such a right to resell is commonly known as a "put" and is also
referred to as a "standby commitment." A Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, a Fund
may purchase beneficial interests in municipal securities held by trusts,
custodial arrangements or partnerships and/or combined with third-party puts or
other types of features such as interest rate swaps; those investments may
require the Fund to pay "tender fees" or other fees for the various features
provided.
The IRS has issued a revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The IRS has also issued
private letter rulings to certain taxpayers (which do not serve as precedent for
other taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. Each Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a standby commitment or other third
party put and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the IRS
will agree with such position in any particular case. Additionally, the federal
income tax treatment of certain other aspects of these investments, including
the treatment of tender fees paid by the Fund, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage each Fund's portfolio in a manner designed to minimize any adverse impact
from the tax rules applicable to these investments.
For federal income tax purposes, each Fund is permitted to carry forward a net
capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders. At October 31, 1996, Fixed Income Fund has capital
loss carryforwards of approximately $530,000 and Short-Term Fixed Income Fund
had capital loss carryforwards of approximately $26,000, in each case expiring
(if not previously used) in the fiscal year ended October 31, 2004.
U.S. Shareholders--Distributions
A Municipal Fund's distributions from the tax-exempt interest it receives will
generally be exempt from federal income tax, provided that such Fund qualifies
as a regulated investment
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<PAGE>
company, at least 50% of the value of the Fund's total assets at the close of
each quarter of its taxable year consists of obligations that pay interest
excluded from gross income under Section 103(a) of the Code, and the Fund
properly designates such distributions as "exempt-interest dividends." The
portions of such exempt-interest dividends, if any, derived from interest on
certain private activity bonds will constitute tax preference items and may give
rise to, or increase liability under, the federal alternative minimum tax for
particular shareholders. In addition, all exempt-interest dividends may increase
a corporate shareholder's liability, if any, for the corporate alternative
minimum tax and will be taken into account in determining the portion, if any,
of a shareholder's social security benefits or certain railroad retirement
benefits that is subject to tax.
For U.S. federal income tax purposes, distributions by the Funds other than the
Municipal Funds, whether reinvested in additional shares or paid in cash,
generally will be taxable to shareholders who are subject to tax.
Shareholders receiving a distribution in the form of newly issued shares will be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the amount of cash they would have received had they elected to
receive cash and will have a cost basis in each share received equal to such
amount divided by the number of shares received. Distributions from investment
company taxable income of any Fund, including the Municipal Funds, for the year
will be taxable as ordinary income. Investment company taxable income includes,
among other things, dividends, taxable interest, income from repurchase
agreements and securities loans; accrued, recognized market discount; a portion
of the discount on certain stripped tax-exempt obligations and their coupons;
and net short-term capital gain (in excess of net long-term capital loss) from
the sale of investments or options or futures transactions or the disposition of
rights to when-issued securities prior to issuance. Distributions to corporate
shareholders designated as derived from dividend income received by a Fund, if
any, that would be eligible for the dividends received deduction if the Fund
were not a regulated investment company will be eligible, subject to certain
holding period and debt-financing restrictions, for the 70% dividends received
deduction for corporations. Because eligible dividends are limited to those
received by a Fund from U.S. domestic corporations, all dividends paid by the
Municipal Funds, and all or a substantial portion of the dividends paid by the
Fixed Income Funds, will generally not qualify for the dividends received
deduction. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends received are treated as
debt financed under the Code and is eliminated if the shares are deemed to have
been held for less than a minimum period, generally 46 days. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its liability for the
federal alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax basis in
its shares of a Fund. Capital gain dividends (i.e., dividends from net capital
gain) paid by any Fund, including the Municipal Funds, if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations.
Interest on indebtedness incurred directly or indirectly to purchase or carry
shares of a Municipal Fund will not be deductible to the extent it is deemed
related to exempt-interest dividends paid by such Fund.
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<PAGE>
A Municipal Fund may not be an appropriate investment for persons who are, or
are related to, substantial users of facilities financed by industrial
development or private activity bonds.
Shareholders that are required to file tax returns are required to report
tax-exempt interest income, including exempt-interest dividends, on their
federal income tax returns. Each Municipal Fund will inform shareholders of the
federal income tax status of its distributions after the end of each calendar
year, including the amounts that qualify as exempt-interest dividends and any
portions of such amounts that constitute tax preference items under the federal
alternative minimum tax. Shareholders who have not held shares of a Municipal
Fund for a full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of their distributions which is not exactly equal
to a proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in the Fund.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
U.S. Shareholders--Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed of, the
shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has held the shares for more than one year, otherwise short-term. However, any
loss realized on the sale, redemption or other disposition of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividend received with respect to such shares
and will be disallowed to the extent of any exempt-interest dividends received
with respect to such shares. Additionally, any loss realized on a sale,
redemption or other disposition of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced with shares
of the same Fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to a dividend
reinvestment in shares of the Fund. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
The Funds may be required to withhold, as "backup withholding," federal income
tax at a rate of 31% from dividends (including distributions from a Fund's net
long-term capital gains, but not including exempt-interest dividends) and share
redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish the Funds with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Funds that the payee has
failed to properly report interest or dividend income to the IRS or that the TIN
furnished by the payee to the Funds is incorrect, or if (when required to do so)
the payee fails to certify under penalties of perjury that it is not subject to
backup withholding. Any amounts withheld may be credited against a shareholder's
United States federal income tax liability. Distributions by a Municipal Fund
will not be subject to backup withholding, however, for any year such Fund
reasonably estimates that at least 95% of its dividends will be exempt-interest
dividends.
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<PAGE>
Non-U.S. Shareholders
Shareholders who, as to the United States, are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors generally will be subject to U.S. withholding tax at
the rate of 30% on distributions treated as ordinary income unless the tax is
reduced or eliminated pursuant to a tax treaty or the dividends are effectively
connected with a U.S. trade or business of the shareholder. In the latter case
the dividends will be subject to tax on a net income basis at the graduated
rates applicable to U.S. individuals or domestic corporations. Distributions of
net capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption of shares
of a Fund will not be subject to U.S. federal income or withholding tax unless
the gain is effectively connected with the shareholder's trade or business in
the United States, or in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the United States for 183 days or more
during the taxable year and certain other conditions are met. Non-U.S. investors
should consult their tax advisers about the applicability of U.S. federal income
or withholding taxes to certain distributions received by them.
State and Local
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities.
Shareholders should consult their own tax advisers concerning these matters.
GENERAL INFORMATION ABOUT THE TRUST
General
The Trust is an open-end investment company organized as a Delaware business
trust on September 13, 1993. The Trust commenced operations on January 3, 1994.
Until December 30, 1994, the Fixed Income Fund and the Municipal Bond Fund were
series of The Advisors' Inner Circle Fund, a Massachusetts business trust
organized under the laws of the Commonwealth of Massachusetts on July 18, 1991.
In the event of a liquidation or dissolution of the Trust or an individual Fund,
shareholders of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved on liquidation, based on the number of shares of the Fund that are held
by each shareholder.
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<PAGE>
Each service share and institutional share of a Fund is entitled to one vote per
share; however, separate votes will be taken by each Fund or class (or by more
than one Fund or class voting on a single class if similarly affected) on
matters affecting only the Fund or class (or those affected Funds or classes) or
as otherwise required by law. Shares are freely transferable and have no
preemptive, subscription or conversion rights. The Trust does not expect to hold
shareholder meetings except as required by the 1940 Act or the Agreement and
Declaration of Trust (the "Declaration of Trust"). See "Organization and Shares
of the Trust" in the Prospectus.
As of January 24, 1997, the following shareholders owned the following
respective percentages of the outstanding shares of the Fixed Income Fund, the
Municipal Bond Fund, The Short-Term Municipal Bond Fund, the Short-Term Fixed
Income Fund and The Smaller Companies Fund:
Fixed Income Fund:
- ------------------
SEI Trust Company 7.12%
1 Freedom Valley Drive
Oaks, PA 19456
BATRUS & Co. 6.03%
c/o Bankers Trust Company
PO Box 9005
Church Street Station
New York, NY 10006
San Mateo County Employees 8.01%
Retirement Association
2317 Broadway St STE 115
Redwood City, CA 94063-1613
Municipal Bond Fund:
- --------------------
SEI Trust Company 9.34%
1 Freedom Valley Drive
Oaks, PA 19456
Batrus & Co., (New York Corporation) 44.53%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
INFID & Co. 11.32%
c/o Bankers Trust Co.
PO Box 9005 Church Street Station
New York, NY 10008
Charles Schwab & Co. Inc. 7.59%
101 Montgomery Street
San Francisco, CA 94104-4122
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<PAGE>
Short-Term Municipal Bond Fund:
- -------------------------------
SEI Trust Company 5.39%
1 Freedom Valley Drive
Oaks, PA 19456
Rocco A. Ortenzio 16.86%
c/o Select Capital Corp
4718 Old Gettysburg Rd.
Mechanicsburg, PA 17055
Robert A. Ortenzio 5.62%
c/o Select Capital Corp
4718 Old Gettysburg Rd.
Mechanicsburg, PA 17055
Robert D. Greene 16.77%
26 Island Road
Stuart, FL 34996
Wilmington Trust Company 6.88%
FBO David Baldt
1100 N. Market Street
Wilmington, DE 19890
Timothy Mather 11.28%
4901 S. Franklin St.
Engleewood, CO 80110
Short-Term Fixed Income Fund:
- -----------------------------
BATRUS & Co. (New York Corporation) 24.68%
c/o Bankers Trust PO Box 9005 Church Street
Station New York, NY 10006
SEI Trust Company 9.01%
1 Freedom Valley Drive
Oaks, PA 19456
Infid & Co. 6.17%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
Harris Trust FBO National Sporting Goods Assn 5.17%
111 W. Monroe Street
Chicago, IL 60603
Harris Trust FBO National Sporting Goods Assn 7.29%
111 W. Monroe Street
Chicago, IL 60603
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<PAGE>
TBON & Co. 10.49%
401 Church St.
PO Box 198986
Nashville TN 37219-8986
Smaller Companies Fund:
- -----------------------
Morgan Grenfell Capital Management, Inc. 65.55%
(Delaware Corporation)
885 Third Avenue Suite 3200
New York, NY 10022
Deutsche Morgan Grenfell 29.70%
CJ Lawrence
1290 Avenue of the Americas
New York, NY 10104
Microcap Fund:
- --------------
Deutsche Morgan Grenfell 62.88%
C.J. Lawrence Inc.
1290 Avenue of the Americas
New York, NY 10104
Morgan Grenfell Capital 18.71%
Management, Inc.
885 Third Ave.
New York, NY 10022
Elizabeth Lugar Schater 13.39%
Charlottesville, VA 22902
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under Delaware law, the
shareholders of a business trust are not generally subject to liability for the
debts or obligations of the trust. Similarly, Delaware law provides that none of
the Funds will be liable for the debts or obligations of any other Fund.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in other states. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of the
courts in such other states, the courts may not apply Delaware law and may
thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Consideration for Purchases of Shares
The Trust generally will not issue shares of the Funds for consideration other
than cash. At the Trust's sole discretion, however, it may issue Fund shares for
consideration other than cash in connection with an acquisition of portfolio
securities (other than municipal debt securities issued by state political
subdivisions or their agencies or instrumentalities) or pursuant to a bona fide
purchase of assets, merger or other reorganization, provided (i) the securities
meet the investment objectives and policies of the Fund; (ii) the securities are
acquired by the Fund for investment and not for resale; (iii) the securities are
not restricted as to transfer either by law or liquidity of market; and (iv) the
securities have a value which is readily ascertainable (and not
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<PAGE>
established only by valuation procedures) as evidenced by a listing on the
American Stock Exchange or the New York Stock Exchange or by quotation on the
NASD Automated Quotation System. An exchange of securities for Fund shares will
generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
Price Waterhouse LLP serves as the Funds' independent accountants, providing
audit services, including review and consultation in connection with various
filings by the Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities of the Funds and certain other series of
the Trust. If further information is desired with respect to the Trust, the
Funds or such other series, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31, 1996
are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of Price Waterhouse LLP, the
Trust's independent accountants, as experts in accounting and auditing.
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<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS
The rating descriptions set forth below are believed to be the most recent
rating descriptions available from Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's), Duff & Phelps, Inc.
("Duff") and Fitch Investors Service ("Fitch") at the date of this Statement of
Additional Information for the securities listed. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time to
time revise such ratings, they undertake no obligation to do so, and the ratings
indicated do not necessilarily represent ratings which will be given to these
securities on the date of a Fund's fiscal year end.
I. Long-Term Debt Ratings
Moody's Investors Service, Inc.
Description of four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1,2 and 3) in each rating category to indicate the
security's ranking within the category):
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to prinicpal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
ie:, they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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<PAGE>
Standard & Poor's Ratings Group (1)
Description of the four highest long-term debt ratings by Standard & Poor's
(Standard & Poor's may apply a plus (+) or minus (-) to a particular rating
classification to show relative standing within the classification):
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
(1) Rates all governmental bodies having $1,000,000 or more of debt outstanding,
unless adequate information is not available.
Duff & Phelps, Inc.
Description of the four highest long-term debt ratings by Duff (Duff may
apply a plus or minus to show relative standing within a rating category):
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Investment grade. Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
Fitch Investores Service
Description of the four highest long-term ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
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<PAGE>
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably forseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of thest issues is generally rated "F-1+".
A: Bonds considered to be investment grade and of high crdit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
II. Short-Term Debt Ratings
Short-term debt ratings may be assigned, for example, to commercial paper,
master demand notes, bank instruments and letters of credit.
Moody's description of its highest short-term debt rating:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- Lending market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternative liquidity.
Standard & Poor's description of its highest short-term debt rating:
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<PAGE>
A-1 This designation indicated that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
III. Short-Term Loan / Municipal Note Ratings
Moody's description of its two highest short-term loan / municipal note ratings:
MIG-1/VMIG-1 This description denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceeding group.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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<PAGE>
The financial statements of the Trust for the periods ended on and prior to
October 31, 1996 are incorporated by reference into the preceding Statement of
Additional Information from the Trust's 1996 Annual Report to Shareholders for
the year ended October 31, 1996 (filed electronically on December 30, 1996; file
no. 812-10080; accession no. 0000935069-96-000172), and will be attached to each
copy of such Statement of Additional Information that is distributed.
<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.
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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.
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<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.
- --------------------------------------------------------------------------------
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 ...................................... 35
Organization and Shares of the Trust .................................... 36
Performance Information ................................................. 38
Appendix A .............................................................. 39
Appendix B .............................................................. 42
- --------------------------------------------------------------------------------
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
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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
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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.
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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 nor more than 5% of its total assets in purchased options other than
protective put options. A Fund's transactions in options, forward currency
contracts, futures contracts and options on futures contracts may be limited by
the requirements for qualification of the Fund as a regulated investment company
for tax purposes. See "Taxes" in the Statement of Additional Information.
FIXED INCOME SECURITIES
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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<PAGE>
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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<PAGE>
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.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund will not invest more than 15%
of its net assets in illiquid securities, which include repurchase agreements
and fixed time deposits maturing in more than seven days and securities that are
not readily marketable. In addition, each Fund will not invest more than 5% of
its net assets in securities that are subject to
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<PAGE>
restrictions on resale because they are not registered in reliance on the
exemption for non-public offerings ("restricted securities") under the
Securities Act of 1933 (the "1933 Act"). However, this restriction does not
apply to restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act or to securities purchased in
accordance with Regulation S under the 1933 Act.
LENDING SECURITIES. For the purpose of realizing income, each Fund may lend
to broker-dealers portfolio securities amounting to not more than 33 1/3% of its
total assets taken at current value. These transactions must be fully
collateralized at all times but involve some credit risk to a Fund if the other
party should default on its obligation and the Fund is delayed in or prevented
from recovering the collateral. Voting rights with respect to a portfolio
security pass to the borrower when the security is loaned by a Fund, but the
Trustees (or the Adviser) are required to call the loan if necessary to vote on
a material event affecting the Fund's investment in the loaned security.
OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of its total
assets, calculated at the time of purchase, in the securities of other
investment companies. A Fund may not invest more than 5% of its total assets in
the securities of any one investment company or acquire more than 3% of the
voting securities of any other investment company. A Fund will indirectly bear
its proportionate share of any management or other fees paid by investment
companies in which it invests, in addition to its own fees.
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which are
described in detail in the Statement of Additional Information. Those investment
restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. Each Fund's
investment objective and all other investment restrictions and policies are
nonfundamental and can be changed by the Board of Trustees of the Trust at any
time without shareholder approval.
Each Fund has fundamental investment restrictions with respect to
borrowing, lending, diversification of investments, senior securities, pledging
of assets, underwriting, real estate investments and commodities. See
"Investment Restrictions" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for making specific decisions to buy and sell
portfolio securities for the Funds. The Adviser is also responsible for
selecting brokers and dealers to effect these transactions and negotiating, if
possible, brokerage commissions and dealers' charges. The Funds generally
purchase and sell foreign securities in foreign countries, since the best
available market for foreign securities is often on foreign markets. In
transactions on foreign markets, brokerage commissions generally are fixed and
are often higher than in the United States where commissions are negotiated. In
the over-the-counter markets, securities generally are traded on a net basis
with the dealers acting as principal for their own accounts without a stated
commission.
The primary consideration in selecting broker-dealers to execute portfolio
security transactions is the execution of such portfolio transactions at the
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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.
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<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.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and yield
for service shares of a Fund, may be quoted in advertisements or in
communications to shareholders. Total return for service shares of a Fund may be
calculated on an annualized and aggregate basis for various periods (which
periods will be stated in the advertisement). Average annual return reflects the
average percentage change per year in value of an investment in service shares
of a Fund. Aggregate total return reflects the total percentage change over the
stated period. In calculating total return, dividends and capital gain
distributions made by the Fund during the period are assumed to be reinvested in
the Fund's service shares. A Fund's yield reflects a Fund's overall rate of
income on portfolio investments as a percentage of the service share price.
Yield is computed by annualizing the result of dividing the net investment
income per service share over a 30-day period by the net asset value per service
share on the last day of that period.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss
performance as reported by various financial publications. The performance of a
Fund may be compared in publications to the performance of various indices and
investments for which reliable performance data is available. In addition, the
performance of a Fund may be compared in publications to averages, performance
rankings or other information prepared by recognized mutual fund statistical
services.
Performance quotations of a Fund represent the Fund's past performance and,
consequently, should not be considered representative of the future performance
of the Fund. The value of service shares, when redeemed, may be more or less
than the original cost. Any fees charged by banks or other institutional
investors directly to their customer accounts in connection with investments in
service shares of a Fund are not at the direction or within the control of the
Funds and will not be included in the Funds' calculations of total return.
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<PAGE>
APPENDIX A
PORTFOLIO MANAGER INFORMATION
Funds Portfolio Managers
- ----- ------------------
Morgan Grenfell International Equity Fund Patrick Disney
Patrick Deane
Morgan Grenfell Global Equity Fund Patrick Disney
Patrick Deane
Morgan Grenfell European Equity Fund Julian Johnston
Jeremy Lodwick
Morgan Grenfell Pacific Basin Equity Fund William Thomas
Graham Bamping
Morgan Grenfell International Small Cap Graham Bamping
Equity Fund Jonathan Wild
Morgan Grenfell Japanese Small Cap James Pulsford
Equity Fund
Morgan Grenfell European Small Cap Julian Johnston
Equity Fund Jonathan Wild
Morgan Grenfell Emerging Markets Richard Lamb
Equity Fund Christopher Getley
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<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 International Equity Fund Manager, MGIS
Markets (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 MGIS (since 1987);
Equity Markets Portfolio Manager,
Brazilian, Mexican and
Argentinian Team (since 1989);
Portfolio Manager, Australian and
Canadian Team (1987-89).
Julian Johnston European Equity Director, MGIS
Markets (since 1988);
Fidelity International
(1984-88); James
Capel & Co. (1979-84).
Richard Lamb Latin American MGIS (since 1993);
Markets Rothschild Asset
Management (The Chile Fund and
Five Arrows Fund) (1988-93);
Portfolio Manager, Berkeley
Govett and Samual Montagu
(1981-88).
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<PAGE>
Portfolio Manager Expertise Professional
- ----------------- --------- ------------
Experience
----------
Jeremy Lodwick European Equity Director, MGIS
Markets (since 1994);
Portfolio Manager,
MGIS (1992-1994);
Vice President, MGCM
(1986-1991); MIM
Britannia Ltd
(1985-1986); Samuel
Montagu & Co.
(1984-1985).
James Pulsford Japanese Markets Portfolio Manager,
Japanese Markets,
MGIS (since 1987);
UK research (since
1984).
William Thomas Japanese Markets Director, MGIS
(since 1988);
Portfolio Manager,
MGIS (technology
investments)
(1984-88); Director,
Extel (UK computing
services company)
(1971-79).
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).
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<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.
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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.
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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<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of seventeen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following eight separate investment portfolios of the Trust (the "Funds"):
Morgan Grenfell International Equity Fund
Morgan Grenfell Global Equity Fund
Morgan Grenfell European Equity Fund
Morgan Grenfell Pacific Basin Equity Fund
Morgan Grenfell International Small Cap Equity Fund
Morgan Grenfell Japanese Small Cap Equity Fund
Morgan Grenfell European Small Cap Equity Fund
Morgan Grenfell Emerging Markets Equity Fund
This Statement of Additional Information is not a prospectus, and should be
read only in conjunction with the Funds' Service Shares Prospectus dated March
7, 1997 (the "Prospectus"). A copy of the Prospectus may be obtained without
charge from SEI Financial Services Company, the Trust's Distributor, by calling
1-800-550-6426 or writing to 1 Freedom Valley Drive, Oaks, Pennsylvania 19456.
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TABLE OF CONTENTS
Page
Introduction................................................... 3
Additional Information on Fund Investments
and Strategies and Related Risks............................... 4
Investment Restrictions........................................ 18
Trustees and Officers.......................................... 22
Investment Advisory and Other Services......................... 24
Service Plan................................................... 29
Portfolio Transactions ........................................ 30
Net Asset Value................................................ 33
Performance Information........................................ 34
Taxes.......................................................... 35
General Information About the Trust............................ 41
Additional Information......................................... 44
Financial Statements........................................... 44
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or its Distributor. The Prospectus does not
constitute an offering by the Trust or by the Distributor in any jurisdiction in
which such offering may not lawfully be made. Shares of the Funds are not
available in certain states. Please call 1-800-550-6426 to determine
availability in your state.
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company currently offering
shares in eighteen separate investment series, including the following eight
series:
Morgan Grenfell International Equity Fund
Morgan Grenfell Global Equity Fund
Morgan Grenfell European Equity Fund
Morgan Grenfell Pacific Basin Equity Fund
Morgan Grenfell International Small Cap Equity Fund
Morgan Grenfell Japanese Small Cap Equity Fund
Morgan Grenfell European Small Cap Equity Fund
Morgan Grenfell Emerging Markets Equity Fund (collectively, the "Funds")
Each of the Funds is classified as "diversified" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act").
Morgan Grenfell Investment Services Limited (the "Adviser" or "MGIS")
serves as investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor.
The information contained in this Statement of Additional Information
generally supplements the information contained in the Prospectus. No investor
should invest in service shares of a Fund without first reading the Prospectus.
Capitalized terms used herein and not otherwise defined have the same meaning
ascribed to them in the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of each Fund.
Foreign Currency Exchange Contracts
Each of the Funds will exchange currencies in the normal course of managing
its investments and may incur costs in doing so because a foreign exchange
dealer will charge a fee for conversion. A Fund may conduct foreign currency
exchange transactions on a "spot" basis (i.e., for prompt delivery and
settlement) at the prevailing spot rate for purchasing or selling currency in
the foreign currency exchange market. A Fund also may enter into forward
currency exchange contracts ("forward currency contracts") or other contracts to
purchase and sell currencies for settlement at a future date. A foreign exchange
dealer, in that situation, will expect to realize a profit based on the
difference between the price at which a foreign currency is sold to the Fund and
the price at which the dealer will cover the purchase in the foreign currency
market. Foreign exchange transactions are entered into at prices quoted by
dealers, which may include a mark-up over the price that the dealer must pay for
the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Funds may enter into forward currency contracts in several
circumstances for both hedging and non-hedging purposes. First, when a Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when a Fund anticipates the receipt in a foreign currency
of dividend or interest payments on such a security which it holds, the Fund may
desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward contract for the purchase or sale, for a fixed amount of dollars,
of the amount of foreign currency involved in the underlying transactions, a
Fund will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when management of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
- --------------------------------------------------------------------------------
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<PAGE>
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward currency
contracts in an attempt to protect the value of a Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which a Fund can achieve at some future point in time. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies or forward contracts entered into for non-hedging
purposes. If the value of the securities placed in the segregated account
declines, additional cash or liquid securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of a Fund's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate these contracts. In such event, the
Funds' ability to utilize forward currency contracts may be restricted.
The Funds generally will not enter into a forward currency contract with a
term of greater than one year.
While the Funds may enter into forward currency contracts in an attempt to
reduce currency exchange rate risks, transactions in currency contracts involve
certain other risks. Thus, while the Funds may benefit from currency
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be an imperfect correlation between a Fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. Such imperfect correlation may cause
a Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Each Fund, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in the required foreign currency.
A Fund could purchase a U.S. dollar-denominated security and at the same
time enter into a forward currency contract to sell U.S. dollars for the
required foreign currency at a future date. By matching the amount of U.S.
dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, a Fund may be able to "lock in" the foreign
currency value of the security and adopt a synthetic investment position whereby
the Fund's overall investment return from the combined position is similar to or
greater than the return from purchasing a foreign currency-denominated
instrument.
A Fund's activities in forward currency exchange contracts, currency
futures contracts and related options and currency options (see below) may be
limited by the requirements of subchapter M of the Internal Revenue Code of
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1986, as amended (the "Code"), for qualification as a regulated investment
company.
Options on Securities, Securities Indices and Foreign Currencies
Each of the Funds may write covered put and call options and purchase put
and call options. Such options may relate to particular U.S. or non-U.S.
securities, to various U.S. or non-U.S. stock indices or to U.S. or non-U.S.
currencies. The Funds may write put and call options which are issued by the
Options Clearing Corporation (the "OCC") or which are traded on U.S. and
non-U.S. exchanges and over-the-counter. See "Description of Securities and
Investment Techniques and Related Risks -- Options" in the Prospectus.
An option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index exceeds (in case of a call option), or is less than (in the
case of a put option), the option's exercise price. The amount of this payment
will be equal to the difference between the closing price of the index at the
time of exercise and the exercise price of the option expressed in U.S. dollars
or a foreign currency, times a specified multiple. A put option on a currency
gives its holder the right to sell an amount (specified in units of the
underlying currency) of the underlying currency at the stated exercise price at
any time prior to the option's expiration. Conversely, a call option on a
currency gives its holder the right to purchase an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration.
The Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the OCC, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options. OTC options will be deemed
illiquid for purposes of a Fund's 15% limitation on investments in illiquid
securities, except that with respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula approved by the staff of the Securities
and Exchange Commission (the "Commission").
A Fund will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if a portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or liquid securities in such amount as are held
in a segregated account by the Fund's custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if the Fund maintains with the Fund's custodian cash or liquid
securities equal to the contract value. A call option on a security or an index
is also covered if the Fund holds a call on the same security or index as the
call written by the Fund where the exercise price of the call held is (i) equal
to or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in cash or liquid securities in a segregated account with the Fund's
custodian. A call option on currency written by a Fund is covered if the Fund
owns an equal amount of the underlying currency.
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When a Fund purchases a put option, the premium paid by it is recorded as
an asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission paid by the Fund) received by the Fund
is included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be marked-to-market on an ongoing basis to reflect the current value of the
option purchased or written. The current value of a traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by the Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received,
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities, securities indices and currencies. For example, there are
significant differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which
the underlying securities and currencies are traded. To the extent that the
options markets close before the markets for the underlying securities and
currencies, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the options markets. The purchase
of options is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio transactions.
The risks described above also apply to options on futures, which are discussed
below.
Futures Contracts and Related Options
To hedge against changes in interest rates or securities prices and for
certain non-hedging purposes, the Funds may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. The Funds may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
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securities), securities indices, currencies and other financial instruments,
currencies and indices. The Funds will engage in futures and related options
transactions only for bona fide hedging or other non-hedging purposes as defined
in regulations promulgated by the CFTC. All futures contracts entered into by
the Funds are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the CFTC or on foreign exchanges approved by the CFTC.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell a particular financial instrument
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Futures contracts obligate the long or short holder to take or make delivery of
a specified quantity of a commodity or financial instrument, such as a security
or the cash value of a securities index, during a specified future period at a
specified price.
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a Fund, through the purchase of futures contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Funds may instead make, or take, delivery of the
underlying securities whenever it appears economically advantageous to do so. A
clearing corporation associated with the exchange on which futures on securities
are traded guarantees that, if still open, the sale or purchase will be
performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that a Fund proposes to acquire. The Funds
may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated rise in interest
rates or a decline in market prices that would adversely affect the value of a
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. If, in the
opinion of the Adviser, there is a sufficient degree of correlation between
price trends for a Fund's portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the Fund may
also enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Adviser will attempt
to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Funds may take a "long" position by purchasing
futures contracts. This would be done, for example, when a Fund anticipates the
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subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give the Funds the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that a Fund intends to purchase. However, a Fund becomes obligated
to purchase a futures contract (if the option is exercised), which may have a
value lower than the exercise price. Thus, the loss incurred by a Fund in
writing options on futures is potentially unlimited and may exceed the amount of
the premium received. The Funds will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
The Funds may use options on futures contracts solely for hedging or other
non-hedging purposes as described below.
Other Considerations. The Funds will engage in futures and related options
transactions only for hedging or non-hedging purposes as permitted by CFTC
regulations which permit principals of an investment company registered under
the 1940 Act to engage in such transactions without registering as commodity
pool operators. A Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities or instruments held by the Fund or
securities or instruments which they expect to purchase. Except as stated below,
the Funds' futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are denominated) that a
Fund owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are
denominated) that a Fund intends to purchase. As evidence of this hedging
intent, each Fund expects that, on 75% or more of the occasions on which it
takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for a Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
As an alternative to compliance with the hedging definition, a CFTC
regulation now permits a Fund to elect to comply with a different test under
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which the aggregate initial margin and premiums required to establish
non-hedging positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase. A Fund
will engage in transactions in futures contracts and related options only to the
extent such transactions are consistent with the requirements of the Code for
maintaining its qualification as a regulated investment company for federal
income tax purposes. See "Taxes."
A Fund will be required, in connection with transactions in futures
contracts and the writing of options on futures contracts, to make margin
deposits, which will be held by the Trust's custodian for the benefit of the
futures commission merchant through whom the Fund engages in such futures
contracts and option transactions. These transactions involve brokerage costs,
require margin deposits and, in the case of futures contracts and options
obligating a Fund to purchase securities, require a Fund to segregate cash or
liquid securities in an account maintained with the Trust's custodian to cover
such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures or option position prior to its maturity or expiration date.
In the event of an imperfect correlation between a futures or options
position and the portfolio position which is intended to be protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
loss. The risk of imperfect correlation may be minimized by investing in
contracts whose price behavior is expected to resemble that of a Fund's
underlying securities. The risk that the Funds will be unable to close out a
futures or related options position will be minimized by entering into such
transactions on a national exchange with an active and liquid secondary market.
Fixed Income Securities
Variable and Floating Rate Instruments. Debt instruments purchased by a
Fund may be structured to have variable or floating interest rates. These
instruments may include variable amount master demand notes that permit the
indebtedness to vary in addition to providing for periodic adjustments in the
interest rates. The Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instrument is subject to a demand feature, will continuously monitor their
financial ability to meet payment on demand. Where necessary to ensure that a
variable or floating rate instrument is equivalent to the quality standards
applicable to a Fund's fixed income investments, the issuer's obligation to pay
the principal of the instrument will be backed by an unconditional bank letter
or line of credit, guarantee or commitment to lend. Any bank providing such a
bank letter, line of credit, guarantee or loan commitment will meet the Fund's
investment quality standards relating to investments in bank obligations. A Fund
will invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. The Adviser will also
continuously monitor the creditworthiness of issuers of such instruments to
determine whether a Fund should continue to hold the investments.
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The absence of an active secondary market for certain variable and floating
rate notes could make it difficult to dispose of the instruments, and a Fund
could suffer a loss if the issuer defaults or during periods in which a Fund is
not entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to
the Fund's 15% limitation on investments in illiquid securities when a reliable
trading market for the instruments does not exist and the Fund may not demand
payment of the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard and Poor's
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
and other nationally and internationally recognized rating organizations
represent their respective opinions as to the quality of the obligations they
undertake to rate. Ratings, however, are general and are not absolute standards
of quality or value. Consequently, obligations with the same rating, maturity
and interest rate may have different market prices.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees or the Adviser, pursuant to
guidelines established by the Board of Trustees, will consider such an event in
determining whether the Fund should continue to hold the security in accordance
with the interests of the Fund and applicable regulations of the Commission.
Inverse Floating Rate Securities. The Funds may invest up to 5% of their
net assets in inverse floating rate securities. The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values.
Zero Coupon and Deferred Interest Bonds. The Funds may invest in zero
coupon bonds and deferred interest bonds. Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. The original discount approximates the total amount of interest the bonds
will accrue and compound over the period until maturity or the first interest
accrual date at a rate of interest reflecting the market rate of the security at
the time of issuance. While zero coupon bonds do not require the periodic
payment of interest, deferred interest bonds generally provide for a period of
delay before the regular payment of interest begins. Although this period of
delay is different for each deferred interest bond, a typical period is
approximately one-third of the bond's term to maturity. Such investments benefit
the issuer by mitigating its initial need for cash to meet debt service, but
some also provide a higher rate of return to attract investors who are willing
to defer receipt of such cash. Zero coupon and deferred interest bonds are more
volatile than instruments that pay interest regularly. The Funds will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is generally
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Funds' distribution obligations. See "Taxes" below.
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Preferred Stock
Each of the Funds, subject to its investment objectives, may purchase
preferred stock. Preferred stocks are equity securities, but possess certain
attributes of debt securities and are generally considered fixed income
securities. Holders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
in such cases all cumulative dividends usually must be paid prior to dividend
payments to common stockholders. Because of this preference, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stocks. However, preferred stocks are equity securities in that they do
not represent a liability of the issuer and therefore do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer. See "Convertible Securities and Preferred Stocks" in the Prospectus
for a description of certain characteristics of convertible preferred stock.
Warrants
As stated in the Prospectus, each of the Funds may purchase warrants, which
are privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves a risk that
a Fund could lose the purchase value of a warrant if the right to subscribe to
additional shares is not exercised prior to the warrant's expiration. Also, the
purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security. A Fund will not invest more
than 5% of its net assets, taken at market value, in warrants, or more than 2%
of its net assets, taken at market value, in warrants not listed on a recognized
securities exchange. Warrants acquired by a Fund in units or attached to other
securities shall not be included in determining compliance with these percentage
limitations. See "Investment Restrictions."
Mortgage-Backed Securities
The Funds may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. Each
mortgage pool underlying mortgage-backed securities will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on owner and
non-owner occupied one-unit to four-unit residential properties, multifamily
residential properties, agricultural properties, commercial properties and mixed
use properties.
Agency Mortgage Securities. The Funds may invest in mortgage backed
securities issued or guaranteed by the U.S. Government, foreign governments or
any of their agencies, instrumentalities or sponsored enterprises. Agencies,
instrumentalities or sponsored enterprises of the U.S. Government include but
are not limited to the Government National Mortgage Association, ("Ginnie Mae"),
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae securities are backed by the
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full faith and credit of the U.S. Government, which means that the U.S.
Government guarantees that the interest and principal will be paid when due.
Fannie Mae securities and Freddie Mac securities are not backed by the full
faith and credit of the U.S. Government; however, these enterprises have the
ability to obtain financing from the U.S. Treasury. There are several types of
agency mortgage securities currently available, including, but not limited to,
guaranteed mortgage pass-through certificates and multiple class securities.
