As filed with the Securities and Exchange Commission on December 12, 1997
1933 Act Registration No. 33-68704
1940 Act Registration No. 811-8006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [_]
Amendment No. 20 [X}
(Check appropriate box or boxes)
MORGAN GRENFELL INVESTMENT TRUST
(Exact name of registrant as specified in Charter)
885 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices)
Registrant's Telephone Number,
including Area Code: 212-230-2600
Copy to:
James E. Minnick Ernest V. Klein, Esq.
Morgan Grenfell Capital Management, Inc. Hale and Dorr
885 Third Avenue Sixty State Street
New York, New York 10022 Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
_X_ on February 25, 1998 pursuant to paragraph (a)(2) of Rule 485.
Registrant has registered an indefinite number of shares pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended.
<PAGE>
CROSS REFERENCE SHEET FOR PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION
COVERING INSTITUTIONAL SHARES OF MORGAN GRENFELL INVESTMENT TRUST
(as required by Rule 495)
Morgan Grenfell Investment Trust
N-1A Item No. Location
- - ------------- --------
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment Objectives
and Policies; Description of
Securities and Investment
Techniques and Related Risks;
Additional Investment
Information; Organization and
Shares of the Trust
Item 5. Management of the Fund Management of the Funds; The
Adviser's Microcap Investment
Results
Item 6. Capital Stock and Other Securities Dividends, Distributions and
Taxes; Organization and Shares of
the Trust; Purchase of Shares
Item 7. Purchase of Securities Being Purchase of Shares;
Offered Net Asset Value
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
Part B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
<PAGE>
N-1A Item No. Location
- - ------------- --------
Item 13. Investment Objectives and Policies Additional Information on Fund
Investments and Strategies and
Related Risks; Investment
Restrictions; Investment Advisory
and Other Services
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers;
Holders of Securities 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
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 INSTITUTIONAL SHARES OF MORGAN GRENFELL INVESTMENT TRUST
(as required by Rule 495)
Morgan Grenfell Investment Trust
N-1A Item No. Location
- - ------------- --------
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Cover Page; Investment Objectives
and Policies; Description of
Securities and Investment
Techniques and Related Risks;
Additional Investment
Information; Organization and
Shares of the Trust
Item 5. Management of the Fund Management of the Funds; The
Adviser's Microcap Investment
Results
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>
N-1A Item No. Location
- - ------------- --------
Item 13. Investment Objectives and Policies Additional Information on Fund
Investments and Strategies and
Related Risks; Investment
Restrictions; Investment Advisory
and Other Services
Item 14. Management of the Fund Trustees and Officers
Item 15. Control Persons and Principal Trustees and Officers;
Holders of Securities 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
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
February 25, 1998
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 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 Total Return Bond Fund, Morgan Grenfell
High Yield Bond Fund, Morgan Grenfell Smaller Companies Fund, Morgan Grenfell
Microcap Fund and Morgan Grenfell Large Cap Growth Fund (each a "Fund"). Each
Fund other than Morgan Grenfell Total Return Bond Fund is diversified.
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.
----------------------------------------
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 February 25, 1998, 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 (the "Commission"). Not all of the Funds are
available in certain states. Please call 1-800-550-6426 to determine
availability in a particular state.
----------------------------------------
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.
MORGAN GRENFELL HIGH YIELD BOND FUND MAY INVEST UP TO 100% OF ITS ASSETS IN
LOWER QUALITY BONDS, COMMONLY KNOWN AS "JUNK BONDS." MORGAN GRENFELL TOTAL
RETURN BOND FUND MAY INVEST UP TO 15% OF ITS ASSETS IN SUCH BONDS. THESE
INVESTMENTS ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN INVESTMENTS IN
HIGHER QUALITY BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING IN THESE FUNDS. SEE "INVESTMENT OBJECTIVES AND POLICIES" AND
"DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS."
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 1
<PAGE>
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 investment objective of Morgan Grenfell
Total Return Bond Fund is to maximize total return consistent with the
preservation of capital. The investment objective of the Morgan Grenfell High
Yield Bond Fund is to seek high current income and, as a secondary objective,
capital growth. 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 effective 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 effective 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 expects to maintain a
dollar weighted effective 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 expects to maintain a
dollar weighted effective average portfolio maturity of no longer than three
years.
Morgan Grenfell Total Return Bond Fund invests primarily in U.S. dollar-
denominated, investment grade bonds of domestic and foreign issuers. The Fund
may invest up to 20% of its assets in securities denominated in foreign
currencies and up to 15% of its assets in certain below investment grade
securities. The Fund expects to maintain a dollar weighted effective average
portfolio maturity of between five and ten years.
Morgan Grenfell High Yield Bond Fund invests primarily in U.S.
dollar-denominated bonds that are below investment grade. The Fund expects to
maintain a dollar weighted effective average portfolio maturity of between five
and ten years.
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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Page 2
<PAGE>
TABLE OF CONTENTS
Page
Expense Information 4
Financial Highlights 6
Introduction to the Funds 8
Risk Factors 9
Investment Objectives and Policies 9
Description of Securities and Investment Techniques
and Related Risks 16
Additional Investment Information 25
Management of the Funds 26
Purchase of Institutional Shares 29
Redemption of Institutional Shares 32
Net Asset Value 33
Dividends, Distributions and Taxes 34
Organization and Shares of the Trust 36
Performance Information 37
Appendix A (The Adviser's Microcap Investment Results) 39
Appendix B (Tax Certification Instructions) 41
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Page 3
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Short-Term High
Fixed Fixed Short-Term Total Yield Smaller Large Cap
Income Municipal Income Municipal Return Bond Bond Companies Microcap Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Fund* Fund* Fund Fund Fund*
---- --------- ---------- ---------- ----------- ----- --------- -------- ---------
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases ................... None None None None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends ................... None None None None None None None None None
Deferred Sales Charge Imposed
on Redemptions ......................... None None None None None None None None None
Exchange Fee ........................... None None 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% 0.45% 0.50% 1.00% 1.50% 0.75%
Other Expenses ......................... ___% ___% ___% ___% 0.31% 0.31% ___% ___% 0.48%
Reduction of Advisory Fee and Expense
Limitation by Adviser** ................ ___% ___% ___% ___% (0.16)% (0.16)% ___% ___% (0.23)%
Net Fund Operating Expenses (after
advisory fee reduction and expense
limitation)** .......................... 0.55% 0.55% 0.55% 0.55% 0.60% 0.65% 1.25% 1.75% 1.00%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total Return Bond Fund, High Yield Bond Fund and Large Cap Growth Fund were
not operational during the fiscal year ended October 31, 1997.
** 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 institutional shares 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, 1998. The
purpose of the voluntary agreement is to enhance a Fund's total return during
the period when, because of its smaller size, fixed expenses have a more
significant impact on total return After giving effect to the Adviser's
voluntary agreement, each Fund's advisory fee is as follows: Fixed Income
Fund ___%, Municipal Bond Fund ___%, Short-Term Fixed Income Fund ___%,
Short-Term Municipal Bond Fund ___%, Total Return Bond Fund 0.29%, High Yield
Bond Fund 0.34%, Smaller Companies Fund ___%, Microcap Fund ___% 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 Smaller 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 __%, Municipal Bond Fund __%, Short-Term Fixed
Income Fund __%, Short-Term Municipal Bond Fund __%, Total Return Bond Fund
0.76%, High Yield Bond Fund 0.81%, Smaller Companies Fund __%, Microcap Fund
__% and Large Cap Growth Fund 1.23%.
- - --------------------------------------------------------------------------------
Page 4
<PAGE>
Example:
Investors in institutional shares would pay the following expenses on a
$1,000(1) investment assuming (1) a 5% annual return and (2) redemption at the
end of each time period:
1 3 5 10
Year Years Years Years
---- ----- ----- -----
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 Total Return Bond Fund $ 6 $19 N/A N/A
Morgan Grenfell High Yield Bond Fund $ 7 $21 N/A N/A
Morgan Grenfell Smaller Companies Fund $-- $-- $-- $--
Morgan Grenfell Microcap Fund $-- $-- $-- $--
Morgan Grenfell Large Cap Growth Fund $10 $32 N/A N/A
(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 Total Return Bond Fund, Morgan Grenfell High Yield Bond Fund and
Morgan Grenfell Large Cap Growth Fund are estimates for the fiscal year ending
October 31, 1998 that are based on actual expenses incurred during the fiscal
year ended October 31, 1997. "Other Expenses" for Morgan Grenfell Total Return
Bond Fund, Morgan Grenfell High Yield Bond Fund and Morgan Grenfell Large Cap
Growth Fund are based on estimated average net assets for the current fiscal
year ending October 31, 1998. If the average net assets of any 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 any of these Funds' average net assets are lower than the
applicable estimate for such year, then that Fund's "Other Expenses" (as a
percentage of average net assets) will be higher than the rate shown in the
table.
The Example assumes reinvestment of all dividends and distributions and that the
percentage amounts listed in the Expense Information Table remain the same each
year. If the Adviser were to discontinue its voluntary fee reductions, the
expenses contained in the Example could increase.
THE EXAMPLE IS DESIGNED FOR INFORMATION PURPOSES ONLY, AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR RETURN FOR ANY FUND. ACTUAL
EXPENSES AND RETURN VARY FROM YEAR TO YEAR AND MAY BE HIGHER OR LOWER THAN THOSE
SHOWN. For further information regarding advisory fees and other expenses of the
Funds, see "Management of the Funds."
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Page 5
<PAGE>
FINANCIAL HIGHLIGHTS
Selected audited data for an outstanding institutional share of each Fund other
than Morgan Grenfell Total Return Bond Fund, Morgan Grenfell High Yield Bond
Fund and Morgan Grenfell Large Cap Growth Fund are presented for periods prior
to and ending October 31, 1997. This data, insofar as it relates to the periods
ended October 31, 1995, October 31, 1996 and October 31, 1997, has been audited
by _______________, the Funds' independent accountants. The data for periods
prior to and ending October 31, 1994 for Morgan Grenfell Fixed Income Fund and
Morgan Grenfell Municipal Bond Fund 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, 1997 and the notes
thereto, which appear in the Funds' Statement of Additional Information. The
Funds' annual report, which contains additional performance information, and
Statement of Additional Information are available free of charge by calling
1-800-550-6426.
No data is shown below for Morgan Grenfell Total Return Bond Fund, Morgan
Grenfell High Yield Bond Fund or Morgan Grenfell Large Cap Growth Fund because
these Funds had not commenced operations on or prior to October 31, 1997.
- - --------------------------------------------------------------------------------
Page 6
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - ------------------------------------------------------------------------------------------------------------------------------------
For an Institutional Share Outstanding Throughout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions Ratio of
Value Investment and from Net from Realized Net Asset Net Assets Expenses to
Beginning Income / Unrealized Investment Capital Value End Total End of Average
Year of Period (Loss) Gains/(Losses) Income Gains of Period Return Period (000) Net Assets
- - ---- --------- ------ -------------- ------ ----- --------- ------ ------------ ----------
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------
Fixed Income Fund
- - ------------------------------
1997
1996 $10.62 $ 0.68 $(0.04) $(0.68) $(0.07) $10.51 6.27 % $758,003 0.55%
1995 $ 9.93 $ 0.70 $ 0.69 $(0.70) -- $10.62 14.53 % $494,221 0.54%
1994 $10.95 $ 0.64 $(0.91) $(0.64) $(0.11) $ 9.93 (2.58)% $239,556 0.54%
1993 $ 9.92 $ 0.64 $ 1.03 $(0.64) -- $10.95 17.28 % $147,917 0.55%
1992(1) $10.00 $ 0.06 $(0.08) $(0.06) -- $ 9.92 (1.61)% $ 25,528 0.55%
- - ------------------------------
Municipal Bond Fund
- - ------------------------------
1997
1996 $10.86 $ 0.60 $ 0.13 $(0.60) -- $10.99 6.90 % $252,152 0.55%
1995 $10.37 $ 0.61 $ 0.49 $(0.61) -- $10.86 10.90 % $221,058 0.54%
1994 $11.36 $ 0.60 $(0.61) $(0.60) $(0.38) $10.37 (0.15)% $165,677 0.54%
1993 $10.56 $ 0.67 $ 0.84 $(0.67) $(0.04) $11.36 14.68 % $148,022 0.55%
1992(2) $10.00 $ 0.60 $ 0.56 $(0.60) -- $10.56 13.42 % $ 94,700 0.55%
- - ------------------------------
Short-Term Fixed Income Fund
- - ------------------------------
1997
1996 $10.01 $ 0.60 $(0.01) $(0.60) -- $10.00 6.09 % $ 6,751 0.53%
1995(3) $10.00 $ 0.37 $ 0.01 $(0.37) -- $10.01 3.82 %(#) $ 4,140 0.52%
- - ------------------------------
Short-Term Municipal Bond Fund
- - ------------------------------
1997
1996 $10.13 $ 0.54 $ 0.04 $(0.54) $(0.04) $10.13 5.90 % $ 9,132 0.53%
1995(4) $10.00 $ 0.30 $ 0.13 $(0.30) -- $10.13 4.39 %(#) $ 3,724 0.52%
- - ------------------------------
Smaller Companies Fund
- - ------------------------------
1997
1996 $10.55 $(0.02) $ 2.61 $(0.04) -- $13.10 24.58 % $ 4,115 1.25%
1995(5) $10.00 $ 0.03 $ 0.52 -- -- $10.55 5.50 %(#) $ 2,638 1.25%
- - ------------------------------
Microcap Fund
- - ------------------------------
1997(6)
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio Average
to Average Expense Expense Turnover Commission
Year Net Assets Limitations) Limitations) Rate Rate*
- - ---- ---------- ------------ ------------ ---- -----
- - ------------------------------------------------------------------------
- - ------------------------------
Fixed Income Fund
- - ------------------------------
1997
<C> <C> <C> <C> <C>
1996 6.52% 0.61% 6.46% 176% N/A
1995 6.81% 0.63% 6.72% 182% N/A
1994 6.22% 0.66% 6.10% 251% N/A
1993 6.01% 0.72% 5.84% 196% N/A
1992(1) 5.24% 1.66% 4.13% 148% N/A
- - ------------------------------
Municipal Bond Fund
- - ------------------------------
1997
1996 5.50% 0.61% 5.44% 66% N/A
1995 5.75% 0.62% 5.67% 63% N/A
1994 5.60% 0.67% 5.47% 94% N/A
1993 5.94% 0.75% 5.74% 160% N/A
1992(2) 6.31% 0.79% 6.07% 143% N/A
- - ------------------------------
Short-Term Fixed Income Fund
- - ------------------------------
1997
1996 6.00% 1.29% 5.24% 124% N/A
1995(3) 5.86% 2.84% 3.54% 90% N/A
- - ------------------------------
Short-Term Municipal Bond Fund
- - ------------------------------
1997
1996 5.34% 1.58% 4.29% 129% N/A
1995(4) 4.60% 2.16% 2.96% 62% N/A
- - ------------------------------
Smaller Companies Fund
- - ------------------------------
1997
1996 (0.23)% 2.55% (1.53)% 141% $0.0560
1995(5) 0.94% 2.28% (0.09)% 23% N/A
- - ------------------------------
Microcap Fund
- - ------------------------------
1997(6)
</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.
(6) Microcap Fund commenced operations on 12/18/96. All ratios for the period
have been annualized.
- - --------------------------------------------------------------------------------
Page 7
<PAGE>
INTRODUCTION TO THE FUNDS
Morgan Grenfell Investment Trust (the "Trust") offers a number of mutual funds,
each of which is a separate series of the Trust. This Prospectus relates solely
to the Funds. Information regarding 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$146.46 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 Total Return Bond Fund,
Morgan Grenfell High Yield Bond Fund and 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, Short-Term Municipal Bond Fund, Total Return Bond Fund and
High Yield Bond Fund, the Adviser seeks to achieve these Funds' investment
objectives by identifying fixed income securities and sectors which it believes
to be undervalued relative to the market and alternative sectors 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 securities and sectors,
supply and demand shifts and lack of market penetration by some issuers.
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.
- - --------------------------------------------------------------------------------
Page 8
<PAGE>
In selecting equity investments, the Adviser considers a number of
company-specific factors, including quality of management, a leading or dominant
position in a major product line, a sound financial position, and a relatively
high rate of return on invested capital so that future growth can be financed
from internal sources. The Adviser also considers a company's record of dividend
payments and/or the likelihood that the company will pay dividends in the
future. However, consistent with their investment objectives, each Equity Fund
may purchase securities of companies that are not expected to pay dividends in
the foreseeable future.
RISK FACTORS
General. 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.
Derivative Instruments. Certain of the Funds may employ investment techniques,
including options and futures contracts and other investments that may be
considered derivative instruments. 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."
Below Investment Grade Bonds. The High Yield Bond Fund and, to a lesser extent,
the Total Return Bond Fund may invest in below investment grade bonds, including
securities in default. These securities are considered speculative and, while
generally offering greater income than investments in higher quality securities,
involve greater risk of loss. See "Description of Securities and Investment
Techniques and Related Risks-Below Investment Grade Bonds."
Diversification. The Total Return Bond Fund is non-diversified under the
Investment Company Act of 1940 (the "1940 Act") and, therefore, may be more
susceptible than the other Funds to developments affecting any single issuer of
portfolio securities. See "Description of Securities and Investment Techniques
and Related Risks-Diversification." Each of the other Funds is diversified under
the 1940 Act.
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 is to seek a high level of income consistent with the preservation
of capital. Under normal circumstances, the Fixed Income Fund expects to
maintain a dollar weighted effective average portfolio maturity of 5 to 10
years, and the Short-Term Fixed Income Fund expects to maintain a dollar
weighted effective average 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
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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 Fund normally invests 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 other
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 Fund may purchase securities on a
when-issued basis. Neither 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, each 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. In
determining the effective maturity of callable securities, the call date may be
used as the effective maturity if interest rates have fallen since the bonds
original issue date.
Each 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 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
either 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 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 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
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securities meeting the Fund's investment objective and policies are not
otherwise readily available for purchase. For a definition of money market
instruments and these 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. Under normal circumstances, the
Municipal Bond Fund expects to maintain a dollar weighted effective average
portfolio maturity of 5 to 10 years, and the Short-Term Municipal Bond Fund
expects to maintain a dollar weighted effective average 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.
Subject to its portfolio maturity policy, each 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. In
determining the effective maturity of callable securities, the call date may be
used as the effective maturity if interest rates have fallen since the bonds
original issue date.
Under normal market conditions, each Municipal Fund invests at least 80% of its
net 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
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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 or BBB by Standard & Poor's,
or, if unrated, determined by the Adviser to be of comparable quality. Municipal
securities in the lowest investment grade category are considered medium grade
securities. Such securities have speculative characteristics, involve greater
risk of loss than higher quality securities, and are more sensitive to changes
in the issuer's capacity to pay.
The Municipal Funds' investments in tax-exempt commercial paper will be limited
to obligations that, at the time of purchase, are rated at least A-1 by Standard
& Poor's or Prime-1 by Moody's, or that are unrated but are determined by the
Adviser to be of comparable quality. The Municipal Funds may purchase other
types of tax-exempt instruments as long as they are of a quality equivalent to
the long-term bond or commercial paper ratings stated above. In the event any
security held by either Municipal Fund is downgraded below the rating categories
set forth above, the Adviser will review the security and determine whether to
retain or dispose of that security, provided that neither Municipal Fund will
hold, at any time, more than 5% of its net assets in securities that are rated
below investment grade.
Under normal circumstances, each Municipal Fund may invest up to 20% of its
total assets in certain taxable securities in order to maintain liquidity. In
addition, for temporary defensive purposes during periods when the Adviser
determines that market conditions warrant, each Municipal Fund may invest
without limit in such taxable securities. Such taxable securities include: U.S.
Treasury obligations (including separately traded interest and principal
component parts of U.S. Treasury obligations, transferable through the federal
book-entry system and known as Separately Traded Registered Interest and
Principal Securities or "STRIPS"); other marketable obligations issued or
guaranteed as to principal and interest by agencies or instrumentalities of the
U.S. Government whether or not backed by the full faith and credit of the U.S.
Treasury; short-term instruments of U.S. commercial banks or savings and loan
institutions (not including foreign branches of U.S. banks or U.S. branches of
foreign banks) that are members of the Federal Reserve System or the Federal
Deposit Insurance Corporation and that have total assets of $1 billion or more
as shown on their last published financial statements at the time of investment;
repurchase agreements involving any of the foregoing obligations; and, to the
extent permitted by applicable law, shares of other investment companies
investing solely in the foregoing obligations.
Distributions by a Fund that are derived from income from taxable securities
held by the Fund will generally be taxable to shareholders as ordinary income.
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Total Return Bond Fund
The investment objective of the Total Return Bond Fund is to maximize total
return consistent with the preservation of capital. Under normal circumstances,
the Fund expects to maintain a dollar weighted effective average portfolio
maturity of 5 to 10 years and to invest at least 65% of its total assets in U.S.
dollar-denominated investment grade bonds. For purposes of this policy, "bonds"
include the U.S. dollar-denominated fixed income securities in which the Fixed
Income Fund and the Short-Term Fixed Income Fund may invest, convertible
securities, and securities (including equity securities) of other investment
companies that invest primarily in any one or more of the foregoing types of
securities.
Under normal circumstances, the Fund may invest up to 35% of its total assets in
cash, money market instruments and, subject to the limits described below,
foreign currency-denominated bonds and below investment grade bonds, including
below investment grade bonds of issuers located in countries with emerging
securities markets. The Fund may not invest more than 20% of its total assets in
foreign currency-denominated bonds and, at the discretion of the Adviser, the
Fund may use certain techniques to hedge its foreign currency exposure back into
the U.S. dollar. See "Description of Securities and Investment Techniques and
Related Risks--Currency Management Techniques."
Also, the Fund may not invest more than 15% of its total assets in below
investment grade bonds, and may not invest more than 10% of its total assets in
below investment grade bonds of issuers located in countries with emerging
securities markets. The Fund's investments in below investment grade bonds will
be limited to securities that are rated B or higher by Moody's, Standard &
Poor's, Duff or Fitch and unrated securities determined by the Adviser to be of
comparable quality, provided that this quality limitation will not apply to the
Fund's investments in other investment companies. Below investment grade bonds
involve greater price volatility and risk of loss of principal and income than
investment grade bonds. See "Description of Securities and Investment Techniques
and Related Risks--Below Investment Grade Bonds." In the event a security held
by the 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.
For a description of the Fund's policy on temporary defensive investments, see
"Description of Securities and Investment Techniques and Related Risks--
Additional Investment Techniques."
High Yield Bond Fund
The investment objective of the High Yield Bond Fund is to seek high current
income and, as a secondary objective, capital growth. Under normal
circumstances, the Fund expects to maintain a dollar weighted effective average
remaining portfolio maturity of 5 to 10 years and to invest at least 65% of its
total assets in below investment grade bonds. For purposes of this policy,
"bonds" include the types of fixed income securities in which the Fixed Income
Fund and the Short-Term Fixed Income Fund may invest (without regard to credit
quality), as well as U.S. dollar-denominated convertible and nonconvertible
fixed income securities of domestic and foreign issuers.
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Below investment grade bonds generally offer higher yields than investment grade
bonds, but involve greater price volatility and risk of loss of principal and
income. The Fund's investments in these securities may be of any credit quality
and may include 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. For a description of these
and other risks of investing in below investment grade bonds, see "Description
of Securities and Investment Techniques and Related Risks--Below Investment
Grade Bonds."
Under normal conditions, the Fund may invest up to 35% 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 Fund's policy on temporary
defensive investments, see "Description of Securities and Investment Techniques
and Related Risks--Additional Investment Techniques."
Smaller Companies Fund
The primary investment objective of the Smaller Companies Fund is to maximize
capital appreciation. The Fund seeks current income as its secondary investment
objective. Under normal market conditions, the Fund pursues these objectives by
investing at least 65% of its total assets in equity and equity-related
securities (but not less than 60% directly in stocks) of small capitalization
U.S. companies. Equity securities in which the Fund may invest include common
stocks and preferred stocks, while equity-related securities include warrants,
purchased call options and other rights to acquire stocks. See "Description of
Securities and Investment Techniques and Related Risks."
For purposes of the Fund's investment policies, small capitalization companies
are those ranked (at time of investment) according to market capitalization in
the bottom 20% of the Wilshire 5000 Index. The Adviser believes that investments
in equity and equity-related securities of many small capitalization companies,
although involving greater risk, provide the opportunity for greater capital
growth than investments in larger, better-known companies. For a description of
the risks associated with investing in small capitalization companies, see
"Description of Securities and Investment Techniques and Related Risks--Small
and Micro Capitalization Companies."
Up to 35% of the Fund's total assets may be invested in investment grade fixed
income securities (see definition on page - ), 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
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(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
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 - ), cash equivalents and equity and
equity-related securities of small and medium capitalization companies. In the
event any fixed income security held by the Fund is downgraded below investment
grade, the Adviser will review the security and determine whether to retain or
dispose of it. In no event, however, will the Fund hold more than 5% of its net
assets in fixed income securities that are not investment grade. Up to 5% of the
Fund's net assets (measured at time of investment) may be invested in the
securities of non-U.S. issuers of all sizes.
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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. Each of the Funds other than
the Equity 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. Each of the Funds other than the Equity Funds may invest in "put"
bonds, which are tax exempt securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Adviser
intends to purchase only those "put" bonds for which the put option is an
integral part of the security as originally issued. The option to "put" the bond
back to the issuer prior to the stated final maturity can cushion the price
decline of the bond in a rising interest rate environment. However, the premium
paid, if any, for an option to put will have the effect of reducing the yield
otherwise payable on the underlying security. For the purpose of determining the
"maturity" of securities purchased subject to an option to put, and for the
purpose of determining the dollar weighted average maturity of a Fund holding
such securities, the Fund will consider "maturity" to be the first date on which
it has the right to demand payment from the issuer of the put although the final
maturity of the security is later than such date.
Variable or Floating Rate Instruments and Variable Rate Demand Instruments. Each
of the Funds other than the Equity 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
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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.
Each of the Funds other than the Equity 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
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.
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Below Investment Grade Bonds. The High Yield Bond Fund and, to a lesser extent,
the Total Return Bond Fund may invest in below investment grade bonds, including
securities in default. These securities are considered speculative and, while
generally offering 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.
These lower quality bonds 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 a Fund invests in such lower quality securities,
the achievement of its investment objective may be more dependent on the
Adviser's own credit analysis.
Below investment grade bonds 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 bonds is generally less liquid than the market for investment grade
bonds. Therefore, the Adviser's judgment may at times play a greater role in
valuing these securities than in the case of investment grade bonds, and it also
may be more difficult under certain adverse market conditions to sell these
lower quality securities to meet redemption requests, to respond to changes in
the market, or to determine accurately a Fund's net asset value.
Securities of Foreign Issuers
General. Each of the Funds other than the Municipal Funds may invest to varying
extents 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 or sales proceeds, 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.
Foreign Government Securities. The foreign government securities in which each
Fund (other than the Municipal 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-
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related securities issued or guaranteed by national, state or provincial
governmental instrumentalities, including quasi-governmental agencies.
Currency Management Techniques
To the extent that they invest in securities denominated or quoted in foreign
currencies, the Equity Funds and the Total Return Bond Fund may enter into
forward currency exchange contracts ("forward contracts") and buy and sell
currency options to hedge against currency exchange rate fluctuations. For the
same purpose, the Total Return Bond Fund may also enter into currency swap
agreements, purchase securities indexed to foreign currencies and buy and sell
futures contracts relating to foreign currencies and options on such futures
contracts. Transactions in these instruments, together with transactions in
forward contracts and currency options, are referred to below collectively as
"Currency-Related Transactions." The instruments involved in Currency-Related
Transactions may be considered derivative instruments. A Fund may enter into
Currency-Related Transactions to attempt to protect against an anticipated rise
in the U.S. dollar price of securities that it intends to purchase. In addition,
a Fund may enter into Currency-Related Transactions to attempt 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. 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 options and currency swap agreements 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 Fund, the Short-Term Fixed Income Fund, the Total Return Bond
Fund, the High Yield Bond Fund 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 Fund, the Short-Term Fixed
Income Fund, the Total Return Bond Fund and the High Yield Bond Fund 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
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<PAGE>
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. The Total Return Bond Fund, the High Yield Bond Fund and each
Equity Fund may write (sell) covered put and call options on 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.
Purchased Options. The Total Return Bond Fund, the High Yield Bond Fund and each
Equity Fund 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.
A 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.
A Fund may purchase and sell options traded on U.S. exchanges and, to the extent
permitted by law, options traded over-the-counter. A Fund may also purchase and
sell options traded on recognized foreign exchanges. 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.
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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, the Total Return Bond Fund, the High Yield
Bond Fund and 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
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 Commission, each Fund
will limit its investments in illiquid securities to 15% of the Fund's net
assets.
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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 the assets of the Total
Return Bond Fund, the High Yield Bond Fund or any Equity Fund that may be at
risk with respect to futures contracts and related options. A Fund may not
invest more than 25% of its total assets in purchased protective put options. A
Fund's transactions in options, futures contracts and options on futures
contracts may be limited by the requirements for qualification of the Fund as a
regulated investment company for tax purposes. See "Taxes" in the Statement of
Additional Information. Options, futures contracts and options on futures
contracts are derivative instruments.
Small and Micro Capitalization Companies
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, the Total Return Bond Fund,
the High Yield Bond Fund and each Equity Fund may invest in convertible
securities, which are ordinarily preferred
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stock or long-term fixed income 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. 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
Each Fund other than the Total Return Bond 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. The
Total Return Bond Fund is "non-diversified" under the 1940 Act. Accordingly,
although it is subject to the issuer diversification requirements imposed on
regulated investment companies by Subchapter M of the Code, the Total Return
Bond Fund is not subject to the more stringent issuer diversification
requirements imposed on diversified funds by the 1940 Act. To the extent that
the Total Return Bond Fund does not meet the standards for being "diversified"
under the 1940 Act, it will be more susceptible to developments affecting any
single issuer of portfolio securities.
Concentration of Investments
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
Mortgage Dollar Rolls. Each of the Funds other than the Equity Funds and the
Municipal 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
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<PAGE>
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 and 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 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.
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 Fund other than the 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 of the Funds other than the Municipal Funds may
invest to a limited extent in restricted securities. Restricted securities are
securities that may not be sold freely to the public without prior registration
under federal securities laws or an exemption from registration. Restricted
securities will be considered illiquid unless they are restricted securities
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933 and the Board of Trustees determines that these
securities are liquid based upon a review of the trading markets for the
specific securities.
Warrants. Each Equity Fund may invest in warrants. Warrants generally entitle
the holder to buy a specified number of shares of common stock at a specified
price, which is often higher than the market price at the time of issuance, for
a period of years or in perpetuity. Warrants may be issued in units with other
securities or separately, and may be freely transferrable and traded on
exchanges. While the market value of a warrant tends to be more volatile than
that of the securities underlying the warrant, the market value of a warrant may
not necessarily change with that of the underlying security. A warrant ceases to
have value if it is not exercised prior to any expiration date to which the
warrant is subject.
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Lending Securities. For the purpose of realizing income, each Fund other than
the Fixed Income Fund and the Municipal Bond 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 U.S.-registered investment companies. In addition, a Fund may not
invest more than 5% of its total assets in the securities of any one such
investment company or acquire more than 3% of the voting securities of any such
investment company, except that, in accordance with an exemptive order expected
to be issued by the Comission, the Total Return Bond Fund may invest up to 10%
of its total assets in institutional shares of Morgan Grenfell Emerging Markets
Debt Fund (but only after such order is issued). 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 of the Funds other
than the Municipal Funds may invest up to 100% of its assets in cash and money
market instruments, including securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; certificates of deposit, time
deposits, and bankers' acceptances issued by banks or savings and loans
associations having net assets of at least $500 million as of the end of their
most recent fiscal year; commercial paper rated at the time of purchase at least
A-1 by Standard & Poor's or P-1 by Moody's, or unrated commercial paper
determined by the Adviser to be of comparable quality; repurchase agreements
involving any of the foregoing; and, to the extent permitted by applicable law,
shares of other investment companies investing solely in money market
instruments. For a description of the Municipal Funds' policy with respect to
temporary defensive investments, see "Investment Objectives and
Policies--Municipal Bond Fund and Short-Term Municipal Bond Fund."
ADDITIONAL INVESTMENT INFORMATION
Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions which are
described in detail in the Statement of Additional Information. Those investment
restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. Each Fund's
investment objective and all other investment restrictions and policies are
nonfundamental and can be changed by the Board of Trustees of the Trust at any
time without shareholder approval. Each Fund's shareholders will, however, be
given 30 days' advance written notice of any change in a Fund's investment
objective.
Each Fund has fundamental investment restrictions with respect to borrowing,
lending, diversification of investments, senior securities, pledging of assets,
underwriting, real estate
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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 other Fund will not
exceed 175%. The higher portfolio turnover rates of these Funds may result from
their respective portfolio management strategies. These 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). (see
"Portfolio Transactions"). See "Financial Highlights" for the Funds' portfolio
turnover rates for the fiscal year ended October 31, 1997.
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.
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The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as investment adviser to each
Fund pursuant to the terms of investment advisory contracts between the Trust,
on behalf of the Funds, and MGCM (the "Advisory Contracts"). MGCM is registered
as an investment adviser with the Commission and provides a full range of
investment advisory services to institutional clients. All of the outstanding
voting stock of MGCM is owned by Morgan Grenfell Asset Management ("MGAM"),
which is an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. As of September 30, 1997,
MGCM managed approximately $9.69 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 Total Return Bond Fund 0.45%
Morgan Grenfell High Yield Bond Fund 0.50%
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 period ended
October 31, 1997, this voluntary agreement was in effect for each Fund (other
than Morgan Grenfell Total Return Bond Fund, Morgan Grenfell High Yield Bond
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, Morgan Grenfell Smaller
Companies Fund and Morgan Grenfell Microcap Fund paid advisory fees equal to -
%, - %, - %, - %, - % and - % of their respective average daily net assets.
The Trust, on behalf of each Fund, is responsible for all of the Fund's expenses
other than those expressly assumed by the Adviser under the terms of the
Advisory Contracts. The expenses borne by each Fund include the Fund's advisory
fee, transfer agent fee and taxes and its proportionate share of custodian fees,
expenses of issuing reports to shareholders, legal fees, auditing and tax fees,
blue sky fees, fees of the Commission, insurance expenses and disinterested
Trustees' fees.
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Each Fund other than the Equity Funds and the High Yield Bond Fund is managed
utilizing a team approach led by David W. Baldt, Exectuive President of the
Adviser. 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, Christopher J. Gagnier and Timothy C. Vile,
all Senior Vice Presidents of the Adviser. Mr. Bartlett has been 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 High Yield Bond Fund is managed by a committee consisting of investment
professionals employed by the Adviser. This committee makes investment decisions
for the Fund.
The Smaller Companies Fund and Microcap Fund are each managed by a team of three
experienced portfolio managers, Audrey M. T. Jones, David A. Baratta and John P.
Callaghan. Ms. Jones and Mr. Baratta have served as members of the Funds's
portfolio management team since the Fund's inception. Mr. Callaghan joined the
Funds' portfolio management team (and the Adviser) in June 1997 and, prior to
such time, worked as a portfolio manager for Odyssey Partners and Weiss, Peck &
Greer. Ms. Jones has been employed by the Adviser as a portfolio manager since
1986. Prior to joining the Adviser 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.
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.
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<PAGE>
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
each Fund other than Morgan Grenfell Fixed Income Fund and Morgan Grenfell
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.
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:
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<PAGE>
By Regular Mail: By Overnight Mail:
- - ---------------- ------------------
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
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:
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.
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Reports to Shareholders and Confirmations
Shareholders of each Fund receive an annual report containing audited financial
statements and a semiannual report. All transactions in institutional shares of
a Fund and dividends and distributions paid by a Fund are reflected in
confirmations issued by the Transfer Agent at the time of the transaction and/or
in monthly statements issued by the Transfer Agent. A year-to-date statement
will be provided by the Transfer Agent. Shareholders with inquiries regarding a
Fund may call Morgan Grenfell Investment Trust at 1-800-550-6426 or write to
Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO 64141-6165.
Exchange Privilege
The Funds provide a telephone exchange privilege and a written exchange
privilege. Institutional shares of a Fund may be exchanged in amounts as low as
$50,000 for institutional shares of any other Fund or any institutional
International Fund. A shareholder should obtain and read the prospectus relating
to institutional shares of an International Fund and consider its investment
objective, policies and fees before making an exchange into that fund. Exchanges
will be permitted only in those states in which the relevant fund is available
for sale.
If a shareholder elects the telephone exchange privilege on the Account
Application, the shareholder will be able to effect the exchange of
institutional shares in its account in one Fund for institutional shares in any
other Fund descibed in this Prospectus by telephone, as long as all accounts are
identically registered. A shareholder can exchange shares by telephone by
calling 1-800-407-7301 before 4:00 p.m., Eastern time, on any Business Day.
Shares exchanged will be valued at their respective net asset values next
determined after the telephone exchange request is received. Neither the Funds
nor their agents will be liable for any loss incurred by a shareholder as a
result of following instructions communicated by telephone that they reasonably
believe to be genuine. To confirm that telephone exchange requests are genuine,
the Funds will employ reasonable procedures such as providing written
confirmation of telephone exchange transactions and tape recording of telephone
exchange requests. If a Fund does not employ such reasonable procedures, it may
be liable for any loss incurred by a shareholder due to a fraudulent or other
unauthorized telephone exchange request. The Funds reserve the right to refuse
any request made by any shareholder.
In addition to using the telephone exchange privilege, shareholders in any of
the Funds may exchange their institutional shares for institutional shares in
any other Fund by submitting a written request, in proper form, to the Transfer
Agent. Institutional shares exchanged in this manner will be valued at their
respective net asset values next determined after the receipt of the written
exchange request.
An exchange is a taxable transaction for shareholders that are subject to tax.
Investors will receive 60 days' written notice prior to any change in a Fund's
exchange procedures.
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<PAGE>
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. Normally,
redemption proceeds will be wired within no more than 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. Frequently,
redemption proceeds will be wired on the next Business Day after the Transfer
Agent's receipt of such documents. 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.
Shareholders may request that redemption payments be made by Federal Reserve
wire or Automated Clearing House (ACH) 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.
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<PAGE>
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 Fund shares of such class.
