<PAGE>
As filed with the Securities and Exchange Commission on December 29, 2000
1933 Act File No. 33-68704
1940 Act File No. 811-8006
Form N-1A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [30]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. [32]
(Check appropriate box or boxes)
MORGAN GRENFELL INVESTMENT TRUST
(Exact name of registrant as specified in charter)
One South Street
Baltimore, Maryland 21202
(Address of principal executive office) (Zip Code)
Registrant's Telephone Number, including Area Code: (410) 727-1700
Daniel O. Hirsch
Morgan Grenfell Investment Trust
One South Street Baltimore, Maryland 21202
(Name and address of agent for service)
Copies of communications to: Christopher P. Harvey, Esq.
Hale and Dorr LLP
60 State Street
Boston, MA 02109
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] On (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Deutsche Asset Management
Mutual Fund
Prospectus
February 28, 2001
Class A, B and C Shares
International Select Equity
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.]
Logo
<PAGE>
Overview
of International Select Equity
Goal.......................................................................
Core Strategy..............................................................
Investment Policies and Strategies.........................................
Principal Risks of Investing in the Fund...................................
Who Should Consider Investing in the Fund..................................
Total Returns, After Fees and Expenses.....................................
Fees and Expenses of the Fund..............................................
A Detailed Look at International Select Equity
Objective..................................................................
Strategy...................................................................
Principal Investments......................................................
Investment Process.........................................................
Other Investments..........................................................
Risks......................................................................
Management of the Fund.....................................................
Portfolio Managers.........................................................
Calculating the Fund's Share Price.........................................
Performance Information....................................................
Dividends and Distributions................................................
Tax Considerations.........................................................
Buying and Selling Fund Shares.............................................
Sales Charges..............................................................
How to Choose the Class that is Right for You..............................
Financial Highlights.......................................................
Goal: The Fund invests for capital appreciation.
Core Strategy: The Fund invests primarily in stocks and other securities with
equity characteristics of companies located in the developed countries that make
up the MSCI EAFE Index.
<PAGE>
Overview
of International Select Equity
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing in a focused
list of approximately 30 to 40 stocks that offer, in our opinion, the greatest
upside potential on a 12 month view. We use an entirely bottom-up approach, with
no active allocation between countries, regions or industries.
The Fund follows a strict buy and sell strategy. We begin with a broad universe
of equity securities that show long-term prospects for growth. We set for each
security a target price objective. The price objective represents our opinion of
the intrinsic value of the security. We rank each security based on these target
price objectives and purchase the top 30 to 40 securities in the ranking. Stocks
are sold when they meet their target price objectives or when we revise price
objectives downward.
---------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. stocks that the Investment Adviser has selected could perform poorly; or
. the stock market could perform poorly in one or more of the countries in
which the Fund has invested.
Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or underperform alternative investments as a result of risks in
the foreign countries in which the Fund invests. For example:
. adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing its full
value;
. foreign accounting and financial reporting standards differ from those in the
U.S. and could convey incomplete information when compared to information
typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
<PAGE>
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in International Select Equity if you are seeking
capital appreciation. There is, of course, no guarantee that the Fund will
realize its goal. Moreover, you should be willing to accept significantly
greater short-term fluctuation in the value of your investment than you would
typically experience investing in more diversified equity funds or in bond or
money market funds.
You should not consider investing in International Select Equity if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.
This Prospectus describes International Select Equity Class A Shares ("Class A
Shares"), Class B Shares ("Class B Shares") and Class C Shares ("Class C
Shares"). Each class has different sales charges and expenses, allowing you to
choose the class that best meets your needs. (See "Sales Charges"). The Fund
offers shares through securities dealers and through financial institutions that
act as shareholder servicing agents.You may also buy shares directly from the
Fund through the Fund's Transfer Agent. The Fund also offers other classes with
different fees, expenses and investment minimums.
The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in U.S. securities alone. Diversifying your investments may
lower the volatility of your overall investment portfolio.
An investment in International Select Equity is not a deposit of any bank, and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
Because the Class A, B and C Shares are newly offered classes of shares with no
performance history, the following bar chart and table show the performance
history of the Fund's Institutional Class shares, which have been in existence
since the Fund's inception on May 15, 1995. The table compares the average
annual return of the Fund's Institutional Class shares with that of the Morgan
Stanley Capital International (MSCI) EAFE Index for the last year, the last five
years and since inception. The Index is a passive measure of combined national
stock market returns. It does not factor in the costs of buying, selling and
holding stocks--costs which are reflected in the Fund's results.