Privately Issued Mortgage-Backed Securities. The Funds may also invest in
mortgage-backed securities issued by trusts or other entities formed or
sponsored by private originators of and institutional investors in mortgage
loans and other foreign or domestic non-governmental entities (or representing
custodial arrangements administered by such institutions). These private
originators and institutions include domestic and foreign savings and loan
associations, mortgage bankers, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. Privately
issued mortgage-backed securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
mortgage-backed securities are not guaranteed by an entity having the credit
standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive a high
quality rating, they normally are structured with one or more types of "credit
enhancement." Such credit enhancements fall generally into two categories; (1)
liquidity protection and (2) protection against losses resulting after default
by a borrower and liquidation of the collateral. Liquidity protection refers to
the providing of cash advances to holders of mortgage-backed securities when a
borrower on an underlying mortgage fails to make its monthly payment on time.
Protection against losses resulting after default and liquidation is designed to
cover losses resulting when, for example, the proceeds of a foreclosure sale are
insufficient to cover the outstanding amount on the mortgage. Such protection
may be provided through guarantees, insurance policies or letters of credit,
through various means of structuring the transaction or through a combination of
such approaches.
Mortgage Pass-Through Securities. The Funds may invest in mortgage
pass-through securities, which are fixed or adjustable rate mortgage-backed
securities that provide for monthly payments that are a "pass-through" of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amounts paid to any guarantor, administrator and/or servicers of the underlying
mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. The Funds may invest in collateralized mortgage obligations
("CMOs"), which are multiple class mortgage-backed securities. CMOs provide an
investor with a specified interest in the cash flow from a pool of underlying
mortgages or of other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or adjustable interest rate and a final
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no principal
payments will be made on a CMO class until all other classes having an earlier
stated maturity date are paid in full. Sometimes, however, CMO classes are
"parallel pay" (i.e., payments of principal are made to two or more classes
concurrently).
Stripped Mortgage-Backed Securities. The Funds may also invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of the interest and principal distributions from a
pool of mortgage loans. If the underlying mortgage loans experience greater than
anticipated prepayments of principal, a Fund may fail to fully
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recoup its initial investment in these securities.
A common type of SMBS will have one class receiving all of the interest
from a pool of mortgage loans ("IOs"), while the other class will receive all of
the principal ("POs"). The market value of POs generally is unusually volatile
in response to changes in interest rates. The yields on IOs are generally higher
than prevailing market yields on other mortgage-backed securities because the
cash flow patterns of IOs are more volatile and there is a greater risk that the
initial investment will not be fully recouped. Because an investment in an IO
consists entirely of a right to an interest income stream and prepayments of
mortgage loan principal amounts can reduce or eliminate such income stream, the
value of IO's can be severely adversely affected by significant prepayments of
underlying mortgage loans. In accordance with a requirement imposed by the staff
of the Commission, the Adviser will consider privately-issued fixed rate IOs and
POs to be illiquid securities for purposes of the Funds' limitation on
investments in illiquid securities. Unless the Adviser, acting pursuant to
guidelines and standards established by the Board of Trustees, determines that a
particular government-issued fixed rate IO or PO is liquid, it will also
consider these IOs and POs to be illiquid.
Asset-Backed Securities
The Funds may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, pools of assets such as
motor vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Such asset pools
are securitized through the use of privately-formed trusts or special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Custodial Receipts
Each of the Funds may acquire U.S. Government Securities and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government Securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are generally held in book-entry form
at a Federal Reserve Bank. Counsel to the underwriters of these certificates or
other evidences of ownership of U.S. Treasury securities have stated that, in
their opinion, purchasers of the stripped securities most likely will be deemed
the beneficial holders of the underlying U.S. government securities for federal
tax and securities purposes. In the case of CATS and TIGRS, the Internal Revenue
Service ("IRS") has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Funds. CATS and TIGRS are not considered U.S. Government securities by
the Staff of the Commission, however. Further, the IRS conclusion is contained
only in a general counsel memorandum, which is an internal document of no
precedential value or binding effect, and a private letter ruling, which also
may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
- --------------------------------------------------------------------------------
Page -14-
<PAGE>
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a
U.S or non-U.S issuer. Each of the Funds may purchase commercial paper for
temporary defensive purposes as described in the Prospectus. A Fund may also
invest in variable rate master demand notes which typically are issued by large
corporate borrowers providing for variable amounts of principal indebtedness and
periodic adjustments in the interest rate according to the terms of the
instrument. Demand notes are direct lending arrangements between a Fund and an
issuer, and are not normally traded in a secondary market. A Fund, however, may
demand payment of principal and accrued interest at any time. In addition, while
demand notes generally are not rated, their issuers must satisfy the same
criteria as those set forth above for issuers of commercial paper. The Adviser
will consider the earning power, cash flow and other liquidity ratios of issuers
of demand notes and continually will monitor their financial ability to meet
payment on demand. See also "Fixed Income Securities--Variable and Floating Rate
Instruments."
Bank Obligations
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates.
Bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). U.S. banks organized under state law are supervised
and examined by state banking authorities but are members of the Federal Reserve
System only if they elect to join. Most state banks are insured by the FDIC
(although such insurance may not be of material benefit to a Fund, depending
upon the principal amount of CDs of each bank held by the Fund) and are subject
to federal examination and to a substantial body of federal law and regulation.
As a result of governmental regulations, U.S. branches of U.S. banks, among
other things, generally are required to maintain specified levels of reserves,
and are subject to other supervision and regulation designed to promote
financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by
the Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Non-U.S. bank obligations include Eurodollar Certificates of Deposit
("ECDs"), which are U.S. dollar-denominated certificates of deposit issued by
offices of non-U.S. and U.S. banks located outside the United States; Eurodollar
Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a non-U.S.
branch of a U.S. bank or a non-U.S. bank; Canadian Time Deposits ("CTDs"), which
are essentially the same as ETDs except they are issued by Canadian offices of
major Canadian banks; Yankee Certificates of Deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
non-U.S. bank and held in the United States; and Yankee Bankers' Acceptances
("Yankee BAs"), which are U.S. dollar-denominated bankers' acceptances issued by
a U.S. branch of a non-U.S. bank and held in the United States.
- --------------------------------------------------------------------------------
Page -15-
<PAGE>
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described in the
Prospectus.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For certain other purposes, it is not clear whether a court would
consider such an obligation as being owned by the Fund or as being collateral
for a loan by the Fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
obligation before its repurchase, under the repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such
delays may result in a loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below the repurchase price (including accrued interest), the seller of the
obligation will be required to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase or
sell particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Fund to lock in a price or
yield on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed appropriate by the Adviser, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a gain or loss.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the separate account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitments. The market value of a
Fund's net assets may fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund's liquidity and ability to manage its portfolio might be affected
when it sets aside cash or portfolio securities to cover such purchase
commitments, each Fund expects that its commitments to purchase when-issued
securities and forward commitments will not exceed 33% of the value of its total
assets absent unusual market conditions. When a Fund engages in "when-issued"
and forward commitment transactions, it relies on the other party to the
transaction to consummate the trade. Failure of such party to do so may result
in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
- --------------------------------------------------------------------------------
Page -16-
<PAGE>
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities.
The Fund does not earn interest or dividends on the securities it has
committed to purchase until the settlement date.
Reverse Repurchase Agreements and Other Borrowings
Each Fund may borrow for temporary or emergency purposes. This borrowing
may be unsecured. Among the forms of borrowing in which each Fund may engage is
entering into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of a portfolio security by the Fund, coupled with its
agreement to repurchase the security at a specified time and price. Each Fund
will maintain a segregated account with the Trust's custodian consisting of cash
or liquid securities equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with banks and domestic broker-dealers.
Reverse repurchase agreements involve the risk that the market value of the
securities subject to the reverse repurchase agreement may decline below the
repurchase price at which the Fund is required to repurchase such securities.
The 1940 Act requires a Fund to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of borrowings)
of 300% of the amount borrowed. If the asset coverage should decline below 300%
as a result of market fluctuations or for other reasons, a Fund is required to
sell some of its portfolio securities within three days to reduce its borrowings
and restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell securities at that time. To avoid the potential
leveraging effects of a Fund's borrowings, investments will not be made while
borrowings (including reverse repurchase agreements and dollar rolls) are in
excess of 5% of a Fund's total assets. Borrowing may exaggerate the effect on
net asset value of any increase or decrease in the market value of the
portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. See "Investment Restrictions."
Lending Portfolio Securities
Each Fund may lend portfolio securities to brokers, dealers and other
financial organizations. These loans, if and when made, may not exceed 33-1/3%
of the value of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, cash equivalents or U.S. Government securities. The cash
or instruments collateralizing the Fund's loans of securities will be maintained
at all times in a segregated account with the Trust's custodian, in an amount at
least equal to the current market value of the loaned securities. From time to
time, a Fund may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and is acting as a "placing broker." No fee
will be paid to affiliated persons of the Fund. The Board of Trustees will make
a determination that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by
continuing to receive amounts equal to the interest or dividends on the loaned
securities as well as by either investing the cash collateral in short-term
instruments or obtaining yield in the form of interest paid by the borrower when
- --------------------------------------------------------------------------------
Page -17-
<PAGE>
U.S. Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as amounts equal to the dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower except
that, if a material event will occur affecting the investment in the loaned
securities, the Fund must terminate the loan in time to vote the securities on
such event.
INVESTMENT RESTRICTIONS
The following investment restrictions may not be changed with respect to
any Fund without the approval of a "majority" (as defined in the 1940 Act) of
the outstanding shares of such Fund. For the purposes of the 1940 Act,
"majority" means the lesser of (a) 67% or more of the shares of the Fund present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the shares of
the Fund. Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund with the exception of borrowings permitted by fundamental investment
restriction (2) listed below.
Accordingly, the Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and
(7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Fund's
investment policy, and the pledge, mortgage or hypothecation of the Fund's
assets within the meaning of paragraph (3) below are not deemed to be senior
securities.
(2) Borrow money (i) except from banks as a temporary measure for
extraordinary emergency purposes and (ii) except that the Fund may enter into
reverse repurchase agreements and dollar rolls with banks, broker-dealers and
other parties; provided that, in each case, the Fund is required to maintain
asset coverage of at least 300% for all borrowings. For the purposes of this
investment restriction, short sales, transactions in currency, forward
contracts, swaps, options, futures contracts and options on futures contracts,
and forward commitment transactions shall not constitute borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options and the purchase of securities or currencies on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to forward contracts, options, futures contracts and
options on futures contracts.
- --------------------------------------------------------------------------------
Page -18-
<PAGE>
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities issued by companies (other than real estate limited partnerships)
that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend portfolio securities in
accordance with the Fund's investment policies and may purchase or invest in
repurchase agreements, bank certificates of deposit, all or a portion of an
issue of bonds, bank loan participation agreements, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon the
original issuance of the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry or group of industries. This restriction does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
In addition, each Fund will adhere to the following fundamental investment
restriction:
With respect to 75% of its total assets, a Fund may not purchase securities
of an issuer (other than the U.S. Government, or any of its agencies or
instrumentalities, or other investment companies), if
(a) such purchase would cause more than 5% of the Fund's total assets taken
at market value to be invested in the securities of such issuer, or
(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following nonfundamental policies that may
be changed or amended by action of the Board of Trustees without shareholder
approval.
Accordingly, the Trust may not, on behalf of a Fund:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Adviser to
save commissions or to average prices among them is not deemed to result in a
securities trading account.
- --------------------------------------------------------------------------------
Page -19-
<PAGE>
(b) Purchase securities on margin or make short sales unless by virtue of
its ownership of other securities, the Fund has the right to obtain, without
payment of additional consideration, securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, except that a Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of securities and in
connection with transactions involving forward foreign currency exchange
transactions, options, futures and options on futures.
(c) Purchase securities of other investment companies, except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase other than the customary broker's commission and as permitted by the
Investment Company Act of 1940 and the rules and regulations thereunder.
(d) Purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operations prior to the
purchase if such purchase would cause investments of the Fund in all such
issuers to exceed 5% of the value of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management of any
company.
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's net assets would be invested in warrants
which are not listed on the New York Stock Exchange or the American Stock
Exchange or more than 5% of the value of the net assets of the Fund would be
invested in warrants generally, whether or not so listed. For these purposes,
warrants are to be valued at the lesser of cost or market, but warrants acquired
by the Fund in units with or attached to debt securities shall be deemed to be
without value.
(g) Knowingly purchase or retain securities of an issuer if one or more of
the Trustees or officers of the Trust or directors or officers of the Adviser or
any investment management subsidiary of the Adviser individually owns
beneficially more than 0.5% and together own beneficially more than 5% of the
securities of such issuer.
(h) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(i) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is illiquid, if more than 15% of the net assets of
the Fund, taken at market value, would be invested in such securities.
(j) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933; provided, however, that no more than 15% of the
Fund's total assets may be invested in restricted securities including
restricted securities eligible for resale under Rule 144A.
(k) Write covered calls or put options with respect to more than 25% of the
value of its total assets or invest more than 5% of its total assets in puts,
calls, spreads, or straddles, other than protective put options.
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include
Page -20-
<PAGE>
such investments in determining compliance with the 15% limitation on
investments in illiquid securities. Restricted securities (including commercial
paper issued pursuant to Section 4(2) of the Securities Act of 1933) which the
Board of Trustees has determined are readily marketable will not be deemed to be
illiquid for purposes of such restriction.
"Value" for the purposes of all investment restrictions shall mean the
market value used in determining each Fund's net asset value.
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<PAGE>
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- ------------------------ ---------- --------------------
<S> <C> <C>
James E. Minnick (1)(3)* President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer, and (since 1990).
New York, NY 10022 Trustee
(age 48)
Patrick W.W. Disney (1)(3)* Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee Services Limited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 40)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 46)
Graham E. Jones (2) Trustee Senior Vice President, BGK Realty Inc.
330 Garfield Street since 1995); Financial Manager, Practice
Santa Fe, NM 87501 Management Systems (medical information
(age 63) services) (1988- 95); Director, 12 closed-
end funds managed by Morgan Stanley
Asset Management; Trustee, 10 open-end
mutual funds managed by Weiss, Peck & Greer.
William N. Searcy (2) Trustee Pension & Savings Trust Officer, Sprint
2330 Shawnee Mission Pkwy Corporation (telecommunications) (since
Westwood, KS 66205 1989).
(age 50)
Hugh G. Lynch Trustee Director, International Investments,
767 Fifth Avenue General Motors Investment Management
New York, NY 10153 Corporation (since September 1990).
(age 59)
Edward T. Tokar* Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc., (advanced technology and manu-
Morristown, NJ 07962 facturer, (since 1985).
(age 49)
</TABLE>
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Page -22-
<PAGE>
<TABLE>
<S> <C> <C>
John G. Alshefski Treasurer, Principal Director of Fund Operations, SEI/ Fund
530 East Swedesford Road Accounting Officer, Resources (since January 1994);
Manager Wayne, PA 19087-1658 Chief Financial Officer International Fund Operations (1992-1994);
(age 30) Senior Associate, Price Waterhouse (1988-
1991).
Neil P. Jenkins (3) Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 36) (since 1985).
David W. Baldt Vice President Executive Vice President and Director of
1435 Walnut Street Fixed Income Investments, MGCM (since
Philadelphia, PA 19102 1989).
(age 47)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income, since
London EC2M 1NB 1989).
England
(age 40)
James Grifo Vice President Executive Vice President and Director
1435 Walnut Street MGCM (since 1996); Senior Vice
Philadelphia, PA 19102 President, GT Global Financial (since
(age 45) 1990).
Martin Hall Vice President Portfolio Manager, Fixed Income Team
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 38)
Mark G. Arthus Secretary and Director, Compliance and Financial Control,
885 Third Avenue Compliance Officer MGCM (since 1992); Vice President, Senior
New York, NY 10022 Compliance Officer and other positions,
(age 40) Citibank, N.A. (to 1992)
</TABLE>
- -----------------
1 Member of the Trust's Valuation and Dividend Committees.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee
4 Member of the Trust's Valuation Committee
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions
Page -23-
<PAGE>
of the federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
Messrs. Jones, Freeman, and Searcy are members of the Audit Committee of
the Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the Trust
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent.
As of January 24, 1997, the Trustees and officers of the Trust owned, as a
group, less than one percent of the outstanding shares of each Fund.
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an
annual fee of $15,000 provided that they attend each regular Board meeting
during the year. Members of the Audit Committee also receive $1,000 for each
Audit Committee meeting attended. The Chairman of the Audit Committee receives
an additional $1,000 per Audit Committee meeting attended. The Trustees are also
reimbursed for out-of-pocket expenses incurred by them in connection with their
duties as Trustees.
The following table sets forth the compensation paid by the Trust to the
Trustees for the fiscal year of the Trust ended October 31, 1996:
Pension or
Retirement Benefits Aggregate
Accrued as Part of Compensation from
Name of Trustee Fund Expenses the Trust/Complex *
James E. Minnick $0 $ 0
Patrick W. Disney $0 $ 0
Paul K. Freeman $0 $ 18,000
Graham E. Jones $0 $ 18,000
William N. Searcy $0 $ 21,000
Hugh G. Lynch $0 $ 15,000
Edward T. Tokar $0 $ 7,500
* The Trustees listed above do not serve on the Board of any other
investment company that may be considered to belong to the same complex as the
Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGIS of London, England acts as investment adviser to each Fund pursuant to
the terms of a Management Contract, dated January 3, 1993, between the Trust, on
behalf of each Fund, and MGIS (the "Management Contract"). Pursuant to the
Management Contract, the Adviser supervises and assists in the management of the
assets of each Fund and furnishes each Fund with research, statistical, advisory
and managerial services. The Adviser determines on a continuous basis, the
allocation of each Fund's investments among countries. The
- --------------------------------------------------------------------------------
Page -24-
<PAGE>
Adviser is responsible for the ordinary expenses of offices, if any, for the
Trust and the compensation, if any, of all officers and employees of the Trust
and all Trustees who are "interested persons" (as defined in the 1940 Act) of
the Adviser.
Under the Management Contract, the Trust, on behalf of each Fund is
obligated to pay the Adviser a monthly fee at an annual rate of each Fund's
average daily net assets as follows:
Annual Rate
Morgan Grenfell 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%
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%
The advisory fees are paid monthly and will be prorated if the Adviser
shall not have acted as a Fund's investment adviser during the entire monthly
period. The Adviser has temporarily agreed, under certain circumstances, to
reduce or not impose its management fee and to make arrangements to limit
certain other expenses as described in the Prospectus under "Expense
Information."
For the fiscal period ended October 31, 1994, Morgan Grenfell International
Small Cap Equity Fund and Morgan Grenfell Emerging Markets Equity Fund paid net
advisory fees of approximately $264,667 and $224,489, respectively. For the
fiscal period ended October 31, 1995, Morgan Grenfell International Equity Fund,
Morgan Grenfell International Small Cap Equity Fund, Morgan Grenfell European
Small Cap Equity Fund and Morgan Grenfell Emerging Markets Equity Fund paid net
advisory fees of approximately $0, $506,065, $677 and $457,521, respectively.
For the fiscal period ended October 31, 1996, Morgan Grenfell International
Equity Fund, Morgan Grenfell International Small Cap Equity Fund, Morgan
Grenfell European Equity Fund, Morgan Grenfell European Small Cap Equity Fund
and Morgan Grenfell Emerging Markets Equity Fund paid net advisory fees of $0,
$987,205, $5,508, $0 and $726,299, respectively. The foregoing advisory fee
payments and non-payments reflect expense limitations that were in effect during
the indicated periods. The Funds not listed in this paragraph were not in
operation during the relevant periods and, accordingly, paid no advisory fees
for such periods.
The Management Contract was last approved on November 21, 1996 by a vote of
the Trust's Board of Trustees, including a majority of those Trustees who were
not parties to the Management Contract or "interested persons" of such parties.
The Management Contract was approved by the Trust's initial shareholder, SEI
Financial Management, on January 3, 1994. The Management Contract will continue
in effect with respect to each Fund only if such continuance is specifically
approved annually by the Trustees, including a majority of the Trustees who are
not parties to the Management Contract or "interested persons" (as such term is
defined in the 1940 Act) of such parties, or by a vote of a majority of the
outstanding shares of each Fund. The Management Contract is terminable by vote
of the Board of Trustees, or, with respect to a Fund, by the holders of a
majority of the outstanding shares of the affected Fund, at any time without
penalty on 60 days' written notice to the Adviser. Termination of the Management
Contract with respect to a Fund will not terminate or otherwise invalidate any
provision of the Management Contract between the Adviser and any other Fund. The
Adviser may terminate the Management Contract at any time without penalty on 60
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days' written notice to the Trust. The Management Contract terminates
automatically in the event of its assignment (as such term is defined in the
1940 Act).
The Management Contract provides that the Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Adviser's obligations under
the Management Contract with the Trust, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
In the management of the Funds and its other accounts, the Adviser and its
subsidiaries allocate investment opportunities to all accounts for which they
are appropriate subject to the availability of cash in any particular account
and the final decision of the individual or individuals in charge of such
accounts. Where market supply is inadequate for a distribution to all such
accounts, securities are allocated based on a Fund's pro rata portion of the
amount ordered. In some cases their procedure may have an adverse effect on the
price or volume of the security as far as a Fund is concerned. However, it is
the judgment of the Board that the desirability of continuing the Trust's
advisory arrangement with the Adviser outweighs any disadvantages that may
result from contemporaneous transactions. See "Portfolio Brokerage."
MGIS is registered with the Commission as an investment adviser and
provides a full range of international investment advisory services to
individual and institutional clients. MGIS is a direct wholly-owned subsidiary
of Morgan Grenfell Asset Management, Ltd., which is an indirect wholly-owned
subsidiary of Deutsche Bank AG, an international commercial and investment
banking group. As of September 30, 1996, MGIS managed approximately $14.7
billion in assets for various individual and institutional accounts, including
the following registered investment companies to which it acts as a subadviser:
Dean Witter Worldwide Investment Trust, Compass International Fixed Income Fund,
RSI International Equity Fund, SEI European Equity Fund, Dean Witter Pacific
Growth Fund, Dean Witter European Growth Fund, Dean Witter International Small
Cap Fund, Dean Witter Japan Fund and Dean Witter Global Asset Allocation Fund,
and Pacific Growth Portfolio and European Growth Portfolio (each a series of
Dean Witter Variable Investment Series).
Portfolio Turnover
The Funds do not expect to trade in securities for short-term gain. Each
Fund's portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal period
ended October 31, 1995, the portfolio turnover rates for Morgan Grenfell
International Equity Fund, Morgan Grenfell International Small Cap Equity Fund,
Morgan Grenfell European Small Cap Equity Fund and Morgan Grenfell Emerging
Markets Equity Fund were 19%, 62%, 34% and 49%, respectively. For the fiscal
period ended October 31, 1996, the portfolio turnover rates for Morgan Grenfell
International Equity Fund, Morgan Grenfell International Small Cap Equity Fund,
Morgan Grenfell European Equity Fund, Morgan Grenfell European Small Cap Equity
Fund and Morgan Grenfell Emerging Markets Equity Fund were 39%, 47%, 5%, 49% and
69%, respectively.
The Administrator
As described in the Prospectus, SEI Financial Management Corporation (the
"Administrator") serves as the Trust's administrator pursuant to an
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<PAGE>
administration agreement (the "Administration Agreement") dated January 3, 1994.
Pursuant to the Administration Agreement, the Administrator has agreed to
furnish statistical and research data, clerical services, and stationery and
office supplies; prepare and file various reports with the appropriate
regulatory agencies including the Commission and state securities commissions;
and provide accounting and bookkeeping services for the Funds, including the
computation of each Fund's net asset value, net investment income and realized
capital gains, if any.
For its services under the Administration Agreement, the Administrator
receives from all series of the Trust an aggregate monthly fee at the following
annual rates of the aggregate average daily net assets ("aggregate assets") of
such series:
0.12% of the aggregate assets under $1 billion
0.08% of the next $500 million of aggregate assets
0.06% of the next $1 billion of aggregate assets
0.04% of the aggregate assets exceeding $2.5 billion
Each Fund that offers its shares pays the Administrator a minimum annual
fee that equals $60,000.
For the fiscal period ended October 31, 1994, Morgan Grenfell International
Small Cap Equity Fund and Morgan Grenfell Emerging Markets Equity Fund paid the
Administrator administration fees of $64,343 and $45,220, respectively. For the
fiscal period ended October 31, 1995, Morgan Grenfell International Equity Fund,
Morgan Grenfell International Small Cap Equity Fund, Morgan Grenfell European
Small Cap Equity Fund and Morgan Grenfell Emerging Markets Equity Fund paid the
Administrator administration fees of $11,694, $97,518, $50,000 and $93,750,
respectively. For the fiscal period ended October 31, 1996, Morgan Grenfell
International Equity Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell
European Small Cap Equity Fund, Morgan Grenfell International Small Cap Equity
Fund and Morgan Grenfell Emerging Markets Equity Fund paid the Administrator
administration fees of $62,500, $3,159, $100,000, $124,286 and $109,687,
respectively. The administration fees shown in this paragraph were paid pursuant
to a fee schedule that provided for higher fees than does the fee schedule that
is in effect for the current fiscal year ending October 31, 1997. The Funds not
listed in this paragraph were not in operation during the relevant periods and,
accordingly, paid no administration fees for such periods.
The Administration Agreement provides that the Administrator shall not be
liable under the Administration Agreement except for bad faith or gross
negligence in the performance of its duties or from the reckless disregard by it
of its duties and obligations thereunder.
Expenses of the Trust
The expenses borne by service shares of the Funds include service fees and
the service shares' allocable share of: (i) fees and expenses of any investment
adviser and any administrator of the Funds; (ii) fees and expenses incurred by
the Funds in connection with membership in investment company organizations;
(iii) brokers' commissions; (iv) payment for portfolio pricing services to a
pricing agent, if any; (v) legal expenses (including an allocable portion of the
cost of the Trust's employees rendering legal services to the Funds); (vi)
interest, insurance premiums, taxes or governmental fees; (vii) the fees and
expenses of the transfer agent of the Funds; (viii) clerical expenses of issue,
redemption or repurchase of shares of the Funds; (ix) the expenses of and fees
for registering or qualifying shares of the Funds for sale and of maintaining
the registration of the Funds and registering the Funds as a broker or a dealer;
(x) the fees and expenses of Trustees who are not affiliated with the Adviser;
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<PAGE>
(xi) the cost of preparing and distributing reports and notices to shareholders,
the Commission and other regulatory authorities; (xii) the fees or disbursements
of custodians of the Funds' assets, including expenses incurred in the
performance of any obligations enumerated by the Declaration of Trust or By-Laws
of the Trust insofar as they govern agreements with any such custodian; (xiii)
costs in connection with annual or special meetings of shareholders, including
proxy material preparation printing and mailing; (xiv) charges and expenses of
the Trusts' auditor; (xv) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Funds'
business; and (xvi) expenses of an extraordinary and nonrecurring nature.
Transfer Agent
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer and dividend disbursing agent for the
Funds pursuant to a transfer agency agreement (the "Transfer Agency Agreement"),
under which the Transfer Agent (i) maintains record shareholder accounts, and
(ii) makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
The Distributor
The Trust has entered into a distribution agreement (the "Distribution
Agreement") pursuant to which SEI Financial Services Company (the
"Distributor"), as agent, serves as principal underwriter for the continuous
offering of shares of each Fund. The Distributor has agreed to use best efforts
to solicit orders for the purchase of shares (including service shares) of each
Fund, although it is not obligated to sell any particular amount of shares.
Shares of the Trust are not subject to sales loads or distribution fees. The
Adviser, and not the Trust, is responsible for payment of any expenses or fees
incurred in the marketing and distribution of shares of the Trust.
The Distribution Agreement will remain in effect for one year from its
effective date and will continue in effect thereafter only if such continuance
is specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" (as such term is defined in the 1940 Act) of such parties. The
Distribution Agreement was most recently approved on November 21, 1996 by a vote
of the Trust's Board of Trustees, including a majority of those Trustees who
were not parties to the Distribution Agreement or "interested persons" of such
parties. The Distribution Agreement is terminable, as to a Fund, by vote of the
Board of Trustees, or by the holders of a majority of the outstanding shares of
the Fund, at any time without penalty on 60 days' written notice to the Trust
and Adviser. The Distributor may terminate the Distribution Agreement at any
time without penalty on 90 days' written notice to the Trust.
Custodian
As described in the Prospectus, The Northern Trust Company (the
"Custodian"), whose principal business address is Fifty South LaSalle Street,
Chicago, Illinois 60675, maintains custody of each Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement"). Under the Custodian Agreement,
the Custodian (i) maintains separate account in the name of each Fund, (ii)
holds and transfers portfolio securities on account of each Fund, (iii) accepts
receipts and makes disbursements of money on behalf of each Fund, (iv) collects
and receives all income and other payments and distributions on account of each
Fund's portfolio securities and (v) makes periodic reports to the Trust's Board
of Trustees concerning each Fund's operations. The Custodian is authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Trust.
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<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
service shares which authorizes it to compensate Service Organizations whose
customers invest in service shares of the Funds for providing certain personal,
account administration and/or shareholder liaison services. Pursuant to the
Plans, the Funds may enter into agreements with Service Organizations ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
Organizations may perform some or all of the following services: (i) acting as
record holder and nominee of all service shares beneficially owned by their
customers; (ii) establishing and maintaining individual accounts and records
with respect to the service shares owned by each customer; (iii) providing
facilities to answer inquiries and respond to correspondence from customers
about the status of their accounts or about other aspects of the Trust or the
applicable Fund; (iv) processing and issuing confirmations concerning customer
orders to purchase, redeem and exchange service shares; and (v) receiving and
transmitting funds representing the purchase price or redemption proceeds of
such service shares.
As compensation for such services, each Fund will pay each Service
Organization with which it has a Service Agreement a service fee in an amount up
to .25% (on an annualized basis) of the average daily net assets of the Fund's
service shares attributable to customers of such Service Organization. Service
Organizations may from time to time be required to meet certain other criteria
in order to receive service fees. As of October 31, 1996, the Trust's fiscal
year end, service shares of the Funds had not been offered.
In accordance with the terms of the Service Plans, the officers of the
Trust provide to the Trust's Board of Trustees for their review a quarterly
written report of the amounts expended under the Service Plans and the purpose
for which such expenditures were made. In the Trustees' quarterly review of such
reports, they will consider the continued appropriateness and the level of
compensation that the Service Plans provide.
Pursuant to the Plans, service shares of a Fund that are beneficially owned
by customers of a Service Organization will convert automatically to
institutional shares of the same Fund in the event that such Service
Organization's Service Agreement expires or is terminated. 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.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974 ("ERISA")) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in service shares of the Fund. Service Organizations that are subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions are urged to consult their own legal advisers before investing
fiduciary assets in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under a Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standard set forth in part 4 of Title I of ERISA. These
standards are designed to help ensure that the fiduciary's decisions are made in
the best interests of the plan and are not colored by self-interest.
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<PAGE>
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a) sets forth a similar requirement on how a
plan fiduciary must discharge his or her duties with respect to the plan, and
provides further that such fiduciary must act prudently and solely in the
interest of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes within the definition of "party in interest" with respect to a plan any
fiduciary with respect to the plan. Thus, Section 406(a)(1)(D) would not only
prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it also would
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which the plan is otherwise responsible for paying). Thus,
the fiduciary duty issues involved in a plan fiduciary's receipt of the service
fee must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
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<PAGE>
Pursuant to the Advisory Agreement, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consideration may also be given to the broker-dealer's
sale of shares of the Funds. In addition, the Advisory Agreement authorizes the
Adviser, subject to the periodic review of the Trust's Board of Trustees, to
cause a Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser to the Fund. Such brokerage and research
services may consist of pricing information, reports and statistics on specific
companies or industries, general summaries of groups of bonds and their
comparative earnings and yields, or broad overviews of the securities markets
and the economy.
Supplemental research information utilized by the Adviser is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable to the Adviser. The Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplemental research or other services received will primarily benefit one
or more other investment companies or other accounts of the Adviser for which
investment discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. During the
fiscal period ended October 31, 1996, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts
managed by the Adviser are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to a Fund. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the
general policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may
place securities transactions with brokers with whom it is affiliated.
(Affiliated Brokers"). These brokers may include but are not limited to Morgan
Grenfell Asia and Morgan Grenfell Debt Arbitrage Trading.
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
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<PAGE>
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time"
A transaction would not be placed with Affiliated Brokers if a Fund would
have to pay a commission rate less favorable than their contemporaneous charges
for comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two or
more funds or customers on the same day, each fund or customer pays the average
price and commissions paid are allocated in direct proportion to the number of
shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement
setting forth the total amount of all compensation retained by them or any
associated person of them in connection with effecting transactions for the
account of the Funds, and the Board reviews and approves all the Funds'
portfolio transactions on a quarterly basis and the compensation received by
Affiliated Brokers in connection therewith. During the fiscal periods ended
October 31, 1995 and October 31, 1996 no Fund paid any brokerage commissions to
any Affiliated Broker.
Affiliated Brokers do not knowingly participate in commissions paid by the
Funds to other brokers or dealers and do not seek or knowingly receive any
reciprocal business as the result of the payment of such commissions. In the
event that an Affiliated Broker learns at any time that it has knowingly
received reciprocal business, it will so inform the Board.
For the fiscal period ended October 31, 1995, Morgan Grenfell International
Equity Fund, Morgan Grenfell International Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund and Morgan Grenfell Emerging Markets
Equity Fund paid aggregate brokerage commissions of $7,389, $363,181, $31,827
and $572,550, respectively. For the fiscal period ended October 31, 1996, Morgan
Grenfell International Equity Fund, Morgan Grenfell European Equity Fund, Morgan
Grenfell International Small Cap Equity Fund, Morgan Grenfell European Small Cap
Equity Fund and Morgan Grenfell Emerging Markets Equity Fund paid aggregate
brokerage commissions of $6,948, $3,645, $382,726, $17,303 and $623,975,
respectively.
As of October 31, 1996, Morgan Grenfell European Equity Fund held
securities of HSBC Holdings, one of its regular broker-dealers during the year
then ended. The value of such securities on this date was $121,837. As of
October 31, 1996, Morgan Grenfell International Equity Fund held securities of
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Nomura and NatWest, two of its regular broker-dealers during the year then
ended. The values of such securities on this date were $66,116 and $91,386,
respectively.
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its shares at the close of
such regular trading, which is normally 4:00 p.m. Eastern time, on each day on
which the New York Stock Exchange ("NYSE") is open (a "Business Day"). The NYSE
is closed on Saturdays and Sundays as well as the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For purposes of calculating net asset value, equity securities traded on a
recognized U.S. or foreign securities exchange or the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") are valued at their
last sale price on the principal exchange on which they are traded or NASDAQ (if
NASDAQ is the principal market for such securities) prior to the time of
valuation on the valuation day or, if no sale occurs, at the bid price. Unlisted
equity securities for which market quotations are readily available are valued
at the most recent bid price prior to the time of valuation.
Debt securities and other fixed income investments of the Funds are valued at
prices supplied by independent pricing agents, which prices reflect
broker-dealer supplied valuations and electronic data processing techniques.
Short-term obligations maturing in sixty days or less may be valued at amortized
cost, which method does not take into account unrealized gains or losses on such
portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets for which market quotations are not readily available
are valued at fair value using methods determined in good faith by the Board of
Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the 4:00 P.M.
(Eastern Time) close of business on each Business Day. In addition, European or
Far Eastern securities trading generally or in a particular country or countries
may not take place on all Business Days. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Business Days in New York and on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
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affect net asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
Total Return
Each Fund that advertises "average annual total return" for a class of its
shares computes such return by determining the average annual compounded rate of
return during specified periods that equates the initial amount invested to the
ending redeemable value of such investment according to the following formula:
ERV
T = [(-----) 1/n - 1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the applicable period
(or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises "aggregate total return" for a class of its
shares computes such returns by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The above calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
For the fiscal period ended October 31, 1996, the average annual total
returns of institutional shares of Morgan Grenfell International Equity Fund,
Morgan Grenfell International Small Cap Equity Fund, Morgan Grenfell European
Small Cap Equity Fund and Morgan Grenfell Emerging Markets Equity Fund were
12.70%, 6.43%, 10.06% and 10.02%, respectively. For their respective periods
from commencement of operations to October 31, 1996, the average annual total
returns of institutional shares of Morgan Grenfell International Equity Fund,
Morgan Grenfell European Equity Fund, Morgan Grenfell International Small Cap
Equity Fund, Morgan Grenfell European Small Cap Equity Fund and Morgan Grenfell
Emerging Markets Equity Fund were 15.46%, 6.00%, 0.99%, 12.85% and (1.62)%
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respectively. If the expense limitations described in the Prospectus for the
above Funds had not been in effect during the indicated periods, the total
returns for institutional shares of these Funds for such periods would have been
lower than the total return figures shown in this paragraph.