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
- - --------------------------------------------------------------------------------
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<PAGE>
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 Funds (not including the Municipal
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 a 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 of
the other Funds distributes substantially all of its net investment income in
the form of dividends declared daily and paid monthly. Each Fund, including the
Equity Funds, 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 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 capital gain regardless of how long the
shareholder has held its shares. It is anticipated that future tax regulations
implementing federal tax legislation enacted
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<PAGE>
on August 5, 1997 will provide that distributions of long-term capital gains to
individuals or other noncorporate taxpayers will be subject to different maximum
tax rates, depending on the dates on which the gains are recognized and the
applicable Fund's holding periods for the assets that produce the gains. 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 tax 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 anticipate that they generally will not
be eligible to elect to pass such taxes or any associated foreign tax credits or
deductions through to their shareholders, but will provide appropriate
information to shareholders in the event such an election is made for any Fund.
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.
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<PAGE>
Redemptions and exchanges of institutional shares are taxable events for
shareholders that are subject to tax.
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 the application to them of the federal tax
legislation referred to above and any other 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 thirteen additional series. Until December 28, 1994, the Fixed
Income Fund and the Municipal Bond Fund were series of The Advisors' Inner
Circle Fund, a business trust organized under the laws of The Commonwealth of
Massachusetts on July 18, 1991. The Declaration of Trust further authorizes the
Trust to classify or reclassify any series or portfolio of shares into one or
more classes. As of the date hereof, the Trustees have established two classes
of shares: service shares and institutional shares.
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidations, except that only service shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of service shares of each Fund have exclusive voting rights
with respect to the service plan adopted by their Fund.
When issued, shares of the Funds are fully paid and nonassessable. In the event
of liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to shareholders. Shares of the
Funds entitle their holders to one vote 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
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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 November 24, 1997, the Adviser owned 63.70% and Deutsche Morgan Grenfell
C. J. Lawrence owned 31.18% of the outstanding shares of the Smaller Companies
Fund, Bankers Trust Company owned 42.08% of the outstanding shares of the
Municipal Bond Fund, Deutsche Morgan Grenfell C. J. Lawrence Inc. owned 42.39%
of the outstanding shares of the Microcap Fund and Charles Schwab & Co., Inc.
owned 30.17% of the outstanding shares of the Short-Term Municipal Bond 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.
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.
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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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APPENDIX A
THE ADVISER'S MICROCAP INVESTMENT RESULTS
Set forth below are 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 (other than Morgan
Grenfell Microcap Fund, which commenced operations on December 18, 1996) 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 below are not Microcap Fund's actual
investment results and 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 and the Internal Revenue Code of
1986, as amended. 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.
- - ------------
* Audrey Jones, David Baratta and John Callaghan are the members of the
Adviser's Microcap Equity Team. Ms. Jones has been a member of the Team
throughout the eleven-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. Mr. Callaghan joined the
Team in June 1997, following the departure of a portfolio manager who had been a
member of the Team since at least 1987. Also, in May 1996, another portfolio
manager who had been a member of the Team since at least 1987 left MGCM.
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Average Annual Total Return
---------------------------
MGCM Microcap
Composite
Year (Net of Fees) Russell 2000
- - ---- ------------- ------------
1997 -- % -- %
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, 1997 -- % -- %
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 $ - , assuming
reinvestment of dividends, by December 31, 1997.
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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 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
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of twenty-two 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 Total Return Bond Fund
o Morgan Grenfell High Yield 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
February 25, 1998, 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 ................................................... 26
Investment Advisory and Other Services .................................. 29
Portfolio Transactions .................................................. 33
Net Asset Value ......................................................... 35
Performance Information ................................................. 36
Taxes ................................................................... 39
General Information About the Trust ..................................... 47
Additional Information .................................................. 50
Financial Statements .................................................... 50
Appendix A--Description of Ratings ...................................... 51
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 that currently consists
of twenty-two separate investment portfolios. This Statement of Additional
Information relates to the following nine 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 Municipal Bond Fund
Morgan Grenfell Short-Term Municipal Bond Fund
(collectively, the "Municipal Funds")
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Short-Term Fixed Income Fund
Morgan Grenfell Total Return Bond Fund
Morgan Grenfell High Yield Bond Fund
Each Fund other than the Total Return Bond Fund is 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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<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 Poor's
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 any Fund other than the Total Return Bond Fund and the High Yield Bond Fund
hold more than 5% of its net assets in fixed income securities that are not
investment grade.
Lower Quality High Yield "High Risk" Debt Obligations. As discussed in the
Prospectus, the High Yield Bond Fund and, to a lesser extent, the Total Return
Bond Fund may invest in high yielding fixed income securities that are rated
lower than Baa by Moody's or BBB by Standard & Poor's and unrated securities
determined to be of comparable quality. The values of these lower quality
securities generally fluctuate more than those of higher quality securities. In
addition, these securities involve 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 reduce these risks through
investment analysis and attention to current developments in interest rates and
economic conditions, but there can be no assurance that the Adviser will be
successful in reducing the risks associated with investments in such securities.
To the extent that the High Yield Bond Fund and the Total Return Bond Fund
invest in lower quality fixed income securities, the achievement of their
respective investment objectives will be more dependent on the Adviser's ability
than it would be otherwise.
As noted in the Prospectus, the High Yield Bond Fund and the Total Return Bond
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.
In addition, each Fund may invest in zero coupon bonds. Both of these types of
bonds may be more speculative and subject to greater fluctuations in value than
securities which pay interest periodically and in cash, due to changes in
interest rates. A 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 fixed income 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. Similarly, when such yields increase, the market value of a
portfolio already invested at lower yields can be expected to decline.
Custodial Receipts. Each of the Funds other than the Equity Funds and the
Municipal 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
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<PAGE>
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
The Total Return Bond Fund, the High Yield Bond Fund and each of the Equity
Funds, subject to its investment objectives, may purchase preferred stock.
Preferred stocks are equity securities, but possess certain attributes of debt
securities and are generally considered fixed income securities. Holders of
preferred stocks normally have the right to receive dividends at a fixed rate
when and as declared by the issuer's board of directors, but do not participate
in other amounts available for distribution by the issuing corporation.
Dividends on the preferred stock may be cumulative, and in such cases all
cumulative dividends usually must be paid prior to dividend payments to common
stockholders. Because of this preference, preferred stocks generally entail less
risk than common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stocks. However,
preferred stocks are equity securities in that they do not represent a liability
of the issuer and therefore do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. In addition, preferred stocks are subordinated in right of payment
to all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer. See
"Convertible Securities and Preferred Stocks" in the Prospectus for a
description of certain characteristics of convertible preferred stock.
Warrants
As stated in the Prospectus, each of the Equity Funds may purchase warrants,
which are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a specified
price during a specified period of time. The purchase of warrants involves a
risk that a Fund could lose the purchase value of a warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
Municipal Securities
As stated in the Prospectus, the Municipal Funds and, to a more limited extent,
the Fixed Income Fund, the Short-Term Fixed Income Fund, the Total Return Bond
Fund and the High Yield Bond Fund 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
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<PAGE>
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 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
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<PAGE>
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
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 of the Funds other than the Equity Funds 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,
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<PAGE>
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 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.
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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
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.
A Fund's investments in auction rate preferred securities of closed-end funds
are subject to limitations on investments in other U.S. registered investment
companies, which limitations are prescribed by the 1940 Act. These limitations
include prohibitions against acquiring more than 3% of the voting securities of
any other such investment company, and investing more than 5% of the Fund's
assets in securities of any one such investment company or more than 10% of its
assets in securities of all such 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
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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, each of the Funds other than the Equity 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. A 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 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 the Fixed Income Fund, the Short-Term Fixed Income Fund, the Total
Return Bond Fund and the High Yield Bond Fund 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
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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 Fund with a portfolio maturity policy and make
needed adjustments to comply with such 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 Fund, the Short-Term Fixed Income
Fund, the Total Return Bond Fund and the High Yield Bond Fund 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, each of the
Funds other than the Municipal Funds may invest in securities of foreign
issuers. While the non-U.S. investments of the Equity Funds and the Total Return
Bond Fund may be denominated in any currency, the investments of the Fixed
Income Fund, the Short-Term Fixed Income Fund and the High Yield Bond Fund in
foreign securities may be denominated only in the U.S. dollar. Foreign
securities may
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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 investments of the Equity Funds and the Total Return Bond Fund
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 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 Equity Funds and
the Total Return Bond Fund will incur transaction costs in connection with
conversions between currencies.
Foreign Government Securities. The foreign government securities in which each
of the Funds other than the Municipal Funds may invest generally consist of debt
obligations issued or guaranteed by national, state or provincial governments or
similar political subdivisions. Each of the Funds other than the Municipal 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, the Fixed Income Fund and the Short-Term
Fixed Income Fund intend 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
The Total Return Bond Fund and 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. 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 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 a 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.
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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 Equity Funds and the Total Return Bond Fund may enter into forward currency
contracts only for the following 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 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 a 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 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 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
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contracts may be restricted. In addition, a particular forward currency contract
and assets used to cover such contract may be illiquid.
A Fund generally will not enter into a forward currency contract with a term of
greater than one year.
While a Fund will enter into forward currency contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while a Fund 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 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.
Options on Securities, Securities Indices and Foreign Currencies
The Total Return Bond Fund, the High Yield Bond Fund and each Equity Fund 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.
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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 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.
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
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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 Total Return Bond Fund, the High Yield Bond Fund and
each of 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. Each such Fund 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. A Fund 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 a Fund 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. A Fund 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 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
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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, a Fund 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 a Fund 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. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
A Fund may use options on futures contracts solely for bona fide hedging or
other non-hedging purposes as described below.
Other Considerations. The Total Return Bond Fund, the High Yield Bond Fund and
each of 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. A 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, a Fund's 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
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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 bona fide hedging definition, a CFTC
regulation now permits a Fund to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish
non-hedging positions in futures contracts and options on futures will not
exceed 5% of the net asset value of a Fund's portfolio, after taking into
account unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase. A Fund
will engage in transactions in futures contracts and related options only to the
extent such transactions are consistent with the requirements of the Code for
maintaining its qualification as a regulated investment company. 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 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 a 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
- - --------------------------------------------------------------------------------
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<PAGE>
commercial paper. The Adviser will consider the earning power, cash flow and
other liquidity ratios of issuers of demand notes and continually will monitor
their financial ability to meet payment on demand. See also "Fixed Income
Securities--Variable and Floating Rate Instruments."
Bank Obligations
As stated in the Prospectus, each Fund's investments in money market instruments
may include certificates of deposit, time deposits and bankers' acceptances.
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates.
Bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and examined by
the Comptroller of the Currency and are required to be members of the Federal
Reserve System and to be insured by the Federal Deposit Insurance Corporation
(the "FDIC"). U.S. banks organized under state law are supervised and examined
by state banking authorities but are members of the Federal Reserve System only
if they elect to join. Most state banks are insured by the FDIC (although such
insurance may not be of material benefit to a Fund, depending upon the principal
amount of CDs of each bank held by the Fund) and are subject to federal
examination and to a substantial body of federal law and regulation. As a result
of governmental regulations, U.S. branches of U.S. banks, among other things,
generally are required to maintain specified levels of reserves, and are subject
to other supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised and subject to examination by the Office of Thrift
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
- - --------------------------------------------------------------------------------
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<PAGE>
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, including a distribution by a
Municipal Fund, 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 Fund other than the Fixed Income
Fund and the 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
- - --------------------------------------------------------------------------------
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<PAGE>
additional investments while they have any borrowings outstanding. Borrowing
generally will exaggerate the effect on net asset value of any increase or
decrease in the market value of the portfolio. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased. A Fund also may be required to maintain minimum average
balances in connection with such borrowing or to pay a commitment or other fee
to maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate. See "Investment Restrictions."
Lending Portfolio Securities
Each Fund, other than Fixed Income Fund and Municipal Bond Fund, may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made by a Fund, may not exceed 33 1/3% of the value of
the Fund's total assets. A Fund's loans of securities will be collateralized by
cash, cash equivalents or U.S. Government securities. The cash or instruments
collateralizing the Fund's loans of securities will be maintained at all times
in a segregated account with the Fund's custodian, in an amount at least equal
to the current market value of the loaned securities. From time to time, a Fund
may pay a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and is acting as a "placing broker". No fee will be paid to
affiliated persons of the Fund. The Board of Trustees will make a determination
that the fee paid to the placing broker is reasonable.
By lending portfolio securities, a Fund can increase its income by continuing to
receive amounts equal to the interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as 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
- - --------------------------------------------------------------------------------
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<PAGE>
of, a Fund with the exception of borrowings permitted by fundamental investment
restriction (2) listed below for each Fund other than the Fixed Income Fund and
the Municipal Bond Fund 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, Total Return Bond Fund, High Yield 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
- - --------------------------------------------------------------------------------
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<PAGE>
exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the
Fund's investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry or group of industries. This
restriction does not apply to investments in obligations of the U.S.
Government or any of its agencies or instrumentalities.
In addition, each Fund will adhere to the following fundamental
investment restriction:
With respect to 75% of its total assets, a Fund may not purchase
securities of an issuer (other than the U.S. Government, or any of its
agencies or instrumentalities, or other investment companies), if (a)
such purchase would cause more than 5% of the Fund's total assets
taken at market value to be invested in the securities of such issuer,
or (b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the Fund.
NonFundamental Investment Restrictions. The Trust may not, on behalf of a Fund:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of
marketable Fund securities with other accounts under the management of
the Adviser to save commissions or to average prices among them is not
deemed to result in a securities trading account.
(b) Purchase securities of other U.S.-registered investment companies,
except as permitted by the Investment Company Act of 1940 and the
rules, regulations and any applicable exemptive order issued
thereunder.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) 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.
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.
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<PAGE>
(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.
(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.
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<PAGE>
(2) A Fund may not purchase securities of other U.S.-registered investment
companies except as permitted by the Investment Company Act of 1940
and the rules, regulations and any applicable exemptive order issued
thereunder.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set forth
below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
Positions Principal Occupation
Name and Address With Trust During Past Five Years
James E. Minnick (1) President, Chief President, Secretary and
885 Third Avenue Executive Officer, and Treasurer, MGCM (since
New York, NY 10022 Trustee 1990).
(age 49)
Patrick W.W. Disney (1) Senior Vice President Director, Morgan Grenfell
20 Finsbury Circus and Trustee Investment Services
London EC2M 1NB Limited ("MGIS") (since
ENGLAND 1988).
(age 41)
Paul K. Freeman (2) Trustee Chief Executive Officer,
7257 South Tucson Way The Eric Group Inc.,
Englewood, CO 80112 (environmental insurance)
(age 47) (since 1986).
Graham E. Jones (2) Trustee Senior Vice President, BGK
330 Garfield Street Realty Inc. (since 1995);
Santa Fe, NM 87501 Financial Manager,
(age 64) Practice Management
Systems (medical
information services)
(1988- 95); Director, 12
closed-end funds managed
by Morgan Stanley Asset
Management; Trustee, 10
open-end mutual funds
managed by Weiss, Peck &
Greer.
William N. Searcy (2) Trustee Pension & Savings Trust
2330 Shawnee Mission Pkwy Officer, Sprint
Westwood, KS 66205 Corporation
(age 51) (telecommunications)
(since 1989).
Hugh G. Lynch Trustee Managing Director,
767 Fifth Avenue International Investments,
New York, NY 10153 General Motors Investment
(age 60) Management Corporation
(since September 1990).
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<PAGE>
Edward T. Tokar Trustee Vice
101 Columbia Road President-Investments,
Morristown, NJ 07962 Allied Signal, Inc.
(advanced technology and
manufacturer) (since 1985).
John G. Alshefski Treasurer, Principal Director of Fund
530 East Swedesford Road Accounting Officer, Operations, SEI/ Fund
Wayne, PA 19087-1658 Chief Financial Officer Resources (since January
(age 31) 1994); Manager
International Fund
Operations (1992-1994);
Senior Associate, Price
Waterhouse (1988-1991).
Neil P. Jenkins Vice President Director, MGCM (since
20 Finsbury Circus 1991), Morgan Grenfell
London, England International Funds
Co., Ltd. (age 37) Management (1995), and
Morgan Grenfell & (since
1985).
David W. Baldt Vice President Executive Vice President
1435 Walnut Street and Director of Fixed
Philadelphia, PA 19102 Income Investments, MGCM
(age 48) (since 1989).
Ian D. Kelson Vice President Director, MGIS (since
20 Finsbury Circus 1988); Chief Investment
London EC2M 1NB Officer, Fixed Income,
England MGIS (since 1989).
(age 41)
James Grifo Vice President Executive Vice President
1435 Walnut Street and Director, MGCM (since
Philadelphia, PA 19102 1996); Senior Vice
(age 46) President, GT Global
Financial (since 1990).
Martin Hall(4) Vice President Portfolio Manager, Fixed
1435 Walnut Street Income Team MGIS (since
Philadelphia, PA 19102 1988).
(age 39)
Joan A. Binstock(4) Secretary Chief Operating Officer,
885 Third Avenue and Vice President MGCM (since June 1997);
New York, NY 10022 Principal, National
(age 43) Director of Investment
Management Regulatory
Consulting, Ernst & Young
(May 1995 - June 1997);
Vice President, Head of
Compliance, JP Morgan
Mutual Funds (August
1993-May 1995).
--------------
(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.
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<PAGE>
Certain of the Trustees and officers of the Trust reside outside the United
States, and substantially all the assets of these persons are located outside
the United States. It may not be possible, therefore, for investors to effect
service of process within the United States upon these persons or to enforce
against them, in United States courts or foreign courts, judgments obtained in
United States courts predicated upon the civil liability provisions of the
federal securities laws of the United States or the laws of the State of
Delaware. In addition, it is not certain that a foreign court would enforce, in
original actions or in actions to enforce judgments obtained in the United
States, liabilities against these Trustees and officers predicated solely upon
the federal securities laws.
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 November 30, 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, Morgan Grenfell Smaller
Companies Fund and Morgan Grenfell Microcap Fund. On such date, the Trustees and
officers of the Trust owned, as a group, 2.06% of the outstanding shares of
Morgan Grenfell Short-Term Municipal Bond Fund, 1.72% of the outstanding shares
of Morgan Grenfell Smaller Companies Fund and 4.15% of the outstanding shares of
Morgan Grenfell Microcap Fund, respectively.
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, 1997:
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 $ --
Graham E. Jones $ 0 $ --
William N. Searcy $ 0 $ --
Hugh G. Lynch $ 0 $ --
Edward T. Tokar $ 0 $ --
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Page 28
<PAGE>
- - ----------
* 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
each Fund pursuant to the terms of Management Contracts, dated December 28,
1994, August 7, 1996 and January 30, 1997 (referred to collectively herein 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 Total Return Bond Fund ............................... 0.45%
Morgan Grenfell High Yield Bond Fund ................................. 0.50%
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, 1997, 1996 and 1995, Morgan Grenfell
Fixed Income Fund paid the Adviser net advisory fees of $ _____, $2,041,053 and
$1,150,707, respectively. For the same years, Morgan Grenfell Municipal Bond
Fund paid the Adviser net advisory fees of $ _____, $791,321 and $595,795,
respectively. For the fiscal year ended October 31, 1997, Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and
Morgan Grenfell Smaller Companies Fund paid the Adviser net advisory fees of
$_____, $_____, and $_____, respectively. For the fiscal periods 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. For the fiscal period ended
October 31, 1997, Morgan Grenfell Microcap Fund paid the Adviser a net advisory
fee of $________. The foregoing advisory fee payments and non-payments reflect
expense limitations that were in effect during the indicated periods. Morgan
Grenfell Large Cap
- - --------------------------------------------------------------------------------
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<PAGE>
Growth Fund, Morgan Grenfell Total Return Bond Fund and Morgan Grenfell High
Yield Bond Fund were not in operation during any of the indicated periods and,
accordingly, paid no advisory fees during such periods.
Each Management Contract between MGCM and the Trust, was most recently approved
on November 20, 1997 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, 1998 (August
23, 1999, 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 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
September 30, 1997, MGCM managed approximately $9.69 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.
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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 period
ended October 31, 1997, the portfolio turnover rates for Morgan Grenfell Fixed
Income Fund, Morgan Grenfell Municipal Bond Fund, Morgan Grenfell Short-Term
Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund, Morgan
Grenfell Smaller Companies Fund and Morgan Grenfell Microcap Fund were ____%,
____%, _____%, ____%, ____% and _____%, respectively. For the fiscal year ended
October 31, 1996, the portfolio turnover rates for 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 176%, 182%, 124%, 129% and 141%, 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, 1997, 1996 and 1995, Morgan Grenfell
Fixed Income Fund paid the Administrator administration fees of $ ______,
$655,936 and $455,614, respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Administrator administration fees of $ _______,
$253,839 and $227,872, respectively. For the fiscal period ended October 31,
1997, Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund and Morgan Grenfell
Microcap Fund paid the Administrator administration fees of $_______, $_______,
$______ and $_______, 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 administration fees of $45,833, $45,833 and $37,500, respectively.
For the fiscal year ended October 31, 1995, Morgan Grenfell Short-Term Fixed
Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell
Smaller
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Companies Fund paid the Administrator administration fees of $12,500, $12,500
and $4,167, respectively.
The Administration Agreement provides that the Administrator shall not be liable
under the Administration Agreement except for bad faith or gross negligence in
the performance of its duties or from the reckless disregard by it of its duties
and obligations thereunder.
Expenses of the Trust
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 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
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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 20, 1997 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 Distibutor. The Distributor may terminate the
Distribution Agreement at any time without penalty on 60 days' written notice to
the Trust.
Custodians
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 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
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<PAGE>
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 year ended October 31, 1997, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts managed by
the Adviser are made independently of each other in the light of differing
conditions. However, the same investment decision may be made for two or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect on the price or value of the security as far as
a Fund is concerned, in other cases it is believed to be beneficial to a Fund.
To the extent permitted by law, the Adviser may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers").
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees 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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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 such portfolio transactions on a
quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal years ended October 31, 1995, 1996 and
1997, 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, 1996, and 1997, Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund paid no brokerage
commissions. For the fiscal years ended October 31, 1995, 1996 and 1997, Morgan
Grenfell Short-Term Fixed Income Fund and Morgan Grenfell Short-Term Municipal
Bond Fund paid no brokerage commissions. For the fiscal years ended October 31,
1997 and 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. For the fiscal period ended October 31, 1997, Morgan
Grenfell Microcap Fund paid aggregate brokerage commissions of $_____.
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
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"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 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 and on which the Funds' net asset values are not
calculated. Such calculation may not take place contemporaneously with the
determination of the prices of certain portfolio securities used in such
calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
Yield
From time to time, the Fixed Income Fund, the Short-Term Fixed Income Fund, the
Total Return Bond Fund, the High Yield Bond 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 a
Fund refers to the annualized income generated by an investment in the Fund over
a specified 30-day period. The yield is calculated by assuming that the income
generated by the investment during that period is
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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, 1997, 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 __%, __%, __% and __%,
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 Funds would have been __%, __%, __% and __%, 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 __% and __%,
respectively, assuming the highest Federal Income Tax bracket for individuals
(39.6%). If the expense limitations described in the Prospectus for these Funds
had not been in effect during this period, the tax-equivalent yields for
institutional shares of these Funds would have been __% and __%, 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
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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:
T = [ (ERV) 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, 1997, 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 __%, __%, __%, __% and __%, respectively. For the five-year
period ended October 31, 1997, the average annual total returns of institutional
shares of Morgan Grenfell Fixed Income Fund and Morgan Grenfell Municipal Bond
Fund were _____% and _____%, respectively. For their respective periods from
commencement of operations to October 31, 1997, 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, Morgan Grenfell Smaller Companies Fund
and Morgan Grenfell Microcap Fund were __%, __%, __%, __%, __% and __%,
respectively. If expense limitations for the above Funds had not been in
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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, Lehman Brothers, Inc., First Boston Corporation,
Dean Witter 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 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
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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"); and (b) 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. 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 such regulations.
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
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
- - --------------------------------------------------------------------------------
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<PAGE>
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 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 a
Fund 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. Additionally, a Fund may be required
to recognize gain if an option, future, forward contract, short sale, or other
transaction that is not subject to these mark to market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any gain or loss recognized on actual or deemed
sales of futures contracts, forward contracts, or options that are subject to
the mark to market rules, but not the constructive sales rules, (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, forward
contracts and constructive sales may affect the amount, timing and character of
a Fund's distributions to shareholders. 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 Funds other than the Municipal,
Fixed Income and Short-Term Fixed Income 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 Fund acquires stock (including, under proposed regulations, an option to
acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) 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 or make an available
election to minimize their tax liability or maximize their return from these
investments.
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<PAGE>
The federal income tax rules applicable to currency swaps, mortgage dollar
rolls, and certain structured securities are unclear in certain respects, and
the Funds may be required to account for these transactions or instruments under
tax rules in a manner that may affect the amount, timing and character of
income, gain or loss therefrom and that may, under certain circumstances, limit
the extent to which the Funds engage in these transactions or acquire these
instruments.
The High Yield Bond Fund and the Total Return Bond 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 these Funds. Tax rules are not entirely
clear about issues such as when a Fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by these Funds, to the extent 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 having to pay federal income or excise tax.
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
anticipate that they generally will not be entitled to elect to pass through
such foreign taxes to their shareholders. If such an election is made,
shareholders would have to include their shares of such taxes as additional
income, but could be entitled to U.S. tax credits or deductions for such taxes,
subject to certain requirements and limitations under the Code.
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.
Transactions or instruments subject to the mark to market or constructive sale
rules described above may have the same result in some circumstances. 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.
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<PAGE>
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, 1997, Fixed Income Fund has capital
loss carryforwards of approximately $_____ and Short-Term Fixed Income Fund had
capital loss carryforwards of approximately $_____, 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 debt
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 certain corporate shareholders'
liability, if any, for the corporate alternative
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<PAGE>
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, as well as any distributions of the Municipal Funds that are
not designated as exempt-interest dividends as described above, 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, dividends paid by Funds
other than the Equity Funds will generally not qualify for the dividends
received deduction, and some of the dividends paid by the Equity Funds also may
not qualify for the 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,
extending before and after each such dividend. 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. 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 and,
to the extent such basis would be reduced below zero, require the current
recognition of income. 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 capital gain regardless of
how long shares have been held by shareholders, but are not eligible for the
dividends received deduction for corporations. As a result of the enactment of
the Taxpayer Relief Act of 1997 (the "1997 TRA") on August 5, 1997, gain
recognized after May 6, 1997 from the sale of a capital asset is taxable to
individual (noncorporate) investors at different maximum federal income tax
rates, depending generally upon the tax holding period for the asset, the
federal income tax bracket of the taxpayer, and the dates the asset was acquired
and/or sold. The Treasury Department has issued Notice 97-59 and Announcement
97-109, and is expected to issue further guidance, to apply this legislation (as
modified by any "technical corrections" that may be enacted) to capital gains
and losses and to distributions by regulated investment companies ("RICs"),
including the Funds, from their realized net capital gain. This guidance should
enable RICs to pass through to their shareholders the benefits of the capital
gains tax rates contained in the 1997 TRA by designating certain capital gains
dividends or portions thereof as eligible for a 20% maximum tax rate (or 10% for
taxpayers in the 15% rate bracket), with other capital gain dividends or
portions thereof subject
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<PAGE>
to a maximum 28% tax rate, in each case for individuals and other noncorporate
taxpayers entitled to such preferential capital gains tax rates. This guidance
also provides or will provide for the appropriate tax treatment of other
long-term capital gains and losses, such as those recognized by a Fund under the
mark to market rules described above, and distributions attributable to such
gains. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
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
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 in a
transaction that is treated as a sale for tax purposes, 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. However, any loss realized on the sale,
redemption or other disposition of shares of a Municipal Fund with a tax holding
period of six months or less will be disallowed to the extent of any
exempt-interest dividends with respect to such shares. Moreover, any loss
realized on the sale, redemption, or other disposition of the shares of any Fund
with a tax holding period of six months or less, to the extent such loss is not
disallowed under any other tax rule, will be treated as a long-term capital loss
to the extent of any capital gain dividend 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. Shareholders should consult their own tax advisers regarding
their particular circumstances to determine whether a disposition of Fund shares
is properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion. Also, future Treasury Department regulations, announcements or other
guidance issued to implement the 1997 TRA may contain rules for determining
different tax rates
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<PAGE>
applicable to sales of Fund shares held for more than one year, more than 18
months, and (for certain sales after the year 2000 or the year 2005) more than
five years. These regulations may also modify some of the provisions described
above.
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.
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.
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<PAGE>
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 November 24, 1997, the following shareholders owned the following
respective percentages of the outstanding institutional 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:
Fixed Income Fund:
- - ------------------
San Mateo County Employees 9.18%
Retirement Association
2317 Broadway St STE 115
Redwood City, CA 94063-1613
Municipal Bond Fund:
- - --------------------
SEI Trust Company 6.40%
1 Freedom Valley Drive
Oaks, PA 19456
Batrus & Co., (New York Corporation) 42.08%
c/o Bankers Trust Co.
PO Box 9005
Church Street Station
New York, NY 10006
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<PAGE>
Charles Schwab & Co. Inc. 15.86%
101 Montgomery Street
San Francisco, CA 94104-4122
Short-Term Municipal Bond Fund:
- - -------------------------------
SEI Trust Company 5.07%
1 Freedom Valley Drive
Oaks, PA 19456
Rocco A. Ortenzio 15.96%
c/o Select Capital Corp
4718 Old Gettysburg Rd
Mechanicsburg, PA 17055
Robert A. Ortenzio 5.32%
c/o Select Capital Corp
4718 Old Gettysburg Rd
Mechanicsburg, PA 17055
Charles Schwab & Co., Inc. 30.17%
101 Montgomery Street
San Francisco, CA 94104-4122
Short-Term Fixed Income Fund:
- - -----------------------------
Batrus & Co. (New York Corporation) 6.10%
c/o Bankers Trust
PO Box 9005
Church Street Station
New York, NY 10006
SEI Trust Company 5.57%
1 Freedom Valley Drive
Oaks, PA 19456
Independence Trust Company 17.29%
381 Riverside Dr. Suite 110
Franklin, TN 37064-5302
Saxon & Co. 13.22%
fbo J. F. Money Market
P.O. Box 7780-1888
Philadelphia, PA 19182
Patterson & Co. 6.47%
P.O. Box 7829
Philadelphia, PA 19101-7829
Smaller Companies Fund:
- - -----------------------
Morgan Grenfell Capital Management, Inc. (Delaware Corporation) 63.70%
885 Third Avenue Suite 3200
New York, NY 10022
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<PAGE>
Deutsche Morgan Grenfell 31.18%
CJ Lawrence
1251 Avenue of the Americas
New York, NY 10020
Microcap Fund:
- - --------------
Deutsche Morgan Grenfell 42.39%
C. J. Lawrence Inc.
1251 Avenue of the Americas
New York, NY 10020
Morgan Grenfell Capital Management Inc. 13.32%
885 Third Avenue
New York, NY 10022
Charles Schwab & Co., Inc. 14.66%
101 Montgomery Street
San Francisco, CA 94104-4122
Miter & Co. 9.34%
fbo Deutsche Bank
P.O. Box 2977
Milwaukee, WI 53201-2977
Robert D. Greene 7.41%
26 Island Rd
Stuart, FL 34996-7005
Audrey Mt. Jones 6.48%
108 Kemeys Cove
Briarcliff Manor, NY 10510-2045
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.
- - --------------------------------------------------------------------------------
Page 49
<PAGE>
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 the securities meet
the investment objectives and policies of the Fund and are acquired by the Fund
for investment and not for resale. An exchange of securities for Fund shares
will generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
________________, serves as the Funds' independent accountants, providing audit
services, including review and consultation in connection with various filings
by the Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities of the Funds and certain other series of
the Trust. If further information is desired with respect to the Trust, the
Funds or such other series, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31, 1997
are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of _______________, the
Trust's independent accountants, as experts in accounting and auditing.
The financial statements of the Trust for the periods ended on and prior to
October 31, 1997 are included in, and incorporated by reference into, this
Statement of Additional Information from the Trust's 1997 Annual Report to
Shareholders for the year ended October 31, 1997 (filed electronically on
December ____, 1997; file no. 812-10080; accession no. __________), and will be
attached to each copy of such Statement of Additional Information that is
distributed.
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Page 50
<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.
- - --------------------------------------------------------------------------------
Page 51
<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):
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.
- - --------------------------------------------------------------------------------
Page 52
<PAGE>
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 (+).
- - --------------------------------------------------------------------------------
Page 53
<PAGE>
III. Short-Term Loan / Municipal Note Ratings
Moody's description of its two highest short-term loan / municipal note ratings:
MIG-1/VMIG-1 This description denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceeding group.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
- - --------------------------------------------------------------------------------
54
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
SERVICE SHARES
885 Third Avenue
New York, New York 10022
February 25, 1998
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 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 Total Return Bond Fund, Morgan Grenfell
High Yield Bond Fund, Morgan Grenfell Smaller Companies Fund, Morgan Grenfell
Microcap Fund and Morgan Grenfell Large Cap Growth Fund (each a "Fund"). Each
Fund other than Morgan Grenfell Total Return Bond Fund is diversified.
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 investment objective of Morgan Grenfell
Total Return Bond Fund is to maximize total return consistent with the
preservation of capital. The investment objective of Morgan Grenfell High Yield
Bond Fund is to seek high current income and, as a secondary objective, capital
growth. The primary investment objective of Morgan Grenfell Smaller Companies
Fund and Morgan Grenfell Large Cap Growth Fund is to maximize capital
appreciation. The sole investment objective of Morgan Grenfell Microcap Fund is
to maximize capital appreciation.
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 February 25, 1998, 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.
MORGAN GRENFELL HIGH YIELD BOND FUND MAY INVEST UP TO 100% OF ITS ASSETS IN
LOWER QUALITY BONDS, COMMONLY KNOWN AS "JUNK BONDS." MORGAN GRENFELL TOTAL
RETURN BOND FUND MAY INVEST UP TO 15% OF ITS ASSETS IN SUCH BONDS. THESE
INVESTMENTS ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN INVESTMENTS IN
HIGHER QUALITY BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING IN THESE FUNDS. SEE "INVESTMENT OBJECTIVES AND POLIICES" AND
"DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES AND RELATED RISKS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- - --------------------------------------------------------------------------------
Page 1
<PAGE>
Each Fund's primary investments are summarized below:
Morgan Grenfell 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 effective 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 effective 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 expects to maintain a
dollar weighted effective 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 expects to
maintain a dollar weighted effective average portfolio maturity of no longer
than three years.
Morgan Grenfell Total Return Bond Fund invests primarily in U.S.
dollar-denominated, investment grade bonds of domestic and foreign issuers. The
Fund may invest up to 20% of its assets in securities denominated in foreign
currencies and up to 15% of its assets in certain below investment grade
securities. The Fund expects to maintain a dollar weighted effective average
portfolio maturity of between five and ten years.
Morgan Grenfell High Yield Bond Fund invests primarily in U.S.
dollar-denominated bonds that are below investment grade. The Fund expects to
maintain a dollar weighted effective average portfolio maturity of between five
and ten years.
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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Page 2
<PAGE>
TABLE OF CONTENTS
Page
----
Expense Information 4
Financial Highlights 6
Introduction to the Funds 8
Risk Factors 9
Investment Objectives and Policies 9
Description of Securities and Investment Techniques
and Related Risks 15
Additional Investment Information 23
Management of the Funds 24
Purchase of Service Shares 27
Redemption of Service Shares 30
Net Asset Value 31
Dividends, Distribution and Taxes 32
Organization and Shares of the Trust 34
Performance Information 35
Appendix A (The Adviser's Microcap Investment Results) 36
- - --------------------------------------------------------------------------------
Page 3
<PAGE>
<TABLE>
<CAPTION>
EXPENSE INFORMATION
- - ------------------------------------------------------------------------------------------------------------------------------------
Fixed Fixed Short-Term Total Smaller Large Cap
Income Municipal Income Municipal Return High Yield Companies Microcap Growth
Shareholder Transaction Expenses Fund Bond Fund Fund Bond Fund Bond Fund* Bond Fund* Fund Fund Fund*
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases ................ None None None None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends ................ None None None None None None None None None
Deferred Sales Charge Imposed
on Redemptions ...................... None None None None None None None None None
Exchange Fee ........................ None 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 ....................... 0.40% 0.40% 0.40% 0.40% 0.45 % 0.50 % 1.00% 1.50% 0.75 %
Other Expenses** .................... ___% ___% ___% ___% 0.61 % 0.61 % ___% ___% 0.73 %
Reduction of Advisory Fee and Expense ___% ___% ___% ___% (0.21)% (0.21)% ___% ___% ( 0.23)%
Limitation by Adviser***
Net Fund Operating Expenses (after
advisory fee reduction and expense
limitation) ......................... 0.80% 0.80% 0.80% 0.80% 0.85 % 0.90 % 1.50 % 2.00% 1.25 %
</TABLE>
- - ----------
* Total Return Bond Fund, High Yield Bond Fund and Large Cap Growth Fund
were not operational during the fiscal year ended October 31, 1997.
** 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 service shares 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, 1998. The purpose of the
voluntary agreement is to enhance a Fund's total return during the period when,
because of its smaller size, fixed expenses have a more significant impact on
total return. After giving effect to the Adviser's voluntary agreement, each
Fund's advisory fee is as follows: Fixed Income Fund ___%, Municipal Bond Fund
___%, Short-Term Fixed Income Fund ___%, Short-Term Municipal Bond Fund___%,
Total Return Bond Fund 0.24%, High Yield Bond Fund 0.29%, Smaller Companies Fund
___%, Microcap Fund___%, 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 Fund Operating Expenses. If the Adviser's voluntary agreement was not in
effect, the Fund Operating Expenses for service shares of each Fund would be as
follows: Fixed Income Fund ___%, Municipal Bond Fund ___%, Short-Term Fixed
Income Fund ___%, Short-Term Municipal Bond Fund ___%, Total Return Bond Fund
1.06%, High Yield Bond Fund 1.11%, Smaller Companies Fund ___%, Microcap Fund
___% 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 endof each
time period:
1 3 5 10
Year Years Years Years
---- ----- ----- -----
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 Total Return Bond Fund $ 9 $27 N/A N/A
Morgan Grenfell High Yield Bond Fund $ 9 $29 N/A N/A
Morgan Grenfell Smaller Companies Fund $-- $-- $-- $ --
Morgan Grenfell Microcap Fund $-- $-- $-- $ --
Morgan Grenfell Large Cap Growth Fund $13 $40 N/A N/A
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 Total Return Bond Fund, Morgan Grenfell High Yield Bond Fund and Morgan
Grenfell Large Cap Growth Fund are estimates for the fiscal year ending October
31, 1998 that are based on actual expenses incurred during the fiscal year ended
October 31, 1997, except that the figures shown assume that service fees were in
effect throughout the year ended October 31, 1997. "Other Expenses" for Morgan
Grenfell Total Return Bond Fund, Morgan Grenfell High Yield Bond Fund and Morgan
Grenfell Large Cap Growth Fund are based on estimated average net assets for the
current fiscal year ending October 31, 1998. If the average net assets of any of
these Funds exceeds 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 service share of Morgan Grenfell
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund and Morgan Grenfell
Microcap Fund are presented for the respective periods from inception (of
service shares of such Funds) to October 31, 1997. This data have been audited
by _________________, the Funds' independent accountants. Morgan Grenfell
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund and Morgan Grenfell
Microcap Fund were the only Funds that had service shares outstanding prior to
October 31, 1997.