------------------------------------------------
The MSCI EAFE Index of major markets in Europe, Australia and the Far East is a
widely accepted benchmark of international stock performance. It is a model, not
an actual portfolio. It tracks stocks in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United
Kingdom.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
<TABLE>
<S> <C> <C> <C> <C>
10.31% 0.51 23.49% 88.85% ____%
1996 1997 1998 1999 2000/2/
</TABLE>
Since inception, the Fund's highest return for its Institutional Class in any
calendar quarter was _____% (____ quarter ____) and its lowest quarterly return
was (____%) (___ quarter ____). Past performance offers no indication of how the
Fund will perform in the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Since Inception
1 Year 5 Years (5/15/95)/3/
</TABLE>
------------
/1/ Institutional Class performance is presented because Class A, B and C Shares
have no performance history. Except with respect to the impact of sales
charges and other expenses, it is expected that the future performance of
Class A, B and C Shares will be similar to the future performance of the
Institutional Class because the shares are invested in the same portfolio of
securities. The bar chart and table do not reflect (i) 12b-1 fees at an
aggregate annual rate of up to 0.25% of the Fund's average daily net assets
for Class A shares and 0.75% of the Fund's average daily net assets for
Class B and C shares, (ii) sales charges and (iii) a .25% shareholder
servicing fee for Class B and C Shares. If they did, returns would be less
than those shown. Institutional Class shares are offered under a separate
prospectus, which is available upon request.
/2/ Past performance is not indicative of future results. The Fund's recent
performance was achieved during favorable market conditions that may not
be sustained.
/3/ MSCI EAFE Index performance is calculated from May 30, 1995.
<PAGE>
<TABLE>
<S> <C> <C> <C>
International Select
Equity--Institutional Class/1/ -------% -------% ------%
-------------------------------------------------------------------
EAFE Index ------% -------%
</TABLE>
FEES AND EXPENSES OF THE FUND
The Fees and Expenses table describes the fees and estimated expenses that you
may pay if you buy and hold Class A, B and C Shares of International Select
Equity.
FEES AND EXPENSES
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
SHAREHOLDER FEES Initial Deferred Sales Deferred
(fees paid directly from your investment) Sales Charge Charge Sales Charge
----------------- ----------------- -----------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases 5.50%/2/ None None
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage 1.00%/5/ 5.00%/3/ 1.00%/4/
of original purchase price or redemption proceeds,
whichever is lower)
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
Management Fees 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) fees 0.25% 0.75% 0.75%
Other Expenses/5/ (including a 0.25% shareholder
servicing fee for Class B and Class C Shares) 0.46% 0.71% 0.71%
Total Annual Fund Operating Expenses 1.41% 2.16% 2.16%
Less: Fee Waivers or Expense Reimbursements/1/ (0.00%) (0.00%) (0.00%)
Net Expenses 1.41% 2.16% 2.16%
</TABLE>
------------
/1/ The Institutional Class performance figures have been adjusted to include
the impact of the maximum fees and expenses of the new classes.
/2/ Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge, but may be subject to a contingent deferred sales
charge of 1.00% or 0.50% if you redeem your shares within one year and two
years, respectively. (See "Sales Charges--Redemption Price.")
/3/ Contingent deferred sales charges for Class B shares decline over time and
reach zero after six years. After seven years, Class B Shares convert
automatically to Class A Shares. (See "Sales Charges" and "How to Choose the
Class That is Right for You.")
/4/ You will be required to pay a contingent deferred sales charge if you redeem
your Class C Shares within one year after purchase. (See "Sales Charges--
Redemption Price.")
/5/ Expenses are based on the actual expenses of the Institutional Class
including the Other Expenses for the current fiscal year. Class A, B and C
Shares are new classes of shares with no operating history. For the fiscal
year ended October 31, 2000, Other Expenses and Total Annual Fund Operating
Expenses of Institutional Class Shares were ___% and ___%, respectively, of
the average daily net assets of the Institutional Class shares. Expenses for
the Institutional Class Shares do not reflect Sales Charges and 12b-1 fees
paid by the Class A, B and C Shares.
<PAGE>
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Class A, B and C Shares of the Fund. The numbers assume
that (a) the Fund earned an annual return of 5% over the periods shown, (b) the
Fund's operating expenses remained the same and (c) you reinvest all dividends
and distributions.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
EXPENSE EXAMPLE/2/
You would pay the following expenses if you redeemed your shares at the end of
each period:
----------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ $ $ $
----------------------------------------------------------------------
Class B Shares $ $ $ $
----------------------------------------------------------------------
Class C Shares $ $ $ $
----------------------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ $ $ $
----------------------------------------------------------------------
Class B Shares $ $ $ $
----------------------------------------------------------------------
Class C Shares $ $ $ $
----------------------------------------------------------------------
</TABLE>
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charges
at all. (See "Sales Charges") If you hold your shares for a long time, the
combination of the initial sales charge you paid and the recurring 12b-1 fees
may exceed the maximum sales charges permitted by the Conduct Rule for the
National Association of Securities Dealers, Inc.