The Funds may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to,
Barron's, The Wall Street Journal, Weisenberger Investment Companies Service,
Business Week, Changing Times, Financial World, Forbes, Fortune and Money. In
addition, a Fund may from time to time advertise its performance relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which measure total return and average current yield for
the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry); (c)
the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Shearson Lehman Brothers Aggregate Bond Index or its component indices (the
Aggregate Bond Index measures the performance of Treasury, U.S. Government
agency, corporate, mortgage and Yankee bonds); (f) the Standard & Poor's Bond
Indices (which measure yield and price of corporate, municipal and U.S.
Government bonds); and (g) historical investment data supplied by the research
departments of Goldman Sachs, Shearson Lehman Hutton, First Boston Corporation,
Morgan Stanley, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette
or other providers of such data. The composition of the investments in such
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of any Fund's portfolio.
These indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by a Fund to calculate its performance figures.
TAXES
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Prospective
shareholders are urged to consult their own tax advisers with respect to the
specific federal, state, local and foreign tax consequences of investing in the
Funds. The summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
General
Each Fund is a separate taxable entity and has elected or intends to elect
to be treated, and to qualify for each taxable year, as a regulated investment
company under Subchapter M of the Code.
Qualification of a Fund as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with
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respect to its business of investing in such stock, securities or currencies
(the "90% gross income test"); (b) the Fund derive less than 30% of its gross
income for its taxable year from the sale or other disposition of any of the
following which was held for less than three months: (i) stock or securities;
(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies); and (iii) foreign currencies and
foreign currency options, futures and forward contracts or derivatives that are
not directly related to the Fund's principal business of investing in stock or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) the Fund diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market value
of its total (gross) assets is comprised of cash, cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the value of the Fund's total assets and to not more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. Gains from the
sale or other disposition of foreign currencies (or options, futures or forward
contracts on foreign currencies) that are not directly related to a Fund's
principal business of investing in stock or securities or options and futures
with respect to stock or securities will be treated as gains from the sale of
investments held for less than three months under the short-short test (even
though characterized as ordinary income for some purposes) if such currencies or
instruments were held for less than three months. In addition, future Treasury
regulations could provide that qualifying income under the 90% gross income test
will not include gains from foreign currency transactions or derivatives that
are not directly related to a Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities. Using
foreign currency positions or entering into foreign currency options, futures or
forward contracts for purposes other than hedging currency risk with respect to
securities in a Fund's portfolio or anticipated to be acquired may not qualify
as "directly-related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
the Fund distributes at least 90% of its "investment company taxable income"
(which includes dividends, interest, accrued original issue discount and
recognized market discount income, income from securities lending, any net
short-term capital gain in excess of net long-term capital loss and certain net
realized foreign exchange gains and is reduced by deductible expenses), the Fund
(but not its shareholders) will be relieved of federal income tax on any income
of the Fund, including long-term capital gains, distributed to shareholders.
However, if a Fund retains any investment company taxable income or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), it will be subject to federal income tax at regular corporate rates on
the amount retained. If a Fund retains any net capital gain, the Fund may
designate the retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of a
Fund will be increased by an amount equal under current law to 65% of the amount
of undistributed net capital gains included in the shareholder's gross income.
Each Fund intends to distribute at least annually to its shareholders all or
substantially all of its investment company taxable income and net capital gain.
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<PAGE>
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors such as the Funds and may therefore make it more
difficult for the Funds to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, the Funds generally expect to be able to obtain sufficient cash to
satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Fund does not qualify as a regulated
investment company, it will be taxed on all of its investment company taxable
income and net capital gain at corporate rates, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its current
and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed in such year and on which no federal income tax was
paid by the Fund. For federal income tax purposes, dividends declared by a Fund
in October, November or December to shareholders of record on a specified date
in such a month and paid during January of the following year are treated as
distributed by the Fund and are taxable to such shareholders as if received on
December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain futures contracts,
forward contracts and options held by the Funds will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Funds' taxable year.
As a result, a Fund may be required to recognize income or gain without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options (not including
certain foreign currency options, forward contracts, and futures contracts) will
be treated as 60% long-term capital gain or loss and 40% short-short capital
gain or loss. As a result of certain hedging transactions entered into by the
Funds, the Funds may be required to defer the recognition of losses on futures
or forward contracts and options or underlying securities or foreign currencies
to the extent of any unrecognized gains on related positions and the
characterization of gains or losses as long-term or short-term may be changed.
The tax provisions described above applicable to options, futures and forward
contracts may affect the amount, timing and character of a Fund's distributions
to shareholders. The short-short test described above may limit a Fund's ability
to use options, futures and forward transactions as well as its ability to
engage in short sales. Certain tax elections may be available to the Funds to
mitigate some of the unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by the Funds. Under these
rules, foreign exchange gain or loss realized with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary
loss under Section 988 of the Code were to exceed a Fund's investment
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<PAGE>
company taxable income (computed without regard to such loss) for a taxable
year, the resulting loss would not be deductible by the Fund or its shareholders
in future years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result that either no dividends are paid or a
portion of the Fund's dividends is treated as a return of capital, which is
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally gives rise to capital gains.
Each Fund's investments in zero coupon securities, deferred interest
securities, increasing-rate securities, pay-in-kind securities or other
securities bearing original issue discount or, if the Fund elects to include
market discount in income currently, market discount will generally cause it to
realize income prior to the receipt of cash payments with respect to these
securities. Options, futures or forward contracts subject to the mark to market
rules described above may have the same result if recognized mark to market
gains exceed recognized mark to market losses. In order to obtain cash to
distribute this income or gain, maintain its qualification as a regulated
investment company, and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The Funds anticipate that they will be subject to foreign taxes on certain
income they derive from foreign securities, possibly including, in some cases,
capital gains from the sale of such securities. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. If more
than 50% of a Fund's total assets at the close of any taxable year consists of
stock or securities of foreign corporations, a Fund may file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions they actually receive) their pro rata shares of
qualified foreign taxes paid by the Fund even though not actually received, and
(ii) treat such respective pro rata portions as foreign taxes paid by them. If a
Fund makes this election, shareholders may then deduct such pro rata portions of
qualified foreign taxes in computing their taxable incomes, or, alternatively,
use them as foreign tax credits, subject to applicable limitations, against
their U.S. federal income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct their pro rata
portion of qualified foreign taxes paid by a Fund, although such shareholders
will be required to include their shares of such taxes in gross income if the
Fund makes the election referred to above. If a shareholder chooses to take a
credit for the foreign taxes deemed paid by such shareholder as a result of any
such election by a Fund, the amount of the credit that may be claimed in any
year may not exceed the same proportion of the U.S. tax against which such
credit is taken which the shareholder's taxable income from foreign sources (but
not in excess of the shareholder's entire taxable income) bears to his entire
taxable income. For this purpose, distributions from long-term and short-term
capital gains or foreign currency gains by a Fund will generally not be treated
as income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of a Fund that makes the election described above may not be able
to claim a credit for the full amount of their proportionate shares of the
foreign taxes paid by the Fund. Tax-exempt shareholders will ordinarily not
benefit from this election. Each year that a Fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the Fund and (ii) the portion
of Fund dividends which represents income
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<PAGE>
from each foreign country. If a Fund does not make this election, it may deduct
such taxes in computing its investment company taxable income.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rents, royalties or capital gain) or hold
at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), the Fund could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain without the concurrent receipt of
cash. Each Fund may limit and/or manage its holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
The federal income tax rules applicable to currency and interest rate
swaps, mortgage dollar rolls, and interest rate floors and caps are unclear in
certain respects, and the Funds may be required to account for those instruments
under tax rules in a manner that may affect the amount, timing and character of
income, gain or loss from such instruments and that may, under certain
circumstances, limit their transactions in these instruments.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders. At October 31, 1996, International Small Cap Equity
Fund had capital loss carryforwards of approximately $859,000 expiring (if not
previously used) in the fiscal year ended October 31, 2003.
U.S. Shareholders -- Distributions
For U.S. federal income tax purposes, distributions by the Funds, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received. Distributions from investment company taxable income for the
year will be taxable as ordinary income. Distributions to corporate shareholders
designated as derived from a Fund's dividend income, if any, that would be
eligible for the dividends received deduction if the Fund were not a regulated
investment company will be eligible, subject to certain holding period
requirements and debt-financing restrictions, for the 70% dividends received
deduction for corporations. Because eligible dividends are limited to those
received by a Fund from U.S. domestic corporations, it is unlikely that any
significant portion of any Fund's distributions will qualify for the dividends
received deduction. The entire dividend, including the deducted amount, is
considered in determining the excess, if any, of a corporate shareholder's
adjusted current earnings over its alternative minimum taxable income, which may
increase its liability for the federal alternative minimum tax, and the dividend
may, if it is treated as an "extraordinary dividend" under the Code, reduce such
shareholder's tax basis in its shares of a Fund. Capital gain dividends (i.e.,
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<PAGE>
dividends from net capital gain), if designated as such in a written notice to
shareholders mailed not later than 60 days after a Fund's taxable year closes,
will be taxed to shareholders as long-term capital gain regardless of how long
shares have been held by shareholders, but are not eligible for the dividends
received deduction for corporations.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
U.S. Shareholders -- Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has held the shares for more than one year, otherwise short-term. If, however, a
shareholder receives a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time they are
sold, redeemed or otherwise disposed of, then any loss the shareholder realizes
on the disposition will be treated as a long-term capital loss to the extent of
such capital gain dividend. Additionally, any loss realized on a sale,
redemption or other disposition of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced with shares
of the same Fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to a dividend
reinvestment in shares of the Fund. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
The Funds may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including distributions from a
Fund's net long-term capital gains) and share redemption and exchange proceeds
to individuals and other non-exempt shareholders who fail to furnish the Funds
with a correct taxpayer identification number ("TIN") certified under penalties
of perjury, or if the Internal Revenue Service or a broker notifies the Funds
that the payee has failed to properly report interest or dividend income to the
Internal Revenue Service or that the TIN furnished by the payee to the Funds is
incorrect, or if (when required to do so) the payee fails to certify under
penalties of perjury that it is not subject to backup withholding. Any amounts
withheld may be credited against a shareholder's U.S. federal income tax
liability.
Non-U.S. Shareholders
Shareholders who, as to the United States, are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors generally will be subject to U.S. withholding tax at
the rate of 30% on distributions treated as ordinary income unless the tax is
reduced or eliminated pursuant to a tax treaty or the dividends are effectively
connected with a U.S. trade or business of the shareholder. In the latter case
the dividends will be subject to tax on a net income basis at the graduated
rates applicable to U.S. individuals or domestic corporations. Distributions of
net capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or
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<PAGE>
business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption of
shares of a Fund will not be subject to U.S. federal income or withholding tax
unless the gain is effectively connected with the shareholder's trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. investors should consult their tax advisers about the
applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
State and Local
The Funds may be subject to state or local taxes in jurisdictions in which
the Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
GENERAL INFORMATION ABOUT THE TRUST
General
The Trust is an open-end investment company organized as a Delaware
business trust on September 13, 1993. The Trust commenced operations on January
3, 1994.
In the event of a liquidation or dissolution of the Trust or an individual
Fund, shareholders of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved on liquidation, based on the number of shares of the Fund that are held
by each shareholder.
Each service share and institutional share of a Fund is entitled to one
vote per share; however, separate votes will be taken by each Fund or class (or
by more than one Fund or class voting as a single class if similarly affected)
on matters affecting only the Fund or class (or those affected Funds or classes)
or as otherwise required by law. Shares are freely transferable and have no
preemptive, subscription or conversion rights. The Trust does not expect to hold
shareholder meetings except as required by the 1940 Act or the Agreement and
Declaration of Trust (the "Declaration of Trust"). See "Organization and Shares
of the Trust" in the Prospectus.
As of January 24, 1997, the following shareholders owned the following
respective percentages of the outstanding shares of the indicated Funds:
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<PAGE>
International Small Cap Equity Fund:
- ------------------------------------
Michelin North America Inc. Master Trust, One Parkway South,
P.O. Box 19001, Greenville, SC 29602-9001 (21.99%)
Kroger Company Master Retirement Trust,
P.O. Box 92956, Chicago, IL 60675-2956 (12.62%)
Black & Decker Defined Benefit Plan Master Trust,
P.O. Box 1992, Boston, MA 02105-1992 (6.29%)
Key Trust Co., Trustee f/b/o Centerior Energy Corp. Retirement Plan Trust,
P.O. Box 94870, Cleveland, OH 44101-4870 (9.73%)
Portland General Corporation,
121 SW Salmon Street, Portland, OR 97204 (7.67%)
Delta Airlines Inc. Master Retirement Trust c/o Harris Trust & Savings Bank,
111 W. Monroe Street SE, Chicago, IL 60603 (20.27%)
Swarthmore College, 500 College Avenue, Swarthmore, PA 19081 (5.42%)
United Church Board for Pension Assets Management,
475 Riverside Dr., New York, NY 10115-1099 (6.15%)
Emerging Markets Equity Fund:
- -----------------------------
Michelin North America Inc. Master Trust,
One Parkway South, P.O. Box 19001, Greenville, SC 29602-9001 (25.63%)
Kroger Company Master Retirement Trust,
P.O. Box 92956, Chicago, IL 60675-2956 (13.99%)
Motorola Employees Savings & Profit Sharing Trust, c/o Northern Trust,
50 South La Salle Street, Chicago, ILL 60675 (10.49%)
Motorola Pension Fund, c/o Harris Trust,
111 West Monroe, Chicago, ILL 60690 (8.61%)
Public Employees Retirement Association,
1300 Logan Street, Denver, Colorado 80203 (27.41%)
European Small Cap Equity Fund
- ------------------------------
Pitney Bowes Retirement Plan
1 Enterprise Drive W6C, N. Quincy, MA 02171 (30.09%)
TRW Master Trust, c/o Boston Safe Deposit & Trust Company,
One Cabot Road, Medford, MA 02155 (69.89%)
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<PAGE>
International Equity Fund
- --------------------------
Morgan Grenfell Capital Management, Inc., (Delaware Corporation)
885 Third Avenue, New York, NY 10022 (68.70%)
Deutsche Morgan Grenfell/C.J. Lawrence Inc.,
1290 Avenue of the Americas, New York, NY (29.72%)
European Equity Fund
- --------------------
Louisiana Municipal Police Employees' Retirement System Public Pension Plan,
8401 United Plaza Blvd., Suite 270, Baton Rouge, LA
70809-7017 (96.41%)
As of the date of this Statement of Additional Information, all of the
outstanding shares of Morgan Grenfell Global Equity Fund, Morgan Grenfell
Pacific Basin Equity Fund and Morgan Grenfell Japanese Small Cap Equity Fund are
owned by the Administrator.
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under Delaware
law, the shareholders of a business trust are not generally subject to liability
for the debts or obligations of the trust. Similarly, Delaware law provides that
none of the Funds will be liable for the debts or obligations of any other Fund.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in other states. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of the
courts in such other states, the courts may not apply Delaware law and may
thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Consideration for Purchases of Shares
The Trust generally will not issue shares of the Funds for consideration
other than cash. At the Trust's sole discretion, however, it may issue Fund
shares for consideration other than cash in connection with an acquisition of
portfolio securities (other than municipal debt securities issued by state
political subdivisions or their agencies or instrumentalities) or pursuant to a
bona fide purchase of assets, merger or other reorganization, provided (i) the
securities meet the investment objectives and policies of the
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<PAGE>
Fund; (ii) the securities are acquired by the Fund for investment and not for
resale; (iii) the securities are not restricted as to transfer either by law or
liquidity of market; and (iv) the securities have a value which is readily
ascertainable ( and not established only by valuation procedures) as evidenced
by a listing on the American Stock Exchange or the New York Stock Exchange or by
quotation on the NASD Automated Quotation System. An exchange of securities for
Fund shares will generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Trust's independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the securities of the Funds and certain other
series of the Trust. If further information is desired with respect to the
Trust, the Funds or such other series, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31,
1996 are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of Price Waterhouse LLP, the
Trust's independent accountants, as experts in accounting and auditing.
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<PAGE>
The financial statements of the Trust for the periods ended on and prior to
October 31, 1996 are incorporated by reference into the preceding Statement of
Additional Information from the Trust's 1996 Annual Report to Shareholders for
the year ended October 31, 1996 (filed electronically on December 30, 1996; file
no. 812-10080; accession no. 0000935069-96-000172), and will be attached to each
copy of such Statement of Additional Information that is distributed.
<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
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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.
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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."
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Up to 35% of the Fund's total assets may be invested in investment grade
fixed income securities (see definition on page 11), cash equivalents and equity
and equity-related securities of medium and large capitalization companies. In
the event any fixed income security held by the Fund is downgraded below
investment grade, the Adviser will review the security and determine whether to
retain or dispose of it. In no event, however, will the Fund hold more than 5%
of its net assets in fixed income securities that are not investment grade. Up
to 5% of the Fund's net assets (measured at time of investment) may be invested
in the securities of non-U.S. issuers of all sizes.
Microcap Fund
The investment objective of the Microcap Fund is to maximize capital
appreciation. Under normal market conditions, the Fund pursues this objective by
investing at least 65% of its total assets in common stocks of micro
capitalization U.S. companies and securities convertible into such stocks. For
purposes of the Fund's investment policies, micro capitalization companies are
those ranked (at the time of investment) according to market capitalization in
the bottom 5% of the U.S. equity market, including both listed and unlisted
companies.
The Adviser believes that investments in many micro capitalization
companies, although involving greater risk, provide the opportunity for greater
capital growth, than investments in larger, better-known 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.
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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 11), cash equivalents and equity
and equity-related securities of small and medium capitalization companies. In
the event any fixed income security held by the Fund is downgraded below
investment grade, the Adviser will review the security and determine whether to
retain or dispose of it. In no event, however, will the Fund hold more than 5%
of its net assets in fixed income securities that are not investment grade. Up
to 5% of the Fund's net assets (measured at time of investment) may be invested
in the securities of non-U.S. issuers of all sizes.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS
Fixed Income Securities
General. Each Fund may invest in fixed income securities. In periods of
declining interest rates, the yield (income from portfolio investments over a
stated period of time) of a Fund that invests in fixed income securities may
tend to be higher than prevailing market rates, and in periods of rising
interest rates, the yield of the Fund may tend to be lower. Also, when interest
rates are falling, the inflow of net new money to such a Fund will likely be
invested in portfolio instruments producing lower yields than the balance of the
Fund's portfolio, thereby reducing the yield of the Fund. In periods of rising
interest rates, the opposite can be true. The net asset value of a Fund
investing in fixed income securities can generally be expected to change as
general levels of interest rates fluctuate. The value of fixed income securities
in a Fund's portfolio generally varies inversely with changes in interest rates.
Prices of fixed income securities with longer effective maturities are more
sensitive to interest rate changes than those with shorter effective maturities.
Private Activity and Industrial Development Bonds. The Fixed Income Funds
and the Municipal Funds may invest in private activity and industrial
development bonds, which are obligations issued by or on behalf of public
authorities to raise money to finance various privately owned or operated
facilities for business and manufacturing, housing, sports and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports, parking or sewage or solid waste disposal
facilities, as well as certain other 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.
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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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<PAGE>
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
nor more than 5% of its total assets in purchased options other than protective
put options. A Fund's transactions in options, futures contracts and options on
futures contracts may be limited by the requirements for qualification of the
Fund as a regulated investment company for tax purposes. See "Taxes" in the
Statement of Additional Information. Options, futures contracts and options on
futures contracts are derivative instruments.
Small 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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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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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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.
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Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
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)
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<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
SERVICE SHARES
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of eighteen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following investment portfolios of the Trust (each, a "Fund"):
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
This Statement of Additional Information is not a prospectus, and should be
read only in conjunction with the Funds' Service Shares Prospectus dated March
7, 1997, as amended or supplemented from time to time (the "Prospectus"). A copy
of the Prospectus may be obtained without charge from any Service Organization
that has an agreement with the Trust or SEI Financial Services Company, the
Trust's Distributor, by calling 1-800-550-6426 or writing to 1 Freedom Valley
Drive, Oaks, Pennsylvania 19456-0100.
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<PAGE>
TABLE OF CONTENTS
Page
Introduction .............................................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks ........................................ 4
Investment Restrictions ................................................... 22
Trustees and Officers ..................................................... 27
Investment Advisory and Other Services .................................... 29
Service Plan .............................................................. 34
Portfolio Transactions .................................................... 35
Net Asset Value ........................................................... 38
Performance Information ................................................... 39
Taxes ..................................................................... 41
General Information About the Trust ....................................... 48
Additional Information .................................................... 51
Financial Statements ...................................................... 51
Appendix A -- Description of Ratings ...................................... 53
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or its Distributor. The Prospectus does not
constitute an offering by the Trust or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently
consists of eighteen separate investment portfolios. This Statement of
Additional Information relates to the following seven separate investment
portfolios of the Trust (the "Funds"):
Morgan Grenfell Smaller Companies Fund
Morgan Grenfell MicroCap Fund
Morgan Grenfell Large Cap Growth Fund
(collectively, the "Equity Funds")
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Short-Term Fixed Income Fund
(collectively, the "Fixed Income Funds")
Morgan Grenfell Municipal Bond Fund
Morgan Grenfell Short-Term Municipal Bond Fund
(collectively, the "Municipal Funds")
The Funds are classified as "diversified" within the meaning of the
Investment Company Act of 1940 (the "1940 Act").
Morgan Grenfell Capital Management, Inc. (the "Adviser" or "MGCM") serves
as investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor. SEI
Financial Management Corporation serves as the Funds' administrator.
The information contained in this Statement of Additional Information
generally supplements the information contained in the Prospectus. No investor
should invest in service shares of a Fund without first reading the Prospectus.
Capitalized terms used herein and not otherwise defined have the same meaning
ascribed to them in the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus
concerning the investment objectives and policies of each Fund.
Fixed Income Securities
Variable and Floating Rate Instruments. Debt instruments purchased by a
Fund may be structured to have variable or floating interest rates. These
instruments may include variable amount master demand notes that permit the
indebtedness to vary in addition to providing for periodic adjustments in the
interest rates. The Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instrument is subject to a demand feature, will continuously monitor their
financial ability to meet payment on demand. Where necessary to ensure that a
variable or floating rate instrument is equivalent to the quality standards
applicable to a Fund's fixed income investments, the issuer's obligation to pay
the principal of the instrument will be backed by an unconditional bank letter
or line of credit, guarantee or commitment to lend. Any bank providing such a
bank letter, line of credit, guarantee or loan commitment will meet the Fund's
investment quality standards relating to investments in bank obligations. A Fund
will invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. The Adviser will also
continuously monitor the creditworthiness of issuers of such instruments to
determine whether a Fund should continue to hold the investments.
The absence of an active secondary market for certain variable and floating
rate notes could make it difficult to dispose of the instruments, and a Fund
could suffer a loss if the issuer defaults or during periods in which a Fund is
not entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to
the Fund's limitation on investments in illiquid securities when a reliable
trading market for the instruments does not exist and the Fund may not demand
payment of the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard and Poors
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
and other recognized rating organizations represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality or value. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. See Appendix A for a description of the ratings provided by
Standard & Poor's, Moody's and certain other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by a Fund. The Board of Trustees or the Adviser, pursuant to guidelines
established by the Board of Trustees, will consider such an event in determining
whether the Fund should continue to hold the security in accordance with the
interests of the Fund and applicable regulations of the Securities and Exchange
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<PAGE>
Commission (the "Commission"). In no event, however, will a Fund hold more than
5% of its net assets in fixed income securities that are not investment grade.
Custodial Receipts. Each of the Fixed Income Funds may acquire U.S.
Government Securities and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government Securities, the holder will resell the stripped
securities in custodial receipt programs with a number of different names,
including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
generally held in book-entry form at a Federal Reserve Bank. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government Securities for federal tax and securities purposes.
In the case of CATS and TIGRS, the Internal Revenue Service ( the "IRS") has
reached this conclusion for the purpose of applying the tax diversification
requirements applicable to regulated investment companies such as the Funds.
CATS and TIGRS are not considered U.S. Government Securities by the staff of the
Commission. Further, the IRS conclusion noted above is contained only in a
general counsel memorandum, which is an internal document of no precedential
value or binding effect, and a private letter ruling, which also may not be
relied upon by the Funds. The Trust is not aware of any binding legislative,
judicial or administrative authority on this issue.
Preferred Stock
Subject to their investment objectives, the Equity Funds may purchase
preferred stock. Preferred stocks are equity securities, but possess certain
attributes of debt securities and are generally considered fixed income
securities. Holders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
in such cases all cumulative dividends usually must be paid prior to dividend
payments to common stockholders. Because of this preference, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stocks. However, preferred stocks are equity securities in that they do
not represent a liability of the issuer and therefore do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer. See "Convertible Securities and Preferred Stocks" in the Prospectus
for a description of certain characteristics of convertible preferred stock.
Warrants
As stated in the Prospectus, the Equity Funds may purchase warrants, which
are privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves a risk that
a Fund could lose the purchase value of a warrant if the right to
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<PAGE>
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. An Equity
Fund will not invest more than 5% of its net assets, taken at market value, in
warrants, or more than 2% of its net assets, taken at market value, in warrants
not listed on a recognized securities exchange. Warrants acquired by a Fund in
units or attached to other securities shall not be included in determining
compliance with these percentage limitations. See "Investment Restrictions."
Municipal Securities
As stated in the Prospectus, the Municipal Funds and, to a more limited
extent, the Fixed Income Funds may invest in municipal securities. Municipal
securities consist of bonds, notes and other instruments issued by or on behalf
of states, territories and possessions of the United States (including the
District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax (i.e., excluded from gross income for federal income tax purposes but not
necessarily exempt from the federal alternative minimum tax or from state and
local taxes). Municipal securities may also be issued on a taxable basis (i.e.,
the interest on such securities is not exempt from regular federal income tax).
Municipal securities are often issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal securities
may be issued include refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal securities also include "private
activity" or industrial development bonds, which are issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct or
equip facilities within a municipality for privately or publicly owned
corporations.
The two principal classifications of municipal securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest although the characteristics and enforcement of general obligations may
vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer may also be
backed by a letter of credit, guarantee or insurance. General obligations and
revenue obligations may be issued in a variety of forms, including commercial
paper, fixed, variable and floating rate securities, tender option bonds,
auction rate bonds and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of municipal securities. There are also
numerous differences in the credit backing of municipal securities both within
and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a municipal security which is not a general
obligation is made by the Adviser based on the characteristics of the municipal
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security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of municipal securities may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike some securities that are not publicly
offered, a secondary market exists for many municipal securities that were not
publicly offered initially and such securities can be readily marketable.
The obligations of an issuer to pay the principal of and interest on a
municipal security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a municipal
security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
Interests. A municipal lease is an obligation in the form of a lease or
installment purchase contract which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance (as well as regular
Federal income tax). Municipal leases frequently involve special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Thus, a Fund's
investment in municipal leases will be subject to the special risk that the
governmental issuer may not appropriate funds for lease payments.
In addition, such leases or contracts may be subject to the temporary
abatement of payments in the event the issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed recoupment of a Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase contracts or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may
be deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease obligations
and certificates of participation, the Adviser will consider a variety of
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factors including: (1) the willingness of dealers to bid for the security; (2)
the number of dealers willing to purchase or sell the obligation and the number
of other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund. No Fund may invest more than 5% of its net assets in municipal leases.
Each Municipal Fund and each Fixed Income Fund may purchase participations
in municipal securities held by a commercial bank or other financial
institution. Such participations provide a Fund with the right to a pro rata
undivided interest in the underlying municipal securities. In addition, such
participations generally provide a Fund with the right to demand payment, on not
more than seven days notice, of all or any part of the Fund's participation
interest in the underlying municipal security, plus accrued interest.
Municipal Notes. Municipal securities in the form of notes generally are
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Tax and Revenue Anticipation Notes
and Construction Loan Notes. Tax Anticipation Notes are issued to finance the
working capital needs of governments. Generally, they are issued in anticipation
of various tax revenues, such as income, sales, property, use and business
taxes, and are payable from these specific future taxes. Revenue Anticipation
Notes are issued in expectation of receipt of other kinds of revenue, such as
federal revenues available under federal revenue sharing programs. Bond
Anticipation Notes are issued to provide interim financing until long-term bond
financing can be arranged. In most cases, the long-term bonds then provide the
funds needed for repayment of the notes. Tax and Revenue Anticipation Notes
combine the funding sources of both Tax Anticipation Notes and Revenue
Anticipation Notes. Construction Loan Notes are sold to provide construction
financing. These notes are secured by mortgage notes insured by the Federal
Housing Authority; however, the proceeds from the insurance may be less than the
economic equivalent of the payment of principal and interest on the mortgage
note if there has been a default. The obligations of an issuer of municipal
notes are generally secured by the anticipated revenues from taxes, grants or
bond financing. An investment in such instruments, however, presents a risk that
the anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper
typically represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by state and local governments and their agencies to
finance working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on
municipal securities that have been pre-refunded are no longer paid from the
original revenue source for the securities. Instead, after pre-refunding the
source of such payments is typically an escrow fund consisting of obligations
issued or guaranteed by the U.S. Government. The assets in the escrow fund are
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derived from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded municipal securities. Issuers of municipal securities use this
advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or are
redeemed by the issuer. Pre-refunded municipal securities are usually purchased
at a price which represents a premium over their face value.
Tender Option Bonds. A tender option bond is a municipal security
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates. The bond is typically issued in
conjunction with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof.
As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the bond's fixed coupon
rate and the rate, as determined by a remarketing or similar agent at or near
the commencement of such period, that would cause the securities, coupled with
the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate.
However, an institution will not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrade in the credit rating
assigned to the issuer of the bond. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. Each Municipal Fund intends to invest only in
tender option bonds the interest on which will, in the opinion of bond counsel,
counsel for the issuer of interests therein or counsel selected by the Adviser,
be exempt from regular federal income tax. However, because there can be no
assurance that the IRS will agree with such counsel's opinion in any particular
case, there is a risk that a Municipal Fund will not be considered the owner of
such tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the proper tax treatment of tender
option bonds and the associated fees, in relation to various regulated
investment company tax provisions is unclear. Each Municipal Fund intends to
manage its portfolio in a manner designed to eliminate or minimize any adverse
impact from the tax rules applicable to these investments.
Auction Rate Securities. Auction rate securities consist of auction rate
municipal securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by "Dutch" auction in which bids are made by
broker-dealers and other institutions for a certain amount of securities at a
specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
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value, there is the risk that an auction will fail due to insufficient demand
for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to tax-exempt interest income earned by the fund on the securities
in its portfolio and distributed to holders of the preferred securities,
provided that the preferred securities are treated as equity securities for
federal income tax purposes and the closed-end fund complies with certain
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of complying with the 20% limitation on each Municipal Fund's
investments in taxable investments, auction rate preferred securities will be
treated as taxable investments unless substantially all of the dividends on such
securities are expected to be exempt from regular federal income taxes.
Each Fund's investments in auction rate preferred securities of closed-end
funds are subject to limitations on investments in other investment companies,
which limitations are prescribed by the 1940 Act. These limitations include a
prohibition against acquiring more than 3% of the voting securities of any other
investment company, and investing more than 5% of the Fund's assets in
securities of any one investment company or more than 10% of its assets in
securities of all investment companies. A Fund will indirectly bear its
proportionate share of any management fees paid by such closed-end funds in
addition to the advisory fee payable directly by the Fund.
Private Activity Bonds. Certain types of municipal securities, generally
referred to as industrial development bonds (and referred to under current tax
law as private activity bonds), are issued by or on behalf of public authorities
to obtain funds for privately-operated housing facilities, airport, mass transit
or port facilities, sewage disposal, solid waste disposal or hazardous waste
treatment or disposal facilities and certain local facilities for water supply,
gas or electricity. Other types of industrial development bonds, the proceeds of
which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place substantial limitations
on the size of such issues. The interest from certain private activity bonds
owned by a Fund (including a Municipal Fund's distributions attributable to such
interest) may be a preference item for purposes of the alternative minimum tax.
Mortgage-Backed Securities
As stated in the Prospectus, the Fixed Income Funds and the Municipal Funds
may invest in mortgage-backed securities, including derivative instruments.
Mortgage-backed securities represent direct or indirect participations in or
obligations collateralized by and payable from mortgage loans secured by real
property. Each Fixed Income Fund and each Municipal Fund may invest in
mortgage-backed securities issued or guaranteed by U.S. Government agencies or
instrumentalities such as the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith
and credit of the U.S. Government. Obligations of FNMA and FHLMC are not backed
by the full faith and credit of the U.S. Government but are considered to be of
high quality since they are considered to be instrumentalities of the United
States. The market value and yield of these mortgage-backed securities can vary
due to market interest rate fluctuations and early prepayments of underlying
mortgages. These securities represent ownership in a pool of Federally insured
mortgage loans with a maximum maturity of 30 years. The scheduled monthly
interest and principal payments relating to mortgages in the pool will be
"passed through" to investors. Government
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mortgage-backed securities differ from conventional bonds in that principal is
paid back to the certificate holders over the life of the loan rather than at
maturity. As a result, there will be monthly scheduled payments of principal and
interest.
Only the Fixed Income Funds may invest in mortgage-backed securities issued
by non-governmental entities including collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs"). CMOs are
securities collateralized by mortgages, mortgage pass-throughs, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued with
a number of classes or series which have different maturities and are retired in
sequence. Investors purchasing such CMOs in the shortest maturities receive or
are credited with their pro rata portion of the unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. Government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities, including "regular" interests
and "residual" interests. The Funds do not intend to acquire residual interests
in REMICs under current tax law, due to certain disadvantages for regulated
investment companies that acquire such interests.
Mortgage-backed securities are subject to unscheduled principal payments
representing prepayments on the underlying mortgages. Although these securities
may offer yields higher than those available from other types of securities,
mortgage-backed securities may be less effective than other types of securities
as a means of "locking in" attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, the value of these
securities likely will not rise as much as comparable debt securities due to the
prepayment feature. In addition, these prepayments can cause the price of a
mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Due to prepayments of the underlying mortgage instruments, mortgage-backed
securities do not have a known actual maturity. In the absence of a known
maturity, market participants generally refer to an estimated average life. The
Adviser believes that the estimated average life is the most appropriate measure
of the maturity of a mortgage-backed security. Accordingly, in order to
determine whether such security is a permissible investment, it will be deemed
to have a remaining maturity of three years or less if the average life, as
estimated by the Adviser, is three years or less at the time of purchase of the
security by a Fund. An average life estimate is a function of an assumption
regarding anticipated prepayment patterns. The assumption is based upon current
interest rates, current conditions in the relevant housing markets and other
factors. The assumption is necessarily subjective, and thus different market
participants could produce somewhat different average life estimates with regard
to the same security. Although the Adviser will monitor the average life of the
portfolio securities of each Fixed Income Fund and Municipal Fund and
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make needed adjustments to comply with the Funds' policy as to average dollar
weighted portfolio maturity, there can be no assurance that the average life of
portfolio securities as estimated by the Adviser will be the actual average life
of such securities.
As stated in the Prospectus, no Fund will invest 25% or more of its total
assets in CMOs (other than U.S. Government Securities).
Asset-Backed Securities
As stated in the Prospectus, the Fixed Income Funds may invest in
asset-backed securities, which represent participations in, or are secured by
and payable from, pools of assets including company receivables, truck and auto
loans, leases and credit card receivables. The asset pools that back
asset-backed securities are securitized through the use of privately-formed
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation, or other credit
enhancements may be present. Certain asset backed securities may be considered
derivative instruments. As stated in the Prospectus, no Fund will invest 25% or
more of its total assets in asset-backed securities.
Foreign Securities
Subject to their respective investment objectives and policies, the Equity
Funds and the Fixed Income Funds may invest in securities of foreign issuers.