Selected audited data for an outstanding institutional share of Morgan
Grenfell Fixed Income Fund, Morgan Grenfell Short-Term Fixed Income Fund and
Morgan Grenfell Short-Term Municipal Bond Fund are also presented below, for
periods prior to and ending October 31, 1997. This data, insofar as it relates
to the periods ended October 31, 1995, October 31, 1996 and October 31, 1997,
have been audited by ___________________, the Funds' independent accountants.
The data for periods prior to and ending October 31, 1994 for Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund 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, 1997 and the notes thereto, which appear
in the Funds' Statement of Additional Information. The Funds' annual report,
which contains additional performance information, and Statement of Additional
Information are available free of charge by calling 1-800-550-6426.
No data are shown below for Morgan Grenfell Large Cap Growth Fund,
Morgan Grenfell Total Return Bond Fund and Morgan Grenfell High Yield Bond Fund
because these Funds had not commenced operations on or prior to October 31,
1997.
- - --------------------------------------------------------------------------------
Page 6
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
For an Institutional Share Outstanding Throughout Each Period Ended October 31
Net
Realized Distri-
Net Asset Net and butions Distributions Ratio of
Value Investment Unrealized from Net from Realized Net Asset Net Assets Expenses to
Beginning Income / Gains/ Investment Capital Value End Total End of Average
Year of Period (Loss) Losses) Income Gains of Period Return Period (000) Net Assets
- - ---------------------- ---------- ---------- ---------- ------------- --------- ------ ------------ -----------
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------
Fixed Income Fund
- - ------------------------------
1997
1996 $10.62 $ 0.68 $(0.04) $(0.68) $(0.07) $10.51 6.27% $758,003 0.55%
1995 $ 9.93 $ 0.70 $ 0.69 $(0.70) -- $10.62 14.53% $494,221 0.54%
1994 $10.95 $ 0.64 $(0.91) $(0.64) $(0.11) $ 9.93 (2.58)% $239,556 0.54%
1993 $ 9.92 $ 0.64 $ 1.03 $(0.64) -- $10.95 17.28% $147,917 0.55%
1992(1) $10.00 $ 0.06 $(0.08) $(0.06) -- $ 9.92 (1.61)% $25,528 0.55%
- - ------------------------------
Short-Term Fixed Income Fund
- - ------------------------------
1997
1996 $10.01 $ 0.60 $(0.01) $(0.60) -- $10.00 6.09% $6,751 0.53%
1995(2) $10.00 $ 0.37 $ 0.01 $(0.37) -- $10.01 3.82%# $4,140 0.52%
- - ------------------------------
Short-Term Municipal Bond Fund
- - ------------------------------
1997
1996 $10.13 $ 0.54 $ 0.04 $(0.54) $(0.04) $10.13 5.90% $9,132 0.53%
1995(3) $10.00 $ 0.30 $ 0.13 $(0.30) -- $10.13 4.39%# $3,724 0.52%
- - ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio Average
to Average Expense Expense Turnover Commission
Year Net Assets Limitations) Limitations) Rate Rate*
- - ----------- ------------- ------------ ------------ --------- ---------
- - ----------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
- - ------------------------------
Fixed Income Fund
- - ------------------------------
1997
1996 6.52% 0.61% 6.46% 176% N/A
1995 6.81% 0.63% 6.72% 182% N/A
1994 6.22% 0.66% 6.10% 251% N/A
1993 6.01% 0.72% 5.84% 196% N/A
1992(1) 5.24% 1.66% 4.13% 148% N/A
- - ------------------------------
Short-Term Fixed Income Fund
- - ------------------------------
1997
1996 6.00% 1.29% 5.24% 124% N/A
1995(2) 5.86% 2.84% 3.54% 90% N/A
- - ------------------------------
Short-Term Municipal Bond Fund
- - ------------------------------
1997
1996 5.34% 1.58% 4.29% 129% N/A
1995(3) 4.60% 2.16% 2.96% 62% 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) Short-Term Fixed Income Fund commenced operations on 3/13/95. All ratios for
the period have been annualized.
(3) Short-Term Municipal Bond Fund commenced operations on 3/6/95. All ratios
for the period have been annualized.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Page 7
<PAGE>
INTRODUCTION TO THE FUNDS
Morgan Grenfell Investment Trust (the "Trust") offers a number of mutual
funds, each of which is a separate series of the Trust. This Prospectus relates
solely to the Funds. Information regarding investment portfolios of the Trust
that focus on 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$146.46 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 Total Return Bond Fund , Morgan Grenfell High Yield Bond
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,
Municipal Bond Fund, Short-Term Municipal Bond Fund, Total Return Bond Fund and
High Yield Bond Fund, the Adviser seeks to achieve these Funds' investment
objectives by identifying fixed income securities and sectors which it believes
to be undervalued relative to the market and alternative sectors 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 securities and sectors,
supply and demand shifts and lack of market penetration by some issuers.
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
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
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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
General. 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.
Derivative Instruments. Certain of the Funds may employ investment
techniques, including options and futures contracts and other investments that
may be considered derivative instruments. 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."
Below Investment Grade Bonds. The High Yield Bond Fund and, to a lesser
extent, the Total Return Bond Fund may invest in below investment grade bonds,
including securities in default. These securities are considered speculative
and, while generally offering greater income than investments in higher quality
securities, involve greater risk of loss. See "Description of Securities and
Investment Techniques and Related Risks--Below Investment Grade Bonds."
Diversification. The Total Return Bond Fund is non-diversified under the
Investment Company Act of 1940 (the "1940 Act") and, therefore, may be more
susceptible than the other Funds to developments affecting any single issuer of
portfolio securities. See "Description of Securities and Investment Techniques
and Related Risks--Diversification." Each of the other Funds is diversified
under the 1940 Act.
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 is to seek a high level of income consistent with the preservation
of capital. Under normal circumstances, the Fixed Income Fund expects to
maintain a dollar weighted effective average portfolio maturity of 5 to 10
years, and the Short-Term Fixed Income Fund expects to maintain a dollar
weighted effective average 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.
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Each Fund normally invests 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 other 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 Fund may purchase
securities on a when-issued basis. Neither 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 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. In determining the effective maturity of callable
scurities, the call date may be used as the effective maturity if interest rates
have fallen since the bonds original issue date.
Each 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 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 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 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 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 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.
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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. Under normal
circumstances the Municipal Bond Fund expects to maintain a dollar weighted
effective average portfolio maturity of 5 to 10 years, and the Short-Term
Municipal Bond Fund expects to maintain a dollar weighted effective average
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.
Subject to its portfolio maturity policy, a 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. In determining the effective maturity of callable
scurities, the call date may be used as the effective maturity if interest rates
have fallen since the bonds original issue date.
Under normal market conditions, each Municipal Fund invests at least 80%
of its net 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, or BBB by
Standard & Poor's, or, if unrated, determined by the Adviser to be of
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comparable quality. Municipal securities in the lowest investment grade category
are considered medium grade securities. Such securities have speculative
characteristics, involve greater risk of loss than higher quality securities,
and are more sensitive to changes in the issuer's capacity to pay.
The Municipal Funds' investments in tax-exempt commercial paper will be
limited to obligations that, at the time of purchase, are rated at least A-1 by
Standard & Poor's or Prime-1 by Moody's, or that are unrated but are determined
by the Adviser to be of comparable quality. The Municipal Funds may purchase
other types of tax-exempt instruments as long as they are of a quality
equivalent to the long-term bond or commercial paper ratings stated above. In
the event any security held by either Municipal Fund is downgraded below the
rating categories set forth above, the Adviser will review the security and
determine whether to retain or dispose of that security, provided that neither
Municipal Fund will hold, at any time, more than 5% of its net assets in
securities that are rated below investment grade.
Under normal circumstances, each Municipal Fund may invest up to 20% of
its total assets in certain taxable securities in order to maintain liquidity.
In addition, for temporary defensive purposes during periods when the Adviser
determines that market conditions warrant, each Municipal Fund may invest
without limit in such taxable securities. Such taxable securities include: U.S.
Treasury obligations (including separately traded interest and principal
component parts of U.S. Treasury obligations, transferable through the federal
book-entry system and known as Separately Traded Registered Interest and
Principal Securities or "STRIPS"); other marketable obligations issued or
guaranteed as to principal and interest by agencies or instrumentalities of the
U.S. Government whether or not backed by the full faith and credit of the U.S.
Treasury; short-term instruments of U.S. commercial banks or savings and loan
institutions (not including foreign branches of U.S. banks or U.S. branches of
foreign banks) that are members of the Federal Reserve System or the Federal
Deposit Insurance Corporation and that have total assets of $1 billion or more
as shown on their last published financial statements at the time of investment;
repurchase agreements involving any of the foregoing obligations; and, to the
extent permitted by applicable law, shares of other investment companies
investing solely in the foregoing obligations.
Distributions by a Fund that are derived from income from taxable
investments or transactions (including repurchase agreements) held by the Fund
will generally be taxable to shareholders as ordinary income.
Total Return Bond Fund
The investment objective of the Total Return Bond Fund is to maximize
total return consistent with the preservation of capital. Under normal
circumstances, the Fund expects to maintain a dollar weighted effective average
portfolio maturity of 5 to 10 years and to invest at least 65% of its total
assets in U.S. dollar-denominated investment grade bonds. For purposes of this
policy, "bonds" include the U.S. dollar-denominated fixed income securities in
which the Fixed Income Fund and the Short- Term Fixed Income Fund may invest
foreign currency-denominated fixed income securities, convertible securities and
securities (including equity securities) of other investment companies that
invest primarily in any one or more of the foregoing types of securities.
Under normal circumstances, the Fund may invest up to 35% of its total
assets in cash, money market instruments and, subject to the limits described
below, foreign currency-denominated bonds and below investment grade bonds,
including below investment grade bonds of issuers located in countries with
emerging securities markets. The Fund may not invest more than 20% of its total
assets in foreign currency-denominated bonds and, at the discretion of the
Adviser, the Fund may use certain techniques to hedge its foreign currency
exposure back into the U.S. dollar. See "Description of Securities and
Investment Techniques and Related Risks--Currency Management Techniques."
Also, the Fund may not invest more than 15% of its total assets in
below investment grade bonds, and may not invest more than 10% of its total
assets in below investment grade bonds of issuers located in countries with
emerging securities markets. The Fund's investments in below investment grade
bonds will be limited to securities that are rated B or higher by Moody's,
Standard & Poor's, Duff or Fitch and unrated securities determined by the
Adviser to be of comparable quality, provided that this quality limitation will
not apply to the Fund's investments in other investment companies. Below
investment grade bonds involve greater price volatility and risk of loss of
principal and income than investment grade securities. See "Description of
Securities and Investment Techniques and Related Risks--Below Investment Grade
Bonds." In the event a security held by the Fund is downgraded below the rating
categories set forth
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above, the Adviser will review the security and determine whether to retain or
dispose of that security.
For a description of the Fund's policy on temporary defensive investments,
see "Description of Securities and Investment Techniques and Related
Risks--Additional Investment Techniques."
High Yield Bond Fund
The investment objective of the High Yield Bond Fund is to seek high
current income and, as a secondary objective, capital growth. Under normal
circumstances, the Fund expects to maintain a dollar weighted effective average
portfolio maturity of 5 to 10 years and to invest at least 65% of its assets in
below investment grade bonds. For purposes of this policy, "bonds" include the
types of investment grade fixed income securities in which the Fixed Income Fund
and the Short-Term Fixed Income Fund may invest (without regard to credit
quality), as well as U.S. dollar-denominated convertible and nonconvertible
fixed income securities of domestic and foreign issuers.
Below investment grade bonds generally offer higher yields than investment
grade bonds, but involve greater price volatility and risk of loss of principal
and income. The Fund's investments in these securities may be of any credit
quality and may include 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. For a description of
these and other risks of investing in below investment grade bonds, see
"Description of Securities and Investment Techniques and Related Risks--Below
Investment Grade Bonds."
Under normal circumstances, the Fund may invest up to 35% of its 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 Fund's policy on temporary
defensive investments, see "Description of Securities and Investment Techniques
and Related Risks--Additional Investment Techniques."
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
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believes that investments in equity and equity-related securities of many small
capitalization companies, although involving greater risk, provide the
opportunity for greater capital growth than investments in larger, better-known
companies. For a description of the risks associated with investing in small
capitalization companies, see "Description of Securities and Investment
Techniques and Related Risks--Small Capitalization Companies."
Up to 35% of the Fund's total assets may be invested in investment grade
fixed income securities (see definition on page __), 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
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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 __), 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. Each of the Funds other
than the Equity 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. Each of the Funds other than the Equity Funds may invest in
"put" bonds, which are tax exempt securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Adviser
intends to purchase only those "put" bonds for which the put option is an
integral part of the security as originally issued. The option to "put" the bond
back to the issuer prior to the stated final maturity can cushion the price
decline of the bond in a rising interest rate environment. However, the premium
paid, if any, for an option to put will have the effect of reducing the yield
otherwise payable on the underlying security. For the purpose of determining the
"maturity" of securities purchased subject to an option to put, and for the
purpose of determining the dollar weighted average maturity of a Fund holding
such securities, the Fund will consider "maturity" to be the first date on which
it has the right to demand payment from the issuer of the put although the final
maturity of the security is later than such date.
Variable or Floating Rate Instruments and Variable Rate Demand
Instruments. Each of the Funds other than the Equity Funds may invest in
variable or floating rate instruments and variable rate demand instruments,
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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.
Each of the Funds other than the Equity 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
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.
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Below Investment Grade Bonds. The High Yield Bond Fund and, to a lesser
extent, the Total Return Bond Fund may invest in below investment grade bonds,
including securities in default. These securities are considered speculative
and, while generally offering 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. These lower quality bonds 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 a Fund invests in such lower quality
securities, the achievement of its investment objective may be more dependent on
the Adviser's own credit analysis.
Below investment grade bonds 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 bonds is generally less liquid than the market for
investment grade bonds. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
bonds, and it also may be more difficult under certain adverse market conditions
to sell these lower quality securities to meet redemption requests, to respond
to changes in the market, or to determine accurately a Fund's net asset value.
Securities of Foreign Issuers
General. Each of the Funds other than the Municipal Funds may invest to
varying extents 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 or sales proceeds, 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.
Foreign Government Securities. The foreign government securities in
which each Fund (other than the Municipal 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 agencies.
Currency Management Techniques
To the extent that they invest in securities denominated or quoted in
foreign currencies, the Equity Funds and the Total Return Bond Fund may enter
into forward currency exchange contracts ("forward contracts") and buy and sell
currency options to hedge against currency exchange rate fluctuations.
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<PAGE>
For the same purpose, the Total Return Bond Fund may also enter into currency
swap agreements, purchase securities indexed to foreign currencies and buy and
sell futures contracts relating to foreign currencies and options on such
futures contracts. Transactions in these instruments, together with transactions
in forward contracts and currency options, are referred to below collectively as
"Currency-Related Transactions." The instruments involved in Currency-Related
Transactions may be considered derivative instruments. A Fund may enter into
Currency-Related Transactions to attempt to protect against an anticipated rise
in the U.S. dollar price of securities that it intends to purchase. In addition,
a Fund may enter into Currency-Related Transactions to attempt 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. 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 Fund, the Short-Term Fixed Income Fund, the Total Return
Bond Fund, the High Yield Bond Fund 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 Fund, the Short-Term Fixed
Income Fund, the Total Return Bond Fund and the High Yield Bond Fund 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. The Total Return Bond Fund, the High Yield Bond Fund and
each Equity Fund may write (sell) covered put and call options on 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
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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 Total Return Bond Fund, the High Yield Bond Fund
and each Equity Fund 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.
A 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.
A Fund may purchase and sell options traded on U.S. exchanges and, to
the extent permitted by law, options traded over-the-counter. A Fund may also
purchase and sell options traded on recognized foreign exchanges. 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, the Total Return Bond Fund, the High
Yield Bond Fund and each of the Equity Funds may enter into futures contracts
and purchase and write options on futures contracts to hedge against
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<PAGE>
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
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 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 the assets of the Total
Return Bond Fund, the High Yield Bond Fund or any Equity Fund that may be at
risk with respect to futures contracts and related options. A Fund may not
invest more than 25% of its total assets in purchased protective put options. A
Fund's transactions in options, futures contracts and options on futures
contracts may be limited by the requirements for qualification of the Fund as a
regulated investment company for tax purposes. See "Taxes" in the Statement of
Additional Information. Options, futures contracts and options on futures
contracts are derivative instruments.
Small and Micro Capitalization Companies
The Smaller Companies Fund and Microcap Fund invest a significant portion
of their assets in smaller, lesser-known companies which the Adviser
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<PAGE>
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, the Total Return Bond
Fund, the High Yield Bond Fund and 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. 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
Each Fund other than the Total Return Bond 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. The
Total Return Bond Fund is "non-diversified" under the 1940 Act. Accordingly,
although it is subject to the issuer diversification requirements imposed on
regulated investment companies by Subchapter M of the Code, the Total Return
Bond Fund is not subject to the more stringent issuer diversification
requirements imposed on diversified funds by the 1940 Act. To the extent that
the Total Return Bond Fund does not meet the standards for being diversified
under the 1940 Act, it will be more susceptible to developments affecting any
single issuer of portfolio securities.
Concentration of Investments
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
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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
Mortgage Dollar Rolls. Each of the Funds other than the Equity Funds
and the Municipal 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 and 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 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.
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 Fund other than the 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 of the Funds other than the Municipal Funds
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
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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, each Fund other
than the Fixed Income Fund and the Municipal Bond 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 U.S.-registered investment companies. In addition, a Fund
may not invest more than 5% of its total assets in the securities of any one
such investment company or acquire more than 3% of the voting securities of any
other such investment company, except that, in accordance with an exemptive
order expected to be issued by the Commission, the Total Return Bond Fund may
invest up to 10% of its total assets in institutional shares of Morgan Grenfell
Emerging Markets Debt Fund (but only after such order is issued). 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 of the Funds
other than the Municipal Funds may invest up to 100% of its assets in cash and
money market instruments, including securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; certificates of deposit, time
deposits, and bankers' acceptances issued by banks or savings and loans
associations having net assets of at least $500 million as of the end of their
most recent fiscal year; commercial paper rated at the time of purchase at least
A-1 by Standard & Poor's or P-1 by Moody's, or unrated commercial paper
determined by the Adviser to be of comparable quality; repurchase agreements
involving any of the foregoing; and, to the extent permitted by applicable law,
shares of other investment companies investing solely in money market
instruments. For a description of the Municipal Funds' policy with respect to
temporary defensive investments, see "Investment Objectives and
Policies--Municipal Bond Fund and Short-Term Municipal Bond Fund."
ADDITIONAL INVESTMENT INFORMATION
Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions which
are described in detail in the Statement of Additional Information. Those
investment restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. Each Fund's
investment objective and all other investment restrictions and policies
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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 other Fund will
not exceed 175%. The higher portfolio turnover rates of these Funds may result
from their respective portfolio management strategies. These 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) (see
"Portfolio Transactions"). See "Financial Highlights" for each Fund's portfolio
turnover rate for the fiscal year ended October 31, 1997.
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.
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The Adviser
MGCM, 885 Third Avenue, New York, New York, acts as investment adviser to
each Fund pursuant to the terms of investment advisory contracts between the
Trust, on behalf of the Funds, and MGCM (the "Advisory Contracts"). MGCM is
registered as an investment adviser with the Commission and provides a full
range of investment advisory services to institutional clients. All of the
outstanding voting stock of MGCM is owned by Morgan Grenfell Asset Management
("MGAM"), which is an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. As of September 30, 1997,
MGCM managed approximately $9.69 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 Total Return Bond Fund 0.45%
Morgan Grenfell High Yield Bond Fund 0.50%
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, 1997, this voluntary agreement was in effect for each Fund
(other than Morgan Grenfell Total Return Bond Fund, Morgan Grenfell High Yield
Bond 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, Morgan Grenfell Smaller
Companies Fund and Morgan Grenfell Microcap Fund paid advisory fees equal to
__%, __%, __%, __%, __% and __% of their respective average daily net assets.
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.
Each Fund other than the Equity Funds and the High Yield Bond Fund is managed
utilizing a team approach led by David W. Baldt, Executive Vice President of the
Adviser. 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, Thomas J. Flaherty, Christopher J. Gagnier and Timothy C. Vile,
all Senior Vice Presidents of 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
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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 High Yield Bond Fund is managed by a committee consisting of
investment professionals employed by the Adviser. This committee makes
investment decisions for the Fund.
The Smaller Companies Fund and Microcap Fund are each managed by a team of
three experienced portfolio managers, Audrey M. T. Jones, David A. Baratta and
John P. Callaghan. Ms. Jones and Mr. Baratta have served as members of the
Funds's portfolio management team since the Fund's inception. Mr. Callaghan
joined the Funds' portfolio management team (and the Adviser) in June 1997 and,
prior to such time, worked as a portfolio manager for Odyssey Partners and
Weiss, Peck & Greer. Ms. Jones has been employed by the Adviser as a portfolio
manager since 1986. Prior to joining the Adviser 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.
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
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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
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 each Fund other than Morgan Grenfell Fixed Income Fund and Morgan
Grenfell 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.
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<PAGE>
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
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:
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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
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. Normally, redemption proceeds will be wired within no more than
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. Frequently, redemption proceeds
will be wired on the next Business Day after the Transfer Agent's receipt of
such documents. 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
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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. 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."
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
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<PAGE>
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 Funds (not including the
Municipal 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 of the other Funds distributes substantially all of its net investment
income in the form of dividends declared daily and paid monthly. Each Fund,
including the Equity Funds, 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, 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 capital gain regardless of how long the shareholder has
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held its shares. It is anticipated that future tax regulations implementing
federal tax legislation enacted on August 5, 1997 will provide that
distributions of long-term capital gains to individuals or other noncorporate
taxpayers will be subject to different maximum tax rates, depending on the dates
on which the gains are recognized and the applicable Fund's holding periods for
the assets that produce the gains. 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 tax 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.
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 anticipate that they
generally will not be eligible to elect to pass such taxes or any associated
foreign tax credits or deductions through to their shareholders, but will
provide appropriate information to shareholders in the event such an election is
made for any Fund.
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 for
shareholders that are subject to tax.
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on dividends, capital gain distributions, or the
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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 the application to them of the federal tax
legislation referred to above and any other 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 thirteen additional series. Until
December 28, 1994, the Fixed Income Fund and the Municipal Bond Fund were series
of The Advisors' Inner Circle Fund, a business trust organized under the laws of
The Commonwealth of Massachusetts on July 18, 1991. The Declaration of Trust
further authorizes the Trust to classify or reclassify any series or portfolio
of shares into one or more classes. As of the date hereof, the Trustees have
established two classes of shares: service shares and institutional shares.
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidations, except that only service shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of service shares of each Fund have exclusive voting rights
with respect to the service plan adopted by their Fund.
When issued, shares of the Funds are fully paid and nonassessable. In the
event of liquidation, shareholders are entitled to share pro rata in the net
assets of the applicable Fund available for distribution to shareholders. Shares
of the Funds entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights.
Shares of a Fund will be voted separately with respect to matters
pertaining to that Fund except for the election of Trustees and the ratification
of independent accountants. For example, shareholders of each Fund are required
to approve the adoption of any investment advisory agreement relating to such
Fund and any change in the fundamental investment restrictions of such Fund.
Approval by the shareholders of one Fund is effective only as to that Fund. The
Trust does not intend to hold shareholder meetings, except as may be required by
the 1940 Act. The Trust's Declaration of Trust provides that special meetings of
shareholders shall be called for any purpose, including the removal of a
Trustee, upon written request of shareholders entitled to vote at least 10% of
the outstanding shares of the Trust, or Fund, as the case may be. In addition,
if ten or more shareholders of record who have held shares for at least six
months and who hold in the aggregate either shares having a net asset value of
$25,000 or 1% of the outstanding shares, whichever is less, seek to call a
meeting for the purpose of removing a Trustee, the Trust has agreed to provide
certain information to such shareholders and generally to assist their efforts.
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<PAGE>
As of November 24, 1997, the Adviser owned 63.70% and Deutsche Morgan
Grenfell C. J. Lawrence owned 31.18% of the outstanding shares of the Smaller
Companies Fund, Bankers Trust Company owned 42.08% of the outstanding shares of
the Municipal Bond Fund, Deutsche Morgan Grenfell C. J. Lawrence Inc. owned
42.39% of the outstanding shares of the Microcap Fund and Charles Schwab & Co.,
Inc. owned 30.17% of the outstanding shares of the Short-Term Municipal Bond
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
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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<PAGE>
APPENDIX A
THE ADVISER'S MICROCAP INVESTMENT RESULTS
Set forth below are 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 (other than
Morgan Grenfell Microcap Fund, which commenced operations on December 18, 1996)
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 below are not Microcap Fund's actual
investment results and 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 and the Internal Revenue Code of
1986, as amended. 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.
- - ------------
* Audrey Jones, David Baratta and John Callaghan are the members of the
Adviser's Microcap Equity Team. Ms. Jones has been a member of the Team
throughout the eleven-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. Mr. Callaghan joined the
Team in June 1997, following the departure of a portfolio manager who had been a
member of the Team since at least 1987. Also, in May 1996, another portfolio
manager who had been a member of the Team since at least 1987 left MGCM.
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<PAGE>
Average Annual Total Return
---------------------------
MGCM Microcap
Composite
Year (Net of Fees) Russell 2000
- - ---- ------------- ------------
1997 -- % -- %
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
Year (Net of Fees) Russell 2000
- - ---- ------------- ------------
Annualized Total Return For
Period From December 31, 1986
to December 31, 1997 -- % -- %
- - --------------------------------------------------------------------------------
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 $_____,
assuming reinvestment of dividends, by December 31, 1997.
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<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell Capital Management, Inc.
885 Third Avenue
New York, New York 10022
Administrator and Shareholder
Servicing Agent
SEI Financial Management Corporation
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
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of twenty-two 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 Total Return Bond Fund
Morgan Grenfell High Yield 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 February 25,
1998, 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 1
<PAGE>
TABLE OF CONTENTS
Page
Introduction .............................................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks ................................. 4
Investment Restrictions ................................................... 21
Trustees and Officers ..................................................... 24
Investment Advisory and Other Services .................................... 27
Service Plan .............................................................. 31
Portfolio Transactions .................................................... 32
Net Asset Value ........................................................... 34
Performance Information ................................................... 35
Taxes ..................................................................... 38
General Information About the Trust ....................................... 45
Additional Information .................................................... 46
Financial Statements ...................................................... 47
Appendix A--Description of Ratings ........................................ 48
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 twenty-two separate investment portfolios. This Statement of Additional
Information relates to the following nine 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 Municipal Bond Fund
Morgan Grenfell Short-Term Municipal Bond Fund
(collectively, the "Municipal Funds")
Morgan Grenfell Fixed Income Fund
Morgan Grenfell Short-Term Fixed Income Fund
Morgan Grenfell Total Return Bond Fund
Morgan Grenfell High Yield Bond Fund
Each Fund other than the Total Return Bond Fund is 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 3
<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 Poor's
Ratings Group ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's")
and other recognized rating organizations represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality or value. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. See Appendix A for a description of the ratings provided by
Standard & Poor's, Moody's and certain other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for
purchase by a Fund. The Board of Trustees or the Adviser, pursuant to guidelines
established by the Board of Trustees, will consider such an event in determining
whether the Fund should continue to hold the security in accordance with the
interests of the Fund and applicable regulations of the Securities and Exchange
Commission (the "Commission"). In no event, however, will any Fund other than
the Total Return Bond Fund and the High Yield Bond Fund hold more than 5% of its
net assets in fixed income securities that are not investment grade.
Lower Quality High Yield "High Risk" Debt Obligations. As discussed in the
Prospectus, the High Yield Bond Fund and, to a lesser extent, the Total
- - --------------------------------------------------------------------------------
Page 4
<PAGE>
Return Bond Fund may invest in high yielding fixed income securities that are
rated lower than Baa by Moody's or BBB by Standard & Poor's and unrated
securities determined to be of comparable quality. The values of these lower
quality securities generally fluctuate more than those of higher quality
securities. In addition, these securities involve 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 reduce these risks
through investment analysis and attention to current developments in interest
rates and economic conditions, but there can be no assurance that the Adviser
will be successful in reducing the risks associated with investments in such
securities. To the extent that the High Yield Bond Fund and the Total Return
Bond Fund invest in lower quality fixed income securities, the achievement of
their respective investment objectives will be more dependent on the Adviser's
ability than it would be otherwise.
As noted in the Prospectus, the High Yield Bond Fund and the Total Return Bond
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.
In addition, each Fund may invest in zero coupon bonds. Both of these types of
bonds may be more speculative and subject to greater fluctuations in value than
securities which pay interest periodically and in cash, due to changes in
interest rates. A 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 fixed income 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. Similarly, when such yields
increase, the market value of a portfolio already invested at lower yields can
be expected to decline.
Custodial Receipts. Each of the Funds other than the Equity Funds and the
Municipal 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 Total Return Bond Fund, the High
Yield Bond Fund and each of the Equity Funds may purchase preferred stock.
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<PAGE>
Preferred stocks are equity securities, but possess certain attributes of debt
securities and are generally considered fixed income securities. Holders of
preferred stocks normally have the right to receive dividends at a fixed rate
when and as declared by the issuer's board of directors, but do not participate
in other amounts available for distribution by the issuing corporation.
Dividends on the preferred stock may be cumulative, and in such cases all
cumulative dividends usually must be paid prior to dividend payments to common
stockholders. Because of this preference, preferred stocks generally entail less
risk than common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stocks. However,
preferred stocks are equity securities in that they do not represent a liability
of the issuer and therefore do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. In addition, preferred stocks are subordinated in right of payment
to all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer. See
"Convertible Securities and Preferred Stocks" in the Prospectus for a
description of certain characteristics of convertible preferred stock.
Warrants
As stated in the Prospectus, the Equity Funds may purchase warrants, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves a risk that
a Fund could lose the purchase value of a warrant if the right to subscribe to
additional shares is not exercised prior to the warrant's expiration. Also, the
purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
Municipal Securities
As stated in the Prospectus, the Municipal Funds and, to a more limited
extent, the Fixed Income Fund, the Short-Term Fixed Income Fund, the Total
Return Bond Fund and the High Yield Bond Fund 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
- - --------------------------------------------------------------------------------
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<PAGE>
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
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
- - --------------------------------------------------------------------------------
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<PAGE>
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease obligations
and certificates of
participation, the Adviser will consider a variety of factors including: (1) the
willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades or quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the Adviser will consider factors
unique to particular lease obligations and certificates of participation
affecting the marketability thereof. These include the general creditworthiness
of the issuer, the importance to the issuer of the property covered by the lease
and the likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund. No Fund may invest more
than 5% of its net assets in municipal leases.
Each of the Funds other than the Equity Funds 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
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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.
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
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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 U.S.-registered
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 such investment company, and investing more than 5% of
the Fund's assets in securities of any one such investment company or more than
10% of its assets in securities of all such 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, each of the Funds other than the Equity 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. A 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 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.
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Only the Fixed Income Fund, the Short-Term Fixed Income Fund, the Total Return
Bond Fund and the High Yield Bond Fund 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 Fund with a portfolio maturity policy and make
needed adjustments to comply with such Fund's 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).
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Asset-Backed Securities
As stated in the Prospectus, the Fixed Income Fund, the Short-Term Fixed Income
Fund, the Total Return Bond Fund and the High Yield Bond Fund 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, each of the
Funds other than the Municipal Funds may invest in securities of foreign
issuers. While the non-U.S. investments of the Equity Funds and the Total Return
Bond Fund may be denominated in any currency, the non-U.S. investments of the
Fixed Income Fund, the Short-Term Fixed Income Fund and the High Yield Bond Fund
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 investments of the Equity Funds and the Total Return Bond Fund
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 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 Equity Funds and
the Total Return Bond Fund will incur transaction costs in connection with
conversions between currencies.
Foreign Government Securities. The foreign government securities in which each
of the Funds other than the Municipal Funds may invest generally consist of debt
obligations issued or guaranteed by national, state or provincial governments or
similar political subdivisions. Each of the Funds other than the Municipal 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, the Fixed Income Fund and the Short-Term
Fixed Income Fund intend 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
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securities issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
Forward Foreign Currency Exchange Contracts
The Total Return Bond Fund and 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. 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 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 a 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 Equity Funds and the Total Return Bond Fund may enter into forward currency
contracts only for the following 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 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 a 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
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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.
A Fund generally will not enter into a forward currency contract with a term of
greater than one year.
While a Fund will enter into forward currency contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while a Fund 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 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
The Total Return Bond Fund, the High Yield Bond Fund and each Equity Fund may
write covered put and call options and purchase put and call options. Such
options may relate to particular securities, to various stock indices, or to
currencies. The Equity Funds may write call and put options which are issued by
the Options Clearing Corporation (the "OCC") or which are traded on U.S. and
non-U.S. exchanges and over-the-counter. These instruments may be considered
derivative instruments. See "Description of Securities and Investment Techniques
and Related Risks--Options" in the Prospectus.
A call option on a securities index provides the holder with the right to
receive a cash payment upon exercise of the option if the market value of the
underlying index exceeds the option's exercise price. Conversely, a put option
on a securities index provides the holder with the right to receive a cash
payment upon exercise of the option if the market value of the underlying index
is less than the option's exercise price. The amount of any payment to the
option holder will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
U.S. dollars or a foreign currency, times a specified multiple. A put option on
a currency gives its holder the right to sell an 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.
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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 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 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 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. 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
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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 Total Return Bond Fund, the High Yield Bond
Fund and each of 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. Each such Fund 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. A Fund 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 a Fund 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. A Fund 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 a
Fund's portfolio securities and futures contracts based on other financial
instruments, securities indices or other indices, the
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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, a Fund 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 a Fund 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 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. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
A Fund may use options on futures contracts solely for bona fide hedging or
other non-hedging purposes as described below.
Other Considerations. The Total Return Bond Fund, the High Yield Bond Fund and
each of 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. A 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, a Fund's 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 Fund expects that, on 75%
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<PAGE>
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."
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 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 a 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."
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<PAGE>
Bank Obligations
As stated in the Prospectus, each Fund's investments in money market instruments
may include certificates of deposit, time deposits and bankers' acceptances.
Certificates of Deposit ("CDs") are short-term negotiable obligations of
commercial banks. Time Deposits ("TDs") are non-negotiable deposits maintained
in banking institutions for specified periods of time at
stated interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers usually in connection with international transactions.
U.S. commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the "FDIC"). U.S. banks organized under state law are supervised
and examined by state banking authorities but are members of the Federal Reserve
System only if they elect to join. Most state banks are insured by the FDIC
(although such insurance may not be of material benefit to a Fund, depending
upon the principal amount of CDs of each bank held by the Fund) and are subject
to federal examination and to a substantial body of federal law and regulation.
As a result of governmental regulations, U.S. branches of U.S. banks, among
other things, generally are required to maintain specified levels of reserves,
and are subject to other supervision and regulation designed to promote
financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by
the Funds, are supervised and subject to examination by the Office of Thrift
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
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<PAGE>
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, including a distribution by a
Municipal Fund, 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 Fund
other than the Fixed Income Fund and the 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
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<PAGE>
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 each Fund other than the Fixed Income Fund and
the Municipal Bond Fund 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, Total Return Bond Fund, High Yield Bond Fund and the Equity
Funds
Fundamental Investment Restrictions. The Trust may not, on behalf of a Fund:
(1) Issue senior securities, except as permitted by paragraphs (2), (6) and
(7) below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale of
options, futures contracts and options on futures contracts, forward
commitments, forward foreign exchange contracts, repurchase agreements and
reverse repurchase agreements entered into in accordance with the Fund's
investment policy, and the pledge, mortgage or hypothecation of the Fund's
assets within the meaning of paragraph (3) below are not deemed to be senior
securities, if appropriately covered.
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<PAGE>
(2) Borrow money (i) except from banks as a temporary measure for
extraordinary emergency purposes and (ii) except that the Fund may enter into
reverse repurchase agreements and dollar rolls, if appropriately covered, with
banks, broker-dealers and other parties; provided that, in each case, the Fund
is required to maintain asset coverage of at least 300% for all borrowings. For
the purposes of this investment restriction, short sales, transactions in
currency, forward contracts, swaps, options, futures contracts and options on
futures contracts, and forward commitment transactions shall not constitute
borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and to the extent related to the segregation of
assets in connection with the writing of covered put and call options and the
purchase of securities or currencies on a forward commitment or delayed-delivery
basis and collateral and initial or variation margin arrangements with respect
to forward contracts, options, futures contracts and options on futures
contracts.
(4) Act as an underwriter, except to the extent that, in connection with the
disposition of Fund securities, the Fund may be deemed to be an underwriter for
purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities issued by companies (other than real estate limited partnerships)
that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend Fund securities in accordance
with the Fund's investment policies and may purchase or invest in repurchase
agreements, bank certificates of deposit, all or a portion of an issue of bonds,
bank loan participation agreements, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance of
the securities.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(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 other than the Total Return Bond 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:
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<PAGE>
(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 of other U.S.-registered investment companies, except
as permitted by the Investment Company Act of 1940 and the rules, regulations
and any applicable exemptive order issued thereunder.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) 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.
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
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<PAGE>
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 other U.S.-registered investment
companies except as permitted by the Investment Company Act of 1940 and the
rules, regulations and any applicable exemptive order issued thereunder.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set forth
below. An asterisk (*) indicates those Trustees deemed to be "interested
persons" of the Trust for purposes of the 1940 Act.