------------
/5/ The investment adviser and administrator have contractually agreed, for the
16 month period from October 31, 2000 to waive their fees or reimburse
expenses so that total expenses will not exceed 1.50% for Class A and 2.25%
Class B and C Shares.
/2/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
<PAGE>
A detailed look
at International Select Equity
OBJECTIVE
The Fund seeks capital appreciation. Any dividend and interest income is
incidental to the pursuit of its objective. While we seek capital appreciation,
we cannot offer any assurance of achieving this objective. The Fund's objective
is not a fundamental policy. We must notify shareholders before we change it,
but we do not require their approval to do so.
STRATEGY
We seek to identify a focused list of approximately 30 to 40 companies that
offer, in our opinion, the greatest upside potential on a rolling 12 month view.
We use an entirely bottom-up approach, with no active allocation between
countries, regions or industries.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests primarily in stocks and other
securities with equity characteristics located in the countries that make up the
MSCI EAFE Index. The MSCI EAFE Index tracks stocks in Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.
The majority of securities in which the Fund invests are represented in the MSCI
EAFE Index. However, the Fund may invest up to 50% of its total assets in non-
MSCI EAFE Index securities of companies located in the countries that make up
the MSCI EAFE Index. The MSCI EAFE Index has a median market capitalization of
over $2.7 billion.
-----------------------------------------------------
Under normal market conditions, the Fund invests in securities of issuers with a
minimum market capitalization of $500 million.
-----------------------------------------------------
Equity securities and other securities with equity characteristics include
common stock, preferred stock, warrants, purchased call and put options and
other rights to acquire stock.
INVESTMENT PROCESS
The Fund's process begins with a broad universe of equity securities of issuers
located in the countries that make up the MSCI EAFE Index. The universe includes
all securities in the MSCI EAFE Index and a large number of securities not
included in the MSCI EAFE Index but whose issuers are located in the countries
that make up the MSCI EAFE Index.
Teams of analysts worldwide screen the companies in the universe to identify
those with high and sustainable return on capital and long-term prospects for
growth. We focus on companies with real cash flow on investment rather than
published earnings. The research teams rely on information gleaned from a
variety of sources and perspectives, including broad trends such as lifestyle
and
<PAGE>
technological changes, industry cycles and regulatory changes, quantitative
screening and individual company analysis.
Based on this fundamental research, we set a target price objective (our opinion
of the intrinsic value of the security) for each security and rank the
securities based on these target price objectives. We apply a strict buy and
sell strategy. The top 30 to 40 stocks in the ranking are purchased for the
Fund. Stocks are sold when they meet their target price objectives or when we
revise price objectives downward. In implementing this strategy, the Fund may
experience a high portfolio turnover rate.
-----------------------------------------------------
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period.
Recently, the Fund has had a high portfolio turnover rate. High turnover can
increase the Fund's transaction costs, thereby lowering its returns. It may also
increase your tax liability.
OTHER INVESTMENTS
The Fund may also invest up to 35% of its assets in cash equivalents, U.S.
investment grade fixed income securities and U.S. stocks and other equity
securities.
We may invest in various instruments commonly known as "derivatives" to increase
or decrease the Fund's exposure to a securities market, index or currency. In
particular, the Fund may use futures, options and forward currency transactions.
We may use derivatives in circumstances when we believe they offer an economical
means of gaining exposure to a particular securities market or index. We may
also invest in derivatives to attempt to reduce the Fund's exposure or to keep
cash on hand to meet shareholder redemptions or other needs while maintaining
exposure to the market.
-----------------------------------------------------
Futures and options may be used as low-cost methods for gaining or reducing
exposure to a particular securities or currency market without investing
directly in those securities.
Forward currency transactions involve the purchase or sale of a foreign currency
at an exchange rate established currently, but with payment and delivery at a
specified future time. Forward currency transactions may be used in an attempt
to hedge against losses, or, where possible, to add to investment returns. There
is no guarantee that these currency management activities will be employed or
that they work, and their use could cause lower returns or even losses to the
Fund.
-----------------------------------------------------
<PAGE>
A Detailed Look at International Select Equity
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We could place up to 100% of the Fund's assets in U.S. or
foreign-government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent we might
adopt such a position and over the course of its duration, the Fund may not meet
its goal of capital appreciation.