While the Equity Funds' non-U.S. investments may be denominated in any currency,
the Fixed Income Funds' investments in foreign securities may be denominated
only in the U.S. dollar. Foreign securities may offer investment opportunities
not available in the United States, but such investments also involve
significant risks not typically associated with investing in domestic
securities. In many foreign countries, there is less publicly available
information about foreign issuers, and there is less government regulation and
supervision of foreign stock exchanges, brokers and listed companies. Also, in
many foreign countries, companies are not subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic issuers. Security trading practices differ and there may be difficulty
in enforcing legal rights outside the United States. Settlement of transactions
in some foreign markets may be delayed or may be less frequent than in the
United States, which could affect the liquidity of the Funds' portfolios.
Additionally, in some foreign countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of
securities, property, or other Fund assets, political or social instability or
diplomatic developments which could affect investments in foreign securities.
To the extent an Equity Fund's investments are denominated in foreign
currencies, the net asset values of such Fund may be affected favorably or
unfavorably by fluctuations in currency exchange rates and by changes in
exchange control regulations. For example, if the Adviser increases the Fund's
exposure to a foreign currency, and that currency's value subsequently falls,
the Adviser's currency management may result in increased losses to the Fund.
Similarly, if the Adviser hedges the Fund's exposure to a foreign currency, and
that currency's value rises, the Fund will lose the opportunity to participate
in the currency's appreciation. The Equity Funds will incur transaction costs in
connection with conversions between currencies.
Foreign Government Securities. The foreign government securities in which
the Fixed Income Funds and the Equity Funds may invest generally consist of debt
obligations issued or guaranteed by national, state or provincial
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governments or similar political subdivisions. The Fixed Income Funds and Equity
Funds may invest in foreign government securities in the form of American
Depository Receipts. Foreign government securities also include debt securities
of supranational entities. Currently, each Fixed Income Fund intends to invest
only in obligations issued or guaranteed by the Asian Development Bank, the
Inter-American Development Bank, the International Bank for Reconstruction and
Development (the "World Bank"), the African Development Bank, the European Coal
and Steel Community, the European Economic Community, the European Investment
Bank and the Nordic Investment Bank. Foreign government securities also include
mortgage-related securities issued or guaranteed by national, state or
provincial governmental instrumentalities, including quasi-governmental
agencies.
Forward Foreign Currency Exchange Contracts
Each of the Equity Funds may exchange currencies in the normal course of
managing its investments in foreign securities and may incur costs in doing so
because a foreign exchange dealer will charge a fee for conversion. An Equity
Fund may conduct foreign currency exchange transactions on a "spot" basis (i.e.,
for prompt delivery and settlement) at the prevailing spot rate for purchasing
or selling currency in the foreign currency exchange market. An Equity Fund also
may enter into forward foreign currency exchange contracts ("forward currency
contracts") or other contracts to purchase and sell currencies for settlement at
a future date. A foreign exchange dealer, in that situation, will expect to
realize a profit based on the difference between the price at which a foreign
currency is sold to the Equity Fund and the price at which the dealer will cover
the purchase in the foreign currency market. Foreign exchange transactions are
entered into at prices quoted by dealers, which may include a mark-up over the
price that the dealer must pay for the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract, an Equity Fund may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Equity Funds may enter into forward currency contracts only for the
following hedging purposes. First, when an Equity Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when an Equity Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars,
of the amount of foreign currency involved in the underlying transactions, the
Fund will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
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Additionally, when management of an Equity Fund believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, it may cause the Fund to enter into a forward contract to sell, for
a fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. Using
forward currency contracts in an attempt to protect the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Fund can achieve at some future point
in time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or liquid securities will be placed
in the account on a daily basis so that the value of the account will equal the
amount of the Fund's commitments with respect to such contracts. The segregated
account will be marked-to-market on a daily basis. Although forward currency
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. In such event, the Fund's ability to utilize forward currency
contracts may be restricted. In addition, a particular forward currency contract
and assets used to cover such contract may be illiquid.
The Equity Funds generally will not enter into a forward currency contract
with a term of greater than one year.
While the Equity Funds will enter into forward currency contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the Equity Funds may benefit from currency
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for either Fund than if it had not engaged in any such
transactions. Moreover, there may be an imperfect correlation between a Fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign currency exchange loss. Forward
currency contracts may be considered derivative instruments.
Each Equity Fund's activities in forward currency contracts, currency
futures contracts and related options and currency options (see below) may be
limited by the requirements of Subchapter M of the Code for qualification as a
regulated investment company.
Options on Securities, Securities Indices and Foreign Currencies
Each of the Equity Funds may write covered put and call options and
purchase put and call options. Such options may relate to particular securities,
to various stock indices, or to currencies. The Equity Funds may write call and
put options which are issued by the Options Clearing Corporation (the "OCC") or
which are traded on U.S. and non-U.S. exchanges and over-the-counter. These
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instruments may be considered derivative instruments. See "Description of
Securities and Investment Techniques and Related Risks -- Options" in the
Prospectus.
A call option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index exceeds the option's exercise price. Conversely, a put option
on a securities index provides the holder with the right to receive a cash
payment upon exercise of the option if the market value of the underlying index
is less than the option's exercise price. The amount of any payment to the
option holder will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
U.S. dollars or a foreign currency, times a specified multiple. A put option on
a currency gives its holder the right to sell an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration. Conversely, a call option on a
currency gives its holder the right to purchase an amount (specified in units of
the underlying currency) of the underlying currency at the stated exercise price
at any time prior to the option's expiration.
The Equity Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the OCC, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options.
An Equity Fund will write call options only if they are "covered." In the
case of a call option on a security, the option is "covered" if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or liquid securities in such amount are
held in a segregated account by the Fund's custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if the Fund maintains with the Fund's custodian cash or liquid
securities equal to the contract value. A call option on a security or an index
is also covered if the Fund holds a call on the same security or index as the
call written by the Fund where the exercise price of the call held is (i) equal
to or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in cash or liquid securities in a segregated account with the Fund's
custodian. A call option on currency written by the Fund is covered if the Fund
owns an equal amount of the underlying currency.
When an Equity Fund purchases a put option, the premium paid by it is
recorded as an asset of the Fund. When the Fund writes an option, an amount
equal to the net premium (the premium less the commission paid by the Fund)
received by the Fund is included in the liability section of the Fund's
statement of assets and liabilities as a deferred credit. The amount of this
asset or deferred credit will be marked-to-market on an ongoing basis to reflect
the current value of the option purchased or written. The current value of a
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option purchased by a Fund expires
unexercised, the Fund realizes a loss equal to the premium paid. If a Fund
enters into a closing sale transaction on an option purchased by it, the Fund
will realize a gain if the premium received by a Fund on the closing transaction
is more than the premium paid to purchase the option, or a loss if it is less.
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If an option written by a Fund expires on the stipulated expiration date or if a
Fund enters into a closing purchase transaction, it will realize a gain (or loss
if the cost of a closing purchase transaction exceeds the net premium received
when the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by a Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received,
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities, securities indices and currencies. For example, there are
significant differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which
the underlying securities and currencies are traded. To the extent that the
options markets close before the markets for the underlying securities and
currencies, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the options markets. The purchase
of options is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. The risks described above also apply to options on futures, which
are discussed below.
Futures Contracts and Related Options
To hedge against changes in interest rates or securities prices and for
certain non-hedging purposes, the Equity Funds may purchase and sell various
kinds of futures contracts, and purchase and write call and put options on any
of such futures contracts. The Equity Funds may also enter into closing purchase
and sale transactions with respect to any of such contracts and options. The
futures contracts may be based on various securities (such as U.S. Government
securities), indices, currencies and other financial instruments. The Equity
Funds will engage in futures and related options transactions only for bona fide
hedging or other non-hedging purposes as defined in regulations promulgated by
the CFTC. All futures contracts entered into by the Equity Funds are traded on
U.S. exchanges or boards of trade that are licensed and regulated by the CFTC or
on foreign exchanges approved by the CFTC.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell a particular financial instrument
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Futures contracts obligate the long or short holder to take or make delivery of
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a specified quantity of a commodity or financial instrument, such as a security
or the cash value of a securities index, during a specified future period at a
specified price.
When interest rates are rising or securities prices are falling, an Equity
Fund can seek to offset a decline in the value of its current portfolio
securities through the sale of futures contracts. When interest rates are
falling or securities prices are rising, an Equity Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities will usually be
liquidated in this manner, the Equity Funds may instead make, or take, delivery
of the underlying securities whenever it appears economically advantageous to do
so. A clearing corporation associated with the exchange on which futures on
securities are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that a Fund proposes to acquire. the Equity
Funds may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated rise in interest
rates or a decline in market prices that would adversely affect the value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of the Fund's portfolio securities. If, in the
opinion of the Adviser, there is a sufficient degree of correlation between
price trends for an Equity Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in a Fund's portfolio may
be more or less volatile than prices of such futures contracts, the Adviser will
attempt to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Equity Funds may take a "long" position by
purchasing futures contracts. This would be done, for example, when a Fund
anticipates the subsequent purchase of particular securities when it has the
necessary cash, but expects the prices then available in the applicable market
to be less favorable than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call options on
futures contracts will give the Equity Funds the right (but not the obligation)
for a specified price to sell or to purchase, respectively, the underlying
futures contract at any time during the option period. As the purchaser of an
option on a futures contract, a Fund obtains the benefit of the futures position
if prices move in a favorable direction but limits its risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.
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The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By writing
a call option, a Fund becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that the Fund intends to purchase. However, a Fund becomes
obligated to purchase a futures contract (if the option is exercised) which may
have a value lower than the exercise price. Thus, the loss incurred by a Fund in
writing options on futures is potentially unlimited and may exceed the amount of
the premium received. The Funds will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Equity Funds
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
The Equity Funds may use options on futures contracts solely for bona fide
hedging or other non-hedging purposes as described below.
Other Considerations. The Equity Funds will engage in futures and related
options transactions only for bona fide hedging or non-hedging purposes as
permitted by CFTC regulations which permit principals of an investment company
registered under the 1940 Act to engage in such transactions without registering
as commodity pool operators. Each Equity Fund will determine that the price
fluctuations in the futures contracts and options on futures used by it for
hedging purposes are substantially related to price fluctuations in securities
or instruments held by the Fund or securities or instruments which it expects to
purchase. Except as stated below, the Equity Funds futures transactions will be
entered into for traditional hedging purposes--i.e., futures contracts will be
sold to protect against a decline in the price of securities (or the currency in
which they are denominated) that a Fund owns or futures contracts will be
purchased to protect the Fund against an increase in the price of securities (or
the currency in which they are denominated) that the Fund intends to purchase.
As evidence of this hedging intent, each Equity Fund expects that, on 75% or
more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Fund will have purchased, or
will be in the process of purchasing, equivalent amounts of related securities
(or assets denominated in the related currency) in the cash market at the time
when the futures or option position is closed out. However, in particular cases,
when it is economically advantageous for a Fund to do so, a long futures
position may be terminated or an option may expire without the corresponding
purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation now permits a Fund to elect to comply with a different test
under which the aggregate initial margin and premiums required to establish
non-hedging positions in futures contracts and options on futures will not
exceed 5% of the net asset value of the Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase. Each
Equity Fund will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a regulated investment company. See
"Taxes."
Each Equity Fund will be required, in connection with transactions in
futures contracts and the writing of options on futures contracts, to make
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margin deposits, which will be held by its custodian for the benefit of the
futures commission merchant through whom the Fund engages in such futures and
option transactions. These transactions involve brokerage costs, require margin
deposits and, in the case of futures contracts and options obligating the Fund
to purchase securities, require the Fund to segregate cash or liquid securities
in an account maintained with its custodian to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures position prior to its maturity date.
In the event of an imperfect correlation between a futures position and
portfolio position which is intended to be protected, the desired protection may
not be obtained and an Equity Fund may be exposed to risk of loss. The risk of
imperfect correlation may be minimized by investing in contracts whose price
behavior is expected to resemble that of the Fund's underlying securities. The
Equity Funds will attempt to minimize the risk that they will be unable to close
out futures positions by entering into such transactions on a national exchange
with an active and liquid secondary market.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a
U.S or non-U.S issuer. Each of the Funds may purchase commercial paper as
described in the Prospectus. Each Fund may also invest in variable rate master
demand notes which typically are issued by large corporate borrowers and which
provide for variable amounts of principal indebtedness and periodic adjustments
in the interest rate. Demand notes are direct lending arrangements between a
Fund and an issuer, and are not normally traded in a secondary market. A Fund,
however, may demand payment of principal and accrued interest at any time. In
addition, while demand notes generally are not rated, their issuers must satisfy
the same criteria as those that apply to issuers of commercial paper. The
Adviser will consider the earning power, cash flow and other liquidity ratios of
issuers of demand notes and continually will monitor their financial ability to
meet payment on demand. See also "Fixed Income Securities --Variable and
Floating Rate Instruments."
Bank Obligations
As stated in the Prospectus, each Fund's investments in money market
instruments may include certificates of deposit, time deposits and bankers'
acceptances. Certificates of Deposit ("CDs") are short-term negotiable
obligations of commercial banks. Time Deposits ("TDs") are non-negotiable
deposits maintained in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). U.S. banks organized under state law are supervised
and examined by state banking authorities but are members of the Federal Reserve
System only if they elect to join. Most state banks are insured by the FDIC
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<PAGE>
(although such insurance may not be of material benefit to a Fund, depending
upon the principal amount of CDs of each bank held by the Fund) and are subject
to federal examination and to a substantial body of federal law and regulation.
As a result of governmental regulations, U.S. branches of U.S. banks, among
other things, generally are required to maintain specified levels of reserves,
and are subject to other supervision and regulation designed to promote
financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by
the Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described in the
Prospectus.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For other purposes, it is not clear whether a court would consider
such an obligation as being owned by the Fund or as being collateral for a loan
by the Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the obligation before its
repurchase, under the repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Such delays may result in a
loss of interest or decline in price of the obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the obligation, the Fund may be treated as an unsecured
creditor of the seller and required to return the obligation to the seller's
estate. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below an amount equal to 102% of the repurchase price (including accrued
interest), the seller of the obligation will be required to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase or
sell particular securities with payment and delivery taking place at a future
date (perhaps one or two months later), permit the Fund to lock in a price or
yield on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed appropriate by the Adviser, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a gain or loss, and
distributions attributable to any such gain would be taxable to shareholders.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
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<PAGE>
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the separate account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitments. The market value of a
Fund's net assets will generally fluctuate to a greater degree when it sets
aside portfolio securities to cover such purchase commitments than when it sets
aside cash. Because a Fund's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Fund expects that its commitments to purchase
when-issued securities and forward commitments will not exceed 33% of the value
of its total assets. When a Fund engages in "when-issued" and forward commitment
transactions, it relies on the other party to the transaction to consummate the
trade. Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest or dividends on the securities it has committed to
purchase until the settlement date.
Borrowing
Each Fund may borrow for temporary or emergency purposes, although
borrowings by the Fixed Income Fund and the Municipal Bond Fund may not exceed
10% of the value of their respective net assets. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the asset coverage should decline
below 300% as a result of market fluctuations or for other reasons, a Fund will
be required to sell some of its portfolio securities within three days to reduce
its borrowings and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
To limit the potential leveraging effects of a Fund's borrowings, the Equity
Funds, the Short-Term Fixed Income Fund and the Short-Term Municipal Bond Fund
will not make investments while borrowings are in excess of 5% of total assets.
The Fixed Income Fund and the Municipal Bond Fund may not make additional
investments while they have any borrowings outstanding. Borrowing generally will
exaggerate the effect on net asset value of any increase or decrease in the
market value of the portfolio. Money borrowed will be subject to interest costs
which may or may not be recovered by appreciation of the securities purchased. A
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. See "Investment Restrictions."
Lending Portfolio Securities
Each Fund, other than Fixed Income Fund and Municipal Bond Fund, may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made by a Fund, may not exceed 33 1/3% of the value of
the Fund's total assets. A Fund's loans of securities will be collateralized by
cash, cash equivalents or U.S. Government securities. The cash or instruments
collateralizing the Fund's loans of securities will be maintained at all times
in a segregated account with the Fund's custodian, in an amount at least equal
to the current market value of the loaned securities. From time to time, a Fund
may pay a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and is acting as a "placing broker". No fee will be paid to
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affiliated persons of the Fund. The Board of Trustees will make a determination
that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by
continuing to receive amounts equal to the interest or dividends on the loaned
securities as well as by either investing the cash collateral in short-term
instruments or obtaining yield in the form of interest paid by the borrower when
U.S. Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as amounts equal to the dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower except
that, if a material event will occur affecting the investment in the loaned
securities, the Fund must terminate the loan in time to vote the securities on
such event.
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be changed
with respect to a Fund without the approval of a "majority" (as defined in the
1940 Act) of the outstanding shares of that Fund. For the purposes of the 1940
Act, "majority" means the lesser of (a) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy or (b) more than 50% of the
shares of the Fund. Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund with the exception of borrowings permitted by fundamental investment
restriction (2) listed below for Short Term-Fixed Income Fund, Short-Term
Municipal Bond Fund and the Equity Funds and fundamental investment restriction
(3) listed below for Fixed Income Fund and Municipal Bond Fund.
The nonfundamental investment restrictions set forth below may be changed
or amended by the Trust's Board of Trustees without shareholder approval.
Investment Restrictions That Apply to Short-Term Fixed Income Fund, Short-Term
Municipal Bond Fund and the Equity Funds
Fundamental Investment Restrictions. The Trust may not, on behalf of a
Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and
(7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Fund's
investment policy, and the pledge, mortgage or hypothecation of the Fund's
assets within the meaning of paragraph (3) below are not deemed to be senior
securities, if appropriately covered.
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(2) Borrow money (i) except from banks as a temporary measure for
extraordinary emergency purposes and (ii) except that the Fund may enter into
reverse repurchase agreements and dollar rolls, if appropriately covered, with
banks, broker-dealers and other parties; provided that, in each case, the Fund
is required to maintain asset coverage of at least 300% for all borrowings. For
the purposes of this investment restriction, short sales, transactions in
currency, forward contracts, swaps, options, futures contracts and options on
futures contracts, and forward commitment transactions shall not constitute
borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and to the extent related to the
segregation of assets in connection with the writing of covered put and call
options and the purchase of securities or currencies on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to forward contracts, options, futures contracts and
options on futures contracts.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of Fund securities, the Fund may be deemed to be an underwriter
for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities issued by companies (other than real estate limited partnerships)
that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend Fund securities in accordance
with the Fund's investment policies and may purchase or invest in repurchase
agreements, bank certificates of deposit, all or a portion of an issue of bonds,
bank loan participation agreements, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance of
the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry or group of industries. This restriction does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
In addition, each Fund will adhere to the following fundamental investment
restriction:
With respect to 75% of its total assets, a Fund may not purchase securities
of an issuer (other than the U.S. Government, or any of its agencies or
instrumentalities, or other investment companies), if
(a) such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such
issuer, or
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(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund.
NonFundamental Investment Restrictions. The Trust may not, on behalf of a
Fund:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of marketable Fund
securities with other accounts under the management of the Adviser to save
commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales unless by virtue of
its ownership of other securities, the Fund has the right to obtain, without
payment of additional consideration, securities equivalent in kind and amount to
the securities sold and, if the right is conditional, the sale is made upon the
same conditions, except that a Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of securities and in
connection with transactions involving forward foreign currency exchange
transactions, options, futures and options on futures.
(c) Purchase securities of other investment companies, except in the open
market where no commission or profit to a sponsor or dealer results from the
purchase other than the customary broker's commission and as permitted by the
Investment Company Act of 1940 and the rules and regulations thereunder.
(d) Purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operations prior to the
purchase if such purchase would cause investments of the Fund in all such
issuers to exceed 5% of the value of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management of any
company.
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's net assets would be invested in warrants
which are not listed on the New York Stock Exchange or the American Stock
Exchange or more than 5% of the value of the net assets of the Fund would be
invested in warrants generally, whether or not so listed. For these purposes,
warrants are to be valued at the lesser of cost or market, but warrants acquired
by the Fund in units with or attached to debt securities shall be deemed to be
without value.
(g) Purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or directors or officers of the Adviser or any
investment management subsidiary of the Adviser individually owns beneficially
more than 0.5% and together own beneficially more than 5% of the securities of
such issuer.
(h) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(i) Purchase any security, including any repurchase agreement maturing in
more than seven days, which is illiquid, if more than 15% of the net assets of
the Fund, taken at market value, would be invested in such securities.
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<PAGE>
(j) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933; provided, however, that no more than 15% of the
Fund's total assets may be invested in restricted securities including
restricted securities eligible for resale under Rule 144A.
(k) Write covered calls or put options with respect to more than 25% of the
value of its total assets or invest more than 5% of its total assets in puts,
calls, spreads, or straddles, other than protective put options.
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include such
investments in determining compliance with the 15% limitation on investments in
illiquid securities. Restricted securities (including commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933 which the Board of
Trustees has determined are readily marketable will not be deemed to be illiquid
for purposes of such restriction.
"Value" for the purposes of the foregoing investment restrictions shall
mean the market value used in determining each Fund's net asset value.
Investment Restrictions That Apply to the Fixed Income Fund And the Municipal
Bond Fund
Fundamental Investment Restrictions. The Trust may not, on behalf of the
Fixed Income Fund or the Municipal Bond Fund:
(1) Acquire more than 10% of the voting securities of any one issuer.
(2) Invest in companies for the purpose of exercising control.
(3) Borrow money except for temporary or emergency purposes and then only
in an amount not exceeding 10% of the value of its total assets. Any
borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of a Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, a Fund shall, within three days
thereafter or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce the amount
of its borrowings to such an extent that the asset coverage of such
borrowings shall be at least 300%. This borrowing provision is
included for temporary liquidity or emergency purposes. All borrowings
will be repaid before making investments and any interest paid on such
borrowings will reduce income.
(4) Make loans, except that a Fund may purchase or hold debt instruments
in accordance with its investment objective and policies, and a Fund
may enter into repurchase agreements.
(5) Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed
10% of total assets taken at current value at the time of the
incurrence of such loan.
(6) Purchase or sell real estate, real estate limited partnership
interests, futures contracts, commodities or commodities contracts and
interests in a pool of securities that are secured by interests in
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<PAGE>
real estate. However, subject to the permitted investments of the
Fund, a Fund may invest in municipal securities or other obligations
secured by real estate or interests therein.
(7) Make short sales of securities, maintain a short position or purchase
securities on margin, except that a Fund may obtain short-term credits
as necessary for the clearance of security transactions.
(8) Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
(9) Purchase securities of other investment companies except as permitted
by the Investment Company Act of 1940 and the rules and regulations
thereunder.
(10) Issue senior securities (as defined in the Investment Company Act of
1940) except in connection with permitted borrowings as described
above or as permitted by rule, regulation or order of the Securities
and Exchange Commission.
(11) Purchase or retain securities of an issuer if an officer, trustee,
partner or director of the Fund or any investment adviser of the Fund
owns beneficially more than 1/2 of 1% of the shares or securities of
such issuer and all such officers, trustees, partners and directors
owning more than 1/2 of 1% of such shares or securities together own
more than 5% of such shares or securities.
(12) Invest in interests in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
(13) Write or purchase puts, calls, options or combinations thereof or
invest in warrants, except that a Fund may purchase "put" bonds as
described in the Prospectus.
Nonfundamental Investment Restrictions.
(1) A Fund may not invest in illiquid securities in an amount exceeding, in
the aggregate, 10% of the Municipal Bond Fund's total assets and 15% of the
Fixed Income Fund's net assets. An illiquid security is a security that cannot
be disposed of promptly (within seven days) and in the usual course of business
without a loss, and includes repurchase agreements maturing in excess of seven
days, time deposits with a withdrawal penalty, non-negotiable instruments and
instruments for which no market exists.
(2) A Fund may not purchase securities of any issuer which, together with
any predecessor, has a record of less than three years' continuous operations
prior to the purchase if such purchase would cause investments of the Fund in
all such issuers to exceed 15% of the value of the total assets of the Fund and
the Fund may not invest more than 5% of its total assets in restricted
securities, excluding restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933; provided, however, that no more than 15%
of the Fund's total assets may be invested in restricted securities including
restricted securities eligible for resale under Rule 144A.
(3) A Fund may not purchase securities of other investment companies except
in the open market where no commission or profit to a sponsor or dealer results
from the purchase other than the customary broker's commission and as permitted
by the Investment Company Act of 1940 and the rules and regulations thereunder.
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<PAGE>
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- ------------------------ ---------- ----------------------
<S> <C> <C>
James E. Minnick (1)(3)* President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer, and (since 1990).
New York, NY 10022 Trustee
(age 48)
Patrick W.W. Disney (1)(3)* Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee Services Limited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 40)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 46)
Graham E. Jones (2) Trustee Senior Vice President, BGK Realty Inc.
330 Garfield Street since 1995); Financial Manager, Practice
Santa Fe, NM 87501 Management Systems (medical information
(age 63) services) (1988- 95); Director, 12 closed-
end funds managed by Morgan Stanley
Asset Management; Trustee, 10 open-end
mutual funds managed by Weiss, Peck &
Greer.
William N. Searcy (2) Trustee Pension & Savings Trust Officer, Sprint
2330 Shawnee Mission Pkwy Corporation (telecommunications) (since
Westwood, KS 66205 1989).
(age 50)
Hugh G. Lynch Trustee Director, International Investments,
767 Fifth Avenue General Motors Investment Management
New York, NY 10153 Corporation (since September 1990).
(age 59)
Edward T. Tokar* Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc., (advanced technology and manu-
Morristown, NJ 07962 facturer, (since 1985).
(age 49)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
John G. Alshefski Treasurer, Principal Director of Fund Operations, SEI/ Fund
530 East Swedesford Road Accounting Officer, Resources (since January 1994); Manager
Wayne, PA 19087-1658 Chief Financial Officer International Fund Operations (1992-1994);
(age 30) Senior Associate, Price Waterhouse (1988-
1991).
Neil P. Jenkins (3) Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 36) (since 1985).
David W. Baldt Vice President Executive Vice President and Director of
1435 Walnut Street Fixed Income Investments, MGCM (since
Philadelphia, PA 19102 1989).
(age 47)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income, since
London EC2M 1NB 1989).
England
(age 40)
James Grifo Vice President Executive Vice President and Director
1435 Walnut Street MGCM (since 1996); Senior Vice
Philadelphia, PA 19102 President, GT Global Financial (since
(age 45) 1990).
Martin Hall Vice President Portfolio Manager, Fixed Income Team
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 38)
Mark G. Arthus Secretary and Director, Compliance and Financial Control,
885 Third Avenue Compliance Officer MGCM (since 1992); Vice President, Senior
New York, NY 10022 Compliance Officer and other positions,
(age 40) Citibank, N.A. (to 1992)
</TABLE>
- ---------------
1 Member of the Trust's Valuation and Dividend Committees.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
4 Member of the Trust's Valuation Committee.
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
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<PAGE>
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
Messrs. Jones, Freeman and Searcy are members of the Audit Committee of the
Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the Trust
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent.
As of January 24, 1997, the Trustees and officers of the Trust owned, as a
group, less than one percent of the outstanding shares of each Fund other than
Morgan Grenfell Short-Term Municipal Bond Fund. On such date, the Trustees and
officers of the Trust owned, as a group, 9.39% of the outstanding shares of
Morgan Grenfell Short-Term Municipal Bond Fund.
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an
annual fee of $15,000 provided that they attend each regular Board meeting
during the year. Members of the Audit Committee also receive $1,000 for each
Audit Committee meeting attended. The Chairman of the Audit Committee also
receives an additional $1,000 per Audit Committee meeting attended. The Trustees
are also reimbursed for out-of-pocket expenses incurred by them in connection
with their duties as Trustees.
The following table sets forth the compensation paid by the Trust to the
Trustees for the fiscal year of the Trust ended October 31, 1996:
Pension or
Retirement Benefits Aggregate
Accrued as Part of Compensation from
Name of Trustees Fund Expenses the Trust / Complex *
- ------------------ -------------------- ---------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ 18,000
Graham E. Jones $ 0 $ 18,000
William N. Searcy $ 0 $ 21,000
Hugh G. Lynch $ 0 $ 15,000
Edward T. Tokar $ 0 $ 7,500
* The Trustees listed above do not serve on the Board of any other
investment company that may be considered to belong to the same complex as the
Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as the investment adviser
to the Funds pursuant to the terms of two Management Contracts, each dated
December 28, 1994 (the "Management Contracts"). One Management Contract is
between MGCM and the Trust, on behalf of the Fixed Income Fund and Municipal
Bond Fund. The other Management Contract is between MGCM and the Trust, on
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<PAGE>
behalf of the Equity Funds and Short-Term Fixed Income Fund and Short-Term
Municipal Bond Fund. Pursuant to the Management Contracts, the Adviser
supervises and assists in the management of the assets of each Fund and
furnishes each Fund with research, statistical, advisory and managerial
services. The Adviser pays the ordinary office expenses of the Trust and the
compensation, if any, of all officers and employees of the Trust and all
Trustees who are "interested persons" (as defined in the 1940 Act) of the
Adviser.
Under the Management Contracts, the Trust, on behalf of each Fund is
obligated to pay the Adviser a monthly fee at an annual rate of each Fund's
average daily net assets as follows:
Annual Rate
Morgan Grenfell Fixed Income Fund........................... 0.40%
Morgan Grenfell Short-Term Fixed Income Fund................ 0.40%
Morgan Grenfell Municipal Bond Fund......................... 0.40%
Morgan Grenfell Short-Term Municipal Bond Fund.............. 0.40%
Morgan Grenfell Smaller Companies Fund...................... 1.00%
Morgan Grenfell Microcap Fund............................... 1.50%
Morgan Grenfell Large Cap Growth Fund....................... 0.75%
Each Fund's advisory fees are paid monthly and will be prorated if the
Adviser shall not have acted as the Fund's investment adviser during the entire
monthly period. The Adviser has temporarily agreed, under certain circumstances,
to reduce or not impose its management fee and to make arrangements to limit
certain other expenses as described in the Prospectus under "Expense
Information."
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan Grenfell
Fixed Income Fund paid the Adviser net advisory fees of $2,041,053, $1,150,707
and $532,189 respectively. For the same years, Morgan Grenfell Municipal Bond
Fund paid the Adviser net advisory fees of $791,321, $595,795 and $444,910
respectively. For the fiscal year ended October 31, 1996 and October 31, 1995,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund paid no advisory
fees to the Adviser. The foregoing advisory fee payments and non-payments
reflect expense limitations that were in effect during the indicated periods.
Morgan Grenfell Microcap Fund and Morgan Grenfell Large Cap Growth Fund were not
in operation during the indicated periods and therefore paid no advisory fees
during such periods.
The Management Contract between MGCM and the Trust, on behalf of the Equity
Funds, the Short-Term Fixed Income Fund and the Short-Term Municipal Bond Fund,
was most recently approved on November 21, 1996 by a vote of the Trust's Board
of Trustees, including a majority of those Trustees who were not parties to such
Management Contract or "interested persons" of any such parties. The Management
Contract between MGCM and the Trust, on behalf of the Fixed Income Fund and the
Municipal Bond Fund, was approved on November 21, 1996 by a vote of the Trust's
Board of Trustees, including a majority of those Trustees who were not parties
to such Management Contract or "interested persons" of any such parties.
The Management Contracts will remain in effect until November 30, 1997, and
will continue in effect thereafter, with respect to each Fund, only if such
continuance is specifically approved annually by the Trustees, including a
majority of the Trustees who are not parties to the Management Contracts or
"interested persons" of any such parties, or by a vote of a majority of the
outstanding shares of each Fund. The Management Contracts are terminable by vote
of the Board of Trustees, or, with respect to a Fund, by the holders of a
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<PAGE>
majority of the outstanding shares of the Fund, at any time without penalty on
60 days' written notice to the Adviser. Termination of a Management Contract
with respect to a Fund will not terminate or otherwise invalidate any provision
of either Management Contract with respect to any other Fund. The Adviser may
terminate either Management Contract at any time without penalty on 60 days'
written notice to the Trust. Each Management Contract terminates automatically
in the event of its "assignment" (as such term is defined in the 1940 Act).
Each Management Contract provides that the Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Adviser's obligations under
the Management Contract with the Trust, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
In the management of the Funds and its other accounts, the Adviser
allocates investment opportunities to all accounts for which they are
appropriate subject to the availability of cash in any particular account and
the final decision of the individual or individuals in charge of such accounts.
Where market supply is inadequate for a distribution to all such accounts,
securities are allocated based on a Fund's pro rata portion of the amount
ordered. In some cases this procedure may have an adverse effect on the price or
volume of the security as far as a Fund is concerned. However, it is the
judgment of the Board that the desirability of continuing the Trust's advisory
arrangements with the Adviser outweighs any disadvantages that may result from
contemporaneous transactions. See "Portfolio Brokerage."
MGCM is registered with the Commission as an investment adviser and
provides a full range of investment advisory services to institutional clients.
MGCM is a direct wholly-owned subsidiary of Morgan Grenfell Asset Management,
Ltd., which is an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. As of September 30, 1996,
MGCM managed approximately $8.5 billion in assets for various individual and
institutional accounts, including the Morgan Grenfell SmallCap Fund, Inc., a
registered, closed-end investment company for which it acts as investment
adviser. MGCM also acts as investment subadviser to Fremont U.S. Micro-Cap Fund,
a registered open-end investment company.
Portfolio Turnover
Each Fund's portfolio turnover rate is calculated by dividing the lesser of
the dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal periods
ended October 31, 1996 and 1995, the portfolio turnover rates for Morgan
Grenfell Fixed Income Fund were 176% and 182%, respectively. For the same
periods, the portfolio turnover rates for Morgan Grenfell Municipal Bond Fund
were 66% and 63% respectively. For the fiscal year ended October 31, 1996, the
portfolio turnover rates for Morgan Grenfell Short-Term Fixed Income Fund,
Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund were 124%, 129% and 141%, respectively. For the fiscal period
ended October 31, 1995, the portfolio turnover rates for Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and
Morgan Grenfell Smaller Companies Fund were 90%, 62% and 23%, respectively.
The Administrator
As described in the Prospectus, SEI Financial Management Corporation (the
"Administrator") serves as the Trust's administrator pursuant to an
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<PAGE>
administration agreement between the Administrator and the Trust, on behalf of
the Funds (the "Administration Agreement"). Pursuant to the Administration
Agreement, the Administrator has agreed to furnish statistical and research
data, clerical services, and stationery and office supplies; prepare and file
various reports with the appropriate regulatory agencies including the
Commission and state securities commissions; and provide accounting and
bookkeeping services for the Funds, including the computation of each Fund's net
asset value, net investment income and net realized capital gains, if any.
For its services under the Administration Agreement, the Administrator
receives from all series of the Trust an aggregate monthly fee at the following
annual rates of the aggregate average daily net assets ("aggregate assets") of
such series:
0.12% 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.
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan Grenfell
Fixed Income Fund paid the Administrator administration fees of $655,936,
$455,614 and $259,094, respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Administrator administration fees of $253,839,
$227,872 and $231,957, respectively. For the fiscal year ended October 31, 1996,
Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Smaller Companies Fund paid the
Administrator fees of $45,833, $45,833, and $37,500, respectively. For the
fiscal period ended October 31, 1995, Morgan Grenfell Short-Term Fixed Income
Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund paid the Administrator administration fees of $12,500, $12,500
and $4,167, respectively. The administration fees shown in this paragraph were
paid pursuant to a fee schedule that provided for higher fees than does the fee
schedule that is in effect for the current fiscal year ending October 31, 1997.
The Administration Agreement provides that the Administrator shall not be
liable under the Administration Agreement except for bad faith or gross
negligence in the performance of its duties or from the reckless disregard by it
of its duties and obligations thereunder.
Expenses of the Trust
The expenses borne by service shares of the Funds include the service
shares' allocable share of: (i) fees and expenses of any investment adviser and
any administrator of the Funds; (ii) fees and expenses incurred by the Funds in
connection with membership in investment company organizations; (iii) brokers'
commissions; (iv) payment for portfolio pricing services to a pricing agent, if
any; (v) legal expenses (including an allocable portion of the cost of the
Trust's employees rendering legal services to the Funds); (vi) interest,
insurance premiums, taxes or governmental fees; (vii) the fees and expenses of
the transfer agent of the Funds; (viii) clerical expenses of issue, redemption
or repurchase of shares of the Funds; (ix) the expenses of and fees for
registering or qualifying shares of the Funds for sale and of maintaining the
registration of the Funds and registering the Funds as a broker or a dealer; (x)
the fees and expenses of Trustees who are not affiliated with the Adviser; (xi)
the cost of preparing and distributing reports and notices to shareholders, the
Commission and other regulatory authorities; (xii) the fees or disbursements of
custodians of the Fund's assets, including expenses incurred in the performance
of any obligations enumerated by the Declaration of Trust or By-Laws of the
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<PAGE>
Trust insofar as they govern agreements with any such custodian; (xiii) costs in
connection with annual or special meetings of shareholders, including proxy
material preparation, printing and mailing; (xiv) charges and expenses of the
Trust's auditor; (xv) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business; and (xvi) expenses of an extraordinary and nonrecurring nature.