Positions Principal Occupation
Name and Address With Trust During Past Five Years
- - ---------------- ---------- ----------------------
James E. Minnick (1) President, Chief President, Secretary and
885 Third Avenue Executive Officer, and Treasurer, MGCM (since
New York, NY 10022 Trustee 1990).
(age 49)
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<PAGE>
Patrick W.W. Disney (1) Senior Vice President Director, Morgan Grenfell
20 Finsbury Circus and Trustee Investment
London EC2M 1NB ServicesLimited ("MGIS")
ENGLAND (since 1988).
(age 41)
Paul K. Freeman (2) Trustee Chief Executive Officer,
7257 South Tucson Way The Eric Group Inc.,
(since Englewood, CO 80112 (environmental insurance)
(age 47) 1986).
Graham E. Jones (2) Trustee Senior Vice President,
330 Garfield Street BGK Realty Inc. (since
Santa Fe, NM 87501 1995); Financial Manager,
(age 64) Practice Management
Systems (medical
information services)
(1988-95); Director, 12
closed- end funds managed
by Morgan Stanley Asset
Management; Trustee, 10
open-end mutual funds
managed by Weiss, Peck &
Greer.
William N. Searcy (2) Trustee Pension & Savings Trust
2330 Shawnee Mission Pkwy Officer, Sprint
Westwood, KS 66205 Corporation
(age 51) (telecommunications)
(since 1989).
Hugh G. Lynch Trustee Managing Director,
767 Fifth Avenue International
New York, NY 10153 Investments, General
(age 60) Motors Investment
Management Corporation
(since September 1990).
Edward T. Tokar Trustee Vice
101 Columbia Road President-Investments,
Morristown, NJ 07962 Allied Signal, Inc.
(age 50) (advanced technology and
manufacturer) (since
1985).
John G. Alshefski Treasurer, Principal Director of Fund
530 East Swedesford Road Accounting Officer, Operations, SEI/ Fund
Wayne, PA 19087-1658 Chief Financial Officer Resources (since January
(age 31) 1994); Manager
International Fund
Operations (1992-1994);
Senior Associate, Price
Waterhouse (1988-1991).
Neil P. Jenkins Vice President Director, MGCM (since
20 Finsbury Circus 1991), Morgan Grenfell
London, England International Funds
(age 37) Management, (1995), and
Morgan Grenfell & Co.,
Ltd. (since 1985).
David W. Baldt Vice President Executive Vice President
1435 Walnut Street and Director of Fixed
Philadelphia, PA 19102 Income Investments, MGCM
(age 48) (since 1989).
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<PAGE>
Ian D. Kelson Vice President Director, MGIS (since
20 Finsbury Circus 1988); Chief Investment
London EC2M 1NB Officer, Fixed Income,
England MGIS (since 1989).
(age 41)
James Grifo Vice President Executive Vice President
1435 Walnut Street and Director, MGCM (since
Philadelphia, PA 19102 1996); Senior Vice
(age 46) President, GT Global
Financial (since 1990).
Martin Hall (4) Vice President Portfolio Manager, Fixed
1435 Walnut Street Income Team, MGIS (since
Philadelphia, PA 19102 1988).
(age 39)
Joan A. Binstock (4) Secretary Chief Operating Officer,
885 Third Avenue and Vice President MGCM (since June 1997);
New York, NY 10022 Principal, National
(age 43) Director of Investment
Management Regulatory
Consulting, Ernst & Young
(May 1995 - June 1997);
Vice President, Head of
Compliance, JP Morgan
Mutual Funds (August
1993-May 1995).
- - --------------
(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
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 November 30, 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, Morgan Grenfell Smaller
Companies Fund and Morgan Grenfell Microcap Fund. On such date, the Trustees and
officers of the Trust owned, as a group, 2.06% of the outstanding shares of
Morgan Grenfell Short-Term Municipal Bond Fund, 1.72% of the outstanding shares
of Morgan Grenfell Smaller Companies Fund and 4.15% of the outstanding shares of
Morgan Grenfell Microcap Fund, respectively.
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<PAGE>
Compensation of Trustees
The Trust pays each Trustee who is not affiliated with the Adviser an annual fee
of $15,000 provided that they attend each regular Board meeting during the year.
Members of the Audit Committee also receive $1,000 for each Audit Committee
meeting attended. The Chairman of the Audit Committee 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, 1997:
Pension or
Retirement Benefits Aggregate
Accrued as Part of Compensation from
Name of Trustees Fund Expenses the Trust / Complex *
- - ------------------ -------------------- ---------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ -
Graham E. Jones $ 0 $ -
William N. Searcy $ 0 $ -
Hugh G. Lynch $ 0 $ -
Edward T. Tokar $ 0 $ -
- - ----------------
*The Trustees listed above do not serve on the Board of any other investment
company that may be considered to belong to the same complex as the Trust.
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 Management Contracts, dated December 28,
1994, August 7, 1996 and January 30, 1998 (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 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 Total Return Bond Fund ............................... 0.45%
Morgan Grenfell High Yield Bond Fund ................................. 0.50%
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."
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<PAGE>
For the fiscal years ended October 31, 1997, 1996 and 1995, Morgan Grenfell
Fixed Income Fund paid the Adviser net advisory fees of $______, $2,041,053 and
$1,150,707, respectively. For the same years, Morgan Grenfell Municipal Bond
Fund paid the Adviser net advisory fees of $________, $791,321 and $595,795,
respectively. For the fiscal period year ended October 31, 1997, Morgan Grenfell
Short-Term Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund and
Morgan Grenfell Smaller Companies Fund paid the Adviser net advisory fees of
$______, $______ and $_______, respectively. For the fiscal periods 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. For the fiscal period ended
October 31, 1997, Morgan Grenfell Microcap Fund paid the Adviser a net advisory
fee of $ _____. The foregoing advisory fee payments and non-payments reflect
expense limitations that were in effect during the indicated periods. Morgan
Grenfell Total Return Bond Fund, Morgan Grenfell High Yield Bond 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.
Each Management Contract between MGCM and the Trust was most recently approved
on November 20, 1997 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, 1998, (August
23, 1999, in the case of the Management Contract for Microcap Fund) and will
continue in effect thereafter, with respect to each Fund, only if such
continuance is specifically approved annually by the Trustees, including a
majority of the Trustees who are not parties to the Management Contracts or
"interested persons" of any such parties, or by a vote of a majority of the
outstanding shares of each Fund. The Management Contracts are terminable by vote
of the Board of Trustees, or, with respect to a Fund, by the holders of a
majority of the outstanding shares of the Fund, at any time without penalty on
60 days' written notice to the Adviser. Termination of a Management Contract
with respect to a Fund will not terminate or otherwise invalidate any provision
of either Management Contract with respect to any other Fund. The Adviser may
terminate 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,
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<PAGE>
1997, MGCM managed approximately $9.69 billion in assets for various individual
and institutional accounts, including the Morgan Grenfell SmallCap Fund, Inc., a
registered, closed-end investment company for which it acts as investment
adviser.
Portfolio Turnover
Each Fund's portfolio turnover rate is calculated by dividing the lesser of the
dollar amount of sales or purchases of portfolio securities by the average
monthly value of a Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. For the fiscal period
ended October 31, 1997, the portfolio turnover rates for Morgan Grenfell Fixed
Income Fund, Morgan Grenfell Municipal Bond Fund, Morgan Grenfell Short-Term
Fixed Income Fund, Morgan Grenfell Short-Term Municipal Bond Fund, Morgan
Grenfell Smaller Companies Fund and Morgan Grenfell Microcap Fund were ____%,
____%, ____%, ____%, ____% and ____%, respectively. For the fiscal year ended
October 31, 1996, the portfolio turnover rates for 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 176%, 182%, 124%, 129% and 141%, 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, 1997, 1996 and 1995, Morgan Grenfell
Fixed Income Fund paid the Administrator administration fees of $ _____,
$655,936 and $455,614, respectively. For the same years, Morgan Grenfell
Municipal Bond Fund paid the Administrator administration fees of $_____,
$253,839 and $227,872, respectively. For the fiscal period ended October 31,
1997, Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund and Morgan Grenfell
Microcap Fund paid the Administrator administration fees of $________, $_______,
$_________ and $________, 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 year ended October 31, 1995, Morgan Grenfell Short-Term Fixed Income
Fund, Morgan Grenfell Short-Term Municipal Bond Fund and Morgan Grenfell Smaller
Companies Fund paid the Administrator administration fees of $12,500, $12,500
and $4,167, respectively.
The Administration Agreement provides that the Administrator shall not be liable
under the Administration Agreement except for bad faith or gross
- - --------------------------------------------------------------------------------
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<PAGE>
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 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 other than Microcap Fund, Total Return Bond Fund and
High Yield Bond Fund on December 28, 1994. The Distribution Agreement was most
recently approved on November 20, 1997 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 Distributor. The
Distributor may terminate the Distribution Agreement at any time without penalty
on 60 days' written notice to the Trust.
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<PAGE>
Custodians
As described in the Prospectus, CoreStates Bank, N.A. ("CoreStates"), whose
principal business address is Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, PA 19101 maintains custody of the assets of Morgan Grenfell Fixed
Income Fund and Morgan Grenfell Municipal Bond Fund. As described in the
Prospectus, The Northern Trust Company ("Northern"), whose principal business
address is Fifty South LaSalle Street, Chicago, Illinois 60675, maintains
custody of the assets of the other Funds.
Under their custody agreements with the Trust, CoreStates and Northern
(i) maintain separate accounts in the name of each Fund, (ii) hold and transfer
portfolio securities on account of each Fund, (iii) accept receipts and make
disbursements of money on behalf of each Fund, (iv) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities and (v) make periodic reports to the Trust's Board of Trustees
concerning each Fund's operations. CoreStates and Northern are authorized to
select one or more foreign or domestic banks or companies to serve as
sub-custodian on behalf of the Funds.
SERVICE PLAN
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.
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
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<PAGE>
assets in service shares of the Fund. Service Organizations that are subject to
the jurisdiction of the SEC, the Department of Labor or state securities
commissions are urged to consult their own legal advisers before investing
fiduciary assets in service shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive fees
under a Service Plan if the plan fiduciary otherwise properly discharges its
fiduciary duties, including (if applicable) those under ERISA.
Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of Title I of ERISA.
Those standards are designed to help ensure that the fidcuiary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403 (c)(1) of ERISA provides, in part, that the assets of a plan shall
be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
and provides further that such fiduciary must act prudently and solely in the
interests of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes within the definition of "party in interest" with respect to a plan any
fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not only
prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it would also
prohibit the fiduciary from similarly 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
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<PAGE>
unless a more favorable result is obtainable elsewhere. Fixed income securities
purchased or sold on behalf of the Funds normally will be traded in the
over-the-counter market on a net basis (i.e. without a commission) through
dealers acting for their own account and not as brokers or otherwise through
transactions directly with the issuer of the instrument. Some fixed income
securities are purchased and sold on an exchange or in over-the-counter
transactions conducted on an agency basis involving a commission.
Pursuant to the Management Contracts, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In addition, the Management Contracts authorize the
Adviser, subject to the periodic review of the Trust's Board of Trustees, to
cause a Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular 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, 1997, the Adviser did not, pursuant to any
agreement or understanding with a broker or otherwise through an internal
allocation procedure, direct any Fund's brokerage transactions to a broker
because of research services provided by such broker.
Investment decisions for each Fund and for other investment accounts managed by
the Adviser are made independently of each other in the light of differing
conditions. However, the same investment decision may be made for two or more of
such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect on the price or value of the security as far as
a Fund is concerned, in other cases it is believed to be beneficial to a Fund.
To the extent permitted by law, the Adviser may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers").
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
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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...."
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, 1995, 1996 and
1997, 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, 1996 and 1997, neither Short-Term Fixed Income Fund,
Short-Term Municipal Bond Fund, Smaller Companies Fund nor Microcap 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, 1997, 1996 and 1995, Morgan Grenfell
Fixed Income Fund and Morgan Grenfell Municipal Bond Fund paid no brokerage
commissions. For fiscal years ended October 31, 1997, 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 periods ended October
31, 1997, 1996 and 1995, Morgan Grenfell Smaller Companies Fund paid aggregate
brokerage commissions of $______, $7,708 and $3,778, respectively. For the
fiscal period ended October 31, 1997, Morgan Grenfell Microcap Fund paid
aggregate brokerage commissions of
$-----------.
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
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<PAGE>
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 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 and on which the Funds' net asset values are not
calculated. Such calculation may not take place contemporaneously with the
determination of the prices of certain portfolio securities used in such
calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the NYSE will not be reflected in the Funds' calculation of net asset values
unless the Adviser deems that the particular event would materially affect net
asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
Yield
From time to time, the Fixed Income Fund, the Short-Term Fixed Income Fund, the
Total Return Bond Fund, the High Yield Bond 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:
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<PAGE>
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, 1997 the yields for service shares of
Fixed Income Fund, the Municipal Bond Fund, the Short-Term Fixed Income Fund and
the Short-Term Municipal Bond Fund were __%, __%, __% and __%, respectively. If
the expense limitations described in the Prospectus for these Funds had not been
in effect during this period, the yields for service shares of these Funds would
have been __%, __%, __% and __%, respectively. For the same period, the
tax-equivalent yields for service shares of the Municipal Bond Fund and the
Short-Term Municipal Bond Fund were __% and __%, respectively, assuming the
highest Federal Income Tax bracket for individuals (39.6%). If the expense
limitations described in the Prospectus for these Funds had not been in effect
during this period, the tax-equivalent yields for service shares of these Funds
would have been __% and __%, 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:
T = [ (ERV) ((1/n)) - 1]
---
P
Where: T = average annual total return,
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<PAGE>
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 their respective periods from commencement of operations
(for service shares) to October 31, 1997, the average annual returns for service
shares of Morgan Grenfell Fixed Income Fund, Morgan Grenfell Municipal Bond
Fund, Morgan Grenfell Short-Term Fixed Income Fund, Morgan Grenfell Short-Term
Municipal Bond Fund, Morgan Grenfell Smaller Companies Fund and Morgan Grenfell
Microcap Fund were __%, __%, __%, __%, __% and __%, respectively. If the expense
limitations described in the Prospectus for the above Funds had not been in
effect during the indicated periods, the total returns of 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, Lehman Brothers, Inc., First Boston Corporation,
Dean Witter 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
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<PAGE>
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 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"); and (b) 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. 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 such regulations.
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.
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<PAGE>
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 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 a
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. Additionally, a Fund may be required
to recognize gain if an option, future, forward contract, short sale, or other
transaction that is not subject to these mark to market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any gain or loss recognized on actual or deemed
sales of futures contracts, forward contracts, or options that are subject to
the mark to market rules, but not the constructive sale rules, (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 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, forward
contracts and constructive sales may affect the amount, timing and character of
the Fund's distributions to shareholders. 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 Funds other than the Municipal
Funds and the Fixed Income and Short-Term Fixed Income Funds.
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<PAGE>
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 Fund acquires stock (including, under proposed regulations, an option to
acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) 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 or make an available
election to minimize their tax liability or maximize their return from these
investments.
The federal income tax rules applicable to currency swaps, mortgage dollar
rolls, and certain structured securities are unclear in certain respects, and
the Funds may be required to account for these transactions or instruments under
tax rules in a manner that may affect the amount, timing and character of
income, gain or loss therefrom and that may, under certain circumstances, limit
the extent to which the Funds engage in these transactions or acquire these
instruments.
The High Yield Bond Fund and the Total Return Bond 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 these Funds. Tax rules are not entirely
clear about issues such as when a Fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by these Funds, to the extent 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 having to pay federal income or excise tax.
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
anticipate that they generally will not be entitled to elect to pass through
such foreign taxes to their shareholders. If such an election is made,
shareholders would have to include their shares of such taxes as additional
income, but could be entitled to U.S. tax credits or deductions for such taxes,
subject to certain reguirements and limitations under the Code.
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.
Transactions or instruments subject to the mark to market or constructive sale
rules described above may have the same result in some circumstances. In order
to obtain cash to distribute this income or gain, maintain its qualification as
a regulated investment company, and avoid
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<PAGE>
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 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, 1997, Fixed Income Fund had capital
loss carryforwards of approximately $_____ and Short-Term Fixed Income
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Fund had capital loss carryforwards of approximately $_____, 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 debt
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 certain corporate shareholders'
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, as well as any distributions of the Municipal Funds that are
not designated as exempt-interest dividends as described above, 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, dividends paid by Funds other than the Equity
Funds generally will not qualify for the dividends received deduction, and some
of the dividends paid by the Equity Funds also may not qualify for the
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, extending before
and after each such dividend. 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. 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 and, to the
extent such basis would be reduced below zero, require the current recognition
of income. 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.
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As a result of the enactment of the Taxpayer Relief Act of 1997 (the "1997 TRA")
on August 5, 1997, gain recognized after May 6, 1997 from the sale of a capital
asset is taxable to individual (noncorporate) investors at different maximum
federal income tax rates, depending generally upon the tax holding period for
the asset, the federal income tax bracket of the taxpayer, and the dates the
asset was acquired and/or sold. The Treasury Department has issued Notice 97-59
and Announcement 97-109, and is expected to issue further guidance, to apply
this legislation (as modified by any "technical corrections" that may be
enacted) to capital gains and losses and to distributions by regulated
investment companies ("RICs"), including the Funds, from their realized net
capital gain. This guidance should enable RICs to pass through to their
shareholders the benefits of the capital gains tax rates contained in the 1997
TRA by designating certain capital gains dividends or portions thereof as
eligible for a 20% maximum tax rate (or 10% for taxpayers in the 15% rate
bracket), with other capital gain dividends or portions thereof subject to a
maximum 28% tax rate, in each case for individuals and other noncorporate
taxpayers entitled to such preferential capital gains tax rates. This guidance
also provides or will provide for the appropriate tax treatment of other
long-term capital gains and losses, such as those recognized by a Fund under the
mark to market rules described above, and distributions attributable to such
gains. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
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
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 in a
transaction that is treated as a sale for tax purposes, 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. However, any loss realized on the sale,
redemption or other disposition of shares of a Municipal Fund with a tax holding
period of six months or less will be disallowed to the extent of any
exempt-interest dividends with respect to such shares. Moreover, any loss
realized on the sale, redemption, or other disposition of the shares of any Fund
with a tax holding period of six months or less, to the extent such loss is not
disallowed under any other tax rule, will be treated as a long-term capital loss
to the extent of any capital gain dividend with respect to such shares.
Additionally, any loss realized on a sale, redemption or other
- - --------------------------------------------------------------------------------
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<PAGE>
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. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department regulations,
announcements or other guidelines issued to implement the 1997 TRA may contain
rules for determining different tax rates applicable to sales of Fund shares
held for more than one year, more than 18 months, and (for certain sales after
the year 2000 or the year 2005) more than five years. These regulations may also
modify some of the provisions described above.
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 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
- - --------------------------------------------------------------------------------
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<PAGE>
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 November 24, 1997, the following shareholders owned the following
respective percentages of the outstanding service shares of the Municipal Bond
Fund, the Smaller Companies Fund and the Microcap Fund:
Microcap Fund Service Shares
Donaldson Lufkin & Jenrette 8.26%
Secs Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
National Financial Services Corp. 88.38%
200 Liberty St
1 World Fin. Cnt
New York, NY 10281-1003
Smaller Companies Fund Service Shares
Donaldson Lufkin & Jenrette 82.78%
Secs Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
SEI Corporation 17.22%
1 Freedom Valley Dr.
Oaks, PA 19456
Municipal Bond Fund Service Shares
Donaldson Lufkin & Jenrette 98.17%
Secs Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
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<PAGE>
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 the securities meet
the investment objectives and policies of the Fund and are acquired by the Fund
for investment and not for resale. An exchange of securities for Fund shares
will generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
______________________ serves as the Funds' independent accountants, providing
audit services, including review and consultation in connection with various
filings by the Trust with the Commission and tax authorities.
Registration Statement
The Trust has filed with the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities of the Funds and certain other series of
the Trust. If further information is desired with respect to the Trust, the
Funds or such other series, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
- - --------------------------------------------------------------------------------
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<PAGE>
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October
31, 1997 are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of ______________, the
Trust's independent accountants, as experts in accounting and auditing.
The financial statements of the Trust for the periods ended on and prior to
October 31, 1997 are included in, and incorporated by reference into, this
Statement of Additional Information from the Trust's 1997 Annual Report to
Shareholders for the year ended October 31, 1997 (filed electronically on
December ___, 1997; file no. 812-10080; accession no. ____________), and will be
attached to each copy of such Statement of Additional Information that is
distributed.
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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:
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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<PAGE>
III. Short-Term Loan / Municipal Note Ratings
Moody's description of its two highest short-term loan / municipal note ratings:
MIG-1/VMIG-1 This description denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceeding group.
Standard & Poor's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Institutional Shares
885 Third Avenue
New York, New York 10022
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end management
investment company that includes thirteen distinct investment portfolios that
focus on international 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 securities markets.
The investment objective 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 and Morgan Grenfell Emerging Markets Equity Fund
(the "Equity Funds") is to maximize capital appreciation. The investment
objective of Morgan Grenfell Core Global Fixed Income Fund, Morgan Grenfell
Global Fixed Income Fund, Morgan Grenfell International Fixed Income Fund,
Morgan Grenfell Emerging Markets Debt Fund and Morgan Grenfell Emerging Local
Currency Debt Fund (the "Fixed Income Funds") is to maximize total return.
Information concerning investment portfolios of the Trust that focus on U.S.
investments is contained in a separate prospectus that may be obtained by
calling 1-800-550-6426.
----------
This Prospectus provides information about the Trust and each of the Funds that
investors should know before investing in 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 February 25, 1998, 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, MORGAN GRENFELL EMERGING MARKETS DEBT
FUND AND MORGAN GRENFELL EMERGING LOCAL CURRENCY DEBT FUND ARE DESIGNED FOR
AGGRESSIVE INVESTORS. IN ADDITION, MORGAN GRENFELL EMERGING MARKETS DEBT FUND
AND MORGAN GRENFELL EMERGING LOCAL CURRENCY DEBT FUND INVEST 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.
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>
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.
Morgan Grenfell Core Global Fixed Income Fund invests primarily in investment
grade fixed income securities of issuers throughout the world.
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.
Morgan Grenfell Emerging Local Currency Debt Fund invests primarily in fixed
income securities denominated in currencies of 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 Policies 11
Description of Securities and Investment Techniques
and Related Risks 19
Additional Investment Information 33
Management of the Funds 34
Purchase of Institutional Shares 36
Redemption of Institutional Shares 39
Net Asset Value 40
Dividends, Distributions and Taxes 41
Organization and Shares of the Trust 43
Performance Information 44
Appendix A........................................... 46
Appendix B........................................... 49
Appendix C........................................... 53
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<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
International Japanese European
FUND NAME International Global European Pacific Basin Small Cap Small Cap Small Cap
Equity Fund Equity Fund* Equity Fund Equity Fund* Equity Fund Equity Fund* Equity Fund
----------- ------------ ----------- ------------ ----------- ------------ -----------
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
- - ------------------------------------------------------------------------------------------------------------------------------------
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 .......................... 0.70% 0.70% 0.70% 0.70% 1.00% 1.00% 1.00%
Other Expenses ......................... ___% 0.70% ___% 0.70% ___% 0.70% ___%
Reduction of Advisory Fee
and Expense Limitation by Adviser ** ... (___)% (0.50)% (___)% (0.50)% (___)% (0.45)% (___)%
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Fund Operating
Expenses ............................ 0.90% 0.90% 0.90% 0.90% 1.25% 1.25% 1.25%
====================================================================================================================================
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Emerging Core International Emerging Emerging
FUND NAME Markets Global Fixed Global Fixed Fixed Markets Local Currency
Equity Fund Income Fund* Income Fund Income Fund Debt Fund Debt Fund*
----------- ------------ ----------- ----------- --------- ----------
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
- - ------------------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases ................... None None None None None None
Maximum Sales Charge
Imposed on Reinvested
Dividends .............................. None None None None None None
Deferred Sales Charge
Imposed on Redemptions ................. None None None None None None
Exchange Fee ........................... None None None None None None
- - ------------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net
assets after reduction of advisory fee)
- - ------------------------------------------------------------------------------------------------------------------------------------
Advisory fees .......................... 1.00% 0.50% 0.50% 0.50% 1.00% 0.60%
Other Expenses ......................... ___% 0.51% ___% ___% ___% 0.56%
Reduction of Advisory Fee
and Expense Limitation by Adviser ** ... (___)% (0.46)% (___)% (___)% (___)% (0.46)%
Net Fund Operating
Expenses ............................ 1.25% 0.55% 0.65% 0.65% 1.25% 0.70%
====================================================================================================================================
</TABLE>
* Global Equity Fund, Pacific Basin Equity Fund, Japanese Small Cap Equity Fund,
Core Global Fixed Income Fund and Emerging Local Currency Debt Fund were not
operational during the fiscal year ended October 31, 1997.
** 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 institutional shares of each Fund, on an annual basis, to the
specified percentage of each Fund's assets shown in the above table as Net Fund
Operating Expenses. The above table and the following Example reflect this
voluntary agreement. In its sole discretion, the Advisor may terminate or modify
this voluntary agreement at any time after October 31, 1998 . The purpose of
this voluntary agreement is to enhance a Fund's total return during the period
when, because of its smaller size, fixed expenses have a more significant impact
on total return. After giving effect to the Adviser's voluntary agreement, each
Fund's advisory fee is as follows: International Equity Fund ___%, Global Equity
Fund 0.20%, European Equity Fund ___%, Pacific Basin Equity Fund 0.20%,
International Small Cap Equity Fund ___%, Japanese Small Cap Equity Fund 0.55%,
European Small Cap Equity Fund ___%, Emerging Markets Equity Fund ___%, Core
Global Fixed Income Fund 0.04%, Global Fixed Income Fund ___%, International
Fixed Income Fund___%, Emerging Markets Debt Fund ___% and Emerging Local
Currency Debt Fund 0.14% and the Other Expenses of International Equity Fund and
European Small Cap Equity Fund are equal to the respective amounts shown in the
above table as Net Operating Expenses. If the Adviser's voluntary agreement were
not in effect, the Fund Operating Expenses for institutional shares of each Fund
would be as follows: International Equity Fund, ___%; Global Equity Fund, 1.40%;
European Equity Fund, ___%; Pacific Basin Equity Fund, 1.40%; International
Small Cap Equity Fund, ___%; Japanese Small Cap Equity Fund, 1.70%; European
Small Cap Equity Fund, ___%; Emerging Markets Equity Fund, ___%; Core Global
Fixed Income Fund, 1.01%, Global Fixed Income Fund, __%; International Fixed
Income Fund, __%; Emerging Markets Debt Fund, __% and Emerging Local Currency
Debt Fund, 1.16%.
- - --------------------------------------------------------------------------------
Page -4-
<PAGE>
Example:
Investors in institutional shares would pay the following expenses on a
$1,000(1) investment assuming (1) a 5% annual return and (2) redemption at the
end of each time period:
1 3 5 10
Year Years Years Years
---- ----- ----- -----
Morgan Grenfell International Equity Fund $-- $-- $-- $--
Morgan Grenfell Global Equity Fund $ 9 $29 N/A N/A
Morgan Grenfell European Equity Fund $-- $-- $-- $--
Morgan Grenfell Pacific Basin Equity Fund $ 9 $29 N/A N/A
Morgan Grenfell International Small Cap Equity Fund $-- $-- $-- $--
Morgan Grenfell Japanese Small Cap Equity Fund $13 $40 N/A N/A
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 $-- $-- $-- $--
Morgan Grenfell Emerging Markets Debt Fund $-- $-- $-- $--
Morgan Grenfell Emerging Local Currency Debt Fund $ 7 $22 N/A N/A
Morgan Grenfell Core Global Fixed Income Fund $ 6 $18 N/A N/A
(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 Institutional 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. For each Fund other than
Morgan Grenfell Global Equity Fund, Morgan Grenfell Pacific Basin Equity Fund,
Morgan Grenfell Japanese Small Cap Equity Fund, Morgan Grenfell Core Global
Fixed Income Fund and Morgan Grenfell Emerging Local Currency Debt Fund, "Other
Expenses" included in the Expense Information Table and Example are estimates
for the fiscal year ending October 31, 1998 that are based on actual expenses
incurred during the fiscal year ended October 31, 1997. Additionally, the
figures shown for Morgan Grenfell Emerging Markets Debt Fund reflect the
Adviser's voluntary agreement, effective as of March 1, 1997, to limit Fund
Operating Expenses for institutional shares of this Fund to 1.25% of average net
assets. For Morgan Grenfell Global Equity Fund, Morgan Grenfell Pacific Basin
Equity Fund, Morgan Grenfell Japanese Small Cap Equity Fund, Morgan Grenfell
Core Global Fixed Income Fund and Morgan Grenfell Emerging Local Currency Debt
Fund, "Other Expenses" are based on estimated average net assets for the current
fiscal year ending October 31, 1998. If the average net assets of any 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 any 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 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.
- - --------------------------------------------------------------------------------
Page 5
<PAGE>
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."
----------
FINANCIAL HIGHLIGHTS
Set forth on the following page is selected audited data for an outstanding
institutional share of each 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, 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
for the fiscal periods ended October 31, 1997, October 31, 1996 and (with the
exception of Morgan Grenfell European Equity Fund) October 31, 1995. Selected
data for an outstanding institutional share of each of the above Funds (other
than Morgan Grenfell European Equity Fund and Morgan Grenfell European Small Cap
Equity Fund) during the period from its inception to October 31, 1994 are also
set forth below. The data set forth below have been audited by ________________,
independent accountants, whose report thereon was unqualified.
The information set forth on the following page 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. No information is
presented on the following page for the Funds that had not commenced operations
by October 31, 1997.
- - --------------------------------------------------------------------------------
Page 6
<PAGE>
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a Share Outstanding Throughout Each Period Ended October 31
Net
Net Asset Net Realized Distributions Distributions
Value Investment and from Net from Realized Net Asset
Beginning Income/ Unrealized Investment Capital Value End Total
Year of Period (Loss) Gains/(Losses) Income Gains of Period Return
---- --------- ------ -------------- ------ ----- --------- ------
- - -------------------------
International Equity Fund
- - -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
1996 $10.95 $0.11 $1.25 $(0.43) -- $11.88 12.70%
1995 (1)* $10.00 $0.08 $0.87 -- -- $10.95 9.50%
- - --------------------
European Equity Fund
- - --------------------
1997
1996 (2)* $ 10.00 $ -- $ 0.60 -- -- $10.60 6.00%
- - -----------------------------------
International Small Cap Equity Fund
- - -----------------------------------
1997
1996 $ 9.40 $ 0.03 $ 0.57 $(0.04) -- $ 9.96 6.43%
1995 $ 10.35 $ 0.03 $(0.72) $(0.04) $(0.22) $ 9.40 (6.67)%
1994 (3)* $ 10.00 $ 0.02 $ 0.33 -- -- $10.35 3.50%
- - ------------------------------
European Small Cap Equity Fund
- - ------------------------------
1997
1996 $ 11.55 $ 0.12 $ 1.03 $(0.12) $(0.04) $12.54 10.06%
1995 (4)* $ 10.00 $ 0.12 $ 1.44 $(0.01) -- $11.55 15.66%
- - ----------------------------
Emerging Markets Equity Fund
- - ----------------------------
1997
1996 $ 8.11 $ 0.06 $ 0.75 $(0.03) $(0.09) $ 8.80 10.02%
1995 $ 11.00 $ 0.04 $(2.29) $(0.02) $(0.62) $ 8.11 (21.00)%
1994 (5)* $ 10.00 $(0.01) $ 1.01 -- -- $11.00 10.00%
- - ------------------------
Global Fixed Income Fund
- - ------------------------
1997
1996 $ 10.99 $ 0.59 $ 0.12 $(0.37) $(0.07) $11.26 6.60%
1995 $ 9.85 $ 0.35 $ 0.99 $(0.20) -- $10.99 13.88%
1994 (6)* $ 10.00 $ 0.25 $(0.40) -- -- $ 9.85 (1.50)%
- - -------------------------------
International Fixed Income Fund
- - -------------------------------
1997
1996 $ 11.34 $ 0.86 $(0.12) $(0.66) $(0.12) $ 11.30 6.82%
1995 $ 9.94 $ 0.42 $ 1.03 $(0.05) -- $11.34 14.66%
1994 (7)* $ 10.00 $ 0.29 $(0.35) -- -- $ 9.94 (0.60)%
- - --------------------------
Emerging Markets Debt Fund
- - --------------------------
1997
1996 $ 10.55 $ 1.21 $ 2.60 $(1.00) -- $13.36 38.42%
1995 $ 10.19 $ 0.65 $(0.17) $(0.11) $(0.01) $10.55 4.85%
1994 (8)* $ 10.00 $ 0.13 $ 0.06 -- -- $10.19 1.90%
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Ratio of Investment Net Assets Net Assets
Net Assets Expenses to Income(Loss) (Excluding (Excluding Portfolio Average
End of Average to Average Expense Expense Turnover Commission
Year Period (000) Net Assets Net Assets Limitations) Limitations) Rate Rate**
---- ------------ ---------- ---------- ------------ ------------ ---- ------
<CAPTION>
- - -------------------------
International Equity Fund
- - -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
1996 $3,423 0.90% 0.72% 3.59% (1.97)% 39% $0.0221
1995 (1)* $2,738 0.90% 1.55% 2.73% 0.28)% 19% N/A
- - --------------------
European Equity Fund
- - --------------------
1997
1996 (2)* $17,902 0.90% (0.41)% 1.40% (0.91)% 5% $0.0324
- - -----------------------------------
International Small Cap Equity Fund
- - -----------------------------------
1997
1996 $106,709 1.25% 0.35% 1.38% 0.22% 47% $ 0.0170
1995 $ 90,917 1.25% 0.41% 1.48% 0.18% 62% N/A
1994 (3)* $ 68,798 1.25% 0.34% 1.67% (0.08)% 41% N/A
- - ------------------------------
European Small Cap Equity Fund
- - ------------------------------
1997
1996 $ 9,856 1.25% 0.96% 2.50% (0.29)% 49% $0.0327
1995 (4)* $ 9,336 1.25% 1.25% 2.24% 0.26% 34% N/A
- - ----------------------------
Emerging Markets Equity Fund
- - ----------------------------
1997
1996 $ 88,279 1.25% 0.63% 1.52% 0.36% 69% $0.0003
1995 $ 93,288 1.25% 0.44% 1.55% 0.14% 49% N/A
1994 (5)* $ 56,892 1.36% (0.12)% 1.79% (0.55)% 45% N/A
- - ------------------------
Global Fixed Income Fund
- - ------------------------
1997
1996 $149,917 0.75% 5.39% 0.79% 5.35% 223% N/A
1995 $139,337 0.78% 5.61% 0.87% 5.52% 147% N/A
1994 (6)* $ 53,915 0.85% 5.71% 1.28% 5.28% 173% N/A
- - -------------------------------
International Fixed Income Fund
- - -------------------------------
1997
1996 $ 21,155 0.75% 5.41% 1.03% 5.13% 235% N/A
1995 $ 27,603 0.78% 5.51% 1.15% 5.14% 187% N/A
1994 (7)* $ 15,238 0.85% 5.66% 1.42% 5.09% 130% N/A
- - --------------------------
Emerging Markets Debt Fund
- - --------------------------
1997
1996 $102,431 1.50% 10.15% 1.92% 9.73% 227% N/A
1995 $ 84,438 1.79% 10.97% 2.05% 10.71% 266% N/A
1994 (8)* $ 16,248 1.90% 7.04% 2.60% 6.34% 52% N/A
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(6) Global Fixed Income Fund commenced operations on 1/3/94.
(7) International Fixed Income Fund commenced operations on 3/15/94.
(8) Emerging Markets Debt Fund commenced operations on 8/4/94.
* All ratios, excluding total return and portfolio turnover rate for the
period, are 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.
Page -7-
<PAGE>
INTRODUCTION TO THE FUNDS
Morgan Grenfell Investment Trust (the "Trust") offers a number of mutual funds,
each of which is a separate series of the Trust. This Prospectus relates solely
to the Funds. Information regarding the Trust's other mutual funds (the
"Domestic Funds"), which invest primarily in U.S. securities markets, is
contained in a separate prospectus that may be obtained by calling
1-800-550-6426.
Under normal market conditions, the Funds will invest primarily in foreign
securities. Investing primarily in foreign 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, a member of the London-based Morgan Grenfell Asset Management, which is a
fully owned subsidiary of Deutsche Morgan Grenfell Group, 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$16.3 billion of assets under management. Within the Deutsche Morgan Grenfell
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 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.
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.
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, International Small Cap Equity
Fund, Core Global Fixed Income Fund, Global Fixed Income Fund and International
Fixed Income 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
- - --------------------------------------------------------------------------------
Page 8
<PAGE>
"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, Emerging Markets Debt Fund and Emerging Local
Currency Debt Fund seek to attain their objectives 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.
Each of the Fixed Income Funds is non-diversified under the Investment Company
Act of 1940 (the "1940 Act") and, therefore, may be more susceptible than the
Equity Funds to developments affecting any single issuer of portfolio
securities. See "Description of Securities and Investment Techniques and Related
Risks--Diversification." Each of the Equity Funds is diversified under the 1940
Act.
Certain of the Funds have no operating history and there can be no assurance
that any Fund will achieve its investment objective.
Selection of Portfolio Securities
Equity and Equity-Related Securities. Equity and equity-related securities in
which the Equity 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 Equity 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 Equity 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 Equity Funds and
Fixed Income 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 Fixed
Income 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.
- - --------------------------------------------------------------------------------
Page 9
<PAGE>
The fixed income securities in which each Fund may invest may have stated
maturities ranging from overnight to 1000 years. Each Fixed Income 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. 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. Whether for hedging or non-hedging purposes, the use of
these techniques entails 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
investing in fixed income securities 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, the
Emerging Local Currency Debt Fund and, to a lesser extent, the Global Fixed
Income 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.
- - --------------------------------------------------------------------------------
Page 10
<PAGE>
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
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
- - --------------------------------------------------------------------------------
Page 11
<PAGE>
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.
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.
- - --------------------------------------------------------------------------------
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<PAGE>
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.