RISKS
Below we have set forth some of the prominent risks associated with
international investing, as well as investing in general. Although we attempt
both to assess the likelihood that these risks may actually occur and to limit
them, we cannot guarantee that we will succeed.
Primary Risks
Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market, including stocks held by the Fund.
Stock Selection Risk. A risk that pervades all investing is the risk that the
securities in the Fund's portfolio will decline in value.
Foreign Stock Market Risk. From time to time, foreign capital markets have
exhibited more volatility than those in the United States. Trading stocks on
some foreign exchanges is inherently more difficult than trading in the United
States for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits. While these
political risks have not occurred recently in the major countries in which
the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Stocks that trade infrequently or in low volumes can be more
difficult or more costly to buy, or to sell, than more liquid or active
stocks. This liquidity risk is a factor of the trading volume of a particular
stock, as well as the size and liquidity of the entire local market. On the
whole, foreign exchanges are smaller and less liquid than the U.S. market.
Relatively small transactions in some instances can have a disproportionately
large effect on the price and supply of shares. In certain situations, it may
become virtually impossible to sell a stock in an orderly fashion at a price
that approaches our estimate of its value.
<PAGE>
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
. Currency Risk. The Fund invests in foreign securities denominated in foreign
currencies. This creates the possibility that changes in foreign exchange
rates will affect the U.S. dollar value of foreign securities or the U.S.
dollar amount of income or gain received on these securities.
Secondary Risks
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their fair value in the judgement of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell them. If we value
these securities too highly when you buy shares of the Fund, you may end up
paying too much for your Fund shares. If we underestimate their price when you
sell, you may not receive the full market value for your Fund shares.
Small Company Risk. To the extent that the Fund invests in small capitalization
companies, it will be more susceptible to share price fluctuations, since small
company stocks tend to experience steeper fluctuations in price--down as well as
up--than the stocks of larger companies. A shortage of reliable information, the
same information gap that creates opportunity in small company investing, can
also pose added risk. Industrywide reversals may have a greater impact on small
companies, since they lack a large company's financial resources. Finally, small
company stocks are typically less liquid than large company stocks. A small
company's shares may be more difficult to sell, particularly when they are
performing poorly.
Futures and Options. Although not one of its principal investment strategies,
the Fund may invest in futures and options, which are types of derivatives.
Risks associated with derivatives include:
. the derivative is not well correlated with the security, index or currency
for which it is acting as a substitute;
. derivatives used for risk management may not have the intended effects and
may result in losses or missed opportunities; and
. the risk that the Fund cannot sell the derivative because of an illiquid
secondary market.
If the Fund invests in futures contracts and options on futures contracts for
non-hedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. The use of futures and options
for non-hedging purposes involve greater risks than stock investments.
<PAGE>
A Detailed Look at International Select Equity
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
. changes in the relative strength and value of the U.S. dollar or other major
currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank AG, Deutsche Funds Management, Inc., Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc. ("DeAM, Inc."), and
Deutsche Asset Management Investment Services Limited ("DeAMIS").
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, DeAMIS, with
headquarters at One Appold Street, London, England, acts as investment adviser
for the Fund. The Fund's investment adviser makes the Fund's investment
decisions. The Fund's investment adviser buys and sells securities for the Fund
and conducts the research that leads to the purchase and sale decisions. The
Fund's investment adviser is also responsible for selecting brokers and dealers
and for negotiating brokerage commissions and dealer charges. DeAMIS provides a
full range of international investment advisory services to institutional
clients, and as of December 31, 2000, managed approximately $_______in assets.
<PAGE>
DeAMIS is an indirect wholly owned subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
commercial banking, investment banking and insurance.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund's investments:
Alexander Tedder, Director--Equities, Deutsche Asset Management and Lead Manager
of the Fund
. Joined the investment adviser in 1994.
. 11 years of investment industry experience.
. Head of EAFE equities.
. European portfolio manager/analyst.
. Masters in Economics and Business Administration, Freiburg University.
Richard Wilson, Director--Equities, Deutsche Asset Management and Co-Manager of
the Fund
. Joined the investment adviser in 1993. Prior to that, managed UK pension
funds at HSBC Asset Management from 1988 to 1993.
. 12 years of investment industry experience.
. Head of Pan European Equity Product.
. UK portfolio manager/analyst.
James Pulsford, Director--Equities, Deutsche Asset Management and Co-Manager of
the Fund
. Joined the investment adviser in 1984.
. 16 years investment experience, 12 year resident of Japan.
. Head of Japan Equity desk.
. Fluent Japanese speaker.