Transfer Agent
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer and dividend disbursing agent for the
Funds pursuant to a transfer agency agreement (the "Transfer Agency Agreement"),
under which the Transfer Agent (i) maintains record shareholder accounts, and
(ii) makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
The Distributor
The Trust, on behalf of the Funds, has entered into a distribution
agreement (the "Distribution Agreement") pursuant to which SEI Financial
Services Company, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456 (the
"Distributor"), as agent, serves as principal underwriter for the continuous
offering of shares (including service shares) of each Fund. The Distributor has
agreed to use its best efforts to solicit orders for the purchase of shares of
each Fund, although it is not obligated to sell any particular amount of shares.
Shares of the Funds are not subject to sales loads or distribution fees. The
Trust is not responsible for payment of any expenses or fees incurred in the
marketing and distribution of shares of the Funds.
The Distribution Agreement will remain in effect for one year from its
effective date and will continue in effect thereafter only if such continuance
is specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" of such parties. The Distribution Agreement was approved by the initial
shareholder of each Fund on December 28, 1994. The Distribution Agreement was
most recently approved on November 21, 1996 by a vote of the Trust's Board of
Trustees, including a majority of those Trustees who were not parties to the
Distribution Agreement or "interested persons" of any such parties. The
Distribution Agreement is terminable, as to a Fund, by vote of the Board of
Trustees, or by the holders of a majority of the outstanding shares of the Fund,
at any time without penalty on 60 days' written notice to the Trust and Adviser.
The Distributor may terminate the Distribution Agreement at any time without
penalty on 90 days' written notice to the Trust.
Custodian
As described in the Prospectus, CoreStates Bank, N.A. ("CoreStates"), whose
principal business address is Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, PA 19101 maintains custody of the assets of Morgan Grenfell Fixed
Income Fund and Morgan Grenfell Municipal Bond Fund. As described in the
Prospectus, The Northern Trust Company ("Northern"), whose principal business
address is Fifty South LaSalle Street, Chicago, Illinois 60675, maintains
custody of the assets of the other Funds.
Under their custody agreements with the Trust, CoreStates and Northern (i)
maintain separate accounts in the name of each Fund, (ii) hold and transfer
portfolio securities on account of each Fund, (iii) accept receipts and make
disbursements of money on behalf of each Fund, (iv) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities and (v) make periodic reports to the Trust's Board of Trustees
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<PAGE>
concerning each Fund's operations. CoreStates and Northern are authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Funds.
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
service shares which authorizes it to compensate Service Organizations whose
customers invest in service shares of the Funds for providing certain personal,
account administration and/or shareholder liaison services. Pursuant to the
Plans, the Funds may enter into agreements with Service Organizations ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
Organizations may perform some or all of the following services: (i) acting as
record holder and nominee of all service shares beneficially owned by their
customers; (ii) establishing and maintaining individual accounts and records
with respect to the service shares owned by each customer; (iii) providing
facilities to answer inquiries and respond to correspondence from customers
about the status of their accounts or about other aspects of the Trust or
applicable Fund; (iv) processing and issuing confirmations concerning customer
orders to purchase, redeem and exchange service shares; and (v) receiving and
transmitting funds representing the purchase price or redemption proceeds of
such service shares.
As compensation for such services, each Fund will pay each Service
Organization with which it has a Service Agreement a service fee in an amount up
to .25% (on an annualized basis) of the average daily net assets of the Fund's
service shares attributable to customers of such Service Organization. Service
Organizations may from time to time be required to meet certain other criteria
in order to receive service fees. As of October 31, 1996, the Trust's fiscal
year end, service shares of the Funds had not been offered.
In accordance with the terms of the Service Plans, the officers of the
Trust provide to the Trust's Board of Trustees for their review a quarterly
written report of the amounts expended under the Service Plans and the purpose
for which such expenditures were made. In the Trustees' quarterly review of such
reports, they will consider the continued appropriateness and the level of
compensation that the Service Plans provide.
Pursuant to the Plans, service shares of a Fund that are beneficially owned
by customers of a Service Organization will convert automatically to
institutional shares of the same Fund in the event that such Service
Organization's Service Agreement expires or is terminated. 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.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974 ("ERISA") may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in service shares of the Fund. Service Organizations that are subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions are urged to consult their own legal advisers before investing
fiduciary assets in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under a Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
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<PAGE>
fiduciary responsibility standards set forth in part 4 of Title I of ERISA.
Those standards are designed to help ensure that the fidcuiary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
and provides further that such fiduciary must act prudently and solely in the
interests of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes within the definition of "party in interest" with respect to a plan any
fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not only
prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it would also
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which plan is otherwise responsible for paying). Thus, the
fiduciary duty issues involved in a plan fiduciary's receipt of the service fee
must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through
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dealers acting for their own account and not as brokers or otherwise through
transactions directly with the issuer of the instrument. Some fixed income
securities are purchased and sold on an exchange or in over-the-counter
transactions conducted on an agency basis involving a commission.
Pursuant to the Advisory Agreements, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In addition, the Advisory Agreements authorize the
Adviser, subject to the periodic review of the Trust's Board of Trustees, to
cause a Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser to the Fund. Such brokerage and research
services may consist of pricing information, reports and statistics on specific
companies or industries, general summaries of groups of bonds and their
comparative earnings and yields, or broad overviews of the securities markets
and the economy.
Supplemental research information utilized by the Adviser is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable to the Adviser. The Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplemental research or other services received will primarily benefit one
or more other investment companies or other accounts of the Adviser for which
investment discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. During the
fiscal period ended October 31, 1996, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts
managed by the Adviser are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to a Fund. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the
general policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may
place securities transactions with brokers with whom it is affiliated
("Affiliated Brokers").
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<PAGE>
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
Transactions would not be placed with Affiliated Brokers if a Fund would
have to pay a commission rate less favorable than their contemporaneous charges
for comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two or
more funds or customers on the same day, each fund or customer pays the average
price and commissions paid are allocated in direct proportion to the number of
shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement
setting forth the total amount of all compensation retained by them or any
associated person of them in connection with effecting transactions for the
account of the Funds, and the Board reviews and approves all the Funds'
portfolio transactions on a quarterly basis and the compensation received by
Affiliated Brokers in connection therewith. During the fiscal years ended
October 31, 1994, 1995 and 1996, neither the Fixed Income Fund nor the Municipal
Bond Fund paid any brokerage commissions to any Affiliated Broker. During the
fiscal periods ended October 31, 1995 and October 31, 1996, neither Short-Term
Fixed Income Fund, Short-Term Municipal Bond Fund nor Smaller Companies Fund
paid any brokerage commissions to any affiliated broker.
Affiliated Brokers do not knowingly participate in commissions paid by the
Funds to other brokers or dealers and do not seek or knowingly receive any
reciprocal business as the result of the payment of such commissions. In the
event that an Affiliated Broker learns at any time that it has knowingly
received reciprocal business, it will so inform the Board.
For the fiscal years ended October 31, 1996, 1995 and 1994, Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund paid no brokerage
commissions. For fiscal year ended October 31, 1995, Morgan Grenfell Short-Term
Fixed Income Fund and Morgan Grenfell Short-Term Municipal Bond Fund paid no
brokerage commissions. For the fiscal periods ended October 31, 1996 and October
31, 1995, Morgan Grenfell Smaller Companies Fund paid aggregate brokerage
commissions of $7,708 and $3,778, respectively.
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<PAGE>
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its shares at the close of
such regular trading, which is normally 4:00 p.m. Eastern time, on each day on
which the New York Stock Exchange ("NYSE") is open (a "Business Day"). The NYSE
is closed on Saturdays and Sundays as well as the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For purposes of calculating net asset value, equity securities traded on a
recognized U.S. or foreign securities exchange or the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") are valued at their
last sale price on the principal exchange on which they are traded or NASDAQ (if
NASDAQ is the principal market for such securities) on the valuation day or, if
no sale occurs, at the bid price. Unlisted equity securities for which market
quotations are readily available are valued at the most recent bid price.
Debt securities and other fixed income investments of the Funds are valued
at prices supplied by independent pricing agents, which prices reflect
broker-dealer supplied valuations and electronic data processing techniques.
Short-term obligations maturing in sixty days or less may be valued at amortized
cost, which method does not take into account unrealized gains or losses on such
portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets in which market quotations are not readily
available are valued at fair value using methods determined in good faith by the
Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the 4:00 P.M.
(Eastern Time) close of business on each Business Day. In addition, European or
Far Eastern securities trading generally or in a particular country or countries
may not take place on all Business Days. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Business Days and on which the Funds' net asset values are not
calculated. Such calculation may not take place contemporaneously with the
determination of the prices of certain portfolio securities used in such
calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the NYSE will not be reflected in the Funds' calculation of net asset values
unless the Adviser deems that the particular event would materially affect net
asset value, in which case an adjustment will be made.
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<PAGE>
PERFORMANCE INFORMATION
Yield
From time to time, each Fixed Income Fund and each Municipal Fund may
advertise its yield and (in the case of the Municipal Funds) its tax-equivalent
yield. Yield and tax-equivalent yield are calculated separately for service
shares and institutional shares of a Fund. Each type of share is subject to
differing yields for the same period. The yield of service shares of a Fund
refers to the annualized income generated by an investment in the service shares
of the Fund over a specified 30-day period. The yield is calculated by assuming
that the income generated by the investment during that period is generated for
each like period over one year and is shown as a percentage of the investment.
In particular, yield will be calculated according to the following formula:
YIELD = 2 [(a - b +1)(6) - 1]
cd
Where: a = dividends and interest earned by the
Fund during the period;
b = net expenses accrued for the period;
c = average daily number of shares out-standing during the
period entitled to receive dividends; and
d = maximum offering price per share on
the last day of the period.
Tax-equivalent yield is computed by dividing the portion of the yield that
is tax exempt by one minus a stated income tax rate and adding the product to
that portion, if any, of the yield that is not tax exempt.
Actual yields will depend on such variables as asset quality, average asset
maturity, the type of instruments a Fund invests in, changes in interest rates
on money market instruments, changes in the expenses of the service shares of
the Fund and other factors.
Yields are one basis upon which investors may compare the Funds with other
mutual funds; however, yields of other mutual funds and other investment
vehicles may not be comparable because of the factors set forth above and
differences in the methods used in valuing portfolio instruments.
For the 30-day period ended October 31, 1996, the yields of the
institutional shares of Fixed Income Fund, the Municipal Bond Fund, the
Short-Term Fixed Income Fund and the Short-Term Municipal Bond Fund were 6.38%,
5.23%, 5.94% and 5.07%, respectively. If the expense limitations described in
the Prospectus for these Funds had not been in effect during this period, the
yields of institutional shares of these Funds would have been 6.32%, 5.17%,
5.18% and 4.02%, respectively. For the same period, the tax-equivalent yields of
institutional shares of the Municipal Bond Fund and the Short-Term Municipal
Bond Fund were 8.66% and 8.39%, respectively, assuming the highest Federal
Income Tax bracket for individuals (39.6%). If the expense limitations described
in the Prospectus for these Funds had not been in effect during this period, the
tax-equivalent yields of institutional shares of these Funds would have been
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<PAGE>
8.56% and 6.66%, respectively, assuming the same Federal Income Tax bracket. No
service shares of the Funds were outstanding during the fiscal year ended
October 31, 1996.
Total Return
Average annual total return is calculated separately for service shares and
institutional shares of a Fund. Each type of share is subject to different fees
and expenses and, consequently, may have differing average annual total returns
for the same period. Each Fund that advertises "average annual total return" for
a class of its shares computes such return by determining the average annual
compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment according to
the following formula:
ERV
T = [(-----) (1/n) - 1]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the
1, 5 or 10 year (or other) periods
at the end of the applicable period
(or a fractional portion thereof);
P = hypothetical initial payment of
$1,000; and
n = period covered by the computation,
expressed in years.
Each Fund that advertises "aggregate total return" for a class of its
shares computes such returns by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The above calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period. For the fiscal year ended October 31, 1996 the average annual
return of institutional shares of Morgan Grenfell Fixed Income Fund, Morgan
Grenfell Municipal Bond Fund, Morgan Grenfell Short-Term Fixed Income Fund,
Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund were 6.27%, 6.90%, 6.09%, 5.90% and 24.58%, respectively. For
their respective periods from commencement of operations to October 31, 1996,
the average annual returns of institutional shares of Morgan Grenfell Fixed
Income Fund, Morgan Grenfell Municipal Bond Fund, Morgan Grenfell Short-Term
Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan
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<PAGE>
Grenfell Smaller Companies Fund were 8.29%, 8.93%, 6.09%, 6.24% and 22.69%,
respectively. If the expense limitations described in the Prospectus for the
above Funds had not been in effect during the indicated periods, the total
returns of these Funds for such periods would have been lower than the total
return figures shown in this paragraph. As of October 31, 1996, no service
shares of the Funds had been issued.
The Funds may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to,
Barron's, The Wall Street Journal, Weisenberger Investment Companies Service,
Business Week, Changing Times, Financial World, Forbes, Fortune and Money. In
addition, the Funds may from time to time advertise their performance relative
to certain indices and benchmark investments, including: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Shearson Lehman Brothers Aggregate Bond Index or its
component indices (the Aggregate Bond Index measures the performance of
Treasury, U.S. Government agency, corporate, mortgage and Yankee bonds); (f) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. Government bonds); and (g) historical investment data
supplied by the research departments of Goldman Sachs, Shearson Lehman Hutton,
First Boston Corporation, Morgan Stanley, Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data. The composition
of the investments in such indices and the characteristics of such benchmark
investments are not identical to, and in some cases are very different from,
those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by the Funds to calculate
their performance figures.
TAXES
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Funds.
The summary is based on the laws in effect on the date of this Statement of
Additional Information, which are subject to change.
General
Each Fund is a separate taxable entity. Each Fund has elected or intends to
elect to be treated, and intends to qualify for each taxable year, as a
regulated investment company under Subchapter M of the Code.
Qualification of any Fund as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its
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<PAGE>
gross income (including tax-exempt interest) for its taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks or securities or foreign currencies, or
other income (including but not limited to gains from options, futures, and
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "90% gross income test"); (b) the Fund
derive less than 30% of its gross income for its taxable year from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities; (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign currencies); and
(iii) foreign currencies and foreign currency options, futures and forward
contracts that are not directly related to the Fund's principal business of
investing in stock or securities or options and futures with respect to stocks
or securities (the "short-short test"); and (c) the Fund diversify its holdings
so that, at the close of each quarter of its taxable year, (i) at least 50% of
the market value of its total (gross) assets is comprised of cash, cash items,
United States Government securities, securities of other regulated investment
companies and other securities limited in respect of any one issuer to an amount
not greater in value than 5% of the value of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than United States Government securities and securities of
other regulated investment companies) or two or more issuers controlled by the
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to a
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities will be treated as gains from the
disposition of investments held for less than three months under the short-short
test (even though characterized as ordinary income for some purposes) if such
currencies or instruments were held for less than three months. In addition,
future Treasury regulations could provide that qualifying income under the 90%
gross income test will not include gains from foreign currency transactions or
derivatives that are not directly related to a Fund's principal business of
investing in stock or securities or options and futures with respect to stock or
securities. Using foreign currency positions or entering into foreign currency
options, futures or forward contracts for purposes other than hedging currency
risk with respect to securities in a Fund's portfolio or anticipated to be
acquired may not qualify as "directly-related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
the Fund distributes at least 90% of the sum of (i) its "investment company
taxable income" (which includes dividends, taxable interest, taxable accrued
original issue discount, recognized market discount income, income from
securities lending, any net short-term capital gain in excess of net long-term
capital loss and certain net realized foreign exchange gains and is reduced by
deductible expenses) and (ii) the excess of its gross tax-exempt interest, if
any, over certain disallowed deductions ("net tax-exempt interest"), the Fund
(but not its shareholders) will be relieved of federal income tax on any income
of the Fund, including long-term capital gains, distributed to shareholders.
However, if a Fund retains any investment company taxable income or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), it will be subject to federal income tax at regular corporate rates on
the amount retained.
If a Fund retains any net capital gain, the Fund may designate the retained
amount as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their shares of such undistributed amount, and (ii) will be
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<PAGE>
entitled to credit their proportionate shares of the tax paid by the Fund
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities.
For U.S. federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal under current law to
65% of the amount of undistributed net capital gains included in the
shareholder's gross income. Each Fund intends to distribute at least annually to
its shareholders all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year a
Fund does not qualify as a regulated investment company, it will be taxed on all
of its investment company taxable income and net capital gain at corporate
rates, any net tax-exempt interest may be subject to alternative minimum tax,
and its distributions to shareholders will be taxable as ordinary dividends to
the extent of its current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed in such year and on which no federal income tax was
paid by the Fund. For federal income tax purposes, dividends declared by a Fund
in October, November or December to shareholders of record on a specified date
in such a month and paid during January of the following year are treated as
distributed by the Fund and are taxable to such shareholders as if received on
December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) entered into
by an Equity Fund will generally be treated as capital gains and losses. Certain
of the futures contracts, forward contracts and options held by an Equity Fund
may be required to be "marked-to-market" for federal income tax purposes, that
is, treated as having been sold at their fair market value on the last day of
the Fund's taxable year. As a result, a Fund may be required to recognize income
or gain without a concurrent receipt of cash. Any gain or loss recognized on
actual or deemed sales of these futures contracts, forward contracts, or options
(except for certain foreign currency options, forward contracts, and futures
contracts) will be treated as 60% long-term capital gain or loss and 40%
short-short capital gain or loss. As a result of certain hedging transactions
entered into by an Equity Fund, such Fund may be required to defer the
recognition of losses on futures or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
related positions and the characterization of gains or losses as long-term or
short-term may be changed. The tax provisions described above applicable to
options, futures and forward contracts may affect the amount, timing and
character of the Fund's distributions to shareholders. The short-short test
described above may limit a Fund's ability to use options, futures and forward
transactions as well as its ability to engage in short sales. Certain tax
elections may be available to an Equity Fund to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by an Equity Fund. Under these
rules, foreign exchange gain or loss realized with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and
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<PAGE>
foreign currency-denominated payables and receivables will generally be treated
as ordinary income or loss, although in some cases elections may be available
that would alter this treatment.
If an Equity Fund or a Fixed Income Fund acquires stock (including, under
proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain non-U.S. corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The applicable Funds may
limit and/or manage their holdings in passive foreign investment companies to
minimize their tax liability or maximize their return from these investments.
A Fund that invests in foreign securities may be subject to foreign
withholding or other foreign taxes on certain income (possibly including, in
some cases, capital gains) from such securities. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. The
Funds will not be entitled to pass through such foreign taxes to their
shareholders, who consequently will not be entitled to any U.S. tax credits or
deductions for such taxes.
Each Fund's investments in zero coupon securities or other securities
bearing original issue discount or, if the Fund elects to include market
discount in income currently, market discount will generally cause it to realize
income prior to the receipt of cash payments with respect to these securities.
Options, futures or forward contracts subject to the mark to market rules
described above may have the same result if recognized mark to market gains
exceed recognized mark to market losses. In order to obtain cash to distribute
this income or gain, maintain its qualification as a regulated investment
company, and avoid federal income or excise taxes, a Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold.
Each Municipal Fund purchases tax-exempt municipal securities which are
generally accompanied by an opinion of bond counsel to the effect that interest
on such securities is not included in gross income for federal income tax
purposes. It is not economically feasible to, and the Municipal Funds therefore
do not, make any additional independent inquiry into whether such securities are
in fact tax-exempt. Bond counsels' opinions will generally be based in part upon
covenants by the issuers and related parties regarding continuing compliance
with federal tax requirements. Tax laws, especially those enacted during the
last decade, not only limit the purposes for which tax-exempt bonds can be
issued and the supply of such bonds, but also contain numerous and complex
requirements that must be satisfied on a continuing basis in order for bonds to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed
facility fails to comply with such requirements at any time, interest on the
bond could become taxable, retroactive to the date the obligation was issued. In
that event, a portion of a Municipal Fund's distributions attributable to
interest such Fund received on such bond for the current year and for prior
years could be characterized or recharacterized as taxable income.
Each Fixed Income Fund and each Municipal Fund may purchase municipal
securities together with the right to resell the securities to the seller at an
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agreed upon price or yield within a specified period prior to the maturity date
of the securities. Such a right to resell is commonly known as a "put" and is
also referred to as a "standby commitment." A Fund may pay for a standby
commitment either separately, in cash, or in the form of a higher price for the
securities which are acquired subject to the standby commitment, thus increasing
the cost of securities and reducing the return otherwise available.
Additionally, a Fund may purchase beneficial interests in municipal securities
held by trusts, custodial arrangements or partnerships and/or combined with
third-party puts or other types of features such as interest rate swaps; those
investments may require the Fund to pay "tender fees" or other fees for the
various features provided.
The IRS has issued a revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The IRS has also issued
private letter rulings to certain taxpayers (which do not serve as precedent for
other taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. Each Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a standby commitment or other third
party put and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the IRS
will agree with such position in any particular case. Additionally, the federal
income tax treatment of certain other aspects of these investments, including
the treatment of tender fees paid by the Fund, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage each Fund's portfolio in a manner designed to minimize any adverse impact
from the tax rules applicable to these investments.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders. At October 31, 1996, Fixed Income Fund had capital
loss carryforwards of approximately $530,000 and Short-Term Fixed Income Fund
had capital loss carryforwards of approximately $26,000, in each case expiring
(if not previously used) in the fiscal year ended October 31, 2004.
U.S. Shareholders -- Distributions
A Municipal Fund's distributions from the tax-exempt interest it receives
will generally be exempt from federal income tax, provided that such Fund
qualifies as a regulated investment company, at least 50% of the value of the
Fund's total assets at the close of each quarter of its taxable year consists of
obligations that pay interest excluded from gross income under Section 103(a) of
the Code, and the Fund properly designates such distributions as
"exempt-interest dividends." The portions of such exempt-interest dividends, if
any, derived from interest on certain private activity bonds will constitute tax
preference items and may give rise to, or increase liability under, the federal
alternative minimum tax for particular shareholders. In addition, all
exempt-interest dividends may increase a corporate shareholder's liability, if
any, for the corporate alternative minimum tax and will be taken into account in
determining the portion, if any, of a shareholder's social security benefits or
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certain railroad retirement benefits that is subject to tax.
For U.S. federal income tax purposes, distributions by the Funds other than
the Municipal Funds, whether reinvested in additional shares or paid in cash,
generally will be taxable to shareholders who are subject to tax. Shareholders
receiving a distribution in the form of newly issued shares will be treated for
U.S. federal income tax purposes as receiving a distribution in an amount equal
to the amount of cash they would have received had they elected to receive cash
and will have a cost basis in each share received equal to such amount divided
by the number of shares received. Distributions from investment company taxable
income of any Fund, including the Municipal Funds, for the year will be taxable
as ordinary income. Investment company taxable income includes, among other
things, dividends, taxable interest, income from repurchase agreements and
securities loans; accrued, recognized market discount; a portion of the discount
on certain stripped tax-exempt obligations and their coupons; and net short-term
capital gain (in excess of net long-term capital loss) from the sale of
investments or options or futures transactions or the disposition of rights to
when-issued securities prior to issuance. Distributions to corporate
shareholders designated as derived from dividend income received by a Fund, if
any, that would be eligible for the dividends received deduction if the Fund
were not a regulated investment company will be eligible, subject to certain
holding period and debt-financing restrictions, for the 70% dividends received
deduction for corporations. Because eligible dividends are limited to those
received by a Fund from U.S. domestic corporations, all dividends paid by the
Municipal Funds, and all or a substantial portion of the dividends paid by the
Fixed Income Funds, will generally not qualify for the dividends received
deduction. The dividends-received deduction, if available, is reduced to the
extent the shares with respect to which the dividends received are treated as
debt financed under the Code and is eliminated if the shares are deemed to have
been held for less than a minimum period, generally 46 days. The entire
dividend, including the deducted amount, is considered in determining the
excess, if any, of a corporate shareholder's adjusted current earnings over its
alternative minimum taxable income, which may increase its liability for the
federal alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax basis in
its shares of a Fund. Capital gain dividends (i.e., dividends from net capital
gain) paid by any Fund, including the Municipal Funds, if designated as such in
a written notice to shareholders mailed not later than 60 days after a Fund's
taxable year closes, will be taxed to shareholders as long-term capital gain
regardless of how long shares have been held by shareholders, but are not
eligible for the dividends received deduction for corporations.
Interest on indebtedness incurred directly or indirectly to purchase or
carry shares of a Municipal Fund will not be deductible to the extent it is
deemed related to exempt-interest dividends paid by such Fund.
A Municipal Fund may not be an appropriate investment for persons who are,
or are related to, substantial users of facilities financed by industrial
development or private activity bonds.
Shareholders that are required to file tax returns are required to report
tax-exempt interest income, including exempt-interest dividends, on their
federal income tax returns. Each Municipal Fund will inform shareholders of the
federal income tax status of its distributions after the end of each calendar
year, including the amounts that qualify as exempt-interest dividends and any
portions of such amounts that constitute tax preference items under the federal
alternative minimum tax. Shareholders who have not held shares of a Municipal
Fund for a full taxable year may have designated as tax-exempt or as a tax
preference item a percentage of their distributions which is not exactly equal
to a proportionate share of the amount of tax-exempt interest or tax preference
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income earned during the period of their investment in the Fund.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
U.S. Shareholders -- Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has held the shares for more than one year, otherwise short-term. However, any
loss realized on the sale, redemption or other disposition of shares with a tax
holding period of six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares and, to the
extent in excess of any disallowed amount, will be treated as a long-term
capital loss to the extent of any capital gain dividend received with respect to
such shares. Additionally, any loss realized on a sale, redemption or other
disposition of shares of a Fund may be disallowed under "wash sale" rules to the
extent the shares disposed of are replaced with shares of the same Fund within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis of
the shares acquired.
The Funds may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including distributions from a
Fund's net long-term capital gains, but not including exempt-interest dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish the Funds with a correct taxpayer
identification number ("TIN") certified under penalties of perjury, or if the
Internal Revenue Service or a broker notifies the Funds that the payee has
failed to properly report interest or dividend income to the Internal Revenue
Service or that the TIN furnished by the payee to the Funds is incorrect, or if
(when required to do so) the payee fails to certify under penalties of perjury
that it is not subject to backup withholding. Any amounts withheld may be
credited against a shareholder's United States federal income tax liability.
Distributions by a Municipal Fund will not be subject to backup withholding,
however, for any year such Fund reasonably estimates that at least 95% of its
dividends will be exempt-interest dividends.
Non-U.S. Shareholders
Shareholders who, as to the United States, are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors generally will be subject to U.S. withholding tax at
the rate of 30% on distributions treated as ordinary income unless the tax rate
is reduced pursuant to a tax treaty or the dividends are effectively connected
with a U.S. trade or business of the shareholder. In the latter case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business
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in the United States or, in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the United States for 183 days or more
during the taxable year and certain other conditions are met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption of
shares of a Fund will not be subject to U.S. federal income or withholding tax
unless the gain is effectively connected with the shareholder's trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. investors should consult their tax advisers about the
applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
State and Local
The Funds may be subject to state or local taxes in jurisdictions in which
the Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
GENERAL INFORMATION ABOUT THE TRUST
General
The Trust is an open-end investment company organized as a Delaware
business trust on September 13, 1993. The Trust commenced operations on January
3, 1994. Until December 30, 1994, the Fixed Income Fund and the Municipal Bond
Fund were series of The Advisors' Inner Circle Fund, a Massachusetts business
trust organized under the laws of the Commonwealth of Massachusetts on July 18,
1991.
In the event of a liquidation or dissolution of the Trust or an individual
Fund, shareholders of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved on liquidation, based on the number of shares of the Fund that are held
by each shareholder.
Each service share and institutional share of a Fund is entitled to one
vote per share; however, separate votes will be taken by each Fund or class (or
by more than one Fund or class voting on a single class if similarly affected)
on matters affecting only the Fund or class (or those affected Funds or classes)
or as otherwise required by law. Shares are freely transferable and have no
preemptive, subscription or conversion rights. The Trust does not expect to hold
shareholder meetings except as required by the 1940 Act or the Agreement and
Declaration of Trust (the "Declaration of Trust"). See "Organization and Shares
of the Trust" in the Prospectus.
As of January 24, 1997, the following shareholders owned the following
respective percentages of the outstanding shares of the Fixed Income Fund, the
Municipal Bond Fund, The Short-Term Municipal Bond Fund, the Short-Term Fixed
Income Fund, The Smaller Companies Fund and The Microcap Fund:
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Fixed Income Fund:
SEI Trust Company 7.12%
Oaks,PA 19456-0100
BATRUS & Co. 6.03%
c/o Bankers Trust Company
PO Box 9005
Church Street Station
New York, NY 10006
San Mateo County Employees 8.01%
Retirement Association
2317 Broadway St STE 115
Redwood City, CA 94063-1613
Municipal Bond Fund:
SEI Trust Company 9.34%
Oaks, PA 19456-0100
Batrus & Co., (New York Corporation) 44.53%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
INFID & Co. 11.32%
c/o Bankers Trust Co.
PO Box 9005 Church Street Station
New York, NY 10008
Charles Schwab & Co. Inc. 7.59%
101 Montgomery Street
San Francisco, CA 94104-4122
Short-Term Municipal Bond Fund:
SEI Trust Company 5.39%
Oaks, PA 19456-0100
Rocco A. Ortenzio 16.86%
C/O Select Capital Corp
4718 Old Gettysburg Rd.
Mechanicsburg, PA 17055
Robert A. Ortenzio 5.62%
C/O Select Capital Corp
4718 Old Gettysburg Rd.
Mechanicsburg, PA 17055
c/o Wilmington Trust Company 6.88%
FBO David Baldt
1100 N. Market Street
Wilmington, DE 19890
Timothy Mather 11.28%
4901 S. Franklin St
Englewood, CO 80110
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Robert D. Greene 16.77%
26 Island Road
Stuart, FL 34996-7005
Short-Term Fixed Income Fund:
BATRUS & Co., (New York Corporation) 24.68%
c/o Bankers Trust
PO Box 9005 Church Street Station
New York, NY 10006
SEI Trust Company 9.01%
Oaks, PA 19456-0100
Infid & Co. 6.17%
c/o Bankers Trust Co.
PO Box 706 Church Street Station
New York, NY 10008
Harris Trust 5.17%
FBO National Sporting Goods Assn
111 W. Monroe Street
Chicago, IL 60603
Harris Trust 7.29%
FBO National Sporting Goods Assn
11 W. Monroe Street
Chicago, IL 60603
TBON & CO 10.49%
401 Church St.
PO Box 198986
Nashville, TN 37219-8986
Smaller Companies Fund:
Morgan Grenfell Capital Management, Inc. 65.55%
(Delaware Corporation)
885 Third Avenue Suite 3200
New York, NY 10022
Deutsche Morgan Grenfell 29.70%
CJ Lawrence
1290 Avenue of the Americas
New York, NY 10104
Microcap Fund:
Deutsche Morgan Grenfell 62.88%
C.J. Lawrence Inc.
1290 Avenue of the Americas
New York, NY 10104
Morgan Grenfell Capital 18.71%
Management, Inc.
885 Third Avenue
New York, NY 10022
Elizabeth Lugar Schater 13.39%
Charlottesville, VA 22902
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under Delaware
law, the shareholders of a business trust are not generally subject to liability
for the debts or obligations of the trust. Similarly, Delaware law provides that
none of the Funds will be liable for the debts or obligations of any other Fund.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in other states. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of the
courts in such other states, the courts may not apply Delaware law and may
thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
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entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Consideration for Purchases of Shares
The Trust generally will not issue shares of the Funds for consideration
other than cash. At the Trust's sole discretion, however, it may issue Fund
shares for consideration other than cash in connection with an acquisition of
portfolio securities (other than municipal debt securities issued by state
political subdivisions or their agencies or instrumentalities) or pursuant to a
bona fide purchase of assets, merger or other reorganization, provided (i) the
securities meet the investment objectives and policies of the Fund; (ii) the
securities are acquired by the Fund for investment and not for resale; (iii) the
securities are not restricted as to transfer either by law or liquidity of
market; and (iv) the securities have a value which is readily ascertainable (and
not established only by valuation procedures) as evidenced by a listing on the
American Stock Exchange or the New York Stock Exchange or by quotation on the
NASD Automated Quotation System. An exchange of securities for Fund shares will
generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
Price Waterhouse LLP serves as the Funds' independent accountants,
providing audit services, including review and consultation in connection with
various filings by the Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the securities of the Funds and certain other
series of the Trust. If further information is desired with respect to the
Trust, the Funds or such other series, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31,
1996 are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of Price Waterhouse LLP, the
Trust's independent accountants, as experts in accounting and auditing.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The rating descriptions set forth below are believed to be the most recent
rating descriptions available from Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's), Duff & Phelps, Inc.
("Duff") and Fitch Investors Service ("Fitch") at the date of this Statement of
Additional Information for the securities listed. Ratings are generally given to
securities at the time of issuance. While the rating agencies may from time to
time revise such ratings, they undertake no obligation to do so, and the ratings
indicated do not necessilarily represent ratings which will be given to these
securities on the date of a Fund's fiscal year end.
I. Long-Term Debt Ratings
Moody's Investors Service, Inc.
Description of four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1,2 and 3) in each rating category to indicate the
security's ranking within the category):
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to prinicpal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
ie:, they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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Standard & Poor's Ratings Group (1)
Description of the four highest long-term debt ratings by Standard & Poor's
(Standard & Poor's may apply a plus (+) or minus (-) to a particular rating
classification to show relative standing within the classification):
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
(1) Rates all governmental bodies having $1,000,000 or more of debt outstanding,
unless adequate information is not available.
Duff & Phelps, Inc.
Description of the four highest long-term debt ratings by Duff (Duff may
apply a plus or minus to show relative standing within a rating category):
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Investment grade. Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
Fitch Investores Service
Description of the four highest long-term ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably forseeable
events.
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AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of thest issues is generally rated "F-1+".
A: Bonds considered to be investment grade and of high crdit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
II. Short-Term Debt Ratings
Short-term debt ratings may be assigned, for example, to commercial paper,
master demand notes, bank instruments and letters of credit.
Moody's description of its highest short-term debt rating:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- Lending market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternative liquidity
Standard & Poor's description of its highest short-term debt rating:
A-1 This designation indicated that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
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III. Short-Term Loan / Municipal Note Ratings
Moody's description of its two highest short-term loan / municipal note ratings:
MIG-1/VMIG-1 This description denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceeding group.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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The financial statements of the Trust for the periods ended on and prior to
October 31, 1996 are incorporated by reference into the preceding Statement of
Additional Information from the Trust's 1996 Annual Report to Shareholders for
the year ended October 31, 1996 (filed electronically on December 30, 1996; file
no. 812-10080; accession no. 0000935069-96-000172), and will be attached to each
copy of such Statement of Additional Information that is distributed.
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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.
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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.
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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.
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<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.
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<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 35
Organization and Shares of the Trust 36
Performance Information 37
Appendix A........................................... 39
Appendix B........................................... 42
Appendix C........................................... 44
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<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% 1.50%
Other Expenses*............................................ 0.54% 0.88% 0.72%
Reduction of Advisory Fee
and Expense Limitation by Adviser **....................... (0.14)% (0.48)% (0.47)%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Fund Operating
Expenses**................................................. 0.90% 0.90% 1.75%
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
</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: 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%.
- --------------------------------------------------------------------------------
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<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 $18 $55 $95 $206
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. 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."
- --------------------------------------------------------------------------------
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<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.
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<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.
- --------------------------------------------------------------------------------
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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 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
- --------------------------------------------------------------------------------
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<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
- --------------------------------------------------------------------------------
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<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
- --------------------------------------------------------------------------------
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<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."