Small capitalization companies are: (i) companies ranked according to market
capitalization in the bottom 25% of issuers listed on a stock exchange, (ii)
companies listed on a secondary market (e.g., the Tokyo Stock Exchange Second
Section, the Singapore SESDAQ Market) and (iii) companies whose securities are
not listed on a stock exchange or secondary 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:
(i) companies ranked according to market capitalization in the bottom 20% of
issuers listed on the Tokyo Stock Exchange, (ii) companies listed on a Japanese
secondary market (e.g., the Tokyo Stock Exchange Second Section) and (iii)
companies whose securities are not listed on a stock exchange or secondary
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),
- - --------------------------------------------------------------------------------
Page 13
<PAGE>
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
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: (i) companies ranked according to market
capitalization in the bottom 25% of issuers listed on a European stock exchange,
(ii) companies listed on a European secondary market and (iii) companies whose
securities are not listed on a stock exchange or secondary 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."
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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
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.
Core Global Fixed Income Fund
The investment objective of the Core Global Fixed Income Fund is to maximize
total return, emphasizing current income and, to a lesser extent, providing
opportunities for capital growth consistent with reasonable investment risk.
Under normal circumstances, the Fund pursues this objective by investing at
least 65% of its total assets in fixed income securities of issuers in at least
three countries, which may include: Austria, Belgium, Denmark, Finland, France,
Germany, Holland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States, Canada, Japan, Australia and
New Zealand. At the discretion of the Adviser, the Fund may invest in fixed
income securities of issuers located in other countries.
The fixed income securities in which the Fund invests consist primarily of high
grade debt obligations of foreign governments or their agencies,
instrumentalities, political subdivisions and authorities; debt obligations
issued or guaranteed by international or supranational entities; U.S. Government
securities and high grade fixed income securities of U.S. and foreign corporate
issuers. High grade securities include securities rated within the three highest
grades by Moody's (Aaa, Aa and A), Standard & Poor's (AAA, AA and A) or
comparable rating agency or, if unrated, determined to be of comparable quality
by the Adviser. The Fund may also invest 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.
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
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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 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 fixed
income securities of U.S. and foreign corporate issuers. Most of the Fund's
investments in fixed income securities generally will be in securities rated
within the four highest grades by Moody's (Aaa, Aa, A and Baa), Standard &
Poor's (AAA, AA, A and BBB) or comparable rating agency or, if unrated,
determined to be of comparable quality by the Adviser. However, the Fund may
invest up to 15% of its total assets in fixed income securities rated below
these levels or, if unrated, determined to be of comparable quality by the
Adviser, including securities of issuers in emerging markets. These securities,
which are known as below investment grade securities, involve greater price
volatility and risk of loss of principal and income than investment grade
securities. 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
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(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."
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, Kazakhstan, 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 call options,
the value of which are dependent on the prices of such loans, debt instruments
and fixed income securities. The loans and debt instruments in which the Fund
may invest may be denominated in a major currency, such as the U.S. dollar or
the German Deutschemark, or in the local currency. The price of loans and debt
instruments denominated in a local currency may be linked to the value of a
major currency. The Fund's investments may include so-called "Brady Bonds,"
which recently have been issued by the governments of Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Equador, Jordan, Mexico, Nigeria,
Poland, Panama, the 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
non-governmental issuers located in countries with emerging securities markets.
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Fixed income securities in which the Fund may invest may be of any credit
quality, including securities not paying interest currently, zero coupon bonds,
securities that pay interest in the form of other securities (i.e., "pay in
kind" or PIK securities) and securities in default. Fixed income securities
having low credit quality involve greater price volatility and risk of loss of
principal and income. For a description of these and other risks of investing in
lower quality fixed income securities, see "Description of Securities and
Investment Techniques and Related Risks--Fixed Income Securities." See Appendix
A to this Prospectus for a description of the various ratings categories of
Moody's and Standard & Poor's and a chart showing the distribution of the Fund's
assets across the various ratings categories.
The Fund may invest more than 25% of its total assets in each of Mexico and
Brazil. The concentration of the Fund's investments in these countries will
cause the Fund to be particularly susceptible to the effects of political and
economic developments in these countries. See "Description of Securities and
Investment Techniques and Related Risks--Region and Country Concentration."
Up to 35% of the Fund's total assets may be invested in fixed income securities
issued or guaranteed by the U.S. Government.
Emerging Local Currency Debt Fund
The investment objective of the Emerging Local Currency 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 local currency-denominated issues
or instruments 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, Kazakhstan, 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 instruments in other
currencies of 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."
In making investments for the Fund, the Adviser will give primary emphasis to
the relative attractiveness of the local currencies in which the investments are
denominated. Accordingly, the Fund will not generally attempt to hedge foreign
currency exchange rate risks associated with positions it takes in such
investments. The Fund may use forward foreign currency exchange contracts,
options, futures, swaps, interest rate caps and floors and when-issued and
forward commitment transactions for non-hedging and hedging purposes. However,
because the Fund generally will not use these techniques to attempt to hedge
currency exchange rate risks, the Fund's return may be more dependent on the
Adviser's judgment as to the relative attractiveness of the local currencies in
which the Fund's investments are denominated.
Under normal market conditions, the Fund's investments in emerging securities
markets will consist principally of (i) debt instruments and fixed income
securities issued or guaranteed by sovereign
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governments or their agencies and instrumentalities, (ii) financial instruments,
such as call options, the value of which are dependent on the prices of such
debt instruments and fixed income securities. The Fund's investments in emerging
securities markets may also include fixed income securities of non-governmental
issuers located in countries with emerging securities markets and fixed deposits
denominated in foreign currencies.
The 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. Bonds 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
bonds, see "Description of Securities and Other 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.
The Fund may invest more than 25% of its total assets in Mexico The
concentration of the Fund's investments in Mexico will cause the Fund to be
particularly susceptible to the effects of political and economic developments
in this country. 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 or its agencies or
instrumentalities, and in short-dated investments with commercial banks
denominated in U.S. Dollars.
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.
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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.
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.
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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, each
Fund 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 each
Fund may be denominated in the currency of a country other than the country in
which the investment is made. 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, except that the Emerging Local Currency Debt Fund generally
does not expect to do so. Each Fund may also purchase or sell forward currency
contracts for non-hedging purposes when the Adviser anticipates that the foreign
currency will appreciate or
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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 attempt to protect against an anticipated rise in the U.S. dollar price of
securities that it intends to purchase. Each Fund may enter into contracts to
sell foreign currency to attempt 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 Fixed Income 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 or liquid securities in a segregated account, which
will be marked to market daily, in an amount equal to the value of the total
assets committed to the consummation of the forward currency contract. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account so that the value of the
account will equal the amount of the Fund's commitment with respect to the
contract.
Forward currency contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward currency contract is
not guaranteed by an exchange or clearinghouse, a default on the contract would
deprive a Fund of unrealized profits, transaction costs or the benefits of a
currency hedge or force a Fund to cover its purchase or sale commitments, if
any, at the current market price. The Funds will not enter into forward currency
contracts unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is determined to be investment grade
by the Adviser. The Adviser will monitor the claims-paying ability of the
counterparty on an ongoing basis.
Each 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
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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 Fixed Income 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."
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.
Options
Written Options. The Funds 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
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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.
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
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.
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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 financial
futures contracts and purchase and write options on futures contracts to attempt
to hedge against changes in interest rates, securities prices or currency
exchange rates or for certain non-hedging purposes. 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.
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.
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Except as set forth above under "Futures Contracts and Options on Futures
Contracts" there is no limit on the percentage of a Fund's assets that may be
invested in futures contracts and related options or forward currency contracts.
A Fund may not invest more than 25% of its total assets in purchased protective
put options. A Fund's transactions in options, forward currency contracts,
futures contracts and options on futures contracts may be limited by the
requirements for qualification of the Fund as a regulated investment company for
tax purposes. See "Taxes" in the Statement of Additional Information.
Fixed Income Securities
General. In order to achieve their respective investment objectives, the Funds
may invest in a broad range of U.S. and non-U.S. fixed income securities. In
periods of declining interest rates, a Fund's yield (its income from portfolio
investments over a stated period of time) may tend to be higher than prevailing
market rates, and in periods of rising interest rates, the yield of the Fund may
tend to be lower. Also, when interest rates are falling, the 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 Fixed Income 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 and the
Emerging Local Currency Debt Fund may invest without limit in rated and unrated
fixed income securities of any credit quality, including securities in default.
In addition, the Global Fixed Income Fund may invest up to 15% of its total
assets in fixed income securities that are rated less than Baa by Moody's or BBB
by Standard & Poor's or, if unrated, determined to be of comparable quality by
the Adviser. Securities rated BB or lower by Standard & Poor's or Ba or lower by
Moody's and comparable unrated securities are considered speculative and, while
generally offering 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.
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 a 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,
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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 Global Fixed Income Fund, the
Emerging Markets Debt Fund and the Emerging Local Currency Debt Fund, will
continue to hold fixed income securities that have been downgraded below
investment grade if more than 5% of that Fund's net assets would consist of such
securities.
Foreign Government Securities. The foreign government securities in which the
Funds may invest generally consist of debt obligations issued or guaranteed by
national, state or provincial governments or similar political subdivisions.
Foreign government securities also include debt obligations of supranational or
quasi-governmental entities. Quasi-governmental and supranational entities
include international organizations designated or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government 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
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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 November 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. 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 a 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
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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 issuer diversification and industry concentration
policies, the Fund will treat the underlying borrower of a registered loan as an
issuer of that loan. Where the Fund sells a loan without interest, it will treat
both the borrower and the purchaser of the loan as issuers for purposes of this
policy.
U.S. Government Securities. The Funds may invest in obligations issued or
guaranteed as to both principal and interest by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported either by (i) the full faith and
credit of the U.S. Government (such as securities of the Small Business
Administration), (ii) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (iii) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association ("FNMA")), or (iv) only
the credit of the issuer. No assurance can be given that the U.S. Government
will provide financial support to U.S. Government agencies or instrumentalities
in the future.
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
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categories of receivables. Such securities are generally issued by trusts and
special purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities because asset-backed securities generally do not have
the benefit of a security interest in collateral that is comparable to mortgage
assets. In addition, there is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
Interest Rate, Mortgage and Currency Swaps and Interest Rate Caps and Floors
The Fixed Income Funds may enter into interest rate, mortgage and currency swaps
for hedging and non-hedging purposes. The Fixed Income 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
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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. A Fund will segregate, in an account maintained by the Fund's
custodian, an amount of cash or liquid securities having an aggregate net asset
value equal to the entire amount of the Fund's obligation in a currency swap.
The use of interest rate, mortgage and currency swaps and interest rate caps and
floors is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its forecasts of market values,
interest rates or currency exchange rates, the investment performance of a Fund
may be less favorable than it would have been if these investment techniques
were not used.
Convertible Securities and Preferred Stocks
Subject to their investment policies, the Funds may invest in convertible
securities, which may include corporate notes or preferred stock but are
ordinarily long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield 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 Fixed Income 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 Fixed Income 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 Fixed Income 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 (which also apply to the Equity
Funds) apply only at taxable quarter-ends and are subject to certain
qualifications and exceptions. To the extent that a Fixed Income 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.
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Temporary Defensive Investments
For temporary defensive purposes, each of the Funds may invest all or part of
its portfolio in U.S. or, subject to tax requirements, Canadian currencies, U.S.
Government securities maturing within one year (including repurchase agreements
collateralized by such securities), commercial paper of U.S. or foreign issuers,
and cash equivalents.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by U.S. or foreign corporations and finance companies. The
commercial paper purchased by the Funds consists of U.S. dollar-denominated
obligations of domestic or foreign issuers. Each Fund may also invest in
commercial paper which at the date of investment is rated at least A-2 by
Standard & Poor's or P-2 by Moody's, or their equivalent ratings, or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which are rated, at the time of purchase, A or better by Standard &
Poor's or Moody's, or their equivalents, and other debt instruments, including
unrated instruments, not specifically described if such instruments are deemed
by the Adviser to be of comparable quality.
Cash equivalents include obligations of banks which at the date of investment
have capital, surplus and undivided profits (as of the date of their most
recently published financial statements) in excess of US$ 100 million. Bank
obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances and fixed time deposits. Bank obligations also include U.S.
dollar-denominated obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks, all of the same type as domestic bank obligations. A
Fund will invest in the obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks only when the Adviser determines that the credit risk
with respect to the instrument is minimal.
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.
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Repurchase Agreements. Each Fund may enter into repurchase agreements. In a
repurchase agreement, a Fund buys a security subject to the right and obligation
to sell it back to the other party at the same price plus accrued interest.
These transactions must be fully collateralized at all times, but they involve
some credit risk to a Fund if the other party defaults on its obligations and
the Fund is delayed in or prevented from liquidating the collateral. A Fund will
enter into repurchase agreements only with U.S. or foreign banks having total
assets of at least US$100 million (or its foreign currency equivalent).
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements with banks and domestic broker-dealers. Reverse repurchase agreements
involve sales by a Fund of portfolio securities concurrently with an agreement
by the Fund to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Fund continues to receive
principal and interest payments on these securities. Each Fund will deposit cash
or liquid securities or a combination of both in a segregated account, which
will be marked to market daily, with its custodian equal in value to its
obligations with respect to reverse repurchase agreements. Reverse repurchase
agreements are considered borrowings, and as such are subject to the limitations
on borrowings by the Funds.
Illiquid Securities. Each Fund will not invest more than 15% of its net assets
in illiquid securities, which include repurchase agreements and fixed time
deposits maturing in more than seven days and securities that are not readily
marketable.
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 U.S.-registered
investment companies. A Fund may not invest more than 5% of its total assets in
the securities of any one such investment company or acquire more than 3% of the
voting securities of any such 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.
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Each Fund has fundamental investment restrictions with respect to borrowing,
lending, diversification of investments, senior securities, pledging of assets,
underwriting, real estate investments and commodities. See "Investment
Restrictions" in the Statement of Additional Information.
Portfolio Transactions
The Adviser is responsible for making specific decisions to buy and sell
portfolio securities for the Funds. The Adviser is also responsible for
selecting brokers and dealers to effect these transactions and negotiating, if
possible, brokerage commissions and dealers' charges. The Funds generally
purchase and sell foreign securities in foreign countries, since the best
available market for foreign securities is often on foreign markets. In
transactions on foreign markets, brokerage commissions generally are fixed and
are often higher than in the United States where commissions are negotiated. In
the over-the-counter markets, securities generally are traded on a net basis
with the dealers acting as principal for their own accounts without a stated
commission.
The primary consideration in selecting broker-dealers to execute portfolio
security transactions is the execution of such portfolio transactions at the
most favorable prices. Consideration may also be given to the broker-dealer's
sale of shares of the Funds. Subject to this requirement and the provisions of
Section 28(e) of the Securities Exchange Act of 1934, as amended, securities may
be bought from or sold 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 or the Distributor 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 Equity Funds will not exceed 150%. It is estimated that, under
normal circumstances, the portfolio turnover rate of each of the Fixed Income
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 will also increase the likelihood of net short-term
capital gains (distributions of which are taxable to shareholders as ordinary
income). See "Financial Highlights" for each Fund's portfolio turnover rate for
the fiscal year ended October 31, 1997.
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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 investment advisory contracts between the
Trust, on behalf of each Fund, and MGIS (the "Advisory Contracts"). 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 a wholly-owned subsidiary of Deutsche Bank
AG, an international commercial and investment banking group. As of September
30, 1997, MGIS managed approximately $16.3 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 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%
Morgan Grenfell Core Global Fixed Income Fund 0.50%
Morgan Grenfell Global Fixed Income Fund 0.50%
Morgan Grenfell International Fixed Income Fund 0.50%
Morgan Grenfell Emerging Markets Debt Fund 1.00%
Morgan Grenfell Emerging Local Currency Debt Fund 0.60%
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, 1997, this voluntary agreement was in effect,
and Morgan Grenfell International Equity Fund, Morgan Grenfell European Equity
Fund, Morgan Grenfell European Small Cap Equity Fund, Morgan Grenfell
International Small Cap Equity Fund, Morgan
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Grenfell Emerging Markets Equity Fund, Morgan Grenfell Global Fixed Income Fund,
Morgan Grenfell International Fixed Income Fund and Morgan Grenfell Emerging
Markets Debt Fund paid advisory fees equal to - %, - %, - %, - %, - %, - %, - %
and - % of their respective average daily net assets. 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, Emerging Markets Equity Fund
and Emerging Markets Debt 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 that has commenced operations 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 Contracts. The expenses borne by each Fund include the Fund's advisory
fee, transfer agent fee and taxes and its proportionate share of custodian fees,
expenses of issuing reports to shareholders, legal fees, auditing and tax fees,
blue sky fees, fees of the Commission, insurance expenses and disinterested
Trustees' fees.
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 the Domestic Funds) 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 institutional shares
of the Funds pursuant to a Distribution Agreement with the Trust and assists in
the sale of institutional shares of the Funds.
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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' shares, acts as dividend and distribution disbursing
agent and performs other shareholder servicing functions.
Additional information regarding the services performed by the Administrator,
Distributor, Custodian and Transfer Agent is provided in the Statement of
Additional Information.
PURCHASE OF INSTITUTIONAL SHARES
Institutional 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 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 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.
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 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
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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 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:
- - ---------------- ------------------
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 and Confirmations
Shareholders of each Fund receive an annual report containing audited financial
statements and a semiannual report. All transactions in institutional shares of
a Fund and dividends and distributions paid by a Fund are reflected in
confirmations issued by the Transfer Agent at the time of the transaction and/or
in monthly statements issued by the Transfer Agent. A year-to-date statement
will be provided by the Transfer Agent. Shareholders with inquiries regarding a
Fund may call Morgan Grenfell Investment Trust at 1-800-550-6426 or write to
Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO 64141-6165.
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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 institutional shares of
any Domestic Fund. A shareholder should obtain and read the prospectus relating
to institutional shares of a Domestic 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 described in this Prospectus by telephone, as long as all accounts
are identically registered. A shareholder can exchange institutional shares by
telephone by calling 1-800-407-7301 before 4:00 p.m., Eastern time, on any
Business Day. Institutional 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 manner will be valued at their
respective net asset values next determined after the receipt of the written
exchange request.
An exchange is treated a taxable transaction for shareholders that are subject
to tax. 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
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<PAGE>
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. Normally,
redemption proceeds will be wired within no more than 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. Frequently,
redemption proceeds will be wired on the next Business Day after the Transfer
Agent's receipt of such documents. 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.
Shareholders may request that redemption payments be made by Federal Reserve
wire or Automated Clearing House (ACH) 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
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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 each Fund's net asset value per share, 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.
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 each Fund may be significantly affected by such
trading at times and on days when shareholders have no ability to redeem shares
of the Fund.
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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 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 Internal Revenue Code of 1986, as amended (the
"Code"), and 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 capital gain
regardless of how long the shareholder has held its shares. It is anticipated
that future tax regulations implementing federal tax legislation enacted on
August 5, 1997 will provide that distributions of long-term capital gains to
individuals or other noncorporate taxpayers will be subject to different maximum
tax rates, depending on the dates on which the gains are recognized and the
applicable Fund's holding periods for the assets that produce the gains. 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
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Code are subject to different tax rules and may be subject to non-resident alien
withholding tax 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 holding period
requirements and other 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 institutional shares
immediately prior to a distribution. Investors who purchase institutional 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 institutional shares are taxable events for
shareholders that are subject to tax.
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 the
application to them of the federal tax legislation referred to above and any
other 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 thirteen Funds
described in this Prospectus and nine 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: institutional shares and
service 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 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 November 24, 1997, the James R. Trueman Irrev. Subchapter S Trust owned
beneficially 31.07% and the Wagner Family Trust owned beneficially 25.09% of the
outstanding shares of the International Fixed Income Fund, the TRW Master Trust
owned beneficially 63.17% and the Pitney Bowes Retirement Plan owned
beneficially 36.81% of the outstanding shares of the European Small Cap Equity
Fund, the Motorola Pension Fund owned beneficially 30.34% and the Motorola
Employees Savings & Profit Sharing Trust owned beneficially 29.70% and the
Public Employees' Retirement Association owned beneficially 29.21% of the
outstanding shares of the Emerging Markets Equity Fund, the Louisiana Municipal
Police Employees Retirement System owned beneficially 98.09% of the outstanding
shares of the European Equity Fund, and Morgan Grenfell Capital Management, Inc.
owned beneficially 64.62% and Deutsche Morgan Grenfell C. J. Lawrence Inc. owned
beneficially 27.96% of the outstanding shares of the International Equity Fund,
and Delta Airlines, Inc. Master Retirement Trust owned beneficially 45.33% of
the outstanding shares of the International Small Cap 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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PERFORMANCE INFORMATION
From time to time, performance information, such as total return and yield for a
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
institutional 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 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
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.
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<PAGE>
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor's Ratings Group ("Standard & Poor's") describes
classifications of fixed income securities (not including commercial paper) as
follows:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from the AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Debt rated BB, B, CCC or CC is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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<PAGE>
Quality Distribution for Emerging Markets Debt Fund
During the fiscal year ended October 31, 1997, the percentages of Morgan
Grenfell Emerging Market Debt Fund's assets invested in unrated debt securities
and securities rated in particular rating categories by Standard & Poor's were,
on a weighted average basis, as follows*:
Percentage of
Standard & Poor's (Moody's) Ratings Total Investments
- - ----------------------------------- -----------------
Not Rated ............................................................ - % **
Rated by Standard & Poor's (Moody's):
BBB+, BBB, BBB-....................................................... - %
BB+, BB, BB-, (Ba).................................................... - %
B+, B, B- (B)......................................................... - %
Cash.................................................................. - %
* Based on the average of month-end portfolio holdings during the fiscal year
ended October 31, 1997. Asset composition does not represent actual holdings on
October 31, 1997; nor does it imply that the overall quality of portfolio
holdings is fixed.
** Of this amount, the following percentages of the Fund's assets represent
quality standards attributed by the Adviser to such unrated securities at the
time of purchase: - %, B+, B, B- (B); and - %, CCC+, CCC, CCC- (Caa) .
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<PAGE>
APPENDIX B
PORTFOLIO MANAGER INFORMATION
Funds Portfolio Managers
- - ----- ------------------
Morgan Grenfell International Equity Fund Patrick Disney
Patrick Deane
Alex Tedder
Graham Bamping
William Thomas
Christopher Getley
Morgan Grenfell Global Equity Fund Patrick Disney
Patrick Deane
Alex Tedder
Graham Bamping
William Thomas
Christopher Getley
David Heape
Morgan Grenfell European Equity Fund Richard Wilson
Julian Johnston
Morgan Grenfell Pacific Basin Equity Fund Graham Bamping
William Thomas
Morgan Grenfell International Small Cap Equity Fund Jonathan Wild
Julian Johnston
Lim Ser Mui
James Pulsford
Christopher Getley
Morgan Grenfell Japanese Small Cap Equity Fund James Pulsford
Atsuhiko Masuda
Morgan Grenfell European Small Cap Equity Fund Julian Johnston
Jonathan Wild
Morgan Grenfell Emerging Markets Equity Fund Christopher Turner
Neil Jenkins
Alan Nesbit
Morgan Grenfell Core Global Fixed Income Fund Ian Kelson
Annette Fraser
Morgan Grenfell Global Fixed Income Fund Ian Kelson
Annette Fraser
Morgan Grenfell International Fixed Income Fund Ian Kelson
Annette Fraser
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<PAGE>
Morgan Grenfell Emerging Markets Debt Fund Ian Kelson
Simon Treacher
David Dowsett
Morgan Grenfell Emerging Local Currency Debt Fund Ian Kelson
Simon Treacher
David Dowsett
Portfolio Manager Expertise Professional Experience
- - ----------------- --------- -----------------------
Graham Bamping Pacific Basin Equity Markets Director, Morgan Grenfell
Investment Services
("MGIS") (since 1987);
Portfolio Manager,
Pacific Basin (since
1989); Portfolio Manager,
Singapore (1981-1983);
Research, Far East (1980-
1981); Research, UK
(1978-1980).
Patrick Deane UK Equities Fund Manager, MGIS (since
1994); Fund Manager, HSBC
Asset Management
(1992-1994); Fund
Manager, Midland Montagu
Asset Management
(1990-1992).
Patrick Disney EAFE (R) Markets Managing Director, MGIS
(since 1988); Director,
MGIS (1987-1988); EAFE
(R) Team (since 1981).
David Dowsett Emerging Markets Debt Portfolio Manager,
Emerging Markets Debt,
MGIS (since 1995);
Portfolio Manager,
Emerging Markets Debt,
Morgan Grenfell
International Funds
Management Ltd. ("MGIFM")
(since 1994). BA, Durham
University (1991- 1994).
Annette Fraser Global Fixed Income Portfolio Manager, Fixed
Income Team, MGIS (since
1992); Fund Manager,
MGIFM (since 1990).
David Heape US Equities Director, MGIFM (since
1994); Fund Manager, US
Equities, MGIS &
MGIFM(since 1989);
Analyst, UK Equities,
Morgan Grenfell & Co.,
London (1986-1989).
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<PAGE>
Neil Jenkins, CFA Fixed Income Director and Global and
Emerging Markets Fixed
Income Portfolio Manager,
MGIS (since 1996);
Director, MGIFM (since
1995); Vice President,
the Trust (since 1993);
Director, MGCM
(1991-1996); Morgan
Grenfell, Moscow Office
(1988-1990); Morgan
Grenfell & Company Ltd.
(since 1985).
Julian Johnston European Equity Markets Director, MGIS (since
1988); Fidelity
International (1984-1988)
and James Capel & Co.
(1979-1984).
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)
(1981-1985).
Atsuhiko Masuda Japanese Equities Fund Manager, DB Morgan
Grenfell Asset Management
Limited, Tokyo, (since
1995); MBA, University of
Pennsylvania (1993-1995).
Analyst, Morgan Grenfell,
Tokyo (1990-1993);
Analyst, Morgan Grenfell,
London (1988-1990).
Lim Ser Mui Asia Ex Japan Small Cap Portfolio Manager, Morgan
Grenfell Investment
Management (Asia)
Limited, Singapore (since
1991); Manager, Deutsche
Bank Private Banking
(1988-1991); Investment
Manager, First City
Investments Pte Ltd.
(1986-1988); Assistant
Manager Investments,
Paribas South East Asia
(1985-1986); Assistant
Manager, United Overseas
Bank, Investment Division
(1980-1985); Senior
Auditor, Arthur Young
(1978-1980).
Alan Nesbit Emerging Markets Director of Morgan
Grenfell Asset Management
Ltd. (since 1985) and
Morgan Grenfell Trust
Managers; Portfolio
Manager, Latin American
Equities, MGIS (since
1991).
James Pulsford Japanese Markets Portfolio Manager,
Japanese Markets, MGIS
(since 1987); UK research
(since 1984).
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<PAGE>
Alex Tedder European Equities Portfolio Manager,
Europe, MGIS (since
1994); Analyst/Portfolio
Manager, Schroder
Investment Management
(1990-1994).
William Thomas Japanese Markets Director, MGIS (since
1988); Portfolio Manager,
MGIS (technology
investments) (1984-1988);
Director, Extel (UK
computing services
company) (1971-1979).
Simon Treacher Emerging Markets Debt Portfolio Manager, 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).
Christopher Turner European Emerging Markets Portfolio Manager,
Equities European Emerging
Markets, MGIS (since
1993); Portfolio Manager,
European Emerging
Markets, MGIFM (since
1990); Analyst/Portfolio
Manager, Equity and Law
Life Assurance Society
(1986- 1990).
Jonathan Wild International Equity Markets, Portfolio Manager, MGIS
Small Capitalization (since 1996); Portfolio
Companies Manager, Finsbury Asset
Management (1993-1995);
Manager, Barclays De
Zoette Wedd (1991-1992);
Manager, KPMG Peat
Marwick (1986- 1991).
Richard Wilson UK Equities Director, MGIS (since
1996); Portfolio Manager,
UK, MGIS (since 1993);
Portfolio Manager, HSBC
Asset Management
(1992-1993); Portfolio
Manager, Midland Montagu
Asset Management
(1988-1992).
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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, and 1442 and 3406 and/or consult your tax adviser.
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<PAGE>
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Investment Adviser
Morgan Grenfell 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
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<PAGE>
9. SAI for institutional shares of the International Funds
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Institutional Shares
885 Third Avenue
New York, New York 10022
STATEMENT OF ADDITIONAL INFORMATION
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of twenty-two investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following thirteen separate investment portfolios of the Trust (the "Funds"):
o Morgan Grenfell International Equity Fund
o Morgan Grenfell Global Equity Fund
o Morgan Grenfell European Equity Fund
o Morgan Grenfell Pacific Basin Equity Fund
o Morgan Grenfell International Small Cap Equity Fund
o Morgan Grenfell Japanese Small Cap Equity Fund
o Morgan Grenfell European Small Cap Equity Fund
o Morgan Grenfell Emerging Markets Equity Fund
o Morgan Grenfell Core Global Fixed Income Fund
o Morgan Grenfell Global Fixed Income Fund
o Morgan Grenfell International Fixed Income Fund
o Morgan Grenfell Emerging Markets Debt Fund
o Morgan Grenfell Emerging Local Currency Debt Fund
This Statement of Additional Information is not a prospectus, and should be read
only in conjunction with the Funds' Institutional Shares Prospectus dated
February 25, 1998 (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 -1-
<PAGE>
TABLE OF CONTENTS
Page
Introduction .............................................................. 3
Additional Information on Fund Investments
and Strategies and Related Risks ............................... 4
Investment Restrictions ................................................... 19
Trustees and Officers ..................................................... 21
Investment Advisory and Other Services .................................... 24
Portfolio Transactions .................................................... 29
Net Asset Value ........................................................... 32
Performance Information ................................................... 33
Taxes ..................................................................... 35
General Information About the Trust ....................................... 42
Additional Information .................................................... 45
Financial Statements ...................................................... 46
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.
- - --------------------------------------------------------------------------------
Page -2-
<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of twenty-two separate investment series, including the following thirteen
series (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
(collectively, the "Equity Funds")
Morgan Grenfell Core Global Fixed Income Fund
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
Morgan Grenfell Emerging Local Currency Debt Fund
(collectively, the "Fixed Income Funds").
Each of the Fixed Income Funds is "non-diversified" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"). Each of the Equity
Funds is "diversified" within the meaning of 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 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.
- - --------------------------------------------------------------------------------
Page -3-
<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, although the Emerging Local Currency Debt
Fund does not expect generally to enter into such contracts for hedging
purposes. First, when a Fund enters into a contract for the purchase or sale of
a security denominated in a foeign 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
- - --------------------------------------------------------------------------------
Page -4-
<PAGE>
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date on which the contract is entered into and the date it matures.
Using forward currency contracts in an attempt to protect the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which a Fund can achieve at some future point in
time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of a Fund's foreign assets.
A Fund's custodian will place cash or liquid securities into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward currency contracts requiring the Fund
to purchase foreign currencies or forward contracts entered into for non-hedging
purposes. If the value of the securities placed in the segregated account
declines, additional cash or liquid securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of a Fund's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate these contracts. In such event, the
Funds' ability to utilize forward currency contracts may be restricted.
A Fund 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.
In addition, each Fund 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. For
example, 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 options and
currency futures contracts and related options (see below) may be limited by the
requirements of subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company.
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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.
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 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's 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.
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
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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 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. The Emerging Local Currency Debt Fund does not expect generally to
enter into such contracts for the purpose of attempting to hedge against
potential adverse changes in currency exchange rate. 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
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<PAGE>
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. Futures contracts that a Fund may use for hedging purposes
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, a 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
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<PAGE>
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.
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
for all the Funds and as noted above for the Emerging Local Currency Bond Fund,
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
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.
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<PAGE>
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 portfolio
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
the obligation and the ratings of the issue. The ratings of Standard and Poor's,
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
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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 Securities and Exchange Commission
(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, provided
that the Emerging Local Currency Debt Fund does not expect generally to use
these instruments to attempt to hedge against potential adverse changes in
currency exchange rates. Inasmuch as transactions in swaps, caps and floors 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.
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.
Brady Bonds. 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 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
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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 and the Emerging Local Currency Debt
Fund and, to a lesser extent, the Global Fixed Income Fund may invest in high
yielding, fixed income securities rated Ba or lower by Moody's, BB or lower by
Standard & Poor's, or an equivalent rating. These Funds 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 quality securities generally fluctuate more than those of
higher quality securities. In addition, a security's low rating and/or quality
reflect 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 investment analysis and
attention to current developments in interest rates and economic conditions.
Where the Emerging Markets Debt Fund and the Emerging Local Currency Bond Fund
invest in securities, the achievement of the Funds' respective goals may be more
dependent on the Adviser's ability than would be the case if these Funds were
investing in higher quality fixed income securities.
As noted in the Prospectus, the Emerging Markets Debt Fund and the Emerging
Local Currency 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. In addition, each Fixed Income Fund may invest in zero coupon
bonds. Both types of bonds may be more speculative and subject to greater
fluctuations in value than securities which pay interest periodically and in
cash, due to changes in interest rates. A 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
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protected against early call. In general, in selecting securities for its
portfolio, the Emerging Markets Debt Fund and the Emerging Local Currency Debt
Fund intend 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. These Funds' respective portfolios 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.
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.
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.
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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 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
- - --------------------------------------------------------------------------------
Page -14-
<PAGE>
usually structured with two classes that receive different proportions of the
interest and principal distributions from a pool of mortgage loans. If the
underlying mortgage loans experience greater than anticipated prepayments of
principal, a Fund may fail to fully recoup its initial investment in these
securities.
A common type of SMBS will have one class receiving all of the interest from a
pool of mortgage loans ("IOs"), while the other class will receive all of the
principal ("POs"). The market value of POs generally is unusually volatile in
response to changes in interest rates. The yields on IOs are generally higher
than prevailing market yields on other mortgage-backed securities because the
cash flow patterns of IOs are more volatile and there is a greater risk that the
initial investment will not be fully recouped. Because an investment in an IO
consists entirely of a right to an interest income stream and prepayments of
mortgage loan principal amounts can reduce or eliminate such income stream, the
value of IO's can be severely adversely affected by significant prepayments of
underlying mortgage loans. In accordance with a requirement imposed by the staff
of the Commission, the Adviser will consider privately-issued fixed rate IOs and
POs to be illiquid securities for purposes of the Funds' limitation on
investments in illiquid securities. Unless the Adviser, acting pursuant to
guidelines and standards established by the Board of Trustees, determines that a
particular government-issued fixed rate IO or PO is liquid, it will also
consider these IOs and POs to be illiquid.
Asset-Backed Securities
The Funds may invest in asset-backed securities, which represent participations
in, or are secured by and payable from, pools of assets such as motor vehicle
installment sale contracts, installment loan contracts, leases 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
- - --------------------------------------------------------------------------------
Page -15-
<PAGE>
in a general counsel memorandum, which is an internal document of no
precedential value or binding effect, and a private letter ruling, which also
may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a U.S
or non-U.S issuer. Each of the Funds may purchase commercial paper for temporary
defensive purposes as described in the Prospectus. A Fund may also invest in
variable rate master demand notes which typically are issued by large corporate
borrowers providing for variable amounts of principal indebtedness and periodic
adjustments in the interest rate according to the terms of the instrument.
Demand notes are direct lending arrangements between a Fund and an issuer, and
are not normally traded in a secondary market. A Fund, however, may demand
payment of principal and accrued interest at any time. In addition, while demand
notes generally are not rated, their issuers must satisfy the same criteria as
those set forth in the Prospectus 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-
- - --------------------------------------------------------------------------------
Page -16-
<PAGE>
denominated certificates of deposit issued by a U.S. branch of a non-U.S. bank
and held in the United States; and Yankee Bankers' Acceptances ("Yankee BAs"),
which are U.S. dollar-denominated bankers' acceptances issued by a U.S. branch
of a non-U.S. bank and held in the United States.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements as described in the
Prospectus.
For purposes of the 1940 Act and, generally, for tax purposes, a repurchase
agreement is considered to be a loan from the Fund to the seller of the
obligation. For certain other purposes, it is not clear whether a court would
consider such an obligation as being owned by the Fund or as being collateral
for a loan by the Fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
obligation before its repurchase, under the repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Such
delays may result in a loss of interest or decline in price of the obligation.
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the obligation, the Fund may be treated as an
unsecured creditor of the seller and required to return the obligation to the
seller's estate. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Funds, the Adviser seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case, the seller of the obligation. In addition to the risk
of bankruptcy or insolvency proceedings, there is the risk that the seller may
fail to repurchase the security. However, if the market value of the obligation
falls below the repurchase price (including accrued interest), the seller of the
obligation will be required to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
"When-Issued" Purchases and Forward Commitments (Delayed Delivery)
These transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. A Fund will
purchase 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 -17-
<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
- - --------------------------------------------------------------------------------
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<PAGE>
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 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.
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.
(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
- - --------------------------------------------------------------------------------
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<PAGE>
arrangements with respect to forward contracts, options, futures contracts
and options on futures contracts.
(4) Act as an underwriter, except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate
or governmental entities secured by real estate or marketable interests
therein or securities issued by companies (other than real estate limited
partnerships) that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend portfolio securities in
accordance with the Fund's investment policies and may purchase or invest
in repurchase agreements, bank certificates of deposit, all or a portion of
an issue of bonds, bank loan participation agreements, bankers'
acceptances, debentures or other securities, whether or not the purchase is
made upon the original issuance of the securities.
(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 Equity Fund will adhere to the following fundamental
investment restriction:
With respect to 75% of its total assets, an Equity 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
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.
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.
- - --------------------------------------------------------------------------------
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<PAGE>
(b) Purchase securities of other investment companies, except as permitted by
the Investment Company Act of 1940 and the rules, regulations and any
applicable exemptive order issued thereunder.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) 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.
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.
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) President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer, and (since 1990).
New York, NY 10022 Trustee
(age 49)
Patrick W.W. Disney (1) Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee Services Limited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 41)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 47)
</TABLE>
- - --------------------------------------------------------------------------------
Page -21-
<PAGE>
<TABLE>
<S> <C> <C>
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 64) 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 51)
Hugh G. Lynch Trustee Managing Director, International
767 Fifth Avenue Investments, General Motors Investment
New York, NY 10153 Management Corporation (since September
(age 60) 1990).
Edward T. Tokar Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc. (advanced technology and manu-
Morristown, NJ 07962 facturer) (since 1985).
(age 50)
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 31) Senior Associate, Price Waterhouse (1988-1991).
Neil P. Jenkins Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 37) (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 48)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income,
London EC2M INB MGIS (since 1989).
England
(age 41)
</TABLE>
- - --------------------------------------------------------------------------------
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<PAGE>
<TABLE>
<S> <C> <C>
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 46) 1990).