Stuart Kirk, Portfolio Manager, Deutsche Asset Management and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. 5 years of investment industry experience.
. Asia-Pacific portfolio manager/analyst.
Amy Low, Portfolio Manager, Deutsche Asset Management and Co-Manager of the
Fund
<PAGE>
. Joined the investment adviser in 1997. Prior to that, credit analyst at OCBC
Group from 1994 to 1997.
. 6 years of investment industry experience.
. Singapore and Hong Kong portfolio manager/analyst.
Other Services. DeAM, Inc., an affiliate of DeAMIS provides administrative
services for the Fund. In addition, DeAM, Inc.--or your broker or financial
adviser--performs the functions necessary to establish and maintain your
account. In addition to setting up the account and processing your purchase and
sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Brokers and financial advisers may charge additional fees to investors for those
services not otherwise included in their subdistribution or servicing
agreements, such as cash management or special trust or retirement-investment
reporting.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the New York Stock Exchange is open for business.
The price you pay when you buy shares or receive when you redeem shares is based
on the Fund's NAV plus any applicable sales charge. When you buy Class A Shares,
the price you pay may by increased by a sales charge. When you redeem any class
of shares, the amount you receive may be reduced by a sales charge. Read the
section on sales charges for details on how and when these charges may or may
not be imposed. The formula for calculating the Fund's Net Asset Value calls
for deducting all of the liabilities of a Fund's class of shares from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares of that class
outstanding. Prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Such price changes in the securities a Fund owns may
ultimately affect the Net Asset Value of Fund shares when the New York Stock
Exchange re-opens.
The Fund uses a forward pricing procedure. Therefore, the price at which you buy
or sell shares is based on the next calculation of the NAV after the order is
received by the Fund or your broker, provided that your broker or financial
adviser forwards your order to the Fund in a timely manner.
<PAGE>
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
-----------------------------------------------------
The New York Stock Exchange is open every week, Monday through Friday, except
when the following holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the third Monday in
February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor
Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in
November) and Christmas Day.
-----------------------------------------------------
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
If a Fund earns net investment income or recognizes net capital gains, its
policy is to distribute to shareholders substantially all of that taxable income
and capital gain on an annual basis. We automatically reinvest all dividends and
any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by the Fund. Your taxes will vary from year to year,
based on the amount of capital gains distributions and dividends paid out by the
Fund. You owe the taxes whether you receive cash or choose to have distributions
and dividends reinvested. Distributions and dividends usually have the following
tax character:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRANSACTION TAX STATUS
--------------------------------------------------------------------
<S> <C>
Income Dividends Ordinary Income
--------------------------------------------------------------------
Short-term capital gains Ordinary Income
distributions
--------------------------------------------------------------------
Long-term capital gains Long-term capital gains
distributions
--------------------------------------------------------------------
</TABLE>
Every year the Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRANSACTION TAX STATUS
--------------------------------------------------------------------
<S> <C>
Your sale of shares owned more Generally, long-term capital gains
than one year or losses
--------------------------------------------------------------------
Your sale of shares owned for Generally, short-term capital
one year or less gains or losses subject to
special rules.
--------------------------------------------------------------------
</TABLE>
The tax considerations for tax deferred accounts or non-taxable entities will be
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of
Deutsche Asset Management
By phone 1-800-730-1313
By mail Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By overnight mail Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week
To Purchase Shares
You may buy any class of the Fund's shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on
<PAGE>
how to enter and pay for your order.You may also buy shares by sending your
check (along with a completed Application Form) directly to the Fund.
Defined contribution plan with assets of $75 million or more may not purchase
Class A shares.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders.
Minimum Account Investments
<TABLE>
<S> <C>
Initial Investment in Class A, B or C shares $2,000
Subsequent Investments $ 100
IRA account, Initial Investment $1,000
Initial Investment for shareholders of other Deutsche Asset Management Funds'
Class A, B and C Shares $ 500
Automatic Investing Plan, Initial Investment $ 250
Monthly plan subsequent investments $ 100
Quarterly plan subsequent investments $ 250
Minimum Investment For Qualified Retirement Plans (such as 401(k), pension, $ 0
or profit sharing plans)
</TABLE>
The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the minimum account investments.
Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or the
Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or quarterly
investment in any class of shares. The amount you decide upon will be withdrawn
from your checking account using a pre-authorized check. When the money is
received by the Transfer Agent, it will be invested at that day's offering price
in the class of shares selected. Either you or the Fund may discontinue your
participation upon 30 days' notice.