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<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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<PAGE>
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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<PAGE>
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 nor more than 5% of its total assets in purchased options other than
protective put options. A Fund's transactions in options, forward currency
contracts, futures contracts and options on futures contracts may be limited by
the requirements for qualification of the Fund as a regulated investment company
for tax purposes. See "Taxes" in the Statement of Additional Information.
Fixed Income Securities
General. In order to achieve their respective investment objectives, the
Funds may invest in a broad range of U.S. and non-U.S. fixed income securities.
In periods of declining interest rates, a Fund's yield (its income from
portfolio investments over a stated period of time) may tend to be higher than
prevailing market rates, and in periods of rising interest rates, the yield of
the Fund may tend to be lower. Also, when interest rates are falling, the
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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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Restricted and Illiquid Securities. Each Fund will not invest more than 15%
of its net assets in illiquid securities, which include repurchase agreements
and fixed time deposits maturing in more than seven days and securities that are
not readily marketable. In addition, each Fund will not invest more than 5% of
its net assets in securities that are subject to restrictions on resale because
they are not registered in reliance on the exemption for non-public offerings
("restricted securities") under the Securities Act of 1933 (the "1933 Act").
However, this restriction does not apply to restricted securities offered and
sold to "qualified institutional buyers" under Rule 144A under the 1933 Act or
to securities purchased in accordance with Regulation S under the 1933 Act.
Lending Securities. For the purpose of realizing income, each Fund may lend
to broker-dealers portfolio securities amounting to not more than 33 1/3% of its
total assets taken at current value. These transactions must be fully
collateralized at all times but involve some credit risk to a Fund if the other
party should default on its obligation and the Fund is delayed in or prevented
from recovering the collateral. Voting rights with respect to a portfolio
security pass to the borrower when the security is loaned by a Fund, but the
Trustees (or the Adviser) are required to call the loan if necessary to vote on
a material event affecting the Fund's investment in the loaned security.
Other Investment Companies. Each Fund may invest up to 10% of its total
assets, calculated at the time of purchase, in the securities of other
investment companies. A Fund may not invest more than 5% of its total assets in
the securities of any one investment company or acquire more than 3% of the
voting securities of any other investment company. A Fund will indirectly bear
its proportionate share of any management or other fees paid by investment
companies in which it invests, in addition to its own fees.
ADDITIONAL INVESTMENT INFORMATION
Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions which are
described in detail in the Statement of Additional Information. Those investment
restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. Each Fund's
investment objective and all other investment restrictions and policies are
nonfundamental and can be changed by the Board of Trustees of the Trust at any
time without shareholder approval.
Each Fund has fundamental investment restrictions with respect to
borrowing, lending, diversification of investments, senior securities, pledging
of assets, underwriting, real estate investments and commodities. See
"Investment Restrictions" in the Statement of Additional Information.
Portfolio Transactions
The Adviser is responsible for making specific decisions to buy and sell
portfolio securities for the Funds. The Adviser is also responsible for
selecting brokers and dealers to effect these transactions and negotiating, if
possible, brokerage commissions and dealers' charges. The Funds generally
purchase and sell foreign securities in foreign countries, since the best
available market for foreign securities is often on foreign markets. In
transactions on foreign markets, brokerage commissions generally are fixed and
are often higher than in the United States where commissions are negotiated. In
the over-the-counter markets, securities generally are traded on a net basis
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<PAGE>
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 1.50%
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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<PAGE>
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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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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<PAGE>
APPENDIX A
Description of Ratings Categories of
Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group
Moody's Investors Service, Inc. ("Moody's") describes classifications of
fixed income securities (not including commercial paper) as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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
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<PAGE>
Portfolio Manager Expertise Professional Experience
- ----------------- --------- -----------------------
Annette Fraser Global Fixed Income Fund Manager, Fixed Income Team,
MGIS (since 1992); Fund Manager,
Morgan Grenfell International Funds
Management Ltd. (since 1990).
Neil Jenkins, CFA Fixed Income Global and Emerging Markets Fixed
Income Portfolio Manager, MGIS;
Director, MGIS (since 1996) and
MGIFM (since 1995); Vice President,
the Trust (since 1993); Director,
MGCM (1991 -1996); Morgan Grenfell,
Moscow Office (1988-1990); Morgan
Grenfell & Company Ltd. (since
1985).
Ian Kelson Fixed Income Markets Director, MGIS (since 1988); Chief
Investment Officer, MGIS Fixed
Income (since 1989); Portfolio
Manager, Bank of America
(multi-currency accounts) (1981-85).
Simon Treacher Emerging Markets MGIS (since 1994); Portfolio
Manager, Prudential Portfolio
Managers (1992-1993); Portfolio
Manager, Worldinvest Ltd.
(1978-1992); Portfolio Manager,
Bankers Trust Co. (1984-1987);
National Westminster Bank
(1980-1984).
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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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<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
March 7, 1997
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of eighteen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following three separate investment portfolios of the Trust (the "Funds"):
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
This Statement of Additional Information is not a prospectus, and should be
read only in conjunction with the Funds' Service Shares Prospectus dated
March 7, 1997 (the "Prospectus"). A copy of the Service Shares Prospectus
may be obtained without charge from any Service Organization that has an
agreement with the Trust or from SEI Financial Services Company, the Trust's
Distributor, by calling 1-800-550-6426 or writing to 1 Freedom Valley Drive,
Oaks, Pennsylvania 19456-0100.
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<PAGE>
TABLE OF CONTENTS
Page
Introduction.............................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks........................ 4
Investment Restrictions................................... 19
Trustees and Officers..................................... 22
Investment Advisory and Other Services.................... 24
Service Plan.............................................. 28
Portfolio Transactions ................................... 30
Net Asset Value........................................... 32
Performance Information................................... 33
Taxes..................................................... 36
General Information About the Trust....................... 42
Additional Information.................................. 44
Financial Statements...................................... 44
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or Distributor. The Prospectus does not
constitute an offering by the Trust or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of eighteen separate investment series, including the following three series:
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
(collectively, the "Funds").
Each Fund is "non-diversified" within the meaning of the Investment Company Act
of 1940, as amended (the "1940 Act").
Morgan Grenfell Investment Services Limited (the "Adviser" or "MGIS") serves as
investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor.
The information contained in this Statement of Additional Information generally
supplements the information contained in the Funds' Prospectus. No investor
should invest in a Fund without first reading the Prospectus. Capitalized terms
used herein and not otherwise defined have the same meaning ascribed to them in
the Prospectus.
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ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus concerning
the investment objectives and policies of each Fund.
Foreign Currency Exchange Contracts
Each of the Funds will exchange currencies in the normal course of managing its
investments and may incur costs in doing so because a foreign exchange dealer
will charge a fee for conversion. A Fund may conduct foreign currency exchange
transactions on a "spot" basis (i.e., for prompt delivery and settlement) at the
prevailing spot rate for purchasing or selling currency in the foreign currency
exchange market. A Fund also may enter into forward currency exchange contracts
("forward currency contracts") or other contracts to purchase and sell
currencies for settlement at a future date. A foreign exchange dealer, in that
situation, will expect to realize a profit based on the difference between the
price at which a foreign currency is sold to the Fund and the price at which the
dealer will cover the purchase in the foreign currency market. Foreign exchange
transactions are entered into at prices quoted by dealers, which may include a
mark-up over the price that the dealer must pay for the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make delivery
of the currency specified in the contract or, at or prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Funds may enter into forward currency contracts in several circumstances for
both hedging and non-hedging purposes. First, when a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, a Fund will
attempt to protect itself against an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when management of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
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precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward currency
contracts in an attempt to protect the value of a Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which a Fund can achieve at some future point in time. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies or forward contracts entered into for non-hedging
purposes. If the value of the securities placed in the segregated account
declines, additional cash or liquid securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of a Fund's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate these contracts. In such event, the
Funds' ability to utilize forward currency contracts may be restricted.
The Funds generally will not enter into a forward currency contract with a term
of greater than one year.
While the Funds may enter into forward currency contracts in an attempt to
reduce currency exchange rate risks, transactions in currency contracts involve
certain other risks. Thus, while the Funds may benefit from currency
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for a Fund than if it had not engaged in any such
transactions. Moreover, there may be an imperfect correlation between a Fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. Such imperfect correlation may cause
a Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Each Fund, in addition, may combine forward currency exchange contracts with
investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in the required foreign currency.
A Fund could purchase a U.S. dollar-denominated security and at the same time
enter into a forward currency contract to sell U.S. dollars for the required
foreign currency at a future date. By matching the amount of U.S. dollars to be
exchanged with the anticipated value of the U.S. dollar-denominated security, a
Fund may be able to "lock in" the foreign currency value of the security and
adopt a synthetic investment position whereby the Fund's overall investment
return from the combined position is similar to or greater than the return from
purchasing a foreign currency-denominated instrument.
A Fund's activities in forward currency exchange contracts, currency futures
contracts and related options and currency options (see below) may be limited by
the requirements of subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a registered investment company.
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Options on Securities and Foreign Currencies
Each of the Funds may write covered put and call options and purchase
put and call options. Such options may relate to particular U.S.
or non-U.S. securities, or to U.S. or non-U.S. currencies. The
Funds may write put and call options which are issued by the
Options Clearing Corporation (the "OCC") or which are traded on
U.S. and non-U.S. exchanges and over-the-counter. See
"Description of Securities and Investment Techniques and Related
Risks -- Options" in the Prospectus.
A put option on a currency gives its holder the right to sell an amount
(specified in units of the underlying currency) of the underlying currency at
the stated exercise price at any time prior to the option's expiration.
Conversely, a call option on a currency gives its holder the right to purchase
an amount (specified in units of the underlying currency) of the underlying
currency at the stated exercise price at any time prior to the option's
expiration.
The Funds will engage in over-the-counter ("OTC") options only with
broker-dealers deemed creditworthy by the Adviser. Closing transactions in
certain options are usually effected directly with the same broker-dealer that
effected the original option transaction. A Fund bears the risk that the
broker-dealer may fail to meet its obligations. There is no assurance that a
Fund will be able to close an unlisted option position. Furthermore, unlisted
options are not subject to the protections afforded purchasers of listed options
by the OCC, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options.
A Fund will write call options only if they are "covered." In the case of a call
option on a security, the option is "covered" if a portfolio owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or liquid securities in such amount as are held
in a segregated account by the Fund's custodian) upon conversion or exchange of
other securities held by it. A call option on a security is also covered if the
Fund holds a call on the same security as the call written by the Fund where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in cash or liquid securities
in a segregated account with the Fund's custodian. A call option on currency
written by a Fund is covered if the Fund owns an equal amount of the underlying
currency.
When a Fund purchases a put option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission paid by the Fund) received by the Fund
is included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be marked-to-market on an ongoing basis to reflect the current value of the
option purchased or written. The current value of a traded option is the last
sale price or, in the absence of a sale, the average of the closing bid and
asked prices. If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
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the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by the Fund is exercised, the proceeds to the
Fund from the exercise will be increased by the net premium originally received,
and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on securities
and currencies. For example, there are significant differences between the
securities markets, currency markets and the corresponding options markets that
could result in imperfect correlations, causing a given option transaction not
to achieve its objectives. In addition, a liquid secondary market for particular
options, whether traded OTC or on a U.S. or non-U.S. securities exchange may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the OCC may not at all times be adequate to handle current
trading volume; or one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The hours of trading for options may not conform to the hours during which the
underlying securities and currencies are traded. To the extent that the options
markets close before the markets for the underlying securities and currencies,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
The risks described above also apply to options on futures, which are discussed
below.
Futures Contracts and Related Options
To hedge against changes in interest rates or securities prices and for certain
non-hedging purposes, the Funds may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Funds may also enter into closing purchase and sale transactions
with respect to any of such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities), securities
indices, currencies and other financial instruments, currencies and indices. The
Funds will engage in futures and related options transactions only for bona fide
hedging or other non-hedging purposes as defined in regulations promulgated by
the CFTC. All futures contracts entered into by the Funds are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the CFTC or on
foreign exchanges approved by the CFTC.
Futures Contracts. A futures contract may generally be described as an agreement
between two parties to buy and sell a particular financial instrument for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract). Futures contracts
obligate the long or short holder to take or make delivery of a specified
quantity of a commodity or financial instrument, such as a security or the cash
value of a securities index, during a specified future period at a specified
price.
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When interest rates are rising or securities prices are falling, a Fund can seek
to offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, a Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Funds may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures on securities are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price and rate of return on portfolio
securities and securities that a Fund proposes to acquire. The Funds may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates or a
decline in market prices that would adversely affect the value of a Fund's
portfolio securities. Such futures contracts may include contracts for the
future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. If, in the
opinion of the Adviser, there is a sufficient degree of correlation between
price trends for a Fund's portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the Fund may
also enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in a Fund's portfolio may be more
or less volatile than prices of such futures contracts, the Adviser will attempt
to estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund enter into
a greater or lesser number of futures contracts or by attempting to achieve only
a partial hedge against price changes affecting a Fund's securities portfolio.
When hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the Funds may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available.
Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give the Funds the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, a Fund obtains the benefit of the futures position if prices move in a
favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of a Fund's assets. By writing a call
option, a Fund becomes obligated, in exchange for the premium, to sell a futures
contract (if the option is exercised), which may have a value higher than the
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exercise price. Conversely, the writing of a put option on a futures contract
generates a premium which may partially offset an increase in the price of
securities that a Fund intends to purchase. However, a Fund becomes obligated to
purchase a futures contract (if the option is exercised), which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
The Funds may use options on futures contracts solely for hedging or other
non-hedging purposes as described below.
Other Considerations. The Funds will engage in futures and related options
transactions only for hedging or non-hedging purposes as permitted by CFTC
regulations which permit principals of an investment company registered under
the 1940 Act to engage in such transactions without registering as commodity
pool operators. A Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are substantially
related to price fluctuations in securities or instruments held by the Fund or
securities or instruments which they expect to purchase. Except as stated below,
the Funds' futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a decline in
the price of securities (or the currency in which they are denominated) that a
Fund owns or futures contracts will be purchased to protect a Fund against an
increase in the price of securities (or the currency in which they are
denominated) that a Fund intends to purchase. As evidence of this hedging
intent, each Fund expects that, on 75% or more of the occasions on which it
takes a long futures or option position (involving the purchase of futures
contracts), the Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities (or assets denominated in
the related currency) in the cash market at the time when the futures or option
position is closed out. However, in particular cases, when it is economically
advantageous for a Fund to do so, a long futures position may be terminated or
an option may expire without the corresponding purchase of securities or other
assets.
As an alternative to compliance with the hedging definition, a CFTC regulation
now permits a Fund to elect to comply with a different test under which the
aggregate initial margin and premiums required to establish non-hedging
positions in futures contracts and options on futures will not exceed 5% of the
net asset value of a Fund's portfolio, after taking into account unrealized
profits and losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase. A Fund will engage in
transactions in futures contracts and related options only to the extent such
transactions are consistent with the requirements of the Code for maintaining
its qualification as a regulated investment company for federal income tax
purposes. See "Taxes."
A Fund will be required, in connection with transactions in futures contracts
and the writing of options on futures contracts, to make margin deposits, which
will be held by the Trust's custodian for the benefit of the futures commission
merchant through whom the Fund engages in such futures contracts and option
transactions. These transactions involve brokerage costs, require margin
deposits and, in the case of futures contracts and options obligating a Fund to
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purchase securities, require a Fund to segregate cash or liquid securities in an
account maintained with the Trust's custodian to cover such contracts and
options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for a Fund than if it had not entered into any
futures contracts or options transactions. The other risks associated with the
use of futures contracts and options thereon are (i) imperfect correlation
between the change in market value of the securities held by a Fund and the
prices of the futures and options and (ii) the possible absence of a liquid
secondary market for a futures contract or option and the resulting inability to
close a futures or option position prior to its maturity or expiration date.
In the event of an imperfect correlation between a futures or options position
and the portfolio position which is intended to be protected, the desired
protection may not be obtained and the Fund may be exposed to risk of loss. The
risk of imperfect correlation may be minimized by investing in contracts whose
price behavior is expected to resemble that of a Fund's underlying securities.
The risk that the Funds will be unable to close out a futures or related options
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
Fixed Income Securities
Variable and Floating Rate Instruments. Debt instruments purchased by a Fund may
be structured to have variable or floating interest rates. These instruments may
include variable amount master demand notes that permit the indebtedness to vary
in addition to providing for periodic adjustments in the interest rates. The
Adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instrument is
subject to a demand feature, will continuously monitor their financial ability
to meet payment on demand. Where necessary to ensure that a variable or floating
rate instrument is equivalent to the quality standards applicable to a Fund's
fixed income investments, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. Any bank providing such a bank letter, line of
credit, guarantee or loan commitment will meet the Fund's investment quality
standards relating to investments in bank obligations. A Fund will invest in
variable and floating rate instruments only when the Adviser deems the
investment to involve minimal credit risk. The Adviser will also continuously
monitor the creditworthiness of issuers of such instruments to determine whether
a Fund should continue to hold the investments.
The absence of an active secondary market for certain variable and floating rate
notes could make it difficult to dispose of the instruments, and a Fund could
suffer a loss if the issuer defaults or during periods in which a Fund is not
entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to the
Fund's 15% limitation on investments in illiquid securities when a reliable
trading market for the instruments does not exist and the Fund may not demand
payment of the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
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the obligation and the ratings of the issue. The ratings of Standard & Poor's
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
and other nationally and internationally recognized rating organizations
represent their respective opinions as to the quality of the obligations they
undertake to rate. Ratings, however, are general and are not absolute standards
of quality or value. Consequently, obligations with the same rating, maturity
and interest rate may have different market prices. See Appendix A in the
Prospectus for a description of the ratings provided by recognized statistical
ratings organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. The Board of Trustees or the Adviser, pursuant to guidelines established
by the Board of Trustees, will consider such an event in determining whether the
Fund should continue to hold the security in accordance with the interests of
the Fund and applicable regulations of the Commission.
Interest Rate, Mortgage and Currency Swaps and Interest Rate Caps and Floors.
The Funds may enter into interest rate, mortgage and currency swaps and interest
rate caps and floors for hedging purposes and non-hedging purposes. Inasmuch as
these transactions are entered into for good faith hedging purposes or are
offset by a segregated account as described in the Prospectus, the Funds and the
Adviser believe that such obligations do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Funds' borrowing restrictions.
A Fund will not enter into any interest rate, mortgage, or currency swap or
interest rate cap or floor transaction unless the unsecured commercial paper,
senior debt or the claims-paying ability of the other party thereto is
considered to be investment grade by the Adviser. If there is a default by the
other party to such a transaction, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. However, the staff of the Commission takes the position
that swaps, caps and floors are illiquid investments that are subject to the
Funds' 15% limitation on such investments.
The federal income tax rules applicable to mortgage dollar rolls (see
prospectus), interest rate, mortgage and currency swaps and interest rate caps
and floors are unclear in certain respects, and a Fund may be required to
account for these instruments under tax rules in a manner that, under certain
circumstances, may limit its transactions in these instruments.
Inverse Floating Rate Securities. The Funds may invest up to 5% of their net
assets in inverse floating rate securities. The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that
exceeds the magnitude of the change in the index rate of interest. The higher
degree of leverage inherent in inverse floaters is associated with greater
volatility in their market values.
Foreign Government Securities. The Emerging Markets Debt Fund may invest in
so-called "Brady Bonds," which have recently been issued by Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria,
Panama, the Philippines, Poland, Uruguay and Venezuela and which may be issued
by other countries. Brady Bonds are issued as part of a debt restructuring in
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which the bonds are issued in exchange for cash and certain of the country's
outstanding commercial bank loans. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the over-the-counter secondary market. U.S. dollar
denominated, collateralized Brady Bonds, which may be fixed rate par bonds or
floating rate discount bonds, are collateralized in full as to principal by U.S.
Treasury zero coupon bonds that have the same maturity as the stated bonds.
Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
Zero Coupon and Deferred Interest Bonds. The Funds may invest in zero coupon
bonds and deferred interest bonds. Zero coupon and deferred interest bonds are
debt obligations which are issued at a significant discount from face value. The
original discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds generally provide for a period of delay before
the regular payment of interest begins. Although this period of delay is
different for each deferred interest bond, a typical period is approximately
one-third of the bond's term to maturity. Such investments benefit the issuer by
mitigating its initial need for cash to meet debt service, but some also provide
a higher rate of return to attract investors who are willing to defer receipt of
such cash. Zero coupon and deferred interest bonds are more volatile than
instruments that pay interest regularly. The Funds will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is generally received at the time of
accrual, may require the liquidation of other portfolio securities to satisfy
the Funds' distribution obligations. See "Taxes" below.
Lower Rated High Yield "High Risk" Debt Obligations. As discussed in the
Prospectus, the Emerging Markets Debt Fund seeks high current income and may
invest in high yielding, fixed income securities rated Baa or lower by Moody's,
BBB or lower by Standard & Poor's, or an equivalent rating. The Emerging Markets
Debt Fund may also invest in unrated fixed income securities of comparable
quality. Ratings are based largely on the historical financial condition of the
issuer. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which may
be better or worse than the rating would indicate.
The values of lower rated securities generally fluctuate more than those of
higher rated securities. In addition, the lower rating reflects a greater
possibility of an adverse change in financial condition affecting the ability of
the issuer to make payments of interest and principal. The Adviser seeks to
minimize these risks through diversification, investment analysis and attention
to current developments in interest rates and economic conditions. Where the
Emerging Markets Debt Fund invests in securities in lower rated categories, the
achievement of the Fund's goals may be more dependent on the Adviser's ability
than would be the case if the Fund were investing in securities in the higher
rated categories.
As noted in the Prospectus, the Emerging Markets Debt Fund may invest in
pay-in-kind (PIK) securities, which pay interest in either cash or additional
securities, at the issuer's option, for a specified period. The Fund may also
invest in zero coupon bonds. Both types of bonds may be more speculative and
subject to greater fluctuations in value than securities which pay interest
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periodically and in cash, due to changes in interest rates. The Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is generally
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Fund's distribution obligations. See "Taxes" below.
The market value of debt securities which carry no equity participation usually
reflects yields generally available on securities of similar quality and type.
When such yields decline, the market value of a portfolio already invested at
higher yields can be expected to rise if such securities are protected against
early call. In general, in selecting securities for its portfolio, the Emerging
Markets Debt Fund intends to seek protection against early call. Similarly, when
such yields increase, the market value of a portfolio already invested at lower
yields can be expected to decline. The Fund's portfolio may include debt
securities which sell at substantial discounts from par. These securities are
low coupon bonds which, during periods of high interest rates, because of their
lower acquisition cost tend to sell on a yield basis approximating current
interest rates.
Preferred Stock
Each of the Funds, subject to its investment objectives, may purchase preferred
stock. Preferred stocks are equity securities, but possess certain attributes of
debt securities and are generally considered fixed income securities. Holders of
preferred stocks normally have the right to receive dividends at a fixed rate
when and as declared by the issuer's board of directors, but do not participate
in other amounts available for distribution by the issuing corporation.
Dividends on the preferred stock may be cumulative, and in such cases all
cumulative dividends usually must be paid prior to dividend payments to common
stockholders. Because of this preference, preferred stocks generally entail less
risk than common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stocks. However,
preferred stocks are equity securities in that they do not represent a liability
of the issuer and therefore do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. In addition, preferred stocks are subordinated in right of payment
to all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer. See
"Convertible Securities and Preferred Stocks" in the Prospectus for a
description of certain characteristics of convertible preferred stock.
Mortgage-Backed Securities
The Funds may invest in mortgage-backed securities. Mortgage-backed securities
represent direct or indirect participations in or obligations collateralized by
and payable from mortgage loans secured by real property. Each mortgage pool
underlying mortgage-backed securities will consist of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on owner and non-owner
occupied one-unit to four-unit residential properties, multifamily residential
properties, agricultural properties, commercial properties and mixed use
properties.
Agency Mortgage Securities. The Funds may invest in mortgage backed securities
issued or guaranteed by the U.S. Government, foreign governments or any of their
agencies, instrumentalities or sponsored enterprises. Agencies,
instrumentalities or sponsored enterprises of the U.S. Government include but
are not limited to the Government National Mortgage Association, ("Ginnie Mae"),
- --------------------------------------------------------------------------------
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<PAGE>
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Ginnie Mae securities are backed by the
full faith and credit of the U.S. Government, which means that the U.S.
Government guarantees that the interest and principal will be paid when due.
Fannie Mae securities and Freddie Mac securities are not backed by the full
faith and credit of the U.S. Government; however, these enterprises have the
ability to obtain financing from the U.S. Treasury. There are several types of
agency mortgage securities currently available, including, but not limited to,
guaranteed mortgage pass-through certificates and multiple class securities.
Privately Issued Mortgage-Backed Securities. The Funds may also invest in
mortgage-backed securities issued by trusts or other entities formed or
sponsored by private originators of and institutional investors in mortgage
loans and other foreign or domestic non-governmental entities (or representing
custodial arrangements administered by such institutions). These private
originators and institutions include domestic and foreign savings and loan
associations, mortgage bankers, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. Privately
issued mortgage-backed securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
mortgage-backed securities are not guaranteed by an entity having the credit
standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive a high
quality rating, they normally are structured with one or more types of "credit
enhancement." Such credit enhancements fall generally into two categories: (1)
liquidity protection and (2) protection against losses resulting after default
by a borrower and liquidation of the collateral. Liquidity protection refers to
the providing of cash advances to holders of mortgage-backed securities when a
borrower on an underlying mortgage fails to make its monthly payment on time.
Protection against losses resulting after default and liquidation is designed to
cover losses resulting when, for example, the proceeds of a foreclosure sale are
insufficient to cover the outstanding amount on the mortgage. Such protection
may be provided through guarantees, insurance policies or letters of credit,
though various means of structuring the transaction or through a combination of
such approaches.
Mortgage Pass-Through Securities. The Funds may invest in mortgage pass-through
securities, which are fixed or adjustable rate mortgage-backed securities that
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicers of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations. The Funds may invest in collateralized mortgage obligations
("CMOs"), which are multiple class mortgage-backed securities. CMOs provide an
investor with a specified interest in the cash flow from a pool of underlying
mortgages or of other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or adjustable interest rate and a final
distribution date. In most cases, payments of principal are applied to the CMO
classes in the order of their respective stated maturities, so that no principal
payments will be made on a CMO class until all other classes having an earlier
stated maturity date are paid in full. Sometimes, however, CMO classes are
"parallel pay" (i.e., payments of principal are made to two or more classes
concurrently).
Stripped Mortgage-Backed Securities. The Funds may also invest in stripped
mortgage-backed securities ("SMBS"), which are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two classes that
receive different proportions of the interest and principal distributions from a
pool of mortgage loans. If the underlying mortgage loans experience greater than
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<PAGE>
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities.
A common type of SMBS will have one class receiving all of the interest from a
pool of mortgage loans ("IOs"), while the other class will receive all of the
principal ("POs"). The market value of POs generally is unusually volatile in
response to changes in interest rates. The yields on IOs are generally higher
than prevailing market yields on other mortgage-backed securities because the
cash flow patterns of IOs are more volatile and there is a greater risk that the
initial investment will not be fully recouped. Because an investment in an IO
consists entirely of a right to an interest income stream and prepayments of
mortgage loan principal amounts can reduce or eliminate such income stream, the
value of IO's can be severely adversely affected by significant prepayments of
underlying mortgage loans. In accordance with a requirement imposed by the staff
of the Commission, the Adviser will consider privately-issued fixed rate IOs and
POs to be illiquid securities for purposes of the Funds' limitation on
investments in illiquid securities. Unless the Adviser, acting pursuant to
guidelines and standards established by the Board of Trustees, determines that a
particular government-issued fixed rate IO or PO is liquid, it will also
consider these IOs and POs to be illiquid.
Asset-Backed Securities
The Funds may invest in asset-backed securities, which represent participations
in, or are secured by and payable from, pools of assets such as motor vehicle
installment sale contracts, installment loan contracts, leases of various types
of real and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. Such asset pools are securitized
through the use of privately-formed trusts or special purpose corporations.
Payments or distributions of principal and interest may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the trust
or corporation, or other credit enhancements may be present.
Custodial Receipts
Each of the Funds may acquire U.S. Government Securities and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
Securities, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRs") and "Certificate of Accrual on Treasury Securities"
("CATS"). The stripped coupons are sold separately from the underlying
principal, which is usually sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. The underlying U.S.
Treasury bonds and notes themselves are generally held in book-entry form at a
Federal Reserve Bank. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. government securities for federal tax
and securities purposes. In the case of CATS and TIGRS, the Internal Revenue
Service ("IRS") has reached this conclusion for the purpose of applying the tax
diversification requirements applicable to regulated investment companies such
as the Funds. CATS and TIGRS are not considered U.S. Government securities by
the Staff of the Commission, however. Further, the IRS conclusion is contained
only in a general counsel memorandum, which is an internal document of no
precedential value or binding effect, and a private letter ruling, which also
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<PAGE>
may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a U.S
or non-U.S issuer. Each of the Funds may purchase commercial paper for temporary
defensive purposes as described in the Prospectus. A Fund may also invest in
variable rate master demand notes which typically are issued by large corporate
borrowers providing for variable amounts of principal indebtedness and periodic
adjustments in the interest rate according to the terms of the instrument.
Demand notes are direct lending arrangements between a Fund and an issuer, and
are not normally traded in a secondary market. A Fund, however, may demand
payment of principal and accrued interest at any time. In addition, while demand
notes generally are not rated, their issuers must satisfy the same criteria as
those set forth above for issuers of commercial paper. The Adviser will consider
the earning power, cash flow and other liquidity ratios of issuers of demand
notes and continually will monitor their financial ability to meet payment on
demand. See also "Fixed Income Securities--Variable and Floating Rate
Instruments."
Bank Obligations
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates.
Bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and examined by
the Comptroller of the Currency and are required to be members of the Federal
Reserve System and to be insured by the Federal Deposit Insurance Corporation
(the "FDIC"). U.S. banks organized under state law are supervised and examined
by state banking authorities but are members of the Federal Reserve System only
if they elect to join. Most state banks are insured by the FDIC (although such
insurance may not be of material benefit to a Fund, depending upon the principal
amount of CDs of each bank held by the Fund) and are subject to federal
examination and to a substantial body of federal law and regulation. As a result
of governmental regulations, U.S. branches of U.S. banks, among other things,
generally are required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Non-U.S. bank obligations include Eurodollar Certificates of Deposit ("ECDs"),
which are U.S. dollar-denominated certificates of deposit issued by offices of
non-U.S. and U.S. banks located outside the United States; Eurodollar Time
Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a non-U.S.
branch of a U.S. bank or a non-U.S. bank; Canadian Time Deposits ("CTDs"), which
are essentially the same as ETDs except they are issued by Canadian offices of
major Canadian banks; Yankee Certificates of Deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
non-U.S. bank and held in the United States; and Yankee Bankers' Acceptances
("Yankee BAs"), which are U.S. dollar-denominated bankers' acceptances issued by
a U.S. branch of a non-U.S. bank and held in the United States.
- --------------------------------------------------------------------------------
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<PAGE>
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described in the
Prospectus.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For certain other purposes, it is not clear whether a court would
consider such an obligation as being owned by the Fund or as being collateral
for a loan by the Fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
obligation before its repurchase, under the repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such
delays may result in a loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below the repurchase price (including accrued interest), the seller of the
obligation will be required to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. A Fund will
purchase securities on a "when-issued" or forward commitment basis only with the
intention of completing the transaction and actually purchasing the securities.
If deemed appropriate by the Adviser, however, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to the Fund on
the settlement date. In these cases the Fund may realize a gain or loss.
When a Fund agrees to purchase securities on a "when-issued" or forward
commitment basis, the Fund's custodian will set aside cash or liquid securities
equal to the amount of the commitment in a separate account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the separate account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitments. The market value of a
Fund's net assets may fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments then when it sets aside cash.
Because a Fund's liquidity and ability to manage its portfolio might be affected
when it sets aside cash or portfolio securities to cover such purchase
commitments, each Fund expects that its commitments to purchase when-issued
securities and forward commitments will not exceed 33% of the value of its total
assets absent unusual market conditions. When a Fund engages in "when-issued"
and forward commitment transactions, it relies on the other party to the
transaction to consummate the trade. Failure of such party to do so may result
in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
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<PAGE>
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities.
The Fund does not earn interest or dividends on the securities it has committed
to purchase until the settlement date.
Reverse Repurchase Agreements and Other Borrowings
Each Fund may borrow for temporary or emergency purposes. This borrowing may be
unsecured. Among the forms of borrowing in which each Fund may engage is
entering into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of a portfolio security by the Fund, coupled with its
agreement to repurchase the security at a specified time and price. Each Fund
will maintain a segregated account with the Trust's custodian consisting of cash
or liquid securities equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with banks and domestic broker-dealers.
Reverse repurchase agreements involve the risk that the market value of the
securities subject to the reverse repurchase agreement may decline below the
repurchase price at which the Fund is required to repurchase such securities.
The 1940 Act requires a Fund to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If the asset coverage should decline below 300% as
a result of market fluctuations or for other reasons, a Fund is required to sell
some of its portfolio securities within three days to reduce its borrowings and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. To avoid the potential
leveraging effects of a Fund's borrowings, investments will not be made while
borrowings (including reverse repurchase agreements and dollar rolls) are in
excess of 5% of a Fund's total assets. Borrowing may exaggerate the effect on
net asset value of any increase or decrease in the market value of the
portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate. See "Investment Restrictions."
Lending Portfolio Securities
Each Fund may lend portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 33-1/3% of the
value of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, cash equivalents or U.S. Government securities. The cash
or instruments collateralizing the Fund's loans of securities will be maintained
at all times in a segregated account with the Trust's custodian, in an amount at
least equal to the current market value of the loaned securities. From time to
time, a Fund may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and is acting as a "placing broker." No fee
will be paid to affiliated persons of the Fund. The Board of Trustees will make
a determination that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by continuing to
receive amounts equal to the interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
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<PAGE>
Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as amounts equal to the dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower except
that, if a material event will occur affecting the investment in the loaned
securities, the Fund must terminate the loan in time to vote the securities on
such event.
INVESTMENT RESTRICTIONS
The following investment restrictions may not be changed with respect to any
Fund without the approval of a "majority" (as defined in the 1940 Act) of the
outstanding shares of such Fund. For the purposes of the 1940 Act, "majority"
means the lesser of (a) 67% or more of the shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy or (b) more than 50% of the shares of the
Fund. Investment restrictions that involve a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a Fund
with the exception of borrowings permitted by fundamental investment restriction
(2) listed below.
Accordingly, the Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and (7)
below. For purposes of this restriction, the issuance of shares of beneficial
interest in multiple classes or series, the purchase or sale of options, futures
contracts and options on futures contracts, forward commitments, forward foreign
exchange contracts, repurchase agreements and reverse repurchase agreements
entered into in accordance with the Fund's investment policy, and the pledge,
mortgage or hypothecation of the Fund's assets within the meaning of paragraph
(3) below are not deemed to be senior securities.
(2) Borrow money (i) except from banks as a temporary measure for extraordinary
emergency purposes and (ii) except that the Fund may enter into reverse
repurchase agreements and dollar rolls with banks, broker-dealers and other
parties; provided that, in each case, the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For the purposes of this
investment restriction, short sales, transactions in currency, forward
contracts, swaps, options, futures contracts and options on futures contracts,
and forward commitment transactions shall not constitute borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and to the extent related to the segregation of
assets in connection with the writing of covered put and call options and the
purchase of securities or currencies on a forward commitment or delayed-delivery
basis and collateral and initial or variation margin arrangements with respect
to forward contracts, options, futures contracts and options on futures
contracts.
(4) Act as an underwriter, except to the extent that, in connection with the
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<PAGE>
disposition of portfolio securities, the Fund may be deemed to be an underwriter
for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities issued by companies (other than real estate limited partnerships)
that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend portfolio securities in accordance
with the Fund's investment policies and may purchase or invest in repurchase
agreements, bank certificates of deposit, all or a portion of an issue of bonds,
bank loan participation agreements, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance of
the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the securities
of one or more issuers conducting their principal business activities in the
same industry or group of industries. This restriction does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
In addition to the fundamental policies mentioned above, the Board of Trustees
of the Trust has adopted the following nonfundamental policies that may be
changed or amended by action of the Board of Trustees without shareholder
approval.
Accordingly, the Trust may not, on behalf of a Fund:
(a) Participate on a joint-and-several basis in any securities trading account.