Martin Hall (4) Vice President Portfolio Manager, Fixed Income Team,
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 39)
Joan A. Binstock (4) Secretary Chief Operating Officer, MGCM (since
885 Third Avenue and Vice President June 1997); Principal, National Director
New York, NY 10022 of Investment Management Regulatory
(age 43) Consulting, Ernst & Young (May 1995 -
June 1997); Vice President, Head of
Compliance, JP Morgan Mutual Funds
(August 1993-May 1995).
</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
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 November 30, 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 International Equity Fund. On such date, the Trustees and
officers of the Trust owned, as a group, 1.84% of the outstanding shares of
Morgan Grenfell International Equity 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
- - --------------------------------------------------------------------------------
Page -23-
<PAGE>
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, 1997:
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 $ -
Graham E. Jones $ 0 $ -
William N. Searcy $ 0 $ -
Hugh G. Lynch $ 0 $ -
Edward T. Tokar $ 0 $ -
---------------
o 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 two Management Contracts between the Trust and MGIS (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
determines on a continuous basis, the allocation of each Fund's investments
among countries. The Adviser is responsible for the ordinary expenses of
offices, if any, for the Trust and the compensation, if any, of all officers and
employees of the Trust and all Trustees who are "interested persons" (as defined
in the 1940 Act) of the Adviser.
Under the Management Contract, the Trust, on behalf of each Fund, is obligated
to pay the Adviser a monthly fee at an annual rate of each Fund's average daily
net assets as follows:
Annual Rate
---------------
Morgan Grenfell International Equity Fund ........................ 0.70%
Morgan Grenfell Global Equity Fund ............................... 0.70%
Morgan Grenfell European Equity Fund ............................. 0.70%
- - --------------------------------------------------------------------------------
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<PAGE>
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%
Morgan Grenfell Core Global Fixed Income Fund .................... 0.50%
Morgan Grenfell Global Fixed Income Fund ......................... 0.50%*
Morgan Grenfell International Fixed Income Fund .................. 0.50%*
Morgan Grenfell Emerging Markets Debt Fund ....................... 1.00%**
Morgan Grenfell Emerging Local Currency Debt Fund ................ 0.60%
- - --------------
* Effective April 1, 1995, the annual advisory fee rate for each of these
Funds was reduced from 0.60% to 0.50% of average daily net assets.
** Effective September 1, 1995, the annual advisory fee rate for this Fund was
reduced from 1.60% to 1.50% of average daily net assets. Effective March 1,
1997, the annual advisory fee rate for this Fund was further reduced from
1.50% to 1.00% of average daily net assets.
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, 1995, 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, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International
Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund paid net
advisory fees of approximately $0, $506,065, $677, $457,521, $384,235, $36,927
and $682,004, 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, 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 paid net advisory fees of $0, $5,508,
$987,205, $0, $726,299, $696,819, $67,316 and $819,659, respectively. For the
fiscal year ended October 31, 1997, Morgan Grenfell International Equity Fund,
Morgan Grenfell European Equity Fund, Morgan Grenfell International 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 paid net advisory fees of $_______, $_______, $________, $______,
$______, $______, $______ and $_______, 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 Contracts were last approved on November 20, 1997 by a vote of
the Trust's Board of Trustees, including a majority of those Trustees who were
not parties to either Management Contract or "interested persons" of such
parties. Each Management Contract will continue in effect with respect to each
Fund that it covers only if such continuance is specifically
- - --------------------------------------------------------------------------------
Page -25-
<PAGE>
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 such Fund. Each 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 a 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 a 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 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, 1997, MGIS managed approximately $16.3 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).
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, 1997, the portfolio turnover rates for Morgan Grenfell International Equity
Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell International Small
Cap Equity Fund, Morgan Grenfell European Small Cap Equity Fund, Morgan Grenfell
Emerging Markets Equity Fund, Morgan
- - --------------------------------------------------------------------------------
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<PAGE>
Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed Income
Fund and Morgan Grenfell Emerging Markets Debt Fund were __%, __%, __%, __%,
__%, __%, __% and __%, respectively. For the fiscal period ended October 31,
1996, the portfolio turnover rates for Morgan Grenfell International Equity
Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell International 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 were 39%, 5%, 47%, 49%, 69%, 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.
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 that offers its shares pays the Administrator a minimum annual fee
that equals $60,000.
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, 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 paid the
Administrator administration fees of $11,694, $97,518, $50,000, $93,750,
$105,406, $68,750 and $ 69,115, 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, 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
paid the Administrator administration fees of $62,500, $3,159, $124,286,
$100,000, $109,687, $165,566, $75,000 and $100,878, respectively. For the fiscal
year ended October 31, 1997, Morgan Grenfell International Equity Fund, Morgan
Grenfell European Equity Fund, Morgan Grenfell International 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
- - --------------------------------------------------------------------------------
Page -27-
<PAGE>
Markets Debt Fund paid the Administrator administration fees of $_______,
$_______, $________, $______, $______, $______, $______ and $_______,
respectively. The Funds not listed in the preceding three sentences 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 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 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 institutional 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
- - --------------------------------------------------------------------------------
Page -28-
<PAGE>
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 20, 1997 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 Distributor. The Distributor may terminate the
Distribution Agreement at any time without penalty on 60 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.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
Pursuant to the Management Contracts, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the
- - --------------------------------------------------------------------------------
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<PAGE>
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 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, 1997, 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 such portfolio transactions on a
quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal periods ended October 31, 1996 and
October 31, 1997 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, 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 paid aggregate
brokerage commissions of $7,389, $363,181, $31,827, $572,550, $ 0, $ 0, and $ 0,
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, 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 paid aggregate brokerage commissions of $6,948,
$3,645, $382,726, $17,303, $623,975, $0, $0 and $0, respectively. For the fiscal
year ended October 31, 1997, Morgan Grenfell International Equity Fund, Morgan
Grenfell European Equity Fund, Morgan Grenfell International 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
paid aggregate brokerage commissions of $_______, $_______, $________, $______,
$______, $______, $______ and $_______, respectively.
As of October 31, 1997, Morgan Grenfell European Equity Fund held securities of
_______, one of its regular broker-dealers during the year then ended. The value
of such securities on this date
- - --------------------------------------------------------------------------------
Page -31-
<PAGE>
was $_____. As of October 31, 1997, Morgan Grenfell International Equity Fund
held securities of _________ and __________, two of its regular broker-dealers.
The value of such securities on this date were $________ and $_________,
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
- - --------------------------------------------------------------------------------
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<PAGE>
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
Yield
From time to time, each Fixed Income Fund may advertise its yield. Yield is
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 a Fund refers to the annualized income generated by
an investment in the institutional 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 outstanding 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 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, 1997, the yields of Morgan Grenfell
Global Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and
Morgan Grenfell Emerging Markets Debt Fund were __%, __% and __%, respectively.
If the expense limitations described in the Prospectus for these Funds had not
been in effect during this period, the yields of Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund would have been __%, __% and __%, respectively.
- - --------------------------------------------------------------------------------
Page -33-
<PAGE>
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:
T = [ (ERV)^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, 1997, the average annual total returns for
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, 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
were __%, __%, __%, __%, __%, __%, __% and __%, respectively. For their
respective periods from commencement of operations to October 31, 1997, the
average annual total returns for institutional shares of Morgan Grenfell
International Equity Fund, Morgan Grenfell European Equity Fund, Morgan Grenfell
International Small Cap Equity Fund, Morgan Grenfell European
- - --------------------------------------------------------------------------------
Page -34-
<PAGE>
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 were __%, __%, __%, __%,
__%, __%, __% and __%, respectively. If the expense limitations described in the
Prospectus for the above Funds had not been in effect during the indicated
periods, the total returns 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, Lehman Brothers, Inc., First Boston Corporation, Dean Witter 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,
- - --------------------------------------------------------------------------------
Page -35-
<PAGE>
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"); and (b) 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. 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 such regulations.
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
- - --------------------------------------------------------------------------------
Page -36-
<PAGE>
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 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. Additionally, a Fund may be required to recognize
gain if an option, future, forward contract, short sale, or other transaction
that is not subject to these mark to market rules is treated as a "constructive
sale" of an "appreciated financial position" held by the Fund under Section 1259
of the Code. Any gain or loss recognized on actual or deemed sales of futures
contracts, forward contracts, or options that are subject to the mark to market
rules, but not the constructive sale rules, (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 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, forward contracts and constructive sales
may affect the amount, timing and character of a Fund's distributions to
shareholders. 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.
- - --------------------------------------------------------------------------------
Page -37-
<PAGE>
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.
Transactions or instruments subject to the mark to market or constructive sale
rules described above may have the same result in some circumstances. 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 withholding or other
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
satisfaction of certain holding period requirements and to other 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 qualified 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 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 foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) 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
- - --------------------------------------------------------------------------------
Page -38-
<PAGE>
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 or make an available election 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, certain structured securities and interest rate floors
and caps are unclear in certain respects, and the Funds may be required to
account for these transactions or instruments under tax rules in a manner that
may affect the amount, timing and character of income, gain or loss therefrom
and that may, under certain circumstances, limit the extent to which the Funds
engage in these transactions or acquire these instruments.
Each of the Fixed Income Funds other than the International Fixed Income 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 these Funds. Tax rules are
not entirely clear about issues such as when a Fund may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by these Funds, to the extent
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 having to pay federal income or excise
tax.
For federal income tax purposes, each Fund is permitted to carry forward a net
capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders. At October 31, 1997, Morgan Grenfell International
Small Cap Equity Fund had a capital loss carryforward 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 of any
Fund 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
- - --------------------------------------------------------------------------------
Page -39-
<PAGE>
that any significant portion of any Fund's distributions will 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 are
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, extending before and after each such dividend. 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. 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 and, to the extent such basis would be reduced below zero, require the
current recognition of income. 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 capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received deduction for
corporations. As a result of the enactment of the Taxpayer Relief Act of 1997
(the "1997 TRA") on August 5, 1997, gain recognized after May 6, 1997 from the
sale of a capital asset is taxable to individual (noncorporate) investors at
different maximum federal income tax rates, depending generally upon the tax
holding period for the asset, the federal income tax bracket of the taxpayer,
and the dates the asset was acquired and/or sold. The Treasury Department has
issued Notice 97-59 and Announcement 97-109, and is expected to issue further
guidance, to apply this legislation (as modified by any "technical corrections"
that may be enacted) to capital gains and losses and to distributions by
regulated investment companies ("RICs"), including the Funds, from their
realized net capital gain. This guidance should enable RICs to pass through to
their shareholders the benefits of the capital gains tax rates contained in the
1997 TRA by designating certain capital gains dividends or portions thereof as
eligible for a 20% maximum tax rate (or 10% for taxpayers in the 15% rate
bracket), with other capital gain dividends or portions thereof subject to a
maximum 28% tax rate, in each case for individuals and other noncorporate
taxpayers entitled to such preferential capital gains tax rates. This guidance
also provides or will provide for the appropriate tax treatment of other
long-term capital gains and losses, such as those recognized by a Fund under the
mark to market rules described above, and distributions attributable to such
gains. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
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 in a
transaction that is treated as a sale for tax purposes, 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. Any loss realized on the sale, redemption or
other disposition of the shares of any Fund with a tax holding period of six
months or less, to the extent such loss is not disallowed under any other tax
rule, will be treated as a long-term capital loss to the extent of any capital
gain dividend with respect so 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
- - --------------------------------------------------------------------------------
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<PAGE>
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. Shareholders
should consult their own tax advisers regarding their particular circumstances
to determine whether a disposition of Fund shares is properly treated as a sale
for tax purposes, as is assumed in the foregoing discussion. Also, future
Treasury Department regulations, announcements or other guidance issued to
implement the 1997 TRA may contain rules for determining different tax rates
applicable to sales of Fund shares held for more than one year, more than 18
months, and (for certain sales after the year 2000 or the year 2005) more than
five years. These regulations may also modify some of the provisions described
above.
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 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
- - --------------------------------------------------------------------------------
Page -41-
<PAGE>
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.
Shares entitle their holders to one vote per share; however, separate votes will
be taken by each Fund on matters affecting an individual Fund. Shares are freely
transferable and have no preemptive, subscription or conversion rights. The
Trust does not expect to hold shareholder meetings except as required by the
1940 Act or the Agreement and Declaration of Trust (the "Declaration of Trust").
See "Organization and Shares of the Trust" in the Prospectus.
As of November 24, 1997, the following shareholders owned the following
respective percentages of the outstanding institutional shares of the indicated
Funds:
International Small Cap Equity Fund:
Kroger Company Master Retirement Trust, P.O. Box 92956, Chicago, IL 60675
(24.44%)
Black & Decker Defined Benefit Plan Master Trust, c/o State Street Bank & Trust
Co., P.O. Box 1952, Boston, MA 02105-1992
(13.92%)
Delta Airlines Inc. c/o Harris Trust & Savings, 111 W Monroe Street SE, Chicago,
IL 60603
(45.33%)
United Church Board for Pension Assets Management, 475 Riverside Dr, New York,
NY 10115
(5.18%)
Pitney Bowes Retirement Plan, One Enterprise Drive W7A, North Quincy, MA 02171
(6.03%)
Emerging Markets Equity Fund:
Motorola Employees Savings & Profit Sharing Trust, c/o Northern Trust, P.O. Box
92956, Chicago, IL 60675
(29.70%)
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<PAGE>
Motorola Pension Fund, c/o Harris Trust, 111 West Monroe, Chicago, IL 60690
(30.34%)
Public Employees Retirement Association, 1300 Logan Street, Denver, Colorado
80203
(29.21%)
Global Fixed Income Fund:
The American University in Cairo, 420 Fifth Ave., New York, NY 10018
(16.29%)
New Hampshire Charitable Foundation, 37 Pleasant Street, Concord, NH 03301
(11.16%)
National Financial Services Corp, 200 Liberty St, 1 World Financial, New York,
NY 10281
(11.93%)
Trustees of Clark University, 950 Main Street, Worcester, MA 01610
(11.59%)
University of North Dakota Foundation, PO Box 8157, Grand Forks, ND 58202
(9.28%)
Town of Plymouth Retirement System, 11 Lincoln St., Plymouth, MA 02360
(6.23%)
Museum of Fine Arts Boston, 465 Huntington Ave., Boston, MA 02115-5597
(5.60%)
Foundation for Seacoast Health, P.O. Box 4606, Portsmouth, NH 03802-4606
(5.07%)
International Fixed Income Fund:
Gilman School Inc., c/o Mercantile Safe Deposit & Trust Co., P.O. Box 2257,
Baltimore, MD 21297
(6.26%)
Harvey Wagner TTEE, FBO Wagner Family Trust, P.O. Box 7370, Incline Village, NV
89452
(25.09%)
Bay City Policemen & Firemen Retirement System, Defined Benefit Pension Plan,
c/o Gary Fields, 301 Washington Ave, Bay City, MI 48708
(8.20%)
Dingle & Co, c/o Comerica Bank, PO Box 75000, Detroit MI 48275
(13.91%)
Holland Community Hospital Non-Pension, One Financial Center, Holland, MI 49423
(13.04%)
James R. Trueman Irrev. Subchapter S Trust, c/o Northern Trust, 50 S LaSalle
St., Chicago IL 60603
(31.07%)
- - --------------------------------------------------------------------------------
Page -43-
<PAGE>
Emerging Markets Debt Fund:
IBM Retirement Plan Trust, c/o Chase Manhattan Bank, 3 Chase Metrotech Center,
Brooklyn, NY 11245
(13.45%)
Iowa Public Employees Retirement System, 600 E. Court Avenue, Des Moines, IA
50309
(15.52%)
Municipal Fire & Police Retirement System of Iowa, 2836 104th St., Des Moines,
IA 50322
(5.81%)
Los Angeles City Employees Retirement Systems, 360 E 2nd St, Los Angeles, CA
90012
(17.10%)
State of Wisconsin Investment Board, 121 E Wilson St., P.O. Box 7847, Madison WI
53707-7847
(5.01%)
European Small Cap Equity Fund:
Pitney Bowes Retirement Plan, One Enterprise Drive W7A, North Quincy, MA 02171
(36.81%)
TRW Master Trust, c/o Boston Safe Deposit & Trust Company, One Cabot Road,
Medford, MA 02155
(63.17%)
International Equity Fund:
Morgan Grenfell Capital Management, Inc., (Delaware Corporation), 885 Third
Avenue, New York, NY 10022
(64.62%)
Deutsche Morgan Grenfell, C.J. Lawrence Inc., 1251 Avenue of the Americas, New
York, NY 10020
(27.96%)
Miter & Co., fbo Deutsche Bank, P.O. Box 2977, Milwaukee, WI 53201
(5.55%)
European Equity Fund:
Lousiana Municipal Police Employees' Retirement System, 8401 United Plaza
Boulevard, Baton Rouge, LA 70809
(98.09%)
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.
- - --------------------------------------------------------------------------------
Page -44-
<PAGE>
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 the securities meet
the investment objectives and policies of the Fund and the securities are
acquired by the Fund for investment and not for resale. An exchange of
securities for Fund shares will generally be a taxable transaction to the
shareholder.
ADDITIONAL INFORMATION
Independent Accountants
______________________, __________________, 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.
- - --------------------------------------------------------------------------------
Page -45-
<PAGE>
FINANCIAL STATEMENTS
The Trust's audited financial statements for the period ended October 31, 1996
are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of _________________, the
Trust's independent accountants, as experts in accounting and auditing.
The financial statements of the Trust for the periods ended on and prior to
October 31, 1997 are included in, and incorporated by reference into, this
Statement of Additional Information from the Trust's 1997 Annual Report to
Shareholders for the year ended October 31, 1997 (filed electronically on
December __, 1997; file no. 812-10080; accession no. ___________), and will be
attached to each copy of such Statement of Additional Information that is
distributed.
- - --------------------------------------------------------------------------------
Page -46-
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
Service Shares
885 Third Avenue
New York, New York 10022
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end management
investment company that includes the following five distinct investment
portfolios that focus on international fixed income investing: Morgan Grenfell
Core Global Fixed Income Fund, Morgan Grenfell Global Fixed Income Fund, Morgan
Grenfell International Fixed Income Fund, Morgan Grenfell Emerging Markets Debt
Fund and Morgan Grenfell Emerging Local Currency Debt Fund (the "Funds"). The
investment objective of each Fund is to maximize total return; Morgan Grenfell
Investment Services Limited (the "Adviser" or "MGIS"), based in London England,
serves as investment adviser to the Funds. The Funds are designed for long-term
investors seeking to participate in foreign fixed income markets.
Information concerning investment portfolios of the Trust that focus on
U.S. investments (the "Domestic Funds") and international equity investments
(the "International Equity Funds") is contained in separate prospectuses that
may be obtained by calling 1-800-550-6426.
- - ------------------------------------------------------------------------------
This Prospectus provides information about the Trust and each of the Funds
that investors should know before investing in service shares of the Funds.
Investors should carefully read this Prospectus and retain it for future
reference. For investors seeking more detailed information, the Statement of
Additional Information dated February 25, 1998 as amended or supplemented from
time to time, is available upon request without charge by calling the applicable
telephone number listed on the back cover or by writing SEI Financial Services
Company, 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-0100. The Statement of
Additional Information, which is incorporated by reference into this Prospectus,
has been filed with the Securities and Exchange Commission. Not all of the Funds
are available in certain states. Please call 1-800-550-6426 to determine
availability in a particular state.
- - ------------------------------------------------------------------------------
INVESTMENTS IN EMERGING MARKETS CAN INVOLVE SIGNIFICANT RISKS, AND MORGAN
GRENFELL EMERGING MARKETS DEBT FUND AND MORGAN GRENFELL EMERGING LOCAL CURRENCY
DEBT FUND ARE DESIGNED FOR AGGRESSIVE INVESTORS. IN ADDITION, MORGAN GRENFELL
EMERGING MARKETS DEBT FUND AND MORGAN GRENFELL EMERGING LOCAL CURRENCY DEBT FUND
INVEST IN LOWER-QUALITY DEBT SECURITIES (JUNK BONDS), WHICH PRESENT HIGHER RISKS
OF UNTIMELY INTEREST AND PRINCIPAL PAYMENTS, DEFAULT, AND PRICE VOLATILITY THAN
HIGHER-QUALITY SECURITIES, AND MAY PRESENT LIQUIDITY AND VALUATION PROBLEMS.
SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- - --------------------------------------------------------------------------------
Page - 1 -
<PAGE>
Each Fund's primary investments are summarized below:
Morgan Grenfell Core Global Fixed Income Fund invests primarily in
investment grade fixed income securities of issuers throughout the world.
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.
Morgan Grenfell Emerging Local Currency Debt Fund invests primarily in
fixed income securities denominated in currencies of countries with
emerging securities markets.
- - --------------------------------------------------------------------------------
Page - 2 -
<PAGE>
TABLE OF CONTENTS
Page
----
Expense Information ................................................ 4
Financial Highlights ............................................... 6
Introduction to the Funds .......................................... 8
Investment Objectives and Polices .................................. 10
Description of Securities and Investment Techniques
and Related Risks ................................................ 14
Additional Investment Information .................................. 26
Management of the Funds ............................................ 27
Purchase of Service Shares ......................................... 29
Redemption of Service Shares ....................................... 31
Net Asset Value .................................................... 33
Dividends, Distributions and Taxes ................................. 34
Organization and Shares of the Trust ............................... 35
Performance Information ............................................ 36
Appendix A ......................................................... 38
Appendix B ......................................................... 40
Appendix C ......................................................... 41
- - --------------------------------------------------------------------------------
Page - 3 -
<PAGE>
EXPENSE INFORMATION
<TABLE>
<CAPTION>
=========================================================================================================================
CORE INTERNATIONAL EMERGING EMERGING
FUND NAME GLOBAL FIXED GLOBAL FIXED FIXED MARKETS LOCAL CURRENCY
INCOME FUND* INCOME FUND INCOME FUND DEBT FUND DEBT FUND*
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
- - -------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases ......................... None None None None None
Maximum Sales Charge
Imposed on Reinvested
Dividends .................................... None None None None None
Deferred Sales Charge
Imposed on Redemptions ....................... None None None None None
Exchange Fee ................................. None None 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% 0.50% 1.00% 0.60%
Other Expenses** ............................. 0.81% ___% ___% ___% 0.86%
Reduction of Advisory Fee
and Expense Limitation by Adviser*** ......... (0.51)% ___% ___% ___% (0.51)%
- - -------------------------------------------------------------------------------------------------------------------------
Net Fund Operating
Expenses*** .................................. 0.80% 0.90% 0.90% 1.50% 0.95%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
* Core Global Fixed Income Fund and Emerging Local Currency Debt Fund were not
operational during the fiscal year ended October 31, 1997.
** 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 service shares of each Fund, on an annual basis, to the specified
percentage of each Fund's assets shown in the above table as Net Fund Operating
Expenses. The above table and the following Example reflect this voluntary
agreement. In it sole discretion, the Adviser may terminate or modify this
voluntary agreement at any time after October 31, 1998. The purpose of this
voluntary agreement is to enhance a Fund's total return during the period when,
because of its smaller size, fixed expenses have a more significant impact on
total return. After giving effect to the Adviser's voluntary agreement, each
Fund's advisory fee is as follows: Core Global Fixed Income Fund (0.01)%, Global
Fixed Income Fund ___%, International Fixed Income Fund ___%, Emerging Markets
Debt Fund ___% and Emerging Local Currency Debt Fund 0.09%. If the Adviser's
voluntary agreement were not in effect, the Fund Operating Expenses for service
shares of each Fund would be as follows: Core Global Fixed Income Fund 1.31%,
Global Fixed Income Fund ___%, International Fixed Income Fund ___%, Emerging
Markets Debt Fund ___% and Emerging Local Currency Debt Fund 1.46%.
================================================================================
- - --------------------------------------------------------------------------------
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 Core Global Fixed Income Fund $8 $26 N/A N/A
Morgan Grenfell Global Fixed Income Fund $- $- $- $-
Morgan Grenfell International Fixed Income Fund $- $- $- $-
Morgan Grenfell Emerging Markets Debt Fund $- $- $- $-
Morgan Grenfell Emerging Local Currency Debt Fund $10 $30 N/A N/A
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 Core Global Fixed Income Fund and Morgan Grenfell Emerging Local
Currency Debt Fund are estimates for the fiscal year ending October 31, 1998
that are based on actual expenses incurred during the fiscal year ended October
31, 1997, except that the figures shown assume that the service fees were in
effect throughout the year ended October 31, 1997. Additionally, the figures
shown in the Expense Information Table and Example reflect the Adviser's
voluntary agreement, effective as of March 1, 1997, to limit Fund Operating
Expenses for service shares of Emerging Markets Debt Fund to 1.50% of average
net assets. "Other Expenses" for Morgan Grenfell Core Global Fixed Income Fund
and Morgan Grenfell Emerging Local Currency Debt Fund are based on estimated
average net assets for the current fiscal year ended October 31, 1998. If the
average net assets of either of these Funds exceeds the estimate for such year,
then its "Other Expenses" (as a percentage of average net assets) will be lower
than the rate shown in the table. Conversely, if the Fund's average net assets
are lower than the estimate for such year, then its "Other Expenses" (as a
percentage of 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 and service fees and other
expenses of the Funds, see "Management of the Funds."
- - --------------------------------------------------------------------------------
Page - 5 -
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below are selected audited data for an outstanding service share
of Morgan Grenfell Emerging Markets Debt Fund for the fiscal period ended
October 31, 1997. The data set forth below have been audited by
_____________________, independent accountants, whose report thereon was
unqualified. Morgan Grenfell Emerging Markets Debt Fund was the only Fund that
had service shares outstanding prior to October 31, 1997.
Selected audited data for an outstanding institutional share of Morgan
Grenfell Global Fixed Income Fund and Morgan Grenfell International Fixed Income
Fund are also presented below for periods prior to and ending October 31, 1997.
This data has been audited by ____________________________, 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.
No data are shown below for Morgan Grenfell Core Global Fixed Income Fund
and Morgan Grenfell Emerging Local Currency Debt Fund because these Funds had
not commenced operations on or prior to October 31, 1997.
- - --------------------------------------------------------------------------------
Page - 6 -
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
For an Institutional Share Outstanding Throughout Each Period Ended October 31
<TABLE>
<CAPTION>
Net
Net Asset Net Realized Distributions Distributions Ratio of
Value Investment and from Net from Realized Net Asset Net Assets Expenses to
Beginning Income/ Unrealized Investment Capital Value End Total End of Average
Year of Period (Loss) Gains/(Losses) Income (3) Gains of Period Return Period (000) Net Assets
- - ---- --------- ------ -------------- ---------- ----- --------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - --------------------------------
Global Fixed Income Fund
- - --------------------------------
1997
1996 $ 10.99 $ 0.59 $ 0.12 $ (0.37) $ (0.07) $ 11.26 6.60% $ 149,917 0.75%
1995 $ 9.85 $ 0.35 $ 0.99 $ (0.20) -- $ 10.99 13.88% $ 139,337 0.78%
1994(1)* $ 10.00 $ 0.25 $ (0.40) -- -- $ 9.85 (1.50)% $ 53,915 0.85%
- - --------------------------------
International Fixed Income Fund
- - --------------------------------
1997
1996 $ 11.34 $ 0.86 $ (0.12) $ (0.66) $ (0.12) $ 11.30 6.82% $ 21,155 0.75%
1995 $ 9.94 $ 0.42 $ 1.03 $ (0.05) -- $ 11.34 14.66% $ 27,603 0.78%
1994(2)* $ 10.00 $ 0.29 $ (0.35) -- -- $ 9.94 (0.60)% $ 15,238 0.85%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income(Loss)
Ratio of Net to Average to Average
Investment Net Assets Net Assets
Income(Loss) (Excluding (Excluding Portfolio
to Average Expense Expense Turnover
Net Assets Limitations) Limitations) Rate
---------- ------------ ------------ ----
<S> <C> <C> <C> <C>
- - -------------------------------
Global Fixed Income Fund
- - -------------------------------
1997
1996 5.39% 0.79% 5.35% 223%
1995 5.61% 0.87% 5.52% 147%
1994(1)* 5.71% 1.28% 5.28% 173%
- - -------------------------------
International Fixed Income Fund
- - -------------------------------
1997
1996 5.41% 1.03% 5.13% 235%
1995 5.51% 1.15% 5.14% 187%
1994(2)* 5.66% 1.42% 5.09% 130%
</TABLE>
================================================================================
(1) Global Fixed Income Fund commenced operations on 1/3/94.
(2) International Fixed Income Fund commenced operations on 3/15/94.
(3) Distributions from net investment income include distributions of certain
foreign currency gains and losses
* All ratios, excluding total return and portfolio turnover rate for the
period, are annualized.
================================================================================
- - --------------------------------------------------------------------------------
Page - 7 -
<PAGE>
INTRODUCTION TO THE FUNDS
Morgan Grenfell Investment Trust (the "Trust") offers a number of mutual
funds, each of which is a separate series of the Trust. This Prospectus relates
solely to the Funds. Information regarding investment portfolios of the Trust
that focus on U.S. investments (the "Domestic Funds") and international equity
investments (the "International Equity Funds") is contained in separate
prospectuses that may be obtained by calling 1-800-550-6426.
Under normal market conditions, the Funds will invest primarily in foreign
fixed income securities. Investing primarily in foreign fixed income securities
and across international borders presents growth opportunities and potentially
higher returns than could be achieved by investing solely in the United States.
International investing permits participation in the economies of countries with
business cycles and stock and bond market performance often different from that
in the United States and, with more than one-half of the world's stock and bond
market value outside the United States, it can help broaden the investments of a
portfolio otherwise solely invested in domestic securities. International
investments also involve certain risks not normally associated with domestic
investments. The Funds are designed for long-term investors comfortable with the
special risk and return characteristics of investing internationally. See
"Description of Securities and Investment Techniques and Related Risks."
MGIS, which is a fully owned subsidiary of London-based Morgan Grenfell
Asset Management, serves as the investment adviser to each of the Funds. Morgan
Grenfell Asset Management has been managing international investments for over
thirty years and now has over US$16.3 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 and Emerging Local Currency Debt Fund seek to
attain their objectives by focusing on what are, in the Adviser's view, the most
promising markets and companies in the world's rapidly developing countries.
While emerging markets are highly volatile and subject to change with political
or economic developments, they offer the opportunity for substantial growth. In
contrast to Emerging Markets Debt Fund, Core Global Fixed Income Fund, Global
Fixed Income Fund and International Fixed Income Fund may spread their
investments across world markets.
- - --------------------------------------------------------------------------------
Page - 8 -
<PAGE>
Each of the Funds is non-diversified under the Investment Company Act of
1940 (the "1940 Act") and, therefore, may be more susceptible than a more
diversified mutual fund to developments affecting any single issuer of portfolio
securities. See "Description of Securities and Investment Techniques and Related
Risks--Diversification." There can be no assurance that a Fund will achieve its
investment objective.
Selection of Portfolio Securities
Fixed income securities in which the Funds may invest include U.S. and
foreign government securities and corporate fixed income securities. See
"Description of Securities and Investment Techniques and Related Risks--Fixed
Income Securities." In managing the Funds, the Adviser uses a top-down approach
which gives primary emphasis to the relative attractiveness of bond markets and
currencies. Markets are selected after consideration is given to their risk and
return outlook under various economic scenarios. Currencies are evaluated
separately, and the underlying currency mix of each Fund's position in fixed
income securities generally is designed to enhance returns during periods of
relative U.S. dollar weakness and to protect return during periods of relative
U.S. dollar strength. These investment decisions require consideration of
macro-economic factors such as inflation, interest rates, monetary and fiscal
policies, taxation and political climate. The Adviser also considers the
characteristics of individual securities and issuers.
The fixed income securities in which each Fund may invest may have stated
maturities ranging from overnight to 1000 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. 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. Whether for hedging or non-hedging purposes, the use
of these techniques entails 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
- - --------------------------------------------------------------------------------
Page - 9 -
<PAGE>
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, the
Emerging Local Currency Debt Fund and, to a lesser extent, the Global Fixed
Income 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
Core Global Fixed Income Fund
The investment objective of the Core Global Fixed Income Fund is to maximize
total return, emphasizing current income and, to a lesser extent, providing
opportunities for capital growth consistent with reasonable investment risk.
Under normal circumstances, the Fund pursues this objective by investing at
least 65% of its total assets in fixed income securities of issuers in at least
three countries, which may include: Austria, Belgium, Denmark, Finland, France,
Germany, Holland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States, Canada, Japan, Australia and
New Zealand. At the discretion of the Adviser, the Fund may invest in fixed
income securities of issuers located in other countries.
The fixed income securities in which the Fund invests consist primarily of high
grade debt obligations of foreign governments or their agencies,
instrumentalities, political subdivisions and authorities; debt obligations
issued or guaranteed by international or supranational entities; U.S. Government
securities and high grade fixed income securities of U.S. and foreign corporate
issuers. High grade securities include securities rated within the three highest
grades by Moody's (Aaa, Aa and A), Standard & Poor's (AAA, AA and A) or
comparable rating agency or, if unrated, determined to be of comparable quality
by the Adviser. The Fund may also invest 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
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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.
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 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 fixed
income securities of U.S. and foreign corporate issuers. Most of the Fund's
investments in fixed income securities generally will be in securities rated
within the four highest grades by Moody's (Aaa, Aa, A and Baa), Standard &
Poor's (AAA, AA, A and BBB) or comparable rating agency or, if unrated,
determined to be of comparable quality by the Adviser. However, the Fund may
invest up to 15% of its total assets in fixed income securities rated below
these levels or, if unrated, determined to be of comparable quality by the
Adviser, including securities of issuers in emerging markets. These securities,
which are known as below investment grade securities, involve greater price
volatility and risk of loss of principal and income than investment grade
securities. 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
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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."
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
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income securities having low credit quality involve greater price volatility and
risk of loss of principal and income. For a description of these and other risks
of investing in lower quality fixed income securities, see "Description of
Securities and Investment Techniques and Related Risks--Fixed Income
Securities." See Appendix A to this Prospectus for a description of the various
ratings categories of Moody's and Standard & Poor's and a chart showing the
distribution of the Fund's assets across the various ratings categories.
The Fund may invest more than 25% of its total assets in each of Mexico and
Brazil. The concentration of the Fund's investments in these countries will
cause the Fund to be particularly susceptible to the effects of political and
economic developments in these countries. See "Description of Securities and
Investment Techniques and Related Risks--Region and Country Concentration."
Up to 35% of the Fund's total assets may be invested in fixed income
securities issued or guaranteed by the U.S. Government.
Emerging Local Currency Debt Fund
The investment objective of the Emerging Local Currency 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 local
currency-denominated issues or instruments 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,
Kazakhstan, 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 instruments in
other currencies of 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."
In making investments for the Fund, the Adviser will give primary emphasis
to the relative attractiveness of the local currencies in which the investments
are denominated. Accordingly, the Fund will not generally attempt to hedge
foreign currency exchange rate risks associated with positions it takes in such
investments. The Fund may use forward foreign currency exchange contracts,
options, futures, swaps, interest rate caps and floors and when-issued and
forward commitment transactions for non-hedging and hedging purposes. However,
because the Fund generally will not use these techniques to attempt to hedge
currency exchange rate risks, the Fund's return may be more dependent on the
Adviser's judgment as to the relative attractiveness of the local currencies in
which the Fund's investments are denominated.
Under normal market conditions, the Fund's investments in emerging
securities markets will consist principally of (i) debt instruments and fixed
income securities issued or guaranteed by sovereign governments or their
agencies and instrumentalities, and (ii) financial instruments, such as call
options, the value of which are dependent on the prices of such debt instruments
and fixed income securities. The Fund's investments in emerging securities
markets may also include fixed income securities of non-governmental issuers
located in countries with emerging securities markets and fixed deposits
denominated in foreign currencies.
The securities in which the Fund may invest may be of any credit quality,
including securities no 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. Bonds 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 bonds, see
"Description of Securities and Other Investment Techniques
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and Related Risk--Fixed Income Securities." See Appendix A to this Prospectus
for a description of the various ratings categories of Moody's and Standard &
Poor's.
The Fund may invest more than 25% of its total assets in Mexico. The
concentration of the Fund's investments in Mexico will cause the Fund to be
particularly susceptible to the effects of political and economic developments
in this country. See "Description of Securities and Investment Techniques and
Related Risks--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 or its agenciies or
instrumentalities, and in short-dated investments with commercial banks
denominated in U.S. Dollars.
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,
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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.
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,
each Fund may enter into forward foreign currency exchange contracts or currency
swap agreements, purchase securities indexed to foreign currencies, and buy and
sell options and futures contracts relating to foreign currencies and options on
such futures contracts. See "Forward Foreign Currency Transactions," "Interest
Rate and Currency Swaps," "Options" and "Futures and Options on Futures" below.
The Funds may use currency hedging techniques in the normal course of business
to lock in an exchange rate in connection with purchases and sales of securities
denominated in foreign currencies. Other currency management strategies allow
the Adviser to hedge portfolio securities, to shift investment exposure from one
currency to another, or to attempt to profit from anticipated declines in the
value of a foreign currency relative to the U.S. dollar. There is no overall
limitation on the amount of assets that any of the Funds may commit to currency
management strategies. Although the Adviser may attempt to manage currency
exchange rate risks, there is no assurance that the Adviser will do so, or do so
at an appropriate time or that the Adviser will be able to predict exchange
rates accurately.
Securities held by a Fund are generally denominated in the currency of the
foreign market in which the investment is made. However, securities held by a
Fund may be denominated in the currency of a country other than the country in
which the security's issuer is located. For example, Emerging Markets Debt Fund
often purchases foreign securities that are denominated in U.S. dollars. The
Funds may also invest in securities denominated in the
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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 except that the Emerging Local Currency Debt Fund generally
does not expect to do so. Each Fund may also purchase or sell forward currency
contracts 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 attempt 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 attempt 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 or liquid securities in a segregated
account, which will be marked to market daily, in an amount equal to the value
of the total assets committed to the consummation of the forward currency
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to the contract.
Forward currency contracts are subject to the risk that the counterparty to
such contract will default on its obligations. Since a forward currency contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive a Fund of unrealized profits, transaction costs or the benefits of
a currency hedge or force a Fund to cover its purchase or sale commitments, if
any, at the current market price. The Funds will not enter into forward currency
contracts unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is
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determined to be investment grade by the Adviser. The Adviser will monitor the
claims-paying ability of the counterparty on an ongoing basis.
Each 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. The Funds may write (sell) covered put and call options on
fixed income securities and enter into related closing transactions. A Fund may
receive fees (referred to as "premiums") for granting the rights evidenced by
the options. However, in return for the premium, the Fund assumes certain risks.