Systematic Purchase Plan. You may also purchase any class of shares through a
Systematic Purchase Plan. Contact your securities dealer or servicing agent for
details.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
<PAGE>
To Redeem Shares
You may redeem any class of the Fund's shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If you have an account with the Fund
that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may require
the following documents before they redeem your shares:
. A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the shares exactly as their names appear on the account.
. If you are redeeming more than $50,000, a signature guarantee. You can obtain
one from most banks or securities dealers.
. Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust, or fiduciary.
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next dividend
payable date. If you have redeemed all of your shares by that time, the dividend
will be paid to you in cash whether or not that is the payment option you have
selected.
If you redeem sufficient shares to reduce your investment to $500 or less, the
Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in-kind under certain
circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange to
have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
If your shares are in an account with the Transfer Agent, you may redeem them in
any amount up to $50,000 or exchange them for shares in another Deutsche Asset
Management fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges, but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
<PAGE>
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that telephoned instructions are genuine. These procedures include requiring you
to provide certain personal identification information when you open your
account and before you execute each telephone transaction. You may be required
to provide additional telecopied instructions. If these procedures are employed,
neither the Fund nor the Transfer Agent will bear any liability for following
telephone instructions that either reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
SALES CHARGES
Purchase Price
The price you pay to buy shares will be the Fund's offering price which is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying.
Class A shares are subject to sales charges according to the following
schedule:
<TABLE>
<CAPTION>
Class A Sales Charge as a % of
-------------------------------------
Net Amount Class B Sales Class C Sales
Amount of Purchase Offering Price Invested Charge Charge
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $ 50,000 5.50% 5.82% None None
$ 50,000 - $ 99,999 4.50% 4.71% None None
$ 100,000 - $ 249,999 3.50% 3.63% None None
$ 250,000 - $ 499,999 2.50% 2.56% None None
$ 500,000 - $ 999,999 2.00% 2.04% None None
$1,000,000 and over None None None None
--------------------------------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000 or
more in Class A Shares or when you buy any amount of Class B or C Shares, you
may pay a sales charge when you redeem your shares. Refer to the section on
redemption price for details. Your securities dealer may be paid a commission at
the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
Rights of Accumulation. If you are purchasing additional Class A Shares of this
Fund or Class A shares of any other Deutsche Asset Management fund or if you
already have investments in Class A shares, you may combine the value of your
purchases with the value of your existing Class A Share investments to determine
whether you qualify for reduced sales charges. (For this purpose your existing
Class A investments will be valued at the higher of cost or current value.) You
may also combine your Class A purchases and investments with those of your
spouse and your children
<PAGE>
under the age of 21 for this purpose. You must be able to provide sufficient
information to verify that you qualify for this right of accumulation.
Letter of Intent. If you anticipate making additional purchases of Class A
Shares of this Fund or any other Deutsche Asset Management fund over the next 13
months, you may combine the value of your current purchase with the value of
your anticipated purchases to determine whether you qualify for a reduced sales
charge. You will be required to sign a letter of intent specifying the total
value of your anticipated purchases and to initially purchase at least 5% of the
total. When you make each purchase during the period, you will pay the sales
charge applicable to their combined value. If, at the end of the 13-month
period, the total value of your purchases is less than the amount you indicated,
you will be required to pay the difference between the sales charges you paid
and the sales charges applicable to the amount you actually did purchase. Some
of the shares you own will be redeemed to pay this difference.
Purchases at Net Asset Value. You may buy Class A Shares without paying a sales
charge under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
2) If you are exchanging an investment in Class A Shares of another Deutsche
Asset Management fund for an investment in this Fund (see "Purchases by
Exchange" for a description of the conditions).
3) If you are a current or retired Director of this or any affiliated Fund, a
director, an employee, or a member of the immediate family of an employee of
any of the following (or their respective affiliates): the Fund's
distributor, the Adviser, or a broker-dealer authorized to sell shares of
the Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner, or
securities dealer purchasing shares on your behalf. To qualify for
this provision, you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your securities dealer or servicing agent if you buy shares in this
manner.
Purchases by Exchange
You may exchange Class A, B, or C Shares of any other Deutsche Asset Management
fund for an equal dollar amount of Class A, B, or C Shares, respectively,
without payment of the sales charges described above or any other charge up to
four times a year. You may enter both your redemption and purchase orders on the
same Business Day or, if you have already redeemed the shares of the
<PAGE>
other fund, you may enter your purchase order within 90 days of the redemption.
The Fund may modify or terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing agent.
Contact them for details on how to enter your order. Before buying shares
through an exchange, you should obtain a copy of that fund's prospectus and read
it carefully. If your shares are in an account with the Fund's Transfer Agent,
you may also request an exchange directly through the Transfer Agent by mail or
by telephone.