The "bunching" of orders for the sale or purchase of marketable portfolio
securities with other accounts under the management of the Adviser to save
commissions or to average prices among them is not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales unless by virtue of its
ownership of other securities, the Fund has the right to obtain, without payment
of additional consideration, securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon the same
conditions, except that a Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of securities and in
connection with transactions involving forward foreign currency exchange
transactions, options, futures and options on futures.
(c) Purchase securities of other investment companies, except in the open market
where no commission or profit to a sponsor or dealer results from the purchase
other than the customary broker's commission and as permitted by the Investment
Company Act of 1940 and the rules and regulations thereunder.
(d) Purchase securities of any issuer which, together with any predecessor, has
a record of less than three years' continuous operations prior to the purchase
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<PAGE>
if such purchase would cause investments of the Fund in all such issuers to
exceed 5% of the value of the total assets of the Fund.
(e) Invest for the purpose of exercising control over or management of any
company.
(f) Purchase warrants of any issuer, if, as a result of such purchases, more
than 2% of the value of the Fund's net assets would be invested in warrants
which are not listed on the New York Stock Exchange or the American Stock
Exchange or more than 5% of the value of the net assets of the Fund would be
invested in warrants generally, whether or not so listed. For these purposes,
warrants are to be valued at the lesser of cost or market, but warrants acquired
by the Fund in units with or attached to debt securities shall be deemed to be
without value.
(g) Knowingly purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or directors or officers of the Adviser or any
investment management subsidiary of the Adviser individually owns beneficially
more than 0.5% and together own beneficially more than 5% of the securities of
such issuer.
(h) Purchase interests in oil, gas or other mineral leases or exploration
programs; however, this policy will not prohibit the acquisition of securities
of companies engaged in the production or transmission of oil, gas or other
minerals.
(i) Purchase any security, including any repurchase agreement maturing in more
than seven days, which is illiquid, if more than 15% of the net assets of the
Fund, taken at market value, would be invested in such securities.
(j) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933; provided, however, that no more than 15% of the Fund's
total assets may be invested in restricted securities including restricted
securities eligible for resale under Rule 144A.
(k) Write covered calls or put options with respect to more than 25% of the
value of its total assets or invest more than 5% of its total assets in puts,
calls, spreads, or straddles, other than protective put options.
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include such
investments in determining compliance with the 15% limitation on investments in
illiquid securities. Restricted securities (including commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933) which the Board of
Trustees has determined are readily marketable will not be deemed to be illiquid
for purposes of such restriction.
"Value" for the purposes of all investment restrictions shall mean the market
value used in determining each Fund's net asset value.
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<PAGE>
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
<TABLE>
<CAPTION>
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- ---------------- ---------- ----------------------
<S> <C> <C>
James E. Minnick (1)(3)* President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer,
New York, NY 10022 and (since 1990) Trustee
(age 48)
Patrick W.W. Disney (1)(3)* Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee ServicesLimited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 40)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 46)
Graham E. Jones (2) Trustee Senior Vice President, BGK Realty Inc.
330 Garfield Street since 1995); Financial Manager, Practice
Santa Fe, NM 87501 Management Systems (medical information
(age 63) services) (1988- 95); Director, 12 closed-
end funds managed by Morgan Stanley Asset
Management; Trustee, 10 open-end mutual
funds managed by Weiss, Peck & Greer.
William N. Searcy (2) Trustee Pension & Savings Trust Officer, Sprint
2330 Shawnee Mission Pkwy Corporation (telecommunications) (since
Westwood, KS 66205 1989).
(age 50)
Hugh G. Lynch Trustee Director, International Investments,
767 Fifth Avenue General Motors Investment Management
New York, NY 10153 Corporation (since September 1990).
(age 59)
Edward T. Tokar* Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc., (advanced technology and manu-
Morristown, NJ 07962 facturer, (since 1985).
(age 49)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
John G. Alshefski Treasurer, Principal Director of Fund Operations, SEI/ Fund
530 East Swedesford Road Accounting Officer, Resources (since January 1994);
Manager Wayne, PA 19087-1658 Chief Financial Officer International Fund Operations (1992-1994);
(age 30) Senior Associate, Price Waterhouse (1988-1991).
Neil P. Jenkins (3) Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 36) (since 1985).
David W. Baldt Vice President Executive Vice President and Director of
1435 Walnut Street Fixed Income Investments, MGCM (since
Philadelphia, PA 19102 1989).
(age 47)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income, since
London EC2M 1NB 1989).
England
(age 40)
James Grifo Vice President Executive Vice President and Director
1435 Walnut Street MGCM (since 1996); Senior Vice
Philadelphia, PA 19102 President, GT Global Financial (since
(age 45) 1990).
Martin Hall Vice President Portfolio Manager, Fixed Income Team
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 38)
Mark G. Arthus Secretary and Director, Compliance and Financial Control,
885 Third Avenue Compliance Officer MGCM (since 1992); Vice President, Senior
New York, NY 10022 Compliance Officer and other positions,
(age 40) Citibank, N.A. (to 1992)
</TABLE>
- ---------------
1 Member of the Trust's Valuation and Dividend Committees.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
4 Member of the Trust's Valuation Committee.
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
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<PAGE>
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
Messrs. Jones, Freeman, and Searcy are members of the Audit Committee of the
Board of Trustees. The Audit Committee's functions include making
recommendations to the Trustees regarding the selection of independent
accountants, and reviewing with such accountants and the Treasurer of the Trust
matters relating to accounting and auditing practices and procedures, accounting
records, internal accounting controls and the functions performed by the Trust's
custodian, administrator and transfer agent.
As of January 24, 1997, the Trustees and officers of the Trust owned, as a
group, less than one percent of the outstanding shares of each Fund.
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an
annual fee of $15,000 provided that they attend each regular Board meeting
during the year. Members of the Audit Committee also receive $1,000 for each
Audit Committee meeting attended. The Chairman of the Audit Committee receives
an additional $1,000 per Audit Committee meeting attended. The Trustees are also
reimbursed for out-of-pocket expenses incurred by them in connection with their
duties as Trustees.
The following table sets forth the compensation paid by the Trust to the
Trustees for the fiscal year of the Trust ended October 31, 1996:
Pension or
Retirement Benefits
Accrued as Part of Aggregate
Name of Trustee Fund Expenses Compensation from the Trust/Complex *
- --------------- ------------------- -------------------------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $18,000
Graham E. Jones $ 0 $18,000
William N. Searcy $ 0 $21,000
Hugh G. Lynch $ 0 $15,000
Edward T. Tokar $ 0 $ 7,500
* The Trustees listed above do not serve on the Board of any other
investment company that may be considered to belong to the same complex as the
Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGIS of London, England acts as investment adviser to each Fund pursuant
to the terms of a Management Contract, dated January 3, 1993, between the Trust,
on behalf of each Fund, and MGIS (the "Management Contract"). Pursuant to the
Management Contract, the Adviser supervises and assists in the management of the
assets of each Fund and furnishes each Fund with research, statistical, advisory
and managerial services. The Adviser determines on a continuous basis, the
allocation of each Fund's investments among countries. The Adviser is
responsible for the ordinary expenses of offices, if any, for the Trust and the
compensation, if any, of all officers and employees of the Trust and all
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<PAGE>
Trustees who are "interested persons" (as defined in the 1940 Act) of the
Adviser.
Under the Management Contract, the Trust, on behalf of each Fund is
obligated to pay the Adviser a monthly fee at an annual rate of each Fund's
average daily net assets as follows:
Annual Rate
-----------
Morgan Grenfell Global Fixed Income Fund.............. 0.50%
Morgan Grenfell International Fixed Income Fund....... 0.50%
Morgan Grenfell Emerging Markets Debt Fund............ 1.50%
The advisory fees are paid monthly and will be prorated if the Adviser
shall not have acted as a Fund's investment adviser during the entire monthly
period. The Adviser has temporarily agreed, under certain circumstances, to
reduce or not impose its management fee and to make arrangements to limit
certain other expenses as described in the Prospectus under "Expense
Information."
For the fiscal period ended October 31, 1994, Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund paid net advisory fees of $41,189, $2,777, and
$25,848, respectively. For the fiscal year ended October 31, 1995, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund paid net advisory fees of
$384,235, $36,927 and $682,004, respectively. For the fiscal year ended October
31, 1996, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid net advisory fees of $ 696,819, $ 67,316 and $ 819,659, respectively. The
foregoing advisory fee payments reflect expense limitations that were in effect
during the indicated periods.
The Management Contract was last approved on November 21, 1996 by a vote of
the Trust's Board of Trustees, including a majority of those Trustees who were
not parties to the Management Contract or "interested persons" of such parties.
The Management Contract was approved by the Trust's initial shareholder, SEI
Financial Management, on January 3, 1994. The Management Contract will continue
in effect with respect to each Fund only if such continuance is specifically
approved annually by the Trustees, including a majority of the Trustees who are
not parties to the Management Contract or "interested persons" (as such term is
defined in the 1940 Act) of such parties, or by a vote of a majority of the
outstanding shares of each Fund. The Management Contract is terminable by vote
of the Board of Trustees, or, with respect to a Fund, by the holders of a
majority of the outstanding shares of the affected Fund, at any time without
penalty on 60 days' written notice to the Adviser. Termination of the Management
Contract with respect to a Fund will not terminate or otherwise invalidate any
provision of the Management Contract between the Adviser and any other Fund. The
Adviser may terminate the Management Contract at any time without penalty on 60
days' written notice to the Trust. The Management Contract terminates
automatically in the event of its assignment (as such term is defined in the
1940 Act).
The Management Contract provides that the Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Trust or
any Fund in connection with the performance of the Adviser's obligations under
the Management Contract with the Trust, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
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<PAGE>
In the management of the Funds and its other accounts, the Adviser and its
subsidiaries allocate investment opportunities to all accounts for which they
are appropriate subject to the availability of cash in any particular account
and the final decision of the individual or individuals in charge of such
accounts. Where market supply is inadequate for a distribution to all such
accounts, securities are allocated based on a Fund's pro rata portion of the
amount ordered. In some cases their procedure may have an adverse effect on the
price or volume of the security as far as a Fund is concerned. However, it is
the judgment of the Board that the desirability of continuing the Trust's
advisory arrangement with the Adviser outweighs any disadvantages that may
result from contemporaneous transactions. See "Portfolio Brokerage."
MGIS is registered with the Commission as an investment adviser and
provides a full range of international investment advisory services to
individual and institutional clients. MGIS is a direct wholly-owned subsidiary
of Morgan Grenfell Asset Management, Ltd., which is an indirect wholly-owned
subsidiary of Deutsche Bank AG, an international commercial and investment
banking group. As of December 1, 1996, MGIS managed approximately $14.7 billion
in assets for various individual and institutional accounts, including the
following registered investment companies to which it acts as a subadviser: Dean
Witter Worldwide Investment Trust, Compass International Fixed Income Fund, RSI
International Equity Fund, SEI International Equity Fund, SEI Institutional
International Equity, Dean Witter Pacific Growth Fund, Dean Witter European
Growth Fund, Dean Witter International SmallCap Fund, Dean Witter Global Asset
Allocation Fund, Dean Witter Japan Fund and Dean Witter Worldwide Investment
Trust, and Pacific Growth Portfolio and European Growth Portfolio (each a series
of Dean Witter Variable Investment Series); and the following other series of
the Trust for which it acts as investment adviser: Morgan Grenfell International
Equity Fund, Morgan Grenfell International Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund, Morgan Grenfell Emerging Markets Equity
Fund and Morgan Grenfell European Equity Fund.
Portfolio Turnover
The Funds do not expect to trade in securities for short-term gain. Each
Fund's portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal year ended
October 31, 1995, the portfolio turnover rates for Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund were 147%, 187% and 266%, respectively. For the
fiscal year ended October 31, 1996, the portfolio turnover rates for Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund were 223%, 235% and 227%,
respectively.
The Administrator
As described in the Prospectus, SEI Financial Management Corporation (the
"Administrator") serves as the Trust's administrator pursuant to an
administration agreement (the "Administration Agreement") dated January 3, 1994.
Pursuant to the Administration Agreement, the Administrator has agreed to
furnish statistical and research data, clerical services, and stationery and
office supplies; prepare and file various reports with the appropriate
regulatory agencies including the Commission and state securities commissions;
and provide accounting and bookkeeping services for the Funds, including the
computation of each Fund's net asset value, net investment income and realized
capital gains, if any.
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<PAGE>
For its services under the Administration Agreement, the Administrator
receives from all series of the Trust an aggregate monthly fee at the following
annual rates of the aggregate average daily net assets ("aggregate assets") of
such series:
0.12% 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.
For the fiscal period ended October 31, 1994, Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund paid the Administrator administration fees of
$33,625, $19,556, and $5,947, respectively. For the fiscal year ended October
31, 1995, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid the Administrator administration fees of $105,406, $68,750 and $ 69,115,
respectively. For the fiscal year ended October 31, 1996, Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund paid the Administrator administration fees
of $165,566, $75,000, and $100,878, respectively. The administration fees shown
in this paragraph were paid pursuant to a fee schedule that provided for higher
fees than does the fee schedule that is in effect for the current fiscal year
ending October 31, 1997.
The Administration Agreement provides that the Administrator shall not be
liable under the Administration Agreement except for bad faith or gross
negligence in the performance of its duties or from the reckless disregard by it
of its duties and obligations thereunder.
Expenses of the Trust
The expenses borne by service shares of the Funds include the service
shares' allocable share of: (i) fees and expenses of any investment adviser and
any administrator of the Funds; (ii) fees and expenses incurred by the Funds in
connection with membership in investment company organizations; (iii) brokers'
commissions; (iv) payment for portfolio pricing services to a pricing agent, if
any; (v) legal expenses (including an allocable portion of the cost of the
Trust's employees rendering legal services to the Funds); (vi) interest,
insurance premiums, taxes or governmental fees; (vii) the fees and expenses of
the transfer agent of the Funds; (viii) clerical expenses of issue, redemption
or repurchase of shares of the Funds; (ix) the expenses of and fees for
registering or qualifying shares of the Funds for sale and of maintaining the
registration of the Funds and registering the Funds as a broker or a dealer; (x)
the fees and expenses of Trustees who are not affiliated with the Adviser; (xi)
the cost of preparing and distributing reports and notices to shareholders, the
Commission and other regulatory authorities; (xii) the fees or disbursements of
custodians of the Fund's assets, including expenses incurred in the performance
of any obligations enumerated by the Declaration of Trust or By-Laws of the
Trust insofar as they govern agreements with any such custodian; (xiii) costs in
connection with annual or special meetings of shareholders, including proxy
material preparation printing and mailing; (xiv) charges and expenses of the
Trust's auditor; (xv) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business; and (xvi) expenses of an extraordinary and nonrecurring nature.
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<PAGE>
Transfer Agent
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer and dividend disbursing agent for the
Funds pursuant to a transfer agency agreement (the "Transfer Agency Agreement"),
under which the Transfer Agent (i) maintains record shareholder accounts, and
(ii) makes periodic reports to the Trust's Board of Trustees concerning the
operations of each Fund.
The Distributor
The Trust has entered into a distribution agreement (the "Distribution
Agreement") pursuant to which SEI Financial Services Company (the
"Distributor"), as agent, serves as principal underwriter for the continuous
offering of shares (including service shares) of each Fund. The Distributor has
agreed to use best efforts to solicit orders for the purchase of shares of each
Fund, although it is not obligated to sell any particular amount of shares.
Shares of the Trust are not subject to sales loads or distribution fees. The
Trust is not responsible for payment of any expenses or fees incurred in the
marketing and distribution of shares of the Trust.
The Distribution Agreement will remain in effect for one year from its
effective date and will continue in effect thereafter only if such continuance
is specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" (as such term is defined in the 1940 Act) of such parties. The
Distribution Agreement was most recently approved on November 21, 1996 by a vote
of the Trust's Board of Trustees, including a majority of those Trustees who
were not parties to the Distribution Agreement or "interested persons" of such
parties. The Distribution Agreement is terminable, as to a Fund, by vote of the
Board of Trustees, or by the holders of a majority of the outstanding shares of
the Fund, at any time without penalty on 60 days' written notice to the Trust
and Adviser. The Distributor may terminate the Distribution Agreement at any
time without penalty on 90 days' written notice to the Trust.
Custodian
As described in the Prospectus, The Northern Trust Company (the
"Custodian"), whose principal business address is Fifty South LaSalle Street,
Chicago, Illinois 60675, maintains custody of each Fund's assets pursuant to a
custodian agreement (the "Custodian Agreement"). Under the Custodian Agreement,
the Custodian (i) maintains a separate account in the name of each Fund, (ii)
holds and transfers portfolio securities on account of each Fund, (iii) accepts
receipts and makes disbursements of money on behalf of each Fund, (iv) collects
and receives all income and other payments and distributions on account of each
Fund's portfolio securities and (v) makes periodic reports to the Trust's Board
of Trustees concerning each Fund's operations. The Custodian is authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Trust.
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
service shares which authorizes it to compensate Service Organizations whose
customers invest in service shares of the Funds for providing certain personal,
account administration and/or shareholder liaison services. Pursuant to the
Plans, the Funds may enter into agreements with Service Organizations ("Service
Agreements"). Under such Service Agreements or otherwise, the Service
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<PAGE>
Organizations may perform some or all of the following services: (i) acting as
record holder and nominee of all service shares beneficially owned by their
customers; (ii) establishing and maintaining individual accounts and records
with respect to the service shares owned by each customer; (iii) providing
facilities to answer inquiries and respond to correspondence from customers
about the status of their accounts or about other aspects of the Trust or
applicable Fund; (iv) processing and issuing confirmations concerning customer
orders to purchase, redeem and exchange service shares; and (v) receiving and
transmitting funds representing the purchase price or redemption proceeds of
such service shares.
As compensation for such services, each Fund will pay each Service
Organization with which it has a Service Agreement a service fee in an amount up
to .25% (on an annualized basis) of the average daily net assets of the Fund's
service shares attributable to customers of such Service Organization. Service
Organizations may from time to time be required to meet certain other criteria
in order to receive service fees. As of October 31, 1996, the Trust's fiscal
year end, service shares of the Funds had not been offered.
Pursuant to the Plans, service shares of a Fund that are beneficially owned
by customers of a Service Organization will convert automatically to
institutional shares of the same Fund in the event that such Service
Organization's Service Agreement expires or is terminated. 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.
In accordance with the terms of the Service Plans, the officers of the
Trust provide to the Trust's Board of Trustees for their review a quarterly
written report of the amounts expended under the Service Plans and the purpose
for which such expenditures were made. In the Trustees' quarterly review of such
reports, they will consider the continued appropriateness and the level of
compensation that the Service Plans provide.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974 ("ERISA") ) may apply to a Service Organization's receipt
of compensation paid by a Fund in connection with the investment of fiduciary
assets in service shares of the Fund. Service Organizations that are subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions are urged to consult their own legal advisers before investing
fiduciary assets in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under a Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standard set forth in part 4 of Title I of ERISA. These
standards are designed to help ensure that the fiduciary's decisions are made in
the best interests of the plan and are not colored by self-interest.
Section 403 (c) (1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404 (a) sets forth a similar requirement on how
a plan fiduciary must discharge his or her duties with respect to the plan, and
provides further that such fiduciary must act prudently and solely in the
interest of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
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<PAGE>
Section 406 (a) (1) (D) of ERISA prohibits a fiduciary of an ERISA plan
from causing that plan to engage in a transaction if he knows or should know
that the transaction would constitute a direct or indirect transfer to, or use
by or for the benefit of, a party in interest, of any assets of that plan.
Section 3 (14) includes within the definition of "party in interest" with
respect to a plan any fiduciary with respect to that plan. Thus, Section 406 (a)
(1) (D) would not only prohibit a fiduciary from causing the plan to engage in a
transaction which would benefit a third person who is a party in interest, but
it also would prohibit the fiduciary from similarly benefiting himself. In
addition, Section 406 (b) (1) specifically prohibits a fiduciary with respect to
a plan from dealing with the assets of that plan in his own interest or for his
own account. Section 406 (b) (3) supplements these provisions by prohibiting a
plan fiduciary from receiving any consideration for his own personal account
from any party dealing with the plan in connection with a transaction involving
the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which the plan is otherwise responsible for paying). Thus,
the fiduciary duty issues involved in a plan fiduciary's receipt of the service
fee must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
Pursuant to the Advisory Agreement, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consideration may also be given to the broker-dealer's
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<PAGE>
sale of shares of the Funds and the other series of the Trust. In addition, the
Advisory Agreement authorizes the Adviser, subject to the periodic review of the
Trust's Board of Trustees, to cause a Fund to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that the Adviser determines in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either the particular
transaction or the overall responsibilities of the Adviser to the Fund. Such
brokerage and research services may consist of pricing information, reports and
statistics on specific companies or industries, general summaries of groups of
bonds and their comparative earnings and yields, or broad overviews of the
securities markets and the economy.
Supplemental research information utilized by the Adviser is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable to the Adviser. The Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplemental research or other services received will primarily benefit one
or more other investment companies or other accounts of the Adviser for which
investment discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company. During the
fiscal period ended October 31, 1996, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts
managed by the Adviser are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to a Fund. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the
general policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may
place securities transactions with brokers with whom it is affiliated.
(Affiliated Brokers"). These brokers may include but are not limited to Morgan
Grenfell Asia and Morgan Grenfell Debt Arbitrage Trading.
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
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<PAGE>
A transaction would not be placed with Affiliated Brokers if a Fund would
have to pay a commission rate less favorable than their contemporaneous charges
for comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two or
more funds or customers on the same day, each fund or customer pays the average
price and commissions paid are allocated in direct proportion to the number of
shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement
setting forth the total amount of all compensation retained by them or any
associated person of them in connection with effecting transactions for the
account of the Funds, and the Board reviews and approves all the Funds'
portfolio transactions on a quarterly basis and the compensation received by
Affiliated Brokers in connection therewith. During the fiscal years ended
October 31, 1995 and October 31, 1996 no Fund paid any brokerage commissions to
any Affiliated Broker.
Affiliated Brokers do not knowingly participate in commissions paid by the
Funds to other brokers or dealers and do not seek or knowingly receive any
reciprocal business as the result of the payment of such commissions. In the
event that an Affiliated Broker learns at any time that it has knowingly
received reciprocal business, it will so inform the Board.
For the fiscal years ended October 31, 1995 and October 31, 1996, each of
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed
Income Fund and Morgan Grenfell Emerging Markets Debt Fund paid no brokerage
commissions.
NET ASSET VALUE
Under the 1940 Act, the Board of Trustees of the Trust is responsible for
determining in good faith the fair value of the securities of each Fund. In
accordance with procedures adopted by the Board of Trustees, the net asset value
per share of each class of each Fund is calculated by determining the net worth
of the Fund attributable to the class (assets, including securities at value,
minus liabilities) divided by the number of shares of such class outstanding.
Each Fund computes net asset value for each class of its shares at the close of
such regular trading, which is normally 4:00 p.m. Eastern time, on each day on
which the New York Stock Exchange ("NYSE") is open (a "Business Day"). The NYSE
is closed on Saturdays and Sundays as well as the following holidays: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For purposes of calculating net asset value, equity securities traded on a
recognized U.S. or foreign securities exchange or the National Association of
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<PAGE>
Securities Dealers Automated Quotation System ("NASDAQ") are valued at their
last sale price on the principal exchange on which they are traded or NASDAQ (if
NASDAQ is the principal market for such securities) prior to the time of
valuation on the valuation day or, if no sale occurs, at the bid price. Unlisted
equity securities for which market quotations are readily available are valued
at the most recent bid price prior to the time of valuation.
Debt securities and other fixed income investments of the Funds are valued
at prices supplied by independent pricing agents, which prices reflect
broker-dealer supplied valuations and electronic data processing techniques.
Short-term obligations maturing in sixty days or less may be valued at amortized
cost, which method does not take into account unrealized gains or losses on such
portfolio securities. Amortized cost valuation involves initially valuing a
security at its cost, and thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods in which the value of the
security, as determined by amortized cost, may be higher or lower than the price
the Fund would receive if the Fund sold the security.
Other assets and assets for which market quotations are not readily
available are valued at fair value using methods determined in good faith by the
Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the 4:00 P.M.
(Eastern Time) close of business on each Business Day. In addition, European or
Far Eastern securities trading generally or in a particular country or countries
may not take place on all Business Days. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Business Days in New York and on which a Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
Yield
From time to time, each Fund may advertise its yield. Yield is calculated
separately for service shares and institutional shares of a Fund. Each type of
share is subject to different fees and expenses and, consequently, may have
differing yields for the same period. The yield of service shares of a Fund
refers to the annualized income generated by an investment in service shares of
the Fund over a specified 30-day period. The yield is calculated by assuming
that the income generated by the investment during that period is generated for
each like period over one year and is shown as a percentage of the investment.
In particular, yield will be calculated according to the following formula:
YIELD = 2 [(a - b +1)(6) - 1]
-----
cd
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<PAGE>
Where: a = dividends and interest earned by the
Fund during the period;
b = net expenses accrued for the period;
c = average daily number of shares out-
standing during the period, entitled
to receive dividends; and
d = maximum offering price per share on
the last day of the period.
Actual yields will depend on such variables as asset quality, average asset
maturity, the type of instruments a Fund invests in, changes in interest rates
on money market instruments, changes in the expenses of service shares of the
Fund and other factors.
Yields are one basis upon which investors may compare the Funds with other
mutual funds; however, yields of other mutual funds and other investment
vehicles may not be comparable because of the factors set forth above and
differences in the methods used in valuing portfolio instruments.
For the 30-day period ended October 31, 1996, the yields of institutional
shares of Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
were 5.13%, 5.08% and 7.68%, respectively. If the expense limitations described
in the Prospectus for these Funds had not been in effect during this period, the
yields of institutional shares of Morgan Grenfell Global Fixed Income Fund,
Morgan Grenfell International Fixed Income Fund and Morgan Grenfell Emerging
Markets Debt Fund would have been 5.09%, 4.80% and 7.26%, respectively. No
service shares of the Funds were outstanding during the fiscal year ended
October 31, 1996.
Total Return
Average annual total return is calculated separately for service shares and
institutional shares of a Fund. Each type of share is subject to different fees
and expenses and, consequently, may have differing average annual total returns
for the same period. Each Fund that advertises "average annual total return" for
a class of its shares computes such return by determining the average annual
compounded rate of return during specified periods that equates the initial
amount invested to the ending redeemable value of such investment according to
the following formula:
ERV
T = [(-----) (1/n) - 1]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the applicable period
(or a fractional portion thereof);
P = hypothetical initial payment of
$1,000; and
n = period covered by the computation,
expressed in years.
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<PAGE>
Each Fund that advertises "aggregate total return" for a class of its
shares computes such returns by determining the aggregate compounded rates of
return during specified periods that likewise equate the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The above calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
For the fiscal year ended October 31, 1996, the average annual total
returns of institutional shares of Morgan Grenfell Global Fixed Income Fund,
Morgan Grenfell International Fixed Income Fund and Morgan Grenfell Emerging
Markets Debt Fund were 6.60%, 6.82% and 38.42%, respectively. For their
respective periods from commencement of operations to October 31, 1996, the
average annual total returns of institutional shares of Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund were 6.54%, 7.77% and 19.08%, respectively.
If the expense limitations described in the Prospectus for the above Funds had
not been in effect during the indicated periods, the total returns of
institutional shares of these Funds for such periods would have been lower than
the total return figures shown in this paragraph. As of October 31, 1996, no
service shares of the Funds had been issued.
The Funds may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to,
Barron's, The Wall Street Journal, Weisenberger Investment Companies Service,
Business Week, Changing Times, Financial World, Forbes, Fortune and Money. In
addition, a Fund may from time to time advertise its performance relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed Income Analysis and
Mutual Fund Indices (which measure total return and average current yield for
the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry); (c)
the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Shearson Lehman Brothers Aggregate Bond Index or its component indices (the
Aggregate Bond Index measures the performance of Treasury, U.S. Government
agency, corporate, mortgage and Yankee bonds); (f) the Standard & Poor's Bond
Indices (which measure yield and price of corporate, municipal and U.S.
Government bonds); and (g) historical investment data supplied by the research
departments of Goldman Sachs, Shearson Lehman Hutton, First Boston Corporation,
Morgan Stanley, Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette
or other providers of such data. The composition of the investments in such
indices and the characteristics of such benchmark investments are not identical
to, and in some cases are very different from, those of any Fund's portfolio.
These indices and averages are generally unmanaged and the items included in the
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<PAGE>
calculations of such indices and averages may not be identical to the formulas
used by a Fund to calculate its performance figures.
TAXES
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities, insurance companies and financial institutions. Prospective
shareholders are urged to consult their own tax advisers with respect to the
specific federal, state, local and foreign tax consequences of investing in the
Funds. The summary is based on the laws in effect on the date of this Additional
Statement, which are subject to change.
General
Each Fund is a separate taxable entity and has elected to be treated, and
intends to qualify for each taxable year, as a regulated investment company
under Subchapter M of the Code.
Qualification of any Fund as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"); (b) the Fund derive less than 30% of its gross income for its
taxable year from the sale or other disposition of any of the following which
was held for less than three months: (i) stock or securities; (ii) options,
futures or forward contracts (other than options, futures or forward contracts
on foreign currencies); and (iii) foreign currencies and foreign currency
options, futures and forward contracts that are not directly related to the
Fund's principal business of investing in stock or securities or options and
futures with respect to stocks or securities (the "short-short test"); and (c)
the Fund diversify its holdings so that, at the close of each quarter of its
taxable year, (i) at least 50% of the market value of its total (gross) assets
is comprised of cash, cash items, United States Government securities,
securities of other regulated investment companies and other securities limited
in respect of any one issuer to an amount not greater in value than 5% of the
value of the Fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than United
States Government securities and securities of other regulated investment
companies) or two or more issuers controlled by the Fund and engaged in the
same, similar or related trades or businesses. Gains from the sale or other
disposition of foreign currencies (or options, futures or forward contracts on
foreign currencies) that are not directly related to a Fund's principal business
of investing in stock or securities or options and futures with respect to stock
or securities will be treated as gains from the sale of investments held for
less than three months under the short-short test (even though characterized as
ordinary income for some purposes) if such currencies or instruments were held
for less than three months. In addition, future Treasury regulations could
provide that qualifying income under the 90% gross income test will not include
gains from foreign currency transactions or derivatives that are not directly
related to a Fund's principal business of investing in stock or securities or
options and futures with respect to stock or securities. Using foreign currency
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<PAGE>
positions or entering into foreign currency options, futures or forward
contracts for purposes other than hedging currency risk with respect to
securities in a Fund's portfolio or anticipated to be acquired may not qualify
as "directly-related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
the Fund distributes at least 90% of its "investment company taxable income"
(which includes dividends, interest, accrued original issue discount and
recognized market discount income, income from securities lending, any net
short-term capital gain in excess of net long-term capital loss and certain net
realized foreign exchange gains and is reduced by deductible expenses), the Fund
(but not its shareholders) will be relieved of federal income tax on any income
of the Fund, including long-term capital gains, distributed to shareholders.
However, if a Fund retains any investment company taxable income or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), it will be subject to federal income tax at regular corporate rates on
the amount retained. If a Fund retains any net capital gain, the Fund may
designate the retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of a
Fund will be increased by an amount equal under current law to 65% of the amount
of undistributed net capital gains included in the shareholder's gross income.
Each Fund intends to distribute at least annually to its shareholders all or
substantially all of its investment company taxable income and net capital gain.
Exchange control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital, or the proceeds of sales of
securities by foreign investors such as the Funds and may therefore make it more
difficult for the Funds to satisfy the distribution requirements described
above, as well as the excise tax distribution requirements described below.
However, the Funds generally expect to be able to obtain sufficient cash to
satisfy such requirements from new investors, the sale of securities or other
sources. If for any taxable year a Fund does not qualify as a regulated
investment company, it will be taxed on all of its investment company taxable
income and net capital gain at corporate rates, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its current
and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed in such year and on which no federal income tax was
paid by the Fund. For federal income tax purposes, dividends declared by a Fund
in October, November or December to shareholders of record on a specified date
in such a month and paid during January of the following year are treated as
distributed by the Fund and are taxable to such shareholders as if received on
December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain futures contracts,
forward contracts and options held by the Funds may be required to be "marked-
- --------------------------------------------------------------------------------
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<PAGE>
to-market" for federal income tax purposes, that is, treated as having been sold
at their fair market value on the last day of the Funds' taxable year. As a
result, a Fund may be required to recognize income or gain without a concurrent
receipt of cash. Any gain or loss recognized on actual or deemed sales of these
futures contracts, forward contracts, or options (not including certain foreign
currency options, forward contracts, and futures contracts) will be treated as
60% long-term capital gain or loss and 40% short-short capital gain or loss. As
a result of certain hedging transactions entered into by the Funds, the Funds
may be required to defer the recognition of losses on futures or forward
contracts and options or underlying securities or foreign currencies to the
extent of any unrecognized gains on related positions and the characterization
of gains or losses as long-term or short-term may be changed. The tax provisions
described above applicable to options, futures and forward contracts may affect
the amount, timing and character of a Fund's distributions to shareholders. The
short-short test described above may limit a Fund's ability to use options,
futures and forward transactions as well as its ability to engage in short
sales. Certain tax elections may be available to the Funds to mitigate some of
the unfavorable consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by the Funds. Under these
rules, foreign exchange gain or loss realized with respect to foreign currencies
and certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign
currency-denominated payables and receivables will generally be treated as
ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary
loss under Section 988 of the Code were to exceed a Fund's investment company
taxable income (computed without regard to such loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future
years. Net loss, if any, from certain foreign currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result that either no dividends are paid or a
portion of the Fund's dividends is treated as a return of capital, which is
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally gives rise to capital gains.
Each Fund's investments in zero coupon securities, deferred interest
securities, increasing-rate securities, pay-in-kind securities or other
securities bearing original issue discount or, if the Fund elects to include
market discount in income currently, market discount will generally cause it to
realize income prior to the receipt of cash payments with respect to these
securities. Options, futures or forward contracts subject to the mark to market
rules described above may have the same result if recognized mark to market
gains exceed recognized mark to market losses. In order to obtain cash to
distribute this income or gain, maintain its qualification as a regulated
investment company, and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The Funds anticipate that they will be subject to foreign taxes on certain
income they derive from foreign securities, possibly including, in some cases,
capital gains from the sale of such securities. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. If more
than 50% of a Fund's total assets at the close of any taxable year consists of
stock or securities of foreign corporations, a Fund may file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to (i) include in ordinary gross income (in addition to taxable
dividends and distributions they actually receive) their pro rata shares
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<PAGE>
of qualified foreign taxes paid by the Fund even though not actually received,
and (ii) treat such respective pro rata portions as foreign taxes paid by them.
If a Fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. federal income taxes. Shareholders who do not
itemize deductions for federal income tax purposes will not, however, be able to
deduct their pro rata portion of qualified foreign taxes paid by a Fund,
although such shareholders will be required to include their shares of such
taxes in gross income if the Fund makes the election referred to above. If a
shareholder chooses to take a credit for the foreign taxes deemed paid by such
shareholder as a result of any such election by a Fund, the amount of the credit
that may be claimed in any year may not exceed the same proportion of the U.S.
tax against which such credit is taken which the shareholder's taxable income
from foreign sources (but not in excess of the shareholder's entire taxable
income) bears to his entire taxable income. For this purpose, distributions from
long-term and short-term capital gains or foreign currency gains by a Fund will
generally not be treated as income from foreign sources. This foreign tax credit
limitation may also be applied separately to certain specific categories of
foreign-source income and the related foreign taxes. As a result of these rules,
which have different effects depending upon each shareholder's particular tax
situation, certain shareholders of a Fund that makes the election described
above may not be able to claim a credit for the full amount of their
proportionate shares of the foreign taxes paid by the Fund. Tax-exempt
shareholders will ordinarily not benefit from this election. Each year that a
Fund files the election described above, its shareholders will be notified of
the amount of (i) each shareholder's pro rata share of qualified foreign taxes
paid by the Fund and (ii) the portion of Fund dividends which represents income
from each foreign country. If a Fund does not make this election, it may deduct
such taxes in computing the amount of income it must distribute to shareholders.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rents, royalties or capital gain) or hold
at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), the Fund could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election could require
the Fund to recognize taxable income or gain without the concurrent receipt of
cash. Each Fund may limit and/or manage its holdings in passive foreign
investment companies to minimize its tax liability or maximize its return from
these investments.