For example, in the case of a written call option, the Fund forfeits the right
to any appreciation in the underlying security while the option is outstanding.
A put option gives to its purchaser the right to compel the Fund to purchase an
underlying security from the option holder at the specified price at any time
during the option period. In contrast, a call option written by the Fund gives
to its purchaser the right to compel the Fund to sell an underlying security to
the option holder at a specified price at any time during the option period.
Upon the exercise of a put option written by a Fund, the Fund may suffer a loss
equal to the difference between the price at which the Fund is required to
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
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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
financial futures contracts and purchase and write options on futures contracts
to attempt to hedge against changes in interest rates, securities prices or
currency exchange rates or for certain non-hedging purposes. 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
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event of market changes or generally in the absence of a liquid secondary
market, (2) correlation risk that changes in the value of hedging positions may
not match the securities market and foreign currency fluctuations intended to be
hedged, and (3) market risk that an incorrect prediction of securities prices or
exchange rates by the Adviser may cause a Fund to perform worse than if such
positions had not been taken. The ability to terminate over-the-counter options
is more limited than with exchange traded options and may involve the risk that
the counterparty to the option will not fulfill its obligations.
The use of options, futures and forward currency contracts is a highly
specialized activity which involves investment techniques and risks that are
different from those associated with ordinary portfolio transactions. Gains and
losses on investments in options and futures depend on the Adviser's ability to
predict the direction of stock prices, interest rates, currency movements and
other economic factors. The loss that may be incurred by a Fund in entering into
futures contracts and written options thereon and forward currency contracts is
potentially unlimited. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times, render certain
facilities of an options clearing entity or other entity performing the
regulatory and liquidity functions of an options clearing entity inadequate, and
thereby result in the institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders. Options and futures
traded on foreign exchanges generally are not regulated by U.S. authorities, and
may offer less liquidity and less protection to a Fund in the event of default
by the other party to the contract.
Except as set forth above under "Futures Contracts and Options on Futures
Contracts" there is no limit on the percentage of a Fund's assets that may be
invested in futures contracts and related options or forward currency contracts.
A Fund may not invest more than 25% of its total assets in purchased protective
put options. A Fund's transactions in options, forward currency contracts,
futures contracts and options on futures contracts may be limited by the
requirements for qualification of the Fund as a regulated investment company for
tax purposes. See "Taxes" in the Statement of Additional Information.
Fixed Income Securities
General. In order to achieve their respective investment objectives, the
Funds may invest in a broad range of U.S. and non-U.S. fixed income securities.
In periods of declining interest rates, a Fund's yield (its income from
portfolio investments over a stated period of time) may tend to be higher than
prevailing market rates, and in periods of rising interest rates, the yield of
the Fund may tend to be lower. Also, when interest rates are falling, the 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
and the Emerging Local Currency Debt Fund may invest without limit in rated and
unrated fixed income securities of any credit quality, including securities in
default. In addition, the Global Fixed Income Fund may invest up to 15% of its
total assets in fixed income securities that are rated below Baa by Moody's or
BBB by Standard & Poor's or, if unrated, determined to be of comparable quality
by the Adviser. Securities rated BB or lower by Standard & Poor's or Ba or lower
by Moody's and comparable unrated securities are
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considered speculative and, while generally offering 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. 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 a 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 critiria (if any) 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. The International Fixed Income
Fund will not 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
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
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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 November 1, 1997, the Fund is not aware of the occurrence of any payment
defaults on Brady Bonds. Investors should recognize however, that Brady Bonds
have been issued only recently, and, accordingly, they do not have a long
payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt, bonds issued at a discount of face value of such debt, bonds
bearing an interest rate which increases over time and bonds issued in exchange
for the advancement of new money by existing lenders. Certain Brady Bonds have
been collateralized as to principal due at maturity by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds, although
the collateral is not available to investors until the final maturity of the
Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and
the debtor nations' reserves. In addition, the first two or three interest
payments on certain types of Brady Bonds may be collateralized by cash or
securities agreed upon by creditors. 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
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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 issuer diversification and industry concentration
policies, the Fund will treat the underlying borrower of a registered loan as an
issuer of that loan. Where the Fund sells a loan without interest, it will treat
both the borrower and the purchaser of the loan as issuers for purposes of this
policy.
U.S. Government Securities. The Funds may invest in obligations issued or
guaranteed as to both principal and interest by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises ("U.S. Government
securities"). Some U.S. Government securities, such as U.S. Treasury bills,
notes and bonds, are supported by the full faith and credit of the United
States. Others, such as obligations issued or guaranteed by U.S. Government
agencies or instrumentalities are supported either by (i) the full faith and
credit of the U.S. Government (such as securities of the Small Business
Administration), (ii) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (iii) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association ("FNMA")), or (iv) only
the credit of the issuer. No assurance can be given that the U.S. Government
will provide financial support to U.S. Government agencies or instrumentalities
in the future.
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
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only interest payments from a pool of mortgage loans ("IOs") and the other
receiving only principal payments ("POs"). The Funds may also invest in
asset-backed securities, which represent participations in, or are secured by
and payable from, assets such as motor vehicle installment sales, installment
loan contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements and other categories
of receivables. Such securities are generally issued by trusts and special
purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities because asset-backed securities generally do not have
the benefit of a security interest in collateral that is comparable to mortgage
assets. In addition, there is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
Interest Rate, Mortgage and Currency Swaps and Interest Rate Caps and Floors
The Funds may enter into interest rate, mortgage and currency swaps for
hedging and non-hedging purposes. The Funds may also enter into other types of
interest rate swap arrangements such as caps and floors. A Fund will typically
use interest rate swaps to adjust the effective duration of its portfolio, to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a future date. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
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
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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. A Fund will segregate, in an account
maintained by the Fund's custodian, an amount of cash or liquid securities
having an aggregate net asset value equal to the entire amount of the Fund's
obligation in a currency swap.
The use of interest rate, mortgage and currency swaps and interest rate
caps and floors is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates or currency exchange rates, the investment performance of
a Fund may be less favorable than it would have been if these investment
techniques were not used.
Convertible Securities and Preferred Stocks
Subject to their investment policies, the Funds may invest in convertible
securities, which may include corporate notes or preferred stock but are
ordinarily long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield 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.
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Commercial paper represents short-term unsecured promissory notes issued in
bearer form by U.S. or foreign corporations and finance companies. The
commercial paper purchased by the Funds consists of U.S. dollar-denominated
obligations of domestic or foreign issuers. Each Fund may also invest in
commercial paper which at the date of investment is rated at least A-2 by
Standard & Poor's or P-2 by Moody's, or their equivalent ratings, or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which are rated, at the time of purchase, A or better by Standard &
Poor's or Moody's, or their equivalents, and other debt instruments, including
unrated instruments, not specifically described if such instruments are deemed
by the Adviser to be of comparable quality.
Cash equivalents include obligations of banks which at the date of
investment have capital, surplus and undivided profits (as of the date of their
most recently published financial statements) in excess of US$ 100 million. Bank
obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances and fixed time deposits. Bank obligations also include U.S.
dollar-denominated obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks, all of the same type as domestic bank obligations. A
Fund will invest in the obligations of foreign branches of U.S. banks or of U.S.
branches of foreign banks only when the Adviser determines that the credit risk
with respect to the instrument is minimal.
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$__ 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
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of both in a segregated account, which will be marked to market daily, with its
custodian equal in value to its obligations with respect to reverse repurchase
agreements. Reverse repurchase agreements are considered borrowings, and as such
are subject to the limitations on borrowings by the Funds.
Illiquid Securities. Each Fund will not invest more than 15% of its net
assets in illiquid securities, which include repurchase agreements and fixed
time deposits maturing in more than seven days and securities that are not
readily marketable.
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
U.S.-registered investment companies. A Fund may not invest more than 5% of its
total assets in the securities of any one such investment company or acquire
more than 3% of the voting securities of any other such investment company. A
Fund will indirectly bear its proportionate share of any management or other
fees paid by investment companies in which it invests, in addition to its own
fees.
ADDITIONAL INVESTMENT INFORMATION
Investment Restrictions
Each Fund has adopted certain fundamental investment restrictions which are
described in detail in the Statement of Additional Information. Those investment
restrictions designated as fundamental in the Statement of Additional
Information can be changed only with shareholder approval. Each Fund's
investment objective and all other investment restrictions and policies are
nonfundamental and can be changed by the Board of Trustees of the Trust at any
time without shareholder approval.
Each Fund has fundamental investment restrictions with respect to
borrowing, lending, diversification of investments, senior securities, pledging
of assets, underwriting, real estate investments and commodities. See
"Investment Restrictions" in the Statement of Additional Information.
Portfolio Transactions
The Adviser is responsible for making specific decisions to buy and sell
portfolio securities for the Funds. The Adviser is also responsible for
selecting brokers and dealers to effect these transactions and negotiating, if
possible, brokerage commissions and dealers' charges. The Funds generally
purchase and sell foreign securities in foreign countries, since the best
available market for foreign securities is often on foreign markets. In
transactions on foreign markets, brokerage commissions generally are fixed and
are often higher than in the United States where commissions are negotiated. In
the over-the-counter markets, securities generally are traded on a net basis
with the dealers acting as principal for their own accounts without a stated
commission.
The primary consideration in selecting broker-dealers to execute portfolio
security transactions is the execution of such portfolio transactions at the
most favorable prices. Consideration may also be given to
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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 or the Distributor 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 will also increase the likelihood
of net short-term capital gains (distributions of which are taxable to
shareholders as ordinary income). See "Financial Highlights" for each Fund's
portfolio turnover rate for the fiscal year ended October 31, 1997.
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 investment advisory contracts
between the Trust, on behalf of each Fund, and MGIS (the "Advisory Contracts").
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, 1997, MGIS managed approximately $16.3 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 Core Global Fixed Income Fund 0.50%
Morgan Grenfell Global Fixed Income Fund 0.50%
Morgan Grenfell International Fixed Income Fund 0.50%
Morgan Grenfell Emerging Markets Debt Fund 1.00%
Morgan Grenfell Emerging Local Currency Debt Fund 0.60%
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
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Fund's operating expenses to a specified percentage of its average net assets.
For the fiscal period ended October 31, 1997, this voluntary agreement was in
effect, and Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid advisory fees equal to __%, __% and __% of their respective average daily
net assets during such period. The advisory fee to which the Adviser is entitled
for Emerging Markets Debt Fund is higher than those for most mutual funds, but
the Trustees believe that this fee is warranted by the resources needed to
evaluate and invest in the particular markets on which this Fund focuses.
Each Fund is managed by a team of MGIS investment professionals with
expertise in the region(s) and types of investments in which the Fund invests.
For a description of the business experience and other credentials of each
investment professional involved in managing the Funds' portfolios, see Appendix
B to this Prospectus.
The Trust, on behalf of each Fund, is responsible for all of the Fund's
expenses other than those expressly assumed by the Adviser under the terms of
the Advisory 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.
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. 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
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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 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 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
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<PAGE>
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 the investment
is to be made. Investors should indicate the name of the appropriate Fund and
account number on all correspondence.
Purchases by Wire
Investors having an account with a commercial bank that is a member of the
Federal Reserve System may purchase service shares of any Fund by requesting
their bank to transmit funds by wire to:
United Missouri Bank, N.A.
ABA No. 10-10-00695
For: Account Number 98-7052-395-7
Further Credit: [appropriate Fund name]
The investor's name and account number must be specified in the wire. In
addition, investors should be aware that some banks may charge wire fees.
Initial Purchases: Before making an initial investment in service shares by
wire, an investor must first telephone 1-800-407-7301 to be assigned a wire
account number. The investor may then transmit funds by wire through the wire
procedures described above. The investor's name, account number, social security
or other taxpayer identification number, and address must be specified in the
wire. In addition, investors making initial investments by wire must promptly
complete the Account Application accompanying this Prospectus and forward it to
the Transfer Agent at:
By Regular Mail: By Overnight Mail:
Morgan Grenfell Investment Trust Morgan Grenfell Investment Trust
P.O Box 419165 c/o DST Systems, Inc.
Kansas City, MO 64141-6165 (SEI Division CT-7)
1004 Baltimore
Kansas City, MO 64105
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<PAGE>
Subsequent Purchases: Additional investments may be made at any time
through the wire procedures described above, which must include the investor's
name and account number.
Reports to Shareholders
Shareholders of each Fund receive an annual report containing audited
financial statements and a semiannual report. Shareholders should contact their
Service Organizations for information regarding the Funds. Also, shareholders
who have shareholder accounts with the Trust may contact Morgan Grenfell
Investment Trust for account information by calling 1-800-550-6426 or by writing
to Morgan Grenfell Investment Trust at P.O. Box 419165, Kansas City, MO
64141-6165.
Exchange Privilege
A shareholder may exchange service shares of a Fund for service shares of 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.
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.
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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. Normally, redemption proceeds will be wired within no more than
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. Frequently,
redemption proceeds will be wired on the next Business Day after the Transfer
Agent's receipt of such documents. 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
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<PAGE>
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. 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."
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
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<PAGE>
its cost, and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the security's market value. While this method provides certainty in valuation,
it may result in periods in which the value of the security, as determined by
the amortized cost method, may be higher or lower than the price a Fund would
receive if the Fund sold the security. Other assets and assets whose market
value does not, in the opinion of the Adviser, reflect fair value are valued at
fair value using methods determined in good faith by the Board of Trustees.
Certain portfolio securities held by each Fund are listed on foreign
exchanges which trade at times and on days when the NYSE is closed. As a result,
the net asset value of each class of any such Fund may be significantly affected
by such trading at times and on days when shareholders have no ability to redeem
shares of the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund declares and pays dividends from net investment income, if any,
and distributes net short-term capital gain, if any, at least annually. Each
Fund also distributes at least annually substantially all of the 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 capital gain regardless of how long the
shareholder has held its shares. It is anticipated that future tax regulations
implementing federal tax legislation enacted on August 5, 1997 will provide that
distributions of long-term capital gains to individuals or other noncorporate
taxpayers will be subject to different maximum tax rates, depending on the dates
on which the gains are recognized and the applicable Fund's holding period for
the assets that produce the gains. 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
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<PAGE>
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 tax 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 holding period
requirements and other 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 for
shareholders that are subject to tax.
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 the
application to them of the federal tax legislation referred to above and any
other 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
five Funds described in this Prospectus and seventeen additional series. The
Declaration of Trust further authorizes the Trust to
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<PAGE>
classify or reclassify any series or portfolio of shares into one or more
classes. As of the date hereof, the Trustees have established two classes of
shares: service shares and institutional shares.
The shares of each class represent an interest in the same portfolio of
investments of a Fund. Each class has equal rights as to voting, redemption,
dividends and liquidation, except that only service shares bear service fees and
each class may bear other expenses properly attributable to the particular
class. Also, holders of service shares of each Fund have exclusive voting rights
with respect to the service plan adopted by their Fund.
When issued, shares of the Funds are fully paid and nonassessable. In the
event of liquidation, shareholders are entitled to share pro rata in the net
assets of the applicable Fund available for distribution to shareholders. Shares
of the Funds entitle their holders to one vote per share, are freely
transferable and have no preemptive, subscription or conversion rights.
Shares of a Fund will be voted separately with respect to matters
pertaining to that Fund except for the election of Trustees and the ratification
of independent accountants. For example, shareholders of each Fund are required
to approve the adoption of any investment advisory agreement relating to such
Fund and any change in the fundamental investment restrictions of such Fund.
Approval by the shareholders of one Fund is effective only as to that Fund. The
Trust does not intend to hold shareholder meetings, except as may be required by
the 1940 Act. The Trust's Declaration of Trust provides that special meetings of
shareholders shall be called for any purpose, including the removal of a
Trustee, upon written request of shareholders entitled to vote at least 10% of
the outstanding shares of the Trust, or Fund, as the case may be. In addition,
if ten or more shareholders of record who have held shares for at least six
months and who hold in the aggregate either shares having a net asset value of
$25,000 or 1% of the outstanding shares, whichever is less, seek to call a
meeting for the purpose of removing a Trustee, the Trust has agreed to provide
certain information to such shareholders and generally to assist their efforts.
As of November 24, 1997, the James R. Trueman Irrev. Subchapter S Trust
owned beneficially 31.07% and the Wagner Family Trust owned beneficially 25.09%
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
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<PAGE>
overall rate of income on portfolio investments as a percentage of the service
share price. Yield is computed by annualizing the result of dividing the net
investment income per service share over a 30-day period by the net asset value
per service share on the last day of that period.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss
performance as reported by various financial publications. The performance of a
Fund may be compared in publications to the performance of various indices and
investments for which reliable performance data is available. In addition, the
performance of a Fund may be compared in publications to averages, performance
rankings or other information prepared by recognized mutual fund statistical
services.
Performance quotations of a Fund represent the Fund's past performance and,
consequently, should not be considered representative of the future performance
of the Fund. The value of service shares, when redeemed, may be more or less
than the original cost. Any fees charged by banks or other institutional
investors directly to their customer accounts in connection with investments in
service shares of a Fund are not at the direction or within the control of the
Funds and will not be included in the Funds' calculations of total return.
--------------------------------------------
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<PAGE>
APPENDIX A
Description of Ratings Categories of
Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group
Moody's Investors Service, Inc. ("Moody's") describes classifications of
fixed income securities (not including commercial paper) as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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.
Quality Distribution for Emerging Markets Debt Fund
During the fiscal year ended October 31, 1997, 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 .............................................. __%**
Rated by Standard & Poor's (Moody's):
BBB+, BBB, BBB- ......................................... __%
BB+, BB, BB-, (Ba) ...................................... __%
B+, B, B- (B) ........................................... __%
Cash .................................................... __%
* Based on the average of month-end portfolio holdings during the fiscal year
ended October 31, 1997. Asset composition does not represent actual holdings on
October 31, 1997; nor does it imply that the overall quality of portfolio
holdings is fixed.
** Of this amount, the following percentages of the Fund's assets represent
quality standards attributed by the Adviser to such unrated securities at the
time of purchase: __%, B+, B, B- (B); and __%, CCC+, CCC, CCC- (Caa).
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<PAGE>
APPENDIX B
PORTFOLIO MANAGER INFORMATION
Funds Portfolio Managers
- - ----- ------------------
Morgan Grenfell Core Global Fixed Income Fund Ian Kelson
Annette Fraser
Morgan Grenfell Global Fixed Income Fund Ian Kelson
Annette Fraser
Morgan Grenfell International Fixed Income Fund Ian Kelson
Annette Fraser
Morgan Grenfell Emerging Markets Debt Fund Ian Kelson
Simon Treacher
David Dowsett
Morgan Grenfell Emerging Local Currency Debt Fund Ian Kelson
Simon Treacher
David Dowsett
Portfolio Manager Expertise Professional Experience
- - ----------------- --------- -----------------------
David Dowsett Emerging Markets Debt Portfolio Manager, Emerging Markets
Debt, MGIS (since 1995); Portfolio
Manager, Emerging Markets Debt,
Morgan Grenfell International Funds
Management Ltd. ("MGIFM") (since
1994). BA, Durham University (1991-
1994).
Annette Fraser Global Fixed Income Portfolio Manager, Fixed Income
Team, MGIS (since 1992); Fund
Manager, MGIFM (since 1990).
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) (1981-1985).
Simon Treacher Emerging Markets Debt Portfolio Manager, 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
February 25, 1998
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of twenty-two investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information provides supplementary information pertaining to the
following five separate investment portfolios of the Trust (the "Funds"):
Morgan Grenfell Core Global Fixed Income Fund
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
Morgan Grenfell Emerging Local Currency 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
February 25, 1998 (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 ................................................... 18
Trustees and Officers ..................................................... 20
Investment Advisory and Other Services .................................... 22
Service Plan .............................................................. 26
Portfolio Transactions .................................................... 27
Net Asset Value ........................................................... 29
Performance Information ................................................... 30
Taxes ..................................................................... 32
General Information About the Trust ....................................... 38
Additional Information .................................................... 40
Financial Statements ...................................................... 40
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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INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of twenty-two separate investment series, including the following five series:
Morgan Grenfell Core Global Fixed Income Fund
Morgan Grenfell Global Fixed Income Fund
Morgan Grenfell International Fixed Income Fund
Morgan Grenfell Emerging Markets Debt Fund
Morgan Grenfell Emerging Local Currency Debt Fund
(collectively, the "Funds").
Each Fund is "non-diversified" within the meaning of the Investment Company Act
of 1940, as amended (the "1940 Act").
Morgan Grenfell Investment Services Limited (the "Adviser" or "MGIS") serves as
investment adviser to the Funds. SEI Financial Services Company (the
"Distributor") serves as the Funds' principal underwriter and distributor.
The information contained in this Statement of Additional Information generally
supplements the information contained in the Funds' Prospectus. No investor
should invest in a Fund without first reading the Prospectus. Capitalized terms
used herein and not otherwise defined have the same meaning ascribed to them in
the Prospectus.
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<PAGE>
ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectus concerning
the investment objectives and policies of each Fund.
Foreign Currency Exchange Contracts
Each of the Funds will exchange currencies in the normal course of managing its
investments and may incur costs in doing so because a foreign exchange dealer
will charge a fee for conversion. A Fund may conduct foreign currency exchange
transactions on a "spot" basis (i.e., for prompt delivery and settlement) at the
prevailing spot rate for purchasing or selling currency in the foreign currency
exchange market. A Fund also may enter into forward currency exchange contracts
("forward currency contracts") or other contracts to purchase and sell
currencies for settlement at a future date. A foreign exchange dealer, in that
situation, will expect to realize a profit based on the difference between the
price at which a foreign currency is sold to the Fund and the price at which the
dealer will cover the purchase in the foreign currency market. Foreign exchange
transactions are entered into at prices quoted by dealers, which may include a
mark-up over the price that the dealer must pay for the currency.
A forward currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make delivery
of the currency specified in the contract or, at or prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
The Funds may enter into forward currency contracts in several circumstances for
both hedging and non-hedging purposes, although the Emerging Local Currency Debt
Fund does not expect generally to enter into such contracts for the purpose of
attempting to hedge against currency exchange rate risks. 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
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
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<PAGE>
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.
A Fund 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. For
example, 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 options and
currency futures contracts and related options (see below) may be limited by the
requirements of subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a registered investment company.
Options on Securities and Foreign Currencies
Each of the Funds may write covered put and call options and purchase put and
call options. Such options may relate to particular U.S. or non-U.S. securities,
or to U.S. or non-U.S. currencies. The Funds may write put and call options
which are issued by the Options Clearing Corporation (the "OCC") or which are
traded on U.S. and non-U.S. exchanges and over-the-counter. See "Description of
Securities and Investment Techniques and Related Risks -- Options" in the
Prospectus.
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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
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;
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<PAGE>
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. The Emerging Local Currency Debt Fund does not expect generally to
enter into such contracts for the purpose of attempting to hedge against
potential adverse changes in currency exchange rates. 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
- - --------------------------------------------------------------------------------
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<PAGE>
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. Futures contracts that a Fund may use for hedging purposes
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
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.
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
for all the Funds and as noted above for the Emerging Local Currency Debt Fund,
the Funds' futures transactions will be entered into for
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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
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 portfolio
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,
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if the instrument is subject to a demand feature, will continuously monitor
their financial ability to meet payment on demand. Where necessary to ensure
that a variable or floating rate instrument is equivalent to the quality
standards applicable to a Fund's fixed income investments, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Any bank providing such a bank letter, line of credit, guarantee or loan
commitment will meet the Fund's investment quality standards relating to
investments in bank obligations. A Fund will invest in variable and floating
rate instruments only when the Adviser deems the investment to involve minimal
credit risk. The Adviser will also continuously monitor the creditworthiness of
issuers of such instruments to determine whether a Fund should continue to hold
the investments.
The absence of an active secondary market for certain variable and floating rate
notes could make it difficult to dispose of the instruments, and a Fund could
suffer a loss if the issuer defaults or during periods in which a Fund is not
entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to the
Fund's 15% limitation on investments in illiquid securities when a reliable
trading market for the instruments does not exist and the Fund may not demand
payment of the principal amount of such instruments within seven days.
Yields and Ratings. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of Standard & 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 Securities and Exchange Commission
(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, provided
that the Emerging Local Currency Debt Fund does not expect generally to use
these instruments to hedge against potential adverse changes in currency
exchange rates. 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
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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
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, the Emerging Local Currency Debt
Fund and, to a lesser extent, the Global Fixed Income Fund may invest in high
yielding, fixed income securities rated Ba or lower by Moody's, BB or lower by
Standard & Poor's, or an equivalent rating. These Funds 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
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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 quality securities generally fluctuate more than those of
higher quality securities. In addition, a security's low rating and/or quality
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 investment analysis and
attention to current developments in interest rates and economic conditions.
Where a Fund invests in lower quality securities, 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 higher quality securities.
As noted in the Prospectus, the Emerging Markets Debt Fund and the Emerging
Local Currency 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. In addition, each Fund may invest in zero coupon bonds. Both
types of bonds may be more speculative and subject to greater fluctuations in
value than securities which pay interest periodically and in cash, due to
changes in interest rates. The Fund will accrue income on such investments for
tax and accounting purposes, as required, which is distributable to shareholders
and which, because no cash is 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 and the Emerging Local Currency Debt Fund intend 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. These Funds' respective portfolios 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.
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<PAGE>
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
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
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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 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
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investment companies such as the Funds. CATS and TIGRS are not considered U.S.
Government securities by the Staff of the Commission, however. Further, the IRS
conclusion is contained only in a general counsel memorandum, which is an
internal document of no precedential value or binding effect, and a private
letter ruling, which also may not be relied upon by the Funds. The Trust is not
aware of any binding legislative, judicial or administrative authority on this
issue.
Commercial Paper
Commercial paper is a short-term, unsecured negotiable promissory note of a U.S.
or non-U.S issuer. Each of the Funds may purchase commercial paper for temporary
defensive purposes as described in the Prospectus. A Fund may also invest in
variable rate master demand notes which typically are issued by large corporate
borrowers providing for variable amounts of principal indebtedness and periodic
adjustments in the interest rate according to the terms of the instrument.
Demand notes are direct lending arrangements between a Fund and an issuer, and
are not normally traded in a secondary market. A Fund, however, may demand
payment of principal and accrued interest at any time. In addition, while demand
notes generally are not rated, their issuers must satisfy the same criteria as
those set forth in the Prospectus 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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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.
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.
- - --------------------------------------------------------------------------------
Page -16-
<PAGE>
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.
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
- - --------------------------------------------------------------------------------
Page -17-
<PAGE>
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 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.
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.
(2) Borrow money (i) except from banks as a temporary measure for extraordinary
emergency purposes and (ii) except that the Fund may enter into reverse
repurchase agreements and dollar rolls with banks, broker-dealers and other
parties; provided that, in each case, the Fund is required to maintain asset
coverage of at least 300% for all borrowings. For the purposes of this
investment restriction, short sales, transactions in currency, forward
contracts, swaps, options, futures contracts and options on futures contracts,
and forward commitment transactions shall not constitute borrowing.
(3) Pledge, mortgage, or hypothecate its assets, except to secure indebtedness
permitted by paragraph (2) above and to the extent related to the segregation of
assets in connection with the writing of covered put and call options and the
purchase of securities or currencies on a forward commitment or delayed-delivery
basis and collateral and initial or variation margin arrangements with respect
to forward contracts, options, futures contracts and options on futures
contracts.
(4) Act as an underwriter, except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed to be an underwriter
for purposes of the Securities Act of 1933.
(5) Purchase or sell real estate, or any interest therein, and real estate
mortgage loans, except that the Fund may invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities issued by companies (other than real estate limited partnerships)
that invest in real estate or interests therein.
(6) Make loans, except that the Fund may lend portfolio securities in accordance
with the Fund's investment policies and may purchase or invest in repurchase
agreements, bank certificates of deposit, all or a portion of an issue of bonds,
bank loan participation agreements, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance of
the securities.
- - --------------------------------------------------------------------------------
Page -18-
<PAGE>
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the Fund's
investment policies.
(8) Invest 25% or more of the value of the Fund's total assets in the securities
of one or more issuers conducting their principal business activities in the
same industry or group of industries. This restriction does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
Nonfundamental Investment Restrictions
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.
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 of other U.S.-registered investment companies, except as
permitted by the Investment Company Act of 1940 and the rules, regulations and
any applicable exemptive order issued thereunder.
(c) Invest for the purpose of exercising control over or management of any
company.
(d) 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.
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 inves
ments 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.
- - --------------------------------------------------------------------------------
Page -19-
<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) President, Chief President, Secretary and Treasurer, MGCM
885 Third Avenue Executive Officer, and (since 1990).
New York, NY 10022 Trustee
(age 49)
Patrick W.W. Disney (1) Senior Vice President Director, Morgan Grenfell Investment
20 Finsbury Circus and Trustee Services Limited ("MGIS") (since 1988).
London EC2M 1NB
ENGLAND
(age 41)
Paul K. Freeman (2) Trustee Chief Executive Officer, The Eric Group
7257 South Tucson Way Inc., (environmental insurance) (since
Englewood, CO 80112 1986).
(age 47)
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 64) 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 51)
Hugh G. Lynch Trustee Managing Director, International
767 Fifth Avenue Investments, General Motors Investment
New York, NY 10153 Management Corporation (since September
(age 60) 1990).
Edward T. Tokar Trustee Vice President-Investments, Allied Signal,
101 Columbia Road Inc. (advanced technology and manu-
Morristown, NJ 07962 facturer) (since 1985).
(age 50)
</TABLE>
- - --------------------------------------------------------------------------------
Page -20-
<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 31) Senior Associate, Price Waterhouse (1988-
1991).
Neil P. Jenkins Vice President Director, MGCM (since 1991), Morgan
20 Finsbury Circus Grenfell International Funds Management,
London, England 1995), and Morgan Grenfell & Co., Ltd.
(age 37) (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 48)
Ian D. Kelson Vice President Director, MGIS (since 1988); Chief
20 Finsbury Circus Investment Officer, Fixed Income,
London EC2M INB MGIS (since 1989).
England
(age 41)
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 46) 1990).
Martin Hall (4) Vice President Portfolio Manager, Fixed Income Team,
1435 Walnut Street MGIS (since 1988).
Philadelphia, PA 19102
(age 39)
Joan A. Binstock (4) Secretary Chief Operating Officer, MGCM (since
885 Third Avenue and Vice President June 1997); Principal, National Director
New York, NY 10022 of Investment Management Regulatory
(age 43) Consulting, Ernst & Young (May 1995 -
June 1997); Vice President, Head of
Compliance, JP Morgan Mutual Funds
(August 1993-May 1995).
</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
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.
- - --------------------------------------------------------------------------------
Page -21-
<PAGE>
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 November 30, 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, 1997:
Pension or
Retirement Benefits
Accrued as Part of Aggregate
Name of Trustee Fund Expenses Compensation from the Trust/Complex
*
- - --------------- ------------------- ------------------------------------
James E. Minnick $ 0 $ 0
Patrick W. Disney $ 0 $ 0
Paul K. Freeman $ 0 $ -
Graham E. Jones $ 0 $ -
William N. Searcy $ 0 $ -
Hugh G. Lynch $ 0 $ -
Edward T. Tokar $ 0 $ -
* The Trustees listed above do not serve on the Board of any other investment
company that may be considered to belong to the same complex as the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser
MGIS of London, England acts as investment adviser to each Fund pursuant
to the terms of two Management Contracts, between the Trust and MGIS (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 determines on a continuous basis, the allocation of each
Fund's investments among countries. The Adviser is responsible for the ordinary
expenses of offices, if any, for the Trust and the compensation, if any, of all
officers and employees of the Trust and all Trustees who are "interested
persons" (as defined in the 1940 Act) of the Adviser.
Under the Management Contract, the Trust, on behalf of each Fund, is obligated
to pay the Adviser a monthly fee at an annual rate of each Fund's average daily
net assets as follows:
Annual Rate
-----------
Morgan Grenfell Core Global Fixed Income Fund ........ 0.50%
Morgan Grenfell Global Fixed Income Fund.............. 0.50%*
Morgan Grenfell International Fixed Income Fund....... 0.50%*
Morgan Grenfell Emerging Markets Debt Fund............ 1.00%
Morgan Grenfell Local Currency Debt Fund.............. 0.60%**
- - --------------------------------------------------------------------------------
Page -22-
<PAGE>
- - ------------
* Effective April 1, 1995, the annual advisory fee rate for each of
these Funds was reduced from 0.60% to 0.50% of average daily net
assets.
** Effective September 1, 1995, the annual advisory fee rate for this
Fund was reduced from 1.60% to 1.50% of average daily net assets.
Effective March 1, 1997, the annual advisory fee rate for this Fund was
further reduced from 1.50% to 1.00% of average daily net assets.
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 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. For the fiscal year ended October
31, 1997, Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell
International Fixed Income Fund and Morgan Grenfell Emerging Markets Debt Fund
paid net advisory fees of $______, $________ and $_______, respectively. The
foregoing advisory fee payments reflect expense limitations that were in effect
during the indicated periods.
The Management Contracts were last approved on November 20, 1997 by a vote of
the Trust's Board of Trustees, including a majority of those Trustees who were
not parties to either Management Contract or "interested persons" of such
parties. Each Management Contract will continue in effect with respect to each
Fund that it covers 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
such Fund. Each 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 a 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 a 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 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
- - --------------------------------------------------------------------------------
Page -23-
<PAGE>
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, 1997, MGIS managed approximately $16.3 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, 1997, the portfolio turnover rates for Morgan Grenfell Global Fixed
Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan Grenfell
Emerging Markets Debt Fund were __%, __% and __%, respectively. 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.
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.
- - --------------------------------------------------------------------------------
Page -24-
<PAGE>
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. For the fiscal year ended October 31, 1997, Morgan Grenfell Global
Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and Morgan
Grenfell Emerging Markets Debt Fund paid the Administrator administration fees
of $_______, $________ and $_________, respectively.
The Administration Agreement provides that the Administrator shall not be liable
under the Administration Agreement except for bad faith or gross negligence in
the performance of its duties or from the reckless disregard by it of its duties
and obligations thereunder.
Expenses of the Trust
The expenses borne by service shares of the Funds include the service shares'
allocable share of: (i) fees and expenses of any investment adviser and any
administrator of the Funds; (ii) fees and expenses incurred by the Funds in
connection with membership in investment company organizations; (iii) brokers'
commissions; (iv) payment for portfolio pricing services to a pricing agent, if
any; (v) legal expenses (including an allocable portion of the cost of the
Trust's employees rendering legal services to the Funds); (vi) interest,
insurance premiums, taxes or governmental fees; (vii) the fees and expenses of
the transfer agent of the Funds; (viii) clerical expenses of issue, redemption
or repurchase of shares of the Funds; (ix) the expenses of and fees for
registering or qualifying shares of the Funds for sale and of maintaining the
registration of the Funds and registering the Funds as a broker or a dealer; (x)
the fees and expenses of Trustees who are not affiliated with the Adviser; (xi)
the cost of preparing and distributing reports and notices to shareholders, the
Commission and other regulatory authorities; (xii) the fees or disbursements of
custodians of the Fund's assets, including expenses incurred in the performance
of any obligations enumerated by the Declaration of Trust or By-Laws of the
Trust insofar as they govern agreements with any such custodian; (xiii) costs in
connection with annual or special meetings of shareholders, including proxy
material preparation printing and mailing; (xiv) charges and expenses of the
Trust's auditor; (xv) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business; and (xvi) expenses of an extraordinary and nonrecurring nature.
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.
- - --------------------------------------------------------------------------------
Page -25-
<PAGE>
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 20, 1997 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
Distributor. The Distributor may terminate the Distribution Agreement at any
time without penalty on 60 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
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.
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
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<PAGE>
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.
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
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<PAGE>
account such factors as price (including the applicable brokerage commission or
dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. Commission rates, being a component of price,
are considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
Pursuant to the Management Contracts, the Adviser agrees to select
broker-dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consideration may also be given to the broker-dealer's
sale of shares of the Funds and the other series of the Trust. In addition, the
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, 1997, 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
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<PAGE>
purchased for other investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers"). These brokers may include but are not limited to Morgan Grenfell Asia
and Morgan Grenfell Debt Arbitrage Trading.
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
A transaction would not be placed with Affiliated Brokers if a Fund would have
to pay a commission rate less favorable than their contemporaneous charges for
comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, 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 such portfolio transactions on a
quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal years ended October 31, 1996 and October
31, 1997 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, 1996 and 1997, 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.
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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) 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
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
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<PAGE>
share is subject to different fees and expenses and, consequently, may have
differing yields for the same period. The yield of service shares of a Fund
refers to the annualized income generated by an investment in service shares of
the Fund over a specified 30-day period. The yield is calculated by assuming
that the income generated by the investment during that period is generated for
each like period over one year and is shown as a percentage of the investment.
In particular, yield will be calculated according to the following formula:
YIELD = 2 [ ( a - b + 1)^6 - 1 ]
-----
cd
Where: a = dividends and interest earned by the
Fund during the period;
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.
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, 1997, the yields of service shares of
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed
Income Fund and Morgan Grenfell Emerging Markets Debt Fund were __%, __% and __,
respectively. If the expense limitations described in the Prospectus for these
Funds had not been in effect during this period, the yields of service shares of
Morgan Grenfell Global Fixed Income Fund, Morgan Grenfell International Fixed
Income Fund and Morgan Grenfell Emerging Markets Debt Fund would have been __%,
__% and __%, respectively.
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:
T = [ (ERV)^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);
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<PAGE>
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 their respective periods from commencement of operations to October 31,
1997, the average annual total returns of service shares of Morgan Grenfell
Global Fixed Income Fund, Morgan Grenfell International Fixed Income Fund and
Morgan Grenfell Emerging Markets Debt Fund were __%, __% and __%, respectively.
If the expense limitations described in the Prospectus for the above Funds had
not been in effect during the indicated periods, the total returns of service
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, Lehman Brothers Inc., First Boston Corporation, Dean Witter 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.
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<PAGE>
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"); and (b) 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. 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 such regulations.
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
- - --------------------------------------------------------------------------------
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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 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 taxable to
such shareholders as if received on December 31 of the year declared.