Please note the following:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. Any deferred sales charge will continue to be measured from the time of your
original purchase. If the fund you exchange into has a higher deferred sales
charge, you will be subject to that charge. If you exchange at any time into
a fund with lower deferred sales charge, your sales charge will not be
reduced.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from the Service
Center or your service agent.
. Your exchange must meet the minimum investment amount for the class of shares
of the fund being purchased.
Redemption Price
The amount of any applicable sales charge will be deducted from your redemption
price according to the following schedule.
<TABLE>
<CAPTION>
Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge
(as % of the Lesser of Cost or Value)
------------------------------------------------
Class A Shares Class B Shares Class C Shares
Years Since Purchase Sales Charge Sales Charge Sales Charge
------------------------------------------------------------------------
<S> <C> <C> <C>
First................. 1.00%* 5.00% 1.00%
Second................ 0.50%* 4.00% None
Third................. None 3.00% None
Fourth................ None 3.00% None
Fifth................. None 2.00% None
Sixth................. None 1.00% None
Thereafter............ None None None
------------------------------------------------------------------------
</TABLE>
* You will pay a deferred sales charge when you redeem Class A Shares only if
your shares were purchased at net asset value because they were part of an
investment of $1 million or more.
<PAGE>
Determination of Deferred Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
. No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
. If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
. If you acquired your shares through an exchange of shares of another Deutsche
Asset Management fund, the period of time you held the original shares will
be combined with the period of time you held the shares being redeemed to
determine the years since purchase.
. The sales charge is applied to the lesser of the cost of the shares or their
value at the time of your redemption. Therefore, you do not pay a sales
charge on amounts representing appreciation or depreciation.
Waiver of Sales Charge. You may redeem shares without paying a deferred sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Deutsche Asset
Management fund of the same class.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
(i) The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent, or the Transfer Agent that such circumstances exist.
<PAGE>
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000, and your securities dealer has agreed to return to the Fund's
distributor any payments received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
Your decision as to which class of the Fund's shares is best for you should be
based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares. Except in the
case of investments of $1,000,000 or more, you pay no sales charge if you redeem
Class A shares.
If you choose Class B Shares, you will pay no sales charge when you buy your
shares, but your annual expenses will be higher than Class A Shares. You will
pay a sales charge if you redeem your shares within six years of purchase, but
the amount of the charge declines the longer you hold your shares and, at the
end of seven years, your shares convert to Class A Shares, thus eliminating the
higher expenses from that point on.
If you choose Class C Shares, you will pay no sales charge when you buy your
shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
In general, if you intend to invest more than $50,000, your combined sales
charges and expenses are lower with Class A Shares. If you intend to invest less
than $50,000 and expect to hold your shares for more than seven years, your
combined sales charges and expenses are lower with Class B Shares. If you intend
to invest less than $50,000 and expect to hold your shares for less than seven
years, your combined sales charges and expenses are lower with Class C Shares.
Your securities dealer is paid a fee when you buy shares. In addition, your
securities dealer is paid an annual fee as long as you hold your shares. For
Class A and B Shares, this fee begins when you purchase your shares. For Class C
Shares, this fee begins one year after you purchase your shares.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
<PAGE>
Distribution Plan
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
and an annual shareholder servicing fee equal to 0.25% of average daily net
assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents. Once
you place your order with a service agent, it is considered received by the
Service Center. It is then your service agent's responsibility to transmit
the order to the Service Center by the next business day. You should contact
your service agent if you have a dispute as to when your order was placed
with the fund.
. After we or your service agent receives your order, you will buy or sell your
shares at the next NAV calculated on a day the New York Stock Exchange is
open for business adjusted for any applicable sales charge.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. Please note that we
cannot accept starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of a fund
recently purchased by check may be delayed for up to 15 calendar days while
we wait for your check to clear.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
always within seven days.
. We reserve the right to close your account on 30 days' notice if it fails to
meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a signature
guarantee. Please contact your service agent or the Service Center for more
information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
<PAGE>
. We reserve the right to reject purchases of Fund shares (including exchanges)
for any reason. We will reject purchases if we conclude that the purchaser
may be investing only for the short-term or for the purpose of profiting from
day to day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including exchanges)
or to suspend or postpone redemptions at times when both the New York Stock
Exchange and the Fund's custodian are closed.
Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on your
fund's overall performance, its current holdings and its investing
strategies.