The federal income tax rules applicable to currency and interest rate
swaps, mortgage dollar rolls, and interest rate floors and caps are unclear in
certain respects, and the Funds may be required to account for those instruments
under tax rules in a manner that may affect the amount, timing and character of
income, gain or loss from such instruments and that may, under certain
circumstances, limit their transactions in these instruments.
The Emerging Markets Debt Fund may invest in debt obligations that are in
the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest as well as issuers who are in default.
Investments in debt obligations that are at risk of or in default present
special tax issues for the Funds. Tax rules are not entirely clear about issues
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<PAGE>
such as when a Fund may cease to accrue interest, original issue discount, or
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Funds, in the event they invest in such securities, in order to
reduce the risk of their distributing insufficient income to preserve their
status as regulated investment companies and seek to avoid becoming subject to
federal income or excise tax.
For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders.
U.S. Shareholders -- Distributions
For U.S. federal income tax purposes, distributions by the Funds, whether
reinvested in additional shares or paid in cash, generally will be taxable to
shareholders who are subject to tax. Shareholders receiving a distribution in
the form of newly issued shares will be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash and will have a cost
basis in each share received equal to such amount divided by the number of
shares received. Distributions from investment company taxable income for the
year will be taxable as ordinary income. Distributions to corporate shareholders
designated as derived from a Fund's dividend income, if any, that would be
eligible for the dividends received deduction if the Fund were not a regulated
investment company will be eligible, subject to certain holding period
requirements and debt-financing restrictions, for the 70% dividends received
deduction for corporations. Because eligible dividends are limited to those
received by a Fund from U.S. domestic corporations, it is unlikely that any
significant portion of any Fund's distributions will qualify for the dividends
received deduction. The entire dividend, including the deducted amount, is
considered in determining the excess, if any, of a corporate shareholder's
adjusted current earnings over its alternative minimum taxable income, which may
increase its liability for the federal alternative minimum tax, and the dividend
may, if it is treated as an "extraordinary dividend" under the Code, reduce such
shareholder's tax basis in its shares of a Fund. Capital gain dividends (i.e.,
dividends from net capital gain), if designated as such in a written notice to
shareholders mailed not later than 60 days after a Fund's taxable year closes,
will be taxed to shareholders as long-term capital gain regardless of how long
shares have been held by shareholders, but are not eligible for the dividends
received deduction for corporations.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
U.S. Shareholders -- Sale of Shares
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
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<PAGE>
gain or loss should be capital in character, and long-term if the shareholder
has held the shares for more than one year, otherwise short-term. If, however, a
shareholder receives a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time they are
sold, redeemed or otherwise disposed of, then any loss the shareholder realizes
on the disposition will be treated as a long-term capital loss to the extent of
such capital gain dividend. Additionally, any loss realized on a sale,
redemption or other disposition of shares of a Fund may be disallowed under
"wash sale" rules to the extent the shares disposed of are replaced with shares
of the same Fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to a dividend
reinvestment in shares of the Fund. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
The Funds may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including distributions from a
Fund's net long-term capital gains) and share redemption and exchange proceeds
to individuals and other non-exempt shareholders who fail to furnish the Funds
with a correct taxpayer identification number ("TIN") certified under penalties
of perjury, or if the Internal Revenue Service or a broker notifies the Funds
that the payee has failed to properly report interest or dividend income to the
Internal Revenue Service or that the TIN furnished by the payee to the Funds is
incorrect, or if (when required to do so) the payee fails to certify under
penalties of perjury that it is not subject to backup withholding. Any amounts
withheld may be credited against a shareholder's U.S. federal income tax
liability.
Non-U.S. Shareholders
Shareholders who, as to the United States, are nonresident aliens, foreign
corporations, fiduciaries of foreign trusts or estates, foreign partnerships or
other non-U.S. investors generally will be subject to U.S. withholding tax at
the rate of 30% on distributions treated as ordinary income unless the tax rate
is reduced pursuant to a tax treaty or the dividends are effectively connected
with a U.S. trade or business of the shareholder. In the latter case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be subject to
U.S. federal income or withholding tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
is present in the United States for 183 days or more during the taxable year and
certain other conditions are met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption of
shares of a Fund will not be subject to U.S. federal income or withholding tax
unless the gain is effectively connected with the shareholder's trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met. Non-U.S. investors should consult their tax advisers about the
applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
State and Local
The Funds may be subject to state or local taxes in jurisdictions in which
the Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
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<PAGE>
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
GENERAL INFORMATION ABOUT THE TRUST
General
The Trust is an open-end investment company organized as a Delaware
business trust on September 13, 1993. The Trust commenced operations on January
3, 1994.
In the event of a liquidation or dissolution of the Trust or an individual
Fund, shareholders of a particular Fund would be entitled to receive the assets
available for distribution belonging to such Fund. Shareholders of a Fund are
entitled to participate in the net distributable assets of the particular Fund
involved on liquidation, based on the number of shares of the Fund that are held
by each shareholder.
Each service share and institutional share of a Fund is entitled to one
vote per share; however, separate votes will be taken by each Fund or class (or
by more than one Fund or class voting as a single class if similarly affected)
on matters affecting only the Fund or class (or those affected Funds or classes)
or as otherwise required by law. Shares are freely transferable and have no
preemptive, subscription or conversion rights. The Trust does not expect to hold
shareholder meetings except as required by the 1940 Act or the Agreement and
Declaration of Trust (the "Declaration of Trust"). See "Organization and Shares
of the Trust" in the Prospectus.
As of January 24, 1997, the following shareholders owned the following
respective percentages of the outstanding shares of the indicated Funds:
Global Fixed Income Fund:
Capital Region Health Care Corporation Endowment, 250 Pleasant Street, Concord,
NH 03301 (7.02%)
The American University in Cairo, 866 United Nations Plaza, Suite
517, New York, NY 10017 (11.29%)
New Hampshire Charitable Foundation, 37 Pleasant Street, Concord, NH 03301
(7.39%)
National Financial Services Corp, 200 Liberty St 1 World Financial, New York, NY
10281 (6.80%)
Trustees of Clark University, 950 Main Street, Worcester, MA 01610-1400 (15.79%)
University of North Dakota Foundation, PO Box 8157, Grand Forks, ND 58202
(5.46%)
International Fixed Income Fund:
Gilman School Inc., c/o Mercantile Safe Deposit & Trust Co., P.O. Box 1101,
Baltimore, MD 21203-1101 (14.13%)
- --------------------------------------------------------------------------------
Page -42-
<PAGE>
Harvey Wagner TTEE, FBO Wagner Family Trust, P.O. Box 7370, Incline Village, NV
89452 (35.35%)
Bay City Policemen & Firemen Retirement System, Defined Benefit Pension Plan,
c/o Deanna Ledesman, 301 Washington Ave, Bay City, MI 48708-5837 (11.55%)
Dingle & Co, C/O Comerica Bank, PO Box 75000, Detroit MI 48275 (14.95%)
Holland Community Hospital Non-Pension, One Financial Center, Holland, MI 49423
(21.30%)
Emerging Markets Debt Fund
IBM Retirement Plan Trust, c/o Chase Manhattan Bank, 3 Chase Metrotech Center,
Brooklyn, NY 11245 (16.99%)
Hewlett Packard Deferred Profit Sharing Plan & Retirement Fund, 3000 Hanover
Street, Palo Alto, CA 94304 (6.15%)
Iowa Public Employees Retirement System, 600 E. Court Avenue, Des Moines, IA
50309 (17.39%)
Municipal Fire & Police Retirement System of Iowa, 950 Office Park Road Suite
321, Des Moines, IA 50265 (7.60%)
American Stores Company Benefit Plan, PO Box 27447, Salt Lake City, UT 84127
(5.23%)
Los Angeles City Employees Retirement System, 360 E 2nd St, 8th floor, Los
Angeles, CA 90012-4207 (16.17%)
c/o Boston Safe Deposit & Trust Co. FBO TRW Master Trust, One Cabot Rd.,
Medford, MA 02155-5141 (5.33%)
Shareholder and Trustee Liability
The Trust is organized as a Delaware business trust and, under Delaware
law, the shareholders of a business trust are not generally subject to liability
for the debts or obligations of the trust. Similarly, Delaware law provides that
none of the Funds will be liable for the debts or obligations of any other Fund.
However, no similar statutory or other authority limiting business trust
shareholder liability exists in other states. As a result, to the extent that a
Delaware business trust or a shareholder is subject to the jurisdiction of the
courts in such other states, the courts may not apply Delaware law and may
thereby subject the Delaware business trust shareholders to liability. To guard
against this risk, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Notice of such
disclaimer will normally be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
- --------------------------------------------------------------------------------
Page -43-
<PAGE>
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Consideration for Purchases of Shares
The Trust generally will not issue shares of the Funds for consideration
other than cash. At the Trust's sole discretion, however, it may issue Fund
shares for consideration other than cash in connection with an acquisition of
portfolio securities (other than municipal debt securities issued by state
political subdivisions or their agencies or instrumentalities) or pursuant to a
bona fide purchase of assets, merger or other reorganization, provided (i) the
securities meet the investment objectives and policies of the Fund; (ii) the
securities are acquired by the Fund for investment and not for resale; (iii) the
securities are not restricted as to transfer either by law or liquidity of
market; and (iv) the securities have a value which is readily ascertainable (
and not established only by valuation procedures) as evidenced by a listing on
the American Stock Exchange or the New York Stock Exchange or by quotation on
the NASD Automated Quotation System. An exchange of securities for Fund shares
will generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Trust's independent accountants, providing audit services,
including review and consultation in connection with various filings by the
Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the securities of the Funds and certain other
series of the Trust. If further information is desired with respect to the
Trust, the Funds or such other series, reference is made to the Registration
Statement and the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31,
1996 are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of Price Waterhouse LLP, the
Trust's independent accountants, as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Page -44-
<PAGE>
The financial statements of the Trust for the periods ended on and prior to
October 31, 1996 are incorporated by reference into the preceding Statement of
Additional Information from the Trust's 1996 Annual Report to Shareholders for
the year ended October 31, 1996 (filed electronically on December 30, 1996; file
no. 812-10080; accession no. 0000935069-96-000172), and will be attached to each
copy of such Statement of Additional Information that is distributed.
<PAGE>
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
The financial highlights for institutional shares of the
Registrant are included in Part A of the Registration
Statement for periods ending on or prior to October 31, 1996.
The financial statements of the Registrant are included in,
and incorporated by reference into, Part B of the Registration
Statement from the 1996 Annual Report to Shareholders for the
year ended October 31, 1996 (filed electronically on December
30, 1996; file no. 812-10080; accession no.
0000935069-96-000172).
(b) Exhibits:
Except as noted, the following exhibits are being filed
herewith:
**1. Agreement and Declaration of Trust of Registrant
dated September 13, 1993, as amended.
**2. Amended By-Laws of Registrant.
**5(a). Management Contract dated January 3, 1994, as amended
as of April 25, 1994, April 1, 1995 and September 1,
1995, between Morgan Grenfell Investment Services
Limited and Registrant, on behalf of Morgan Grenfell
International Equity Fund, Morgan Grenfell Global
Equity Fund, Morgan Grenfell European Equity Fund,
Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell International Small Cap Equity Fund, Morgan
Grenfell Japanese Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund, Morgan
Grenfell Emerging Markets Equity Fund, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund.
C-1
<PAGE>
**5(b). Management Contract dated as of December 28, 1994
between Morgan Grenfell Capital Management, Inc. and
Registrant, on behalf of Morgan Grenfell Fixed Income
Fund and Morgan Grenfell Municipal Bond Fund.
**5(c). Management Contract dated as of December 28, 1994
between Morgan Grenfell Capital Management, Inc. and
Registrant, on behalf of Morgan Grenfell Large Cap
Growth Fund, Morgan Grenfell Smaller Companies Fund,
Morgan Grenfell Short-Term Fixed Income Fund and
Morgan Grenfell Short-Term Municipal Bond Fund.
***5(d). Management Contract between Morgan Grenfell Capital
Management, Inc. and Registrant, on behalf of Morgan
Grenfell Microcap Fund (previously filed with the SEC
on November 1, 1996 pursuant to Post-Effective
Amendment No. 12 to Registrant's Registration
Statement).
*6. Distribution Agreement dated as of December 30, 1993
between SEI Financial Services Company and
Registrant, on behalf of all of its series.
**8(a). Custody Agreement dated as of December 29, 1993
between The Northern Trust Company and Registrant, on
behalf of Morgan Grenfell International Equity Fund,
Morgan Grenfell Global Equity Fund, Morgan Grenfell
European Equity Fund, Morgan Grenfell Pacific Basin
Equity Fund, Morgan Grenfell International Small Cap
Equity Fund, Morgan Grenfell Japanese Small Cap
Equity Fund, Morgan Grenfell European Small Cap
Equity Fund, Morgan Grenfell Emerging Markets Equity
Fund, Morgan Grenfell Global Fixed Income Fund,
Morgan Grenfell International Fixed Income Fund and
Morgan Grenfell Emerging Markets Fixed Income Fund,
and form of amendment effective as of December 28,
1994, causing Custody Agreement to apply to Morgan
Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Short-Term Municipal Bond Fund, Morgan
Grenfell Large Cap Growth Fund and Morgan Grenfell
Smaller Companies Fund.
C-2
<PAGE>
**8(b). Custody Agreement dated as of December 28, 1994
between CoreStates Bank, N.A. and Registrant, on
behalf of Morgan Grenfell Fixed Income Fund and
Morgan Grenfell Municipal Bond Fund.
***9(a). Administration Agreement between SEI Financial
Management Corporation and Registrant, on behalf of
Morgan Grenfell International Equity Fund, Morgan
Grenfell Global Equity Fund, Morgan Grenfell European
Equity Fund, Morgan Grenfell Pacific Basin Equity
Fund, Morgan Grenfell International Small Cap Equity
Fund, Morgan Grenfell Japanese Small Cap Equity Fund,
Morgan Grenfell European Small Cap Equity Fund,
Morgan Grenfell Emerging Markets Equity Fund, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund, Morgan Grenfell Large Cap
Growth Fund, Morgan Grenfell Smaller Companies Fund,
Morgan Grenfell Fixed Income Fund, Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell
Municipal Bond Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Microcap Fund
(previously filed with the SEC on November 1, 1996
pursuant to Post-Effective Amendment No. 12 to
Registrant's Registration Statement).
***9(b). Transfer Agency Agreement dated as of December 30,
1993 between Supervised Service Company, Inc. and
Registrant, on behalf of Morgan Grenfell
International Equity Fund, Morgan Grenfell Global
Equity Fund, Morgan Grenfell European Equity Fund,
Morgan Grenfell Pacific Basin Equity Fund, Morgan
Grenfell International Small Cap Equity Fund, Morgan
Grenfell Japanese Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund, Morgan
Grenfell Emerging Markets Equity Fund, Morgan
Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell
Emerging Markets Fixed Income Fund (previously filed
with the SEC on November 1, 1996 pursuant to
Post-Effective Amendment No. 12 to Registrant's
Registration Statement).
C-3
<PAGE>
***9(c). Transfer Agency Agreement dated as of December 28,
1994 between Supervised Service Company, Inc. and
Registrant, on behalf of Morgan Grenfell Large Cap
Growth Fund, Morgan Grenfell Smaller Companies Fund,
Morgan Grenfell Fixed Income Fund, Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell
Municipal Bond Fund, Morgan Grenfell Short-Term
Municipal Bond Fund and Morgan Grenfell Microcap Fund
(previously filed with the SEC on November 1, 1996
pursuant to Post-Effective Amendment No. 12 to
Registrant's Registration Statement).
10. Not Applicable.
11. Consent of Independent Accountants.
12. Not Applicable.
13. Share Purchase Agreement dated as of December 29,
1993 between Registrant and SEI Financial Management
Corporation.
16. Schedule of Performance Computations.
17. Not Applicable.
18. Form of Amended Rule 18f-3 Plan.
**19(a). Powers of Attorney of Graham E. Jones, William N.
Searcy, Paul K. Freeman, Theresa M. Messina, Patrick
W. Disney, James E. Minnick, Hugh G. Lynch, Edward T.
Tokar and Jeffrey A. Cohen.
***19(b). Power of Attorney of John G. Alshefski (previously
filed with the SEC on November 1, 1996 pursuant to
Post-Effective Amendment No. 12 to Registrant's
Registration Statement)
- ---------------------------
* Previously filed with the SEC on June 11, 1996 and incorporated by reference
herein.
** Previously filed with the SEC on February 14, 1996 and incorporated by
reference herein.
*** Previously filed with the SEC on the dates indicated and incorporated by
reference herein.
C-4
<PAGE>
Item 25. Persons Controlled By or Under Common Control With Registrant
-------------------------------------------------------------
The Registrant does not directly or indirectly control any person. On
the effective date of this Registration Statement, 100% of the shares of the
following series of the Registrant will be owned by SEI Financial Management
Corporation, a Delaware corporation: Morgan Grenfell Global Equity Fund, Morgan
Grenfell Pacific Basin Equity Fund and Morgan Grenfell Japanese Small Cap Equity
Fund. SEI Financial Management Corporation is a wholly-owned subsidiary of SEI
Corporation, a Delaware corporation, which also controls the distributor of the
Registrant, SEI Financial Services Company, and other corporations engaged in
providing various financial and recordkeeping services, primarily to bank trust
departments, pension plan sponsors and investment managers.
Item 26. Number of Holders of Securities
-------------------------------
On December 17, 1996, the number of record holders of shares of each
series of the Registrant was as follows:
Number of
Fund Record Holders
- ---- --------------
Morgan Grenfell International Equity Fund 14
Morgan Grenfell Global Equity Fund 1
Morgan Grenfell European Equity Fund 1
Morgan Grenfell Pacific Basin Equity Fund 1
Morgan Grenfell International Small Cap Equity Fund 19
Morgan Grenfell Japanese Small Cap Equity Fund 1
Morgan Grenfell European Small Cap Equity Fund 8
Morgan Grenfell Emerging Markets Equity Fund 34
Morgan Grenfell Global Fixed Income Fund 87
Morgan Grenfell International Fixed Income Fund 15
Morgan Grenfell Emerging Markets Debt Fund 49
Morgan Grenfell Fixed Income Fund 233
Morgan Grenfell Municipal Bond Fund 130
Morgan Grenfell Short-Term Fixed Income Fund 27
Morgan Grenfell Short-Term Municipal Bond Fund 44
Morgan Grenfell Smaller Companies Fund 17
Morgan Grenfell Microcap Fund 1
Morgan Grenfell Large Cap Growth Fund 0
Item 27. Indemnification
---------------
Article III, Section 7 and Article VII, Section 2 of the Registrant's
Agreement and Declaration of Trust and Article VI of the Registrant's By-Laws
provide for indemnification of the Registrant's trustees and officers under
certain circumstances.
C-5
<PAGE>
Item 28. Business and Other Connections of Investment Advisers
-----------------------------------------------------
All of the information required by this item is set forth in the Form
ADV, as amended, of Morgan Grenfell Investment Services Limited (File No.
801-12880) and in the Form ADV, as amended, of Morgan Grenfell Capital
Management, Inc. (File No. 801-27291). The following sections of each such Form
ADV are incorporated herein by reference:
(a) Items 1 and 2 of Part II
(b) Section 6, Business Background, of each Schedule D.
Item 29. Principal Underwriter
---------------------
(a) The Registrant's distributor is SEI Financial Services Company
("SFS"), which also acts as distributor for SEI Daily Income
Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index
Funds, SEI Institutional Managed Trust, SEI International
Trust, Stepstone Funds, The Advisors' Inner Circle Fund, The
Pillar Funds, CUFUND, STI Classic Funds, CoreFunds, Inc.,
First American Funds, Inc., First American Investment Funds,
Inc., The Arbor Fund, 1784 Funds(R), The PBHG Funds, Inc.,
Marquis Funds(R), The Achievement Funds Trust, Bishop Street
Funds, CrestFunds, Inc., STI Classic Variable Trust, ARK
Funds, Monitor Funds, FMB Funds, Inc., SEI Asset Allocation
Trust, Turner Funds, SEI Institutional Investments Trust and
First American Strategy Funds, Inc. pursuant to distribution
agreements dated July 15, 1982, November 29, 1982, December 3,
1982, July 10, 1985, January 22, 1987, August 30, 1988,
January 30, 1991, November 14, 1991, February 28, 1992, May 1,
1992, May 29, 1992, October 30, 1992, November 1, 1992,
November 1, 1992, January 28, 1993, June 1, 1993, July 16,
1993, August 17, 1993, December 27, 1994, January 27, 1995,
March 1, 1995, August 18, 1995, November 1, 1995, January 11,
1996, March 1, 1996, April 1, 1996, April 30, 1996, June 14,
1996 and October 1, 1996, respectively.
(b) The following table lists, for each director and officer of
SFS, the information indicated.
C-6
<PAGE>
Name and Positions and
Principal Business Position and Offices Office with
Address* with Underwriter Registrant
- ------------------ -------------------- ---------------
Alfred P. West, Jr. Director, Chairman and None
Chief Executive Officer
Henry H. Greer Director, President and None
Chief Operating Officer
Carmen V. Romeo Director, Executive Vice None
President and Treasurer
Gilbert L. Beebower Executive Vice President None
Richard B. Lieb Executive Vice President, None
President - Investment
Services Division
Leo J. Dolan, Jr. Senior Vice President None
Carl A. Guarino Senior Vice President None
Jerome Hickey Senior Vice President None
David G. Lee Senior Vice President None
Steven Kramer Senior Vice President None
William Madden Senior Vice President None
A. Keith McDowell Senior Vice President None
Dennis J. McGonigle Senior Vice President None
Hartland J. McKeown Senior Vice President None
James V. Morris Senior Vice President None
Steven Onofrio Senior Vice President None
Kevin P. Robins Senior Vice President, None
General Counsel and
Secretary
Robert Wagner Senior Vice President None
Patrick K. Walsh Senior Vice President None
Kenneth Zimmer Senior Vice President None
Robert Crudup Vice President and
Managing Director None
Vic Galef Vice President and None
Managing Director
Kim Kirk Vice President and None
Managing Director
John Krzeminski Vice President and None
Managing Director
Carolyn McLaurin Vice President and None
Managing Director
Barbara Moore Senior Vice President None
Donald Pepin Vice President and None
Managing Director
Mark Samuels Vice President and None
Managing Director
Wayne M. Withrow Vice President and None
Managing Director
Mick Duncan Vice President and Team Leader None
C-7
<PAGE>
Robert S. Ludwig Vice President and Team Leader None
Vicki Malloy Vice President and Team Leader None
Robert Aller Vice President None
W. Kelso Morrill Vice President None
Gordon W. Carpenter Vice President None
Barbara A. Nugent Vice President and None
Assistant Secretary
Todd Cipperman Vice President and None
Assistant Secretary
Ed Daly Vice President None
Jeff Drennen Vice President None
Kathy Heilig Vice President None
Larry Hutchison Senior Vice President None
Michael Kantor Vice President None
Samuel King Vice President None
Donald H. Korytowski Vice President None
Jack May Senior Vice President None
Sandra K. Orlow Vice President and None
Assistant Secretary
Larry Pokora Vice President None
Kim Rainey Vice President None
Paul Sachs Vice President None
Steve Smith Vice President None
Daniel Spaventa Vice President None
Kathryn L. Stanton Vice President and None
Assistant Secretary
William Zawaski Vice President None
James Dougherty Director of Brokerage Services None
Marc H. Cahn Vice President and None
Assistant Secretary
- ---------------------------
* The principal business address of each of the listed persons is SEI Financial
Services Company, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100.
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
The Agreement and Declaration of Trust, By-Laws and minute books of
the Registrant are in the physical possession of Morgan Grenfell Capital
Management, Inc., 885 Third Avenue, New York, New York 10022. All other books,
records, accounts and other documents required to be maintained under Section
31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder
will be in the physical possession of the Registrant's custodians: The Northern
Trust Company, Fifty South LaSalle Street, Chicago, Illinois 60675, and
CoreStates Bank, N.A., Broad
C-8
<PAGE>
and Chestnut Streets, Philadelphia, Pennsylvania 19101, except for certain
transfer agency and fund accounting records which are in the physical possession
of DST Systems, Inc., 811 Main Street, Kansas City, Missouri 64105, the
Registrant's transfer agent, and SEI Financial Management Corporation, the
Trust's administrator, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100,
respectively.
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertaking
-----------
(a) Within four to six months from the later of (i) the effective
date of this Post-Effective Amendment under the Securities Act of 1933 and (ii)
the actual date that shares of a series are first sold to the public or
operations otherwise begin with respect to such series, the Registrant
undertakes to file a post-effective amendment covering each series of Registrant
that has not commenced operations prior to the effective date of this
Post-Effective Amendment, using financial statements which need not be
certified.
(b) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in such Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
(c) The Registrant undertakes to furnish, upon request and without
charge, to each person to whom a prospectus is delivered a copy of the latest
annual report to shareholders of such series (except to the extent a series has
not by such time been required to issue an annual report).
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York, on the
5th day of February 1997.
MORGAN GRENFELL INVESTMENT TRUST
By: /s/ Mark G. Arthus
-------------------------------
Mark G. Arthus
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 16 to the Registrant's Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
James E. Minnick* )
- ------------------------
James E. Minnick Chief Executive Officer )
(Principal Executive )
Officer) and Trustee )
)
)
/s/ John G. Alshefski ) Feb. 5, 1997
- -----------------------
John G. Alshefski Treasurer and Chief )
Financial Officer )
(Principal Financial and )
Accounting Officer) )
)
Paul K. Freeman* )
- -----------------------
Paul K. Freeman Trustee )
)
)
Graham E. Jones* )
- -----------------------
Graham E. Jones Trustee )
<PAGE>
Signature Title Date
--------- ----- ----
William N. Searcy* )
- -----------------------
William N. Searcy Trustee )
)
)
Patrick W. Disney* )
- -----------------------
Patrick W. Disney Trustee )
)
)
Hugh G. Lynch* )
- -----------------------
Hugh G. Lynch Trustee )
)
)
Edward T. Tokar* )
- -----------------------
Edward T. Tokar Trustee )
- ------------
Dated: February 5, 1997
*By: /s/ Mark G. Arthus
------------------
Mark G. Arthus, Attorney-in-Fact, pursuant to powers of attorney.
<PAGE>
Exhibit Index
-------------
Exhibit
Number Document Title
- ------- --------------
11. Consent of Independent Accountants.
13. Share Purchase Agreement dated as of December 29, 1993
between Registrant and SEI Financial Management Corporation.
16. Schedule of Performance Computations.
18. Form of Amended Rule 18f-3 Plan.
Consent of Independent Accountants
We hereby consent to the use in the Statements of Additional Information
constituting parts of this Post-Effective Amendment No 16 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 23, 1996 relating to the financial statements and financial highlights
of Municipal Bond Fund, Fixed Income Fund, Short-Term Municipal Bond Fund,
Short-Term Fixed Income Fund, Smaller Companies Fund, International Equity Fund,
European Equity Fund, International Small Cap Equity Fund, European Small Cap
Equity Fund, Emerging Markets Equity Fund, Global Fixed Income Fund,
International Fixed Income Fund and Emerging Markets Debt Fund, (comprising
Morgan Grenfell Investment Trust), which appears in such Statements of
Additional Information, and to the incorporation by reference of our report into
the Prospectuses which constitute parts of this Registration Statement. We also
consent to the references to us under the headings "Financial Statements" and
"Independent Accountants" in such Statements of Additional Information and to
the reference to us under the heading "Financial Highlights" in such
Prospectuses.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
February 7, 1997
SHARE PURCHASE AGREEMENT
This Agreement is made as of the 29 day of December, 1993 between SEI
Financial Management Corporation, a [Delaware] corporation ("SEI"), and Morgan
Grenfell Investment Trust, a Delaware business trust that currently consists of
eleven series (the "Trust").
WHEREAS, the Trust wishes to sell and SEI wishes to purchase [10,000]
shares of beneficial interest of one or more series of the Trust at a purchase
price of [$10] per share (the "Shares"); and
WHEREAS, SEI is purchasing the Shares for the purpose of providing the
initial capitalization of the Trust;
NOW, THEREFORE, the parties hereto agree as follows:
1. Simultaneously with the execution of this Agreement, SEI is
delivering to the Trust a check in the amount of $100,000 in full payment for
the Shares.
2. SEI agrees that it is purchasing the Shares for investment and
has no present intention of redeeming or reselling the Shares.
Executed as of the date first set forth above.
SEI FINANCIAL MANAGEMENT CORPORATION
Name: /s/ T. M. Messina
-----------------------------
Title: Vice President
-----------------------------
MORGAN GRENFELL INVESTMENT TRUST
/s/ James E. Minnick
--------------------------------
James E. Minnick
Chief Executive Officer
MORGAN GRENFELL INVESTMENT TRUST
This schedule is included to illustrate how yield, total return and
tax-equivalent yield figures appearing in the Trust's Statements of Additional
Information were calculated. Actual data for periods ended October 31, 1996, the
Trust's fiscal year end, are used.
Yield for 30-day Period
Ended October 31, 1996 = 2[(a-b + 1)(6)-1]
---
cd
Morgan Grenfell Municipal Bond Fund:
a=1,197,542 b=113,066 c=22,891,923 d=10.98
Morgan Grenfell Fixed Income Fund:
a=4,217,257 b=330,904 c=70,584,265 d=10.49
Morgan Grenfell Short-Term Municipal Bond Fund:
a=41,408 b=3,835 c=887,468 d=10.13
Morgan Grenfell Short-Term Fixed Income Fund:
a=35,124 b=2,873 c=659,092 d=10.00
Morgan Grenfell Global Fixed Income Fund:
a=731,167 b=97,122 c=13,300,862 d=11.26
Morgan Grenfell International Fixed Income Fund:
a=106,676 b=15,587 c=1,923,571 d=11.30
Morgan Grenfell Emerging Markets Debt Fund:
a=768,492 b=126,482 c=7,667,338 d=13.29
Average Annual Total
Return for Fiscal
Period Ended
October 31, 1996: = [( ERV )(n) - 1]
---
P
Morgan Grenfell Municipal Bond Fund:
ERV=1,069 P=$1,000 n=1
<PAGE>
Morgan Grenfell Fixed Income Fund:
ERV=1,062.70 P=$1,000 n=1
Morgan Grenfell Short-Term Municipal Bond Fund:
ERV=1,059 P=$1,000 n=1
Morgan Grenfell Short-Term Fixed Income Fund:
ERV=1,060.90 P=$1,000 n=1
Morgan Grenfell Global Fixed Income Fund:
ERV=1,066 P=$1,000 n=1
Morgan Grenfell International Fixed Income Fund:
ERV=1,068.20 P=$1,000 n=1
Morgan Grenfell Emerging Markets Debt Fund:
ERV=1,384.20 P=$1,000 n=1
Morgan Grenfell International Equity Fund:
ERV=1,127 P=$1,000 n=1
Morgan Grenfell International Small Cap Equity Fund:
ERV=1,064.30 P=$1,000 n=1
Morgan Grenfell European Equity Fund:
ERV=1,060 P=$1,000 n=1
Morgan Grenfell European Small Cap Equity Fund:
ERV=1,100.60 P=$1,000 n=1
Morgan Grenfell Emerging Markets Equity Fund:
ERV=1,100.20 P=$1,000 n=1
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Portion of Yield
Tax-Equivalent Yield (that is Tax-Exempt) Portion of Yield
for 30-Day Period = -------------------- + that is not
Ended October 31, 1996 1 - .396 Tax-Exempt
Morgan Grenfell Municipal Bond Fund:
Portion of Yield that is Tax-Exempt = 5.23
Portion of Yield that is not Tax-Exempt = 0
Morgan Grenfell Short-Term Municipal Bond Fund:
Portion of Yield that is Tax-Exempt = 5.07
Portion of Yield that is not Tax-Exempt = 0
Morgan Grenfell Investment Trust
Form of Amended Plan in Accordance with Rule 18f-3
This plan is applicable to each series of Morgan Grenfell Investment
Trust (the "Trust"). Unless otherwise determined by the Trust's Board of
Trustees, each future series of the Trust will issue multiple classes of shares
in accordance with this plan. Each series of the Trust, including any series
established in the future, is referred to herein as a "Fund."
Except as set forth below, each class of shares of each Fund will
have the same relative rights and privileges, including the right to have
distributions calculated in the same manner and at the same time as all other
classes, and be subject to the same fees and expenses. In addition,
extraordinary expenses attributable to one or more classes shall be borne by
such classes. Further, expenses attributable to two or more classes shall be
allocated to such classes at the same time. The Trust's Board of Trustees may
determine in the future that other allocations of expenses or other services to
be provided to a class of shares are appropriate and amend this Plan accordingly
without the approval of shareholders of any class. Unless a class of shares is
otherwise designated, it shall have the terms set forth below for Institutional
Shares. Except as set forth in a prospectus of the Trust, shares may be
exchanged only for shares of the same class of another Fund.
Institutional Shares
Institutional Shares are sold at net asset value without a sales
charge and are sold subject to the minimum purchase requirements set forth in
the relevant prospectuses of the Trust. A wire transfer fee may be imposed in
connection with the payment of redemption proceeds from Institutional Shares
that is not imposed in connection with other classes of shares. Institutional
Shares shall be entitled to the shareholder services set forth from time to time
in the Trust's prospectuses with respect to Institutional Shares.
Service Shares
Service Shares are sold at net asset value without a sales charge and
are sold subject to the minimum purchase requirements set forth in the relevant
Trust prospectuses. Service Shares are sold only to or through certain service
organizations that have entered into agreements with the Funds. Pursuant to such
agreements, Service Shares are subject to a fee for shareholder services
provided by such organizations. Service Shares beneficially owned by customers
of a service organization will convert automatically to Institutional Shares in
the event that such service organization's agreement with the Trust expires or
is terminated. The terms of any such conversion shall be as set forth from time
to time in the Trust's prospectuses with respect to Service Shares. Service
Shares shall be entitled to the shareholder services set forth from time to time
in the Trust's prospectuses with respect to Service Shares.
Class A Shares
Class A Shares are sold at net asset value with a front-end sales
charge and are sold subject to the minimum purchase requirements set forth in
the relevant Trust prospectuses. Investors that purchase Class A Shares having
at least a specified aggregate value as set forth in the relevant Trust
prospectuses may be permitted to purchase Class A shares at net asset value with
no initial sales charge; but if these
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shares are redeemed within a specified period after their purchase as set forth
in the relevant Trust prospectuses, a contingent deferred sales charge may be
imposed. Class A Shares will be subject to distribution and/or service fees
imposed under a Rule 12b-1 plan as set forth in the relevant Trust prospectuses.
Class A Shares shall be entitled to the shareholder services set forth from time
to time in the Trust's prospectuses with respect to Class A Shares.
Class B Shares
Class B Shares are sold at net asset value and are sold subject to the
minimum purchase requirements set forth in the relevant Trust prospectuses.
Class B Shares redeemed within a specified period after their purchase as set
forth in the relevant Trust prospectuses will be subject to a contingent
deferred sales charge. Class B Shares will be subject to distribution and/or
service fees imposed under a Rule 12b-1 plan as set forth in the relevant Trust
prospectuses. Class B Shares held by an investor will convert automatically to
Class A Shares after the investor has held such Class B Shares for a period of
time, which period shall be specified in the Trust's prospectuses with respect
to Class B Shares. Class B Shares shall be entitled to the shareholder services
set forth from time to time in the Trust's prospectuses with respect to Class B
Shares.
Class C Shares
Class C Shares are sold at net asset value and are sold subject to the
minimum purchase requirements set forth in the relevant Trust prospectuses.
Class C Shares redeemed within a specified period after their purchase as set
forth in the relevant Trust prospectuses will be subject to a contingent
deferred sales charge. Class C Shares will be subject to distribution and/or
service fees imposed under a Rule 12b-1 plan as set forth in the relevant Trust
prospectuses. Class C Shares shall be entitled to the shareholder services set
forth from time to time in the Trust's prospectuses with respect to Class C
Shares.
Shareholder Meeting Expenses
In addition to the expenses identified above, class expenses shall
include printing, postage and other expenses related to preparing and
distributing materials such as proxy statements to current shareholders of a
specific class and holding meetings of the shareholders of such class.
Date Most Recently Amended: February 20, 1997