Gains and losses on the sale, lapse, or other termination of options and futures
contracts, options thereon and certain forward contracts (except certain foreign
currency options, forward contracts and futures contracts) will generally be
treated as capital gains and losses. Certain futures contracts, forward
contracts and options held by the Funds may be required to be "marked-to-market"
for federal income tax purposes, that is, treated as having been sold at their
fair market value on the last day of the Funds' taxable year. As a result, a
Fund may be required to recognize income or gain without a concurrent receipt of
cash. Additionally, a Fund may be required to recognize gain if an option,
future, forward contract, short sale, or other transaction that is not subject
to these mark to market rules is treated as a "constructive sale" or an
"appreciated financial position" held by the Fund under Section 1259 of the
Code. Any gain or loss recognized on actual or deemed sales of futures
contracts, forward contracts, or options that are subject to the mark to market
rules, but not the constructive sales rules, (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, forward contracts and
constructive sales may affect the amount, timing and character of a Fund's
distributions to shareholders. 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
- - --------------------------------------------------------------------------------
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<PAGE>
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.
Transactions or instruments subject to the mark to market or constructive sale
rules described above may have the same result in some circumstances. 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 withholding or other
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
satisfaction of certain holding period requirements and to other 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 qualified 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
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<PAGE>
represents income 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 foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) 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 or make an available election 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, certain structured securities and interest rate floors
and caps are unclear in certain respects, and the Funds may be required to
account for these transactions or instruments under tax rules in a manner that
may affect the amount, timing and character of income, gain or loss therefrom
and that may, under certain circumstances, limit the extent to which the Funds
engage in these transactions or acquire these instruments.
Each Fund other than International Fixed Income Fund may invest in debt
obligations that are in the lowest rating ategories or are unrated, including
debt obligations of issuers not currently paying interest as well as issuers who
are in default. Investments in debt obligations that are at risk of or in
default present special tax issues for the Funds. Tax rules are not entirely
clear about issues such as when a Fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the Funds, to the extent 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 having to pay 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 of any
Fund 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
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<PAGE>
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 dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are 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, extending before and after each such dividend. 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. 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 and, to the extent such basis would be reduced below zero,
require the current recognition of income. 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 capital gain regardless of how long shares have
been held by shareholders, but are not eligible for the dividends received
deduction for corporations. As a result of the enactment of the Taxpayer Relief
Act of 1997 (the "1997 TRA") on August 5, 1997, gain recognized after May 6,
1997 from the sale of a capital asset is taxable to individual (noncorporate)
investors at different maximum federal income tax rates, depending generally
upon the tax holding period for the asset, the federal income tax bracket of the
taxpayer, and the dates the asset was acquired and/or sold. The Treasury
Department has issued Notice 97-59 and Announcement 97-109, and is expected to
issue further guidance, to apply this legislation (as modified by any "technical
corrections" that may be enacted) to capital gains and losses and to
distributions by regulated investment companies ("RICs"), including the Funds,
from their realized net capital gain. This guidance should enable RICs to pass
through to their shareholders the benefits of the capital gains tax rates
contained in the 1997 TRA by designating certain capital gains dividends or
portions thereof as eligible for a 20% maximum tax rate (or 10% for taxpayers in
the 15% rate bracket), with other capital gain dividends or portions thereof
subject to a maximum 28% tax rate, in each case for individuals and other
noncorporate taxpayers entitled to such preferential capital gains tax rates.
This guidance also provides or will provide for the appropriate tax treatment of
other long-term capital gains and losses, such as those recognized by a Fund
under the mark to market rules described above, and distributions attributable
to such gains. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
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 in a
transaction that is treated as a sale for tax purposes, 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. Any loss realized on the sale, redemption or
other disposition of the shares of any Fund with a tax holding period of six
months or less, to the extent such loss is not disallowed under any other tax
rule, will be treated as a long-term capital loss to the extent of any capital
gain dividend 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.
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<PAGE>
Shareholders should consult their own tax advisers regarding their particular
circumstances to determine whether a disposition of Fund shares is properly
treated as a sale for tax purposes, as is assumed in the foregoing discussion.
Also, future Treasury Department regulations, announcements or other guidance
issued to implement the 1997 TRA may contain rules for determining different tax
rates applicable to sales of Fund shares held for more than one year, more than
18 months, and (for certain sales after the year 2000 or the year 2005) more
than five years. These regulations may also modify some of the provisions
described above.
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
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.
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<PAGE>
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 November 24, 1997, the following shareholder owned the following
percentage of the outstanding service shares of the indicated Fund:
Emerging Markets Debt Fund:
Donaldson Lufkin & Jenrette 99.61%
Secs Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
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.
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<PAGE>
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 the securities meet
the investment objectives and policies of the Fund are acquired by the Fund for
investment and not for resale. An exchange of securities for Fund shares will
generally be a taxable transaction to the shareholder.
ADDITIONAL INFORMATION
Independent Accountants
_____________________, ______________, 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, 1997
are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of _________________, the
Trust's independent accountants, as experts in accounting and auditing.
The financial statements of the Trust for the periods ended on and prior to
October 31, 1997 are included in, and incorporated by reference into, this
Statement of Additional Information from the Trust's 1997 Annual Report to
Shareholders for the year ended October 31, 1997 (filed electronically on
December ___, 1997; file no. 812-10080; accession no. ____________), and will be
attached to each copy of such Statement of Additional Information that is
distributed.
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<PAGE>
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
The financial highlights for institutional shares of the
Registrant are included in Part A of this post-effective
amendment for periods ending on or prior to October 31, 1996. The
Registrant expects that the financial highlights for both
institutional shares and service shares for periods ending on or
prior to October 31, 1997 will be included in Part A of the next
post-effective amendment to its registration statement, and that
the Registrant's financial statements covering such periods will
be incorporated by reference into Part B of such post-effective
amendment.
(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.
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<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).
5(e). Form of Management Contract between Morgan Grenfell
Capital Management, Inc. and Registrant, on behalf of
Morgan Grenfell Total Return Bond Fund and Morgan
Grenfell High Yield Bond Fund.
5(f). Form of Management Contract between Morgan Grenfell
Investment Services Ltd. and Registrant, on behalf of
Morgan Grenfell Emerging Local Currency Debt Fund and
Morgan Grenfell Core Global Fixed Income Fund.
*6. Distribution Agreement dated as of December 30, 1993
between SEI Financial Services Company and Registrant,
on behalf of all of its series.
**8(a). Custody Agreement dated as of December 29, 1993 between
The Northern Trust Company and Registrant, on behalf of
Morgan Grenfell International Equity Fund, Morgan
Grenfell Global Equity Fund, Morgan Grenfell European
Equity Fund, Morgan Grenfell Pacific Basin Equity Fund,
Morgan Grenfell International Small Cap Equity Fund,
Morgan Grenfell Japanese Small Cap Equity Fund, Morgan
Grenfell European Small Cap Equity Fund, Morgan
Grenfell Emerging Markets Equity Fund, Morgan Grenfell
Global Fixed Income Fund, Morgan Grenfell International
Fixed Income Fund and Morgan Grenfell Emerging Markets
Fixed Income Fund, and form of amendment effective as
of
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<PAGE>
December 28, 1994, causing Custody Agreement to apply
to Morgan Grenfell Short-Term Fixed Income Fund, Morgan
Grenfell Short-Term Municipal Bond Fund, Morgan
Grenfell Large Cap Growth Fund and Morgan Grenfell
Smaller Companies Fund.
**8(b). Custody Agreement dated as of December 28, 1994 between
CoreStates Bank, N.A. and Registrant, on behalf of
Morgan Grenfell Fixed Income Fund and Morgan Grenfell
Municipal Bond Fund.
***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
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<PAGE>
1, 1996 pursuant to Post-Effective Amendment No. 12 to
Registrant's Registration Statement).
***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. Opinion of Counsel.
11. Not Applicable.
12. Not Applicable.
***13. Share Purchase Agreement dated as of December 29, 1993
between Registrant and SEI Financial Management
Corporation (previously filed with the SEC on February
11, 1997 pursuant to Post-Effective Amendment No. 16 to
Registrant's Registration Statement).
***16. Schedule of Performance Computations (previously filed
with the SEC on February 11, 1997 pursuant to
Post-Effective Amendment No. 16 to Registrant's
Registration Statement).
17. Not Applicable.
***18. Form of Amended Rule 18f-3 Plan (previously filed with
the SEC on February 11, 1997 pursuant to Post-Effective
Amendment No. 16 to Registrant's Registration
Statement).
**19(a). Powers of Attorney of Graham E. Jones, William N.
Searcy, Paul K. Freeman, Theresa M. Messina, Patrick W.
Disney, James E. Minnick, Hugh G. Lynch, Edward T.
Tokar and Jeffrey A. Cohen.
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<PAGE>
***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.
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 November 17, 1997, the number of record holders of shares of each
class of each series of the Registrant was as follows:
Number of Record Holders
Fund of Institutional Shares
Morgan Grenfell International Equity Fund 23
Morgan Grenfell Global Equity Fund 1
Morgan Grenfell European Equity Fund 7
Morgan Grenfell Pacific Basin Equity Fund 1
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Morgan Grenfell International Small Cap Equity Fund 18
Morgan Grenfell Japanese Small Cap Equity Fund 1
Morgan Grenfell European Small Cap Equity Fund 12
Morgan Grenfell Emerging Markets Equity Fund 33
Morgan Grenfell Core Global Fixed Income Fund 0
Morgan Grenfell Global Fixed Income Fund 78
Morgan Grenfell International Fixed Income Fund 23
Morgan Grenfell Emerging Markets Debt Fund 69
Morgan Grenfell Fixed Income Fund 363
Morgan Grenfell Municipal Bond Fund 149
Morgan Grenfell Short-Term Fixed Income Fund 65
Morgan Grenfell Short-Term Municipal Bond Fund 57
Morgan Grenfell Smaller Companies Fund 26
Morgan Grenfell Microcap Fund 26
Morgan Grenfell Large Cap Growth Fund 0
Morgan Grenfell Total Return Bond Fund 0
Morgan Grenfell High Yield Bond Fund 0
Morgan Grenfell Emerging Local Currency Debt Fund 0
Fund Number of Holders
of Service Shares
Morgan Grenfell International Equity Fund 0
Morgan Grenfell Global Equity Fund 0
Morgan Grenfell European Equity Fund 0
Morgan Grenfell Pacific Basin Equity Fund 0
Morgan Grenfell International Small Cap Equity Fund 0
Morgan Grenfell Japanese Small Cap Equity Fund 0
Morgan Grenfell European Small Cap Equity Fund 0
Morgan Grenfell Emerging Markets Equity Fund 0
Morgan Grenfell Core Global Fixed Income Fund 0
Morgan Grenfell Global Fixed Income Fund 0
Morgan Grenfell International Fixed Income Fund 0
Morgan Grenfell Emerging Markets Debt Fund 7
Morgan Grenfell Fixed Income Fund 0
Morgan Grenfell Municipal Bond Fund 7
Morgan Grenfell Short-Term Fixed Income Fund 0
Morgan Grenfell Short-Term Municipal Bond Fund 0
Morgan Grenfell Smaller Companies Fund 7
Morgan Grenfell Microcap Fund 7
Morgan Grenfell Large Cap Growth Fund 0
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<PAGE>
Morgan Grenfell Total Return Bond Fund 0
Morgan Grenfell High Yield Bond Fund 0
Morgan Grenfell Emerging Local Currency Debt Fund 0
Item 27. Indemnification
---------------
Article III, Section 7 and Article VII, Section 2 of the Registrant's
Agreement and Declaration of Trust and Article VI of the Registrant's By-Laws
provide for indemnification of the Registrant's trustees and officers under
certain circumstances.
Item 28. Business and Other Connections of Investment Advisers
-----------------------------------------------------
All of the information required by this item is set forth in the Form
ADV, as amended, of Morgan Grenfell Investment Services Limited (File No.
801-12880) and in the Form ADV, as amended, of Morgan Grenfell Capital
Management, Inc. (File No. 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,
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, Boston 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, TIP Funds, SEI Institutional Investments
Trust, First American Strategy Funds, Inc., High Mark Funds and
Armada Funds pursuant to distribution agreements dated July 15,
1982, November 29, 1982, December 3, 1982, July 10, 1985, January
22, 1987, August 30, 1988, 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,
C-7
<PAGE>
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 28, 1996, June 14, 1996,
October 1, 1996, February 15, 1997 and March 8, 1997,
respectively.
(b) The following table lists, for each director and officer of SFS,
the information indicated.
Name and Positions and
Principal Business Position and Offices Office with
Address* with Underwriter Registrant
- - -------- ---------------- ----------
Alfred P. West, Jr. Director, Chairman and None
Chief Executive Officer
Henry H. Greer Director, President and None
Chief Operating Officer
Carmen V. Romeo Director, Executive Vice None
President, President -
Investment Advisory Group
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
David G. Lee Senior Vice President None
A. Keith McDowell Senior Vice President None
Dennis J. McGonigle Executive Vice President None
Hartland J. McKeown 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
Robert Crudup Vice President and
Managing Director None
Barbara Doyne Vice President 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
C-8
<PAGE>
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
Robert Aller Vice President None
W. Kelso Morrill Vice President None
Joanne Nelson 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
Jeff Drennen Vice President None
Kathy Heilig Vice President and None
Treasurer
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
Kim Rainey Vice President None
Steve Smith Vice President None
Daniel Spaventa Vice President None
Kathryn L. Stanton Vice President and None
Assistant Secretary
James Dougherty Director of Brokerage Services None
Marc H. Cahn Vice President and None
Assistant Secretary
- - ----------
* The principal business address of each of the listed persons is SEI
Financial Services Company, 680 East Swedesford Road, Wayne, Pennsylvania
19087-1658.
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
The Agreement and Declaration of Trust, By-Laws and minute books of
the Registrant are in the physical possession of Morgan Grenfell Capital
Management, Inc., 885 Third Avenue, New York, New York 10022. All other books,
records, accounts and other documents required to be maintained under Section
31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder
will be in the physical possession of the Registrant's
C-9
<PAGE>
custodians: The Northern Trust Company, Fifty South LaSalle Street, Chicago,
Illinois 60675, and CoreStates Bank, N.A., Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101, except for certain transfer agency and fund
accounting records which are in the physical possession of DST Systems, Inc.,
811 Main Street, Kansas City, Missouri 64105, the Registrant's transfer agent,
and SEI Financial Management Corporation, the Trust's administrator, 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-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment 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
17th day of November 1997.
MORGAN GRENFELL INVESTMENT TRUST
By: /s/ James E. Minnick
---------------------
James E. Minnick
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 to the Registrant's Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
/s/ James E. Minnick )
- - ------------------------ Chief Executive Officer )
James E. Minnick (Principal Executive )
Officer) and Trustee )
)
)
/s/ John G. Alshefski ) Nov. 17, 1997
- - ------------------------ Treasurer and Chief )
John G. Alshefski Financial Officer )
(Principal Financial and )
Accounting Officer) )
)
)
Paul K. Freeman* )
- - -------------------- Trustee )
Paul K. Freeman )
)
)
Graham E. Jones* )
- - --------------------- Trustee )
Graham E. Jones
C-11
<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 )
- - ------------
*By: /s/ James E. Minnick Dated: November 17, 1997
--------------------
James E. Minnick, Attorney-in-Fact,
pursuant to powers of attorney
<PAGE>
Exhibit Index
-------------
Exhibit
Number Document Title
- - ------ --------------
5(e). Form of Management Contract between Morgan Grenfell Capital
Management, Inc. and Registrant, on behalf of Morgan Grenfell
Total Return Bond Fund and Morgan Grenfell High Yield Bond Fund.
5(f). Form of Management Contract between Morgan Grenfell Investment
Services Ltd. and Registrant, on behalf of Morgan Grenfell
Emerging Local Currency Debt Fund and Morgan Grenfell Core Global
Fixed Income Fund.
10. Opinion of Legal Counsel.
<PAGE>
FORM OF INVESTMENT MANAGEMENT CONTRACT
AGREEMENT made as of the 30th day of January, 1998, by and between Morgan
Grenfell Investment Trust (the "Trust"), on behalf of Morgan Grenfell Total
Return Bond Fund and Morgan Grenfell High Yield Bond Fund (the "Portfolios"),
and Morgan Grenfell Capital Management, Incorporated (the "Adviser").
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended,
consisting of several series of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained SEI Financial Management Corporation (the
"Administrator") to provide administration of the Trust's operations, subject to
the control of the Board of Trustees;
WHEREAS, the Trust desires to retain the Adviser to render investment
management services with respect to the Portfolios, and the Adviser is willing
to render such services:
NOW, THEREFORE, in consideration of mutual covenants herein contained, the
parties hereto agree as follows:
1. Duties of Adviser. The Trust employs the Adviser to manage the
investment and reinvestment of the assets, and to continuously review,
supervise, and administer the investment programs of the Portfolios,
to determine in its discretion the securities to be purchased or sold,
to provide the Administrator and the Trust with records concerning the
Adviser's activities which the Trust is required to maintain, and to
render regular reports to the Administrator and to the Trust's
officers and trustees concerning the Adviser's discharge of the
foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to
the control of the Board of Trustees of the Trust and in compliance
with such policies as the Trustees may from time to time establish,
and in compliance with the objectives, policies, and limitations for
each such Portfolio set forth in the Portfolio's prospectus and
statement of additional information, as amended from time to time, and
applicable laws and regulations.
The Adviser accepts such employment and agrees, at its own expense, to
render the services and to provide the office space, furnishings and
<PAGE>
equipment and the personnel required by it to perform the services on
the terms and for the compensation provided herein.
2. Portfolio Transactions. The Adviser is authorized to select the
brokers or dealers that will execute the purchases and sales of
portfolio securities for the Portfolios and is directed to use its
best efforts to obtain the best net results as described from time to
time in the Portfolios' Prospectus and Statement of Additional
Information. The Adviser will promptly communicate to the
Administrator and to the officers and the Trustees of the Trust such
information relating to portfolio transactions as they may reasonably
request.
It is understood that the Adviser will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Trust or be in
breach of any obligation owing to the Trust under this Agreement, or
otherwise, solely by reason of its having directed a securities
transaction on behalf of the Trust to a broker-dealer in compliance
with the provisions of Section 28(e) of the Securities Exchange Act of
1934 or as otherwise permitted from time to time by the Portfolios'
Prospectus and Statement of Additional Information.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Trust
shall pay to the Adviser compensation at the rates specified in the
Schedule(s) which are attached hereto and made a part of this
Agreement. Such compensation shall be paid to the Adviser at the end
of each month, and calculated by applying a daily rate, based on the
annual percentage rates as specified in the attached Schedule(s), to
the assets of each Portfolio. The fee shall be based on the average
daily net assets for the month involved (less any assets of such
Portfolios held in non-interest bearing special deposits with a
Federal Reserve Bank).
All rights of compensation under this Agreement for services performed
as of the termination date shall survive the termination of this
Agreement.
4. Other Expenses. The Adviser shall pay all expenses of printing and
mailing reports, prospectuses, statements of additional information,
and sales literature relating to its efforts to solicit prospective
clients.
5. Reports. The Trust and the Adviser agree to furnish to each other, if
applicable, current prospectuses, proxy statements, reports to
Shareholders, certified copies of their financial statements, and such
-2-
<PAGE>
other information with regard to their affairs as each may reasonably
request.
6. Status of Adviser. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar
services to others so long as its services to the Trust are not
impaired thereby. The Adviser shall be deemed to be an independent
contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust in any
way or otherwise be deemed an agent of the Trust.
7. Certain Records. Any records required to be maintained and preserved
pursuant to the provisions of Rule 31a-l and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or
maintained by the Adviser on behalf of the Trust are the property of
the Trust and will be surrendered promptly to the Trust on request.
8. Limitation of Liability of Adviser. The duties of the Adviser shall be
confined to those expressly set forth herein, and no implied duties
are assumed by or may be asserted against the Adviser hereunder. The
Adviser shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except a loss resulting
from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of reckless disregard of its
obligations and duties hereunder, except as may otherwise be provided
under provisions of applicable state law or Federal securities law
which cannot be waived or modified hereby. (As used in this Paragraph
8, the term "Adviser" shall include directors, officers, employees and
other corporate agents of the Adviser as well as that corporation
itself).
9. Permissible Interests. Trustees, agents, and shareholders of the Trust
are or may be interested in the Adviser (or any successor thereof) as
directors, partners, officers, or shareholders, or otherwise;
directors, partners, officers, agents, and shareholders of the Adviser
are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any Successor) is or may be interested
in the Trust as a Shareholder or otherwise. In addition, brokerage
transactions for the Portfolios may be effected through affiliates of
the Adviser if approved by the Board of Trustees, subject to the rules
and regulations of the Securities and Exchange Commission.
10. License of Adviser's Name. The Adviser hereby agrees to grant a
license to the Trust for use of its name in the names of the
Portfolios for
-3-
<PAGE>
the term of this Agreement and such license shall terminate upon
termination of this Agreement.
11. Subadviser. It is understood that the Adviser, on behalf of each
Portfolio, may employ one or more sub-investment advisers (each a
"Subadviser") under written agreements with each such Subadviser,
provided that any such agreement is first approved by the vote of a
majority of the Trustees, including a majority of the Trustees who are
not "interested persons" of the Trust, the Adviser or any such
Subadviser, at a meeting of Trustees called for the purpose of voting
on such approval and by a vote of a "majority of the outstanding
voting securities" of the affected Portfolio. The authorization given
to the Adviser in this Agreement to perform portfolio management and
related services may be delegated by it under any such agreement to
any of the Subadvisers, provided that the Subadvisers shall be subject
to the same restrictions and limitations on the investments and
brokerage discretion as the Adviser.
As used in this Section 11 and 12, the terms "interested persons" and
a "vote of a majority of the outstanding voting securities" shall have
the respective meanings set forth in the Investment Company Act of
1940 and the rules and regulations thereunder, subject to such
exemptions as may be granted by the Securities and Exchange Commission
under said Act.
12. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall remain in effect with respect to a Portfolio
until two years from the date first set forth above, and thereafter,
for periods of one year so long as such continuance thereafter is
specifically approved at least annually (a) by the vote of a majority
of those Trustees of the Trust who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the
Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the Portfolio; provided, however, that if the
shareholders of either Portfolio fail to approve the Agreement as
provided herein, the Adviser may continue to serve hereunder in the
manner and to the extent permitted by the Investment Company Act of
1940 and rules and regulations thereunder. The foregoing requirement
that continuance of this Agreement be "specifically approved at least
annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the rules and regulations
thereunder.
-4-
<PAGE>
This Agreement may be terminated as to either Portfolio at any time,
without the payment of any penalty by vote of a majority of the
Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the Portfolio on not less than 30 days nor more
than 60 days written notice to the Adviser, or by the Adviser at any
time without the payment of any penalty, on 90 days written notice to
the Trust. This Agreement will automatically and immediately terminate
in the event of its assignment. Any notice under this Agreement shall
be given in writing, addressed and delivered, or mailed postpaid, to
the other party at any office of such party.
As used in this Section 12, the term "assignment" shall have the
meaning as set forth in the Investment Company Act of 1940 and the
rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
13. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice
to the other party at the last address furnished by the other party to
the party giving notice: if to the Trust, at 885 Third Avenue, New
York, NY 10022 and if to the Adviser, at 885 Third Avenue, New York,
NY 10022.
14. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
A copy of the Certificate of Trust of the Trust is on file with the Secretary of
State of the State of Delaware, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust as Trustees, and is not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually but binding only upon the assets and property of the Trust.
-5-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
as of the day and year first written above.
MORGAN GRENFELL INVESTMENT TRUST
on behalf of
Morgan Grenfell Total Return Bond Fund
Morgan Grenfell High Yield Bond Fund
By:
--------------------------
Joan A. Binstock
Secretary
Attest:
-----------------------
MORGAN GRENFELL CAPITAL MANAGEMENT INCORPORATED
By:
--------------------------
James E. Minnick
President
Attest:
-----------------------
-6-
<PAGE>
Schedule
to the
Investment Advisory Agreement
between
Morgan Grenfell Investment Trust
on behalf of Morgan Grenfell Total Return Bond Fund
and Morgan Grenfell High Yield Bond Fund
and
Morgan Grenfell Capital Management Incorporated
Pursuant to Article 3, the Trust, on behalf of each Portfolio, shall pay the
Adviser compensation at an annual rate as follows:
Portfolio Fee
- - --------- ---
Morgan Grenfell Total Return 0.45% of the average daily net assets
Bond Fund
Morgan Grenfell High Yield Bond Fund 0.50% of the average daily net assets
-7-
<PAGE>
FORM OF INVESTMENT MANAGEMENT CONTRACT
AGREEMENT made as of the 30th day of January, 1998, by and between Morgan
Grenfell Investment Trust (the "Trust"), on behalf of Morgan Grenfell Core
Global Fixed Income Fund and Morgan Grenfell Emerging Local Currency Debt Fund
(collectively, the "Portfolios"), and Morgan Grenfell Investment Services
Limited, a United Kingdom corporation (the "Adviser").
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended,
consisting of several series of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained SEI Financial Management Corporation (the
"Administrator") to provide administration of the Trust's operations, subject to
the control of the Board of Trustees;
WHEREAS, the Trust desires to retain the Adviser to render investment
management services with respect to the Portfolios, and the Adviser is willing
to render such services:
NOW, THEREFORE, in consideration of mutual covenants herein contained, the
parties hereto agree as follows:
1. Duties of Adviser. The Trust employs the Adviser to manage the
investment and reinvestment of the assets, and to continuously review,
supervise, and administer the investment programs of the Portfolios,
to determine in its discretion the securities to be purchased or sold,
to provide the Administrator and the Trust with records concerning the
Adviser's activities which the Trust is required to maintain, and to
render regular reports to the Administrator and to the Trust's
officers and trustees concerning the Adviser's discharge of the
foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to
the control of the Board of Trustees of the Trust and in compliance
with such policies as the Trustees may from time to time establish,
and in compliance with the objectives, policies, and limitations for
each Portfolio set forth in the Portfolio's prospectus and statement
of additional information, as amended from time to time, and
applicable laws and regulations.
<PAGE>
The Adviser accepts such employment and agrees, at its own expense, to
render the services and to provide the office space, furnishings and
equipment and the personnel required by it to perform the services on
the terms and for the compensation provided herein.
2. Portfolio Transactions. The Adviser is authorized to select the
brokers or dealers that will execute the purchases and sales of
portfolio securities for the Portfolios and is directed to use its
best efforts to obtain the best net results as described from time to
time in the Portfolios' respective Prospectuses and Statements of
Additional Information. The Adviser will promptly communicate to the
Administrator and to the officers and the Trustees of the Trust such
information relating to portfolio transactions as they may reasonably
request.
It is understood that the Adviser will not be deemed to have acted
unlawfully, or to have breached a fiduciary duty to the Trust or be in
breach of any obligation owing to the Trust under this Agreement, or
otherwise, solely by reason of its having directed a securities
transaction on behalf of the Trust to a broker-dealer in compliance
with the provisions of Section 28(e) of the Securities Exchange Act of
1934 or as otherwise permitted from time to time by the applicable
Portfolio's Prospectus and Statement of Additional Information.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Trust
shall pay to the Adviser compensation at the rates specified in the
Schedule(s) which are attached hereto and made a part of this
Agreement. Such compensation shall be paid to the Adviser at the end
of each month, and calculated by applying a daily rate, based on the
annual percentage rates as specified in the attached Schedule(s), to
the assets of each Portfolio. The fee shall be based on the average
daily net assets for the month involved (less any assets of the
applicable Portfolio held in non-interest bearing special deposits
with a Federal Reserve Bank).
All rights of compensation under this Agreement for services performed
as of the termination date shall survive the termination of this
Agreement.
4. Other Expenses. The Adviser shall pay all expenses of printing and
mailing reports, prospectuses, statements of additional information,
and sales literature relating to its efforts to solicit prospective
clients.
-2-
<PAGE>
5. Reports. The Trust and the Adviser agree to furnish to each other, if
applicable, current prospectuses, proxy statements, reports to
Shareholders, certified copies of their financial statements, and such
other information with regard to their affairs as each may reasonably
request.
6. Status of Adviser. The services of the Adviser to the Trust are not to
be deemed exclusive, and the Adviser shall be free to render similar
services to others so long as its services to the Trust are not
impaired thereby. The Adviser shall be deemed to be an independent
contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Trust in any
way or otherwise be deemed an agent of the Trust.
7. Certain Records. Any records required to be maintained and preserved
pursuant to the provisions of Rule 31a-l and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or
maintained by the Adviser on behalf of the Trust are the property of
the Trust and will be surrendered promptly to the Trust on request.
8. Limitation of Liability of Adviser. The duties of the Adviser shall be
confined to those expressly set forth herein, and no implied duties
are assumed by or may be asserted against the Adviser hereunder. The
Adviser shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in carrying out its duties hereunder, except a loss resulting
from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of reckless disregard of its
obligations and duties hereunder, except as may otherwise be provided
under provisions of applicable state law or Federal securities law
which cannot be waived or modified hereby. (As used in this Paragraph
8, the term "Adviser" shall include directors, officers, employees and
other corporate agents of the Adviser as well as that corporation
itself).
9. Permissible Interests. Trustees, agents, and shareholders of the Trust
are or may be interested in the Adviser (or any successor thereof) as
directors, partners, officers, or shareholders, or otherwise;
directors, partners, officers, agents, and shareholders of the Adviser
are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any Successor) is or may be interested
in the Trust as a Shareholder or otherwise. In addition, brokerage
transactions for the Portfolios may be effected through affiliates of
the Adviser if approved by the Board of Trustees, subject to the rules
and regulations of the Securities and Exchange Commission.
-3-
<PAGE>
10. License of Adviser's Name. The Adviser hereby agrees to grant a
license to the Trust for use of its name in the name of each Portfolio
for the term of this Agreement and such license shall terminate upon
termination of this Agreement with respect to such Portfolio.
11. Subadviser. It is understood that the Adviser, on behalf of each
Portfolio, may employ one or more sub-investment advisers (each a
"Subadviser") under written agreements with each such Subadviser,
provided that any such agreement is first approved by the vote of a
majority of the Trustees, including a majority of the Trustees who are
not "interested persons" (as the term "interested person" is defined
in the 1940 Act) of the Trust, the Adviser or any such Subadviser, at
a meeting of Trustees called for the purpose of voting on such
approval and by a vote of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio. The
authorization given to the Adviser in this Agreement to perform
portfolio management and related services may be delegated by it under
any such agreement to any of the Subadvisers, provided that the
Subadvisers shall be subject to the same restrictions and limitations
on the investments and brokerage discretion as the Adviser.
As used in this Section 11 and 12, the terms "interested persons" and
a "vote of a majority of the outstanding voting securities" shall have
the respective meanings set forth in the Investment Company Act of
1940 and the rules and regulations thereunder, subject to such
exemptions as may be granted by the Securities and Exchange Commission
under said Act.
12. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall remain in effect with respect to each Portfolio
until two years from the date first set forth above, and thereafter,
for periods of one year so long as such continuance thereafter is
specifically approved at least annually (a) by the vote of a majority
of those Trustees of the Trust who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the
Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the applicable Portfolio; provided, however, that
if the shareholders of a Portfolio fail to approve the Agreement as
provided herein, the Adviser may continue to serve hereunder in the
manner and to the extent permitted by the Investment Company Act of
1940 and rules and regulations thereunder. The foregoing requirement
that continuance of this Agreement be "specifically approved at least
annually" shall be
-4-
<PAGE>
construed in a manner consistent with the Investment Company Act of
1940 and the rules and regulations thereunder.
This Agreement may be terminated at any time as to a Portfolio,
without the payment of any penalty by vote of a majority of the
Trustees of the Trust or by vote of a majority of the outstanding
voting securities of the applicable Portfolio on not less than 30 days
nor more than 60 days written notice to the Adviser, or by the Adviser
at any time without the payment of any penalty, on 90 days written
notice to the Trust. This Agreement will automatically and immediately
terminate in the event of its assignment. Any notice under this
Agreement shall be given in writing, addressed and delivered, or
mailed postpaid, to the other party at any office of such party.
As used in this Section 12, the terms "assignment" shall have the
meaning as set forth in the Investment Company Act of 1940 and the
rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
13. Notice. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice
to the other party at the last address furnished by the other party to
the party giving notice: if to the Trust, at 885 Third Avenue, New
York, NY 10022 and if to the Adviser, at 20 Finsbury Circus, London,
England EC2M 1NB .
14. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
A copy of the Certificate of Trust of the Trust is on file with the Secretary of
State of the State of Delaware, and notice is hereby given that this instrument
is executed on behalf of the Trustees of the Trust as Trustees, and is not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually but binding only upon the assets and property of the Portfolios.
-5-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
as of the day and year first written above.
MORGAN GRENFELL INVESTMENT TRUST
on behalf of
Morgan Grenfell Core Global Fixed Income Fund
Morgan Grenfell Emerging Local Currency Debt Fund
By:
-----------------------
Joan A. Binstock
Secretary
Attest:
MORGAN GRENFELL INVESTMENT SERVICES LIMITED
By:
-----------------------
Patrick W. W. Disney
Chief Executive Officer
Attest:
-------------------
-6-
<PAGE>
Schedule
to the
Investment Advisory Agreement
between
Morgan Grenfell Investment Trust
on behalf of Morgan Grenfell Core Global Fixed Income Fund
and Morgan Grenfell Emerging Local Currency Debt Fund
and
Morgan Grenfell Investment Services Limited
Pursuant to Article 3, the Trust, on behalf of the Portfolios, shall pay the
Adviser compensation at the following annual rates:
Portfolio Fee
- - --------- ---
Morgan Grenfell Core Global 0.50% of the average daily net assets
Fixed Income Fund
Morgan Grenfell Emerging Local 0.60% of the average daily net assets
Currency Debt Fund
-7-
[LETTERHEAD]
Morris, Nichols, Arsht & Tunnell
December 10, 1997
Morgan Grenfell Investment Trust
885 Third Avenue
New York, New York 10022
Re: Morgan Grenfell Investment Trust
Ladies and Gentlemen:
We have acted as special Delaware counsel to Morgan Grenfell Investment
Trust, a Delaware business trust (the "Trust"), in connection with certain
matters relating to the issuance of Shares in the Trust. Capitalized terms used
herein and not otherwise herein defined are used as defined in the Agreement and
Declaration of Trust of the Trust dated September 13, 1993 (the "Governing
Instrument").
In rendering this opinion, we have examined copies of the following
documents, each in the form provided to us: the Certificate of Trust of the
Trust filed in the Office of the Secretary of State of the State of Delaware
(the "Recording Office") on September 13, 1993 (the "Certificate"); the
Governing Instrument; the By-laws of the Trust; a Written Consent of the
Trustees of the Trust; certain votes of the Trust; the Trust's Notification of
Registration Filed Pursuant to Section 8(a) of the Investment Company Act of
1940 on Form N-8A as filed with the Securities and Exchange Commission on
September 13, 1993; Post-Effective Amendment No. 18 to the Trust's Registration
Statement under the Securities Act of 1933, as amended, on Form N-1A to be filed
with the Securities and Exchange Commission on or about the date hereof (the
"Post-Effective Amendment"); and a certification of good standing of the Trust
obtained as of a recent date from the Recording Office. In such examinations, we
have assumed the genuineness of all signatures, the conformity to original
documents of all documents submitted to us as copies or drafts of documents to
be executed, and the legal capacity of natural persons to complete the execution
of documents. We have further assumed for the purpose of this opinion: (i) the
due authorization, execution and delivery by, or on behalf of, each of the
parties thereto of the above-referenced instruments, certificates and other
documents,
<PAGE>
Morgan Grenfell Investment Trust
December 10, 1997
Page 2
and of all documents contemplated by the Governing Instrument, the By-laws and
applicable resolutions of the Trustees to be executed by investors desiring to
become Shareholders; (ii) the payment of consideration for Shares, and the
application of such consideration, as provided in the Governing Instrument, and
compliance with the other terms, conditions and restrictions set forth in the
Governing Instrument and all applicable resolutions of the Trustees in
connection with the issuance of Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series of Shares
and the rights and preferences attributable thereto as contemplated by the
Governing Instrument); (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books and
records of the Trust in connection with the issuance, redemption or transfer of
Shares; (iv) that no event has occurred subsequent to the filing of the
Certificate that would cause a termination or reorganization of the Trust under
Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the
activities of the Trust have been and will be conducted in accordance with the
terms of the Governing Instrument and the Delaware Act; and (vi) that each of
the documents examined by us is in full force and effect and has not been
amended, supplemented or otherwise modified. No opinion is expressed herein with
respect to the requirements of, or compliance with, federal or state securities
or blue sky laws. Further, we express no opinion on the sufficiency or accuracy
of any registration or offering documentation relating to the Trust or the
Shares. As to any facts material to our opinion, other than those assumed, we
have relied without independent investigation on the above-referenced documents
and on the accuracy, as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Trust is a duly organized and validly existing business trust in
good standing under the laws of the State of Delaware.
2. The Shares of the following Series of the Trust, when issued to
Shareholders of such Series in accordance with the terms, conditions,
requirements and procedures set forth in the Governing Instrument, will
constitute legally issued, fully paid and non-assessable Shares of beneficial
interest in the Trust: Morgan Grenfell Emerging Local Currency Debt Fund; Morgan
Grenfell Core Global Fixed Income Fund; Morgan Grenfell Total Return Bond Fund;
and Morgan Grenfell High Yield Bond Fund.
3. Under the Delaware Act and the terms of the Governing Instrument, each
Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal
<PAGE>
Morgan Grenfell Investment Trust
December 10, 1997
Page 3
liability as that extended to stockholders of private corporations for profit;
provided, however, that we express no opinion with respect to the liability of
any Shareholder who is, was or may become a named Trustee of the Trust. Neither
the existence nor exercise of the voting rights granted to Shareholders under
the Governing Instrument will, of itself, cause a Shareholder to be deemed a
trustee of the Trust under the Delaware Act. Notwithstanding the foregoing or
the opinion expressed in paragraph 2 above, we note that, pursuant to Section 5
of Article IV of the Governing Instrument, the Trustees have the power to cause
Shareholders, or Shareholders of a particular Series, to pay certain custodian,
transfer, servicing or similar agent charges by setting off the same against
declared but unpaid dividends or by reducing Share ownership (or by both means).
We understand that the Trust is currently in the process of registering or
qualifying Shares of the above referenced Series in various states, and we
hereby consent to the filing of a copy of this opinion with the securities
administrators of such states and with the Securities and Exchange Commission as
part of the Post-Effective Amendment. In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
provided in this paragraph, the opinion set forth above is expressed solely for
the benefit of the addressee hereof and may not be relied upon by, or filed
with, any other person or entity for any purpose without our prior written
consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ Morris, Nichols, Arsht & Tunnell
------------------------------------