<PAGE>
A Detailed Look at International Select Equity
Institutional Class performance is presented because Class A, B and C shares are
newly offered classes of shares with no performance history. Class A, B and C
Shares will have different performance. The table below helps you understand the
financial performance of the Institutional Class shares of the Fund for the past
five fiscal periods. Certain information selected reflects financial results for
a single Institutional Class share of the Fund. The total returns in the table
represent the rate of return that an investor would have earned on an investment
in the Institutional Class shares of the Fund, assuming reinvestment of all
dividends and distributions. This information has been audited by --------------
--------, whose report, along with the Fund's financial statements, is included
in the Fund's annual report for Institutional Class shares. The annual report is
available free of charge by calling the Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the years ended October 31, For the
period ended
October 31,
1999 1998 1997 1996 1995/1/
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a Share Outstanding Throughout
each Period:
Net Asset Value, Beginning of Period
-------------------------------------------------------------------------------------------------------
Income From Investment Operations
Net Investment Income
-------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gains (Losses)
-------------------------------------------------------------------------------------------------------
Total From Investment Operations
-------------------------------------------------------------------------------------------------------
Distributions to Shareholders
-------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------
Net Realized Gains
-------------------------------------------------------------------------------------------------------
Total Distributions
-------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
-------------------------------------------------------------------------------------------------------
Total Investment Return +
-------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
-------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(000s omitted)
-------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net Investment Income (Loss)
-------------------------------------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense /3/
Ratio Due to Absorbtion of
Expenses by DAMIS/2/
-------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-------------------------------------------------------------------------------------------------------
</TABLE>
------------
/1/ The Fund's Inception was May 15, 1995.
/2/ DAMIS-Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser.
/3/ Annualized.
+ Return is for the period indicated and has not been annualized.
<PAGE>
This page intentionally left blank.
<PAGE>
Additional information about the Fund's investments and performance is available
in the Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Deutsche Asset Management Mutual Funds Service Center
P.O. Box 219210
Kansas City, MO 64121
or call our toll-free number: 1-800-730-1313
You can find reports and other information about the Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about the Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
International Select Equity--Class A, B and C
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
One South Street
Baltimore, Maryland 21202
CUSIP#
811-8006
Deutsche Asset Management
<PAGE>
Mutual Fund
Prospectus
February 28, 2001
Class A, B and C Shares
European Equity
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.]
Logo
<PAGE>
Overview
of European Equity
Goal...................................................................
Core Strategy..........................................................
Investment Policies and Strategies.....................................
Principal Risks of Investing in the Fund...............................
Who Should Consider Investing in the Fund..............................
Total Returns, After Fees and Expenses.................................
Fees and Expenses of the Fund..........................................
A Detailed Look at European Equity
Objective..............................................................
Strategy...............................................................
Principal Investments..................................................
Investment Process.....................................................
Other Investments......................................................
Risks..................................................................
Management of the Fund.................................................
Portfolio Managers.....................................................
Calculating the Fund's Share Price.....................................
Performance Information................................................
Dividends and Distributions............................................
Tax Considerations.....................................................
Buying and Selling Fund Shares.........................................
Sales Charges..........................................................
How to Choose the Class that is Right for You..........................
Financial Highlights...................................................
Goal: The Fund invests for capital appreciation.
Core Strategy: The Fund invests primarily in stocks and other securities with
equity characteristics of companies located in European countries.
<PAGE>
Overview of European Equity
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
companies located in European countries. We look for investments that may not be
appropriately priced by the market. In selecting investments, we attempt to
identify investment trends or major social developments that are likely to have
a positive impact on a company's technologies, products and services.
The Fund's investment team has a sell discipline which maintains upside and
downside target prices, which are adjusted to keep pace with changes in company,
industry and market circumstances.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. stocks that the Investment Adviser has selected could perform poorly; or
. the stock market could perform poorly in one or more of the countries in
which the Fund has invested.
Beyond the risks common to all stock investing, an investment in the Fund could
also lose money, or underperform alternative investments as a result of risks in
the developed and emerging countries in which the Fund invests. For example:
. adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing its full value;
. foreign accounting and financial reporting standards differ from those in the
U.S. and could convey incomplete information when compared to information
typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
itself to U.S. investors.
<PAGE>
Overview of European Equity
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in European Equity if you are seeking capital
appreciation. There is, of course, no guarantee that the Fund will realize its
goal. Moreover, you should be willing to accept significantly greater short-term
fluctuation in the value of your investment than you would typically experience
investing in bond or money market funds.
You should not consider investing in European Equity if you are pursuing a
short-term financial goal, if you seek regular income or if you cannot tolerate
fluctuations in the value of your investments.
This Prospectus describes European Equity Class A Shares ("Class A Shares"),
Class B Shares ("Class B Shares") and Class C Shares ("Class C Shares"). Each
Class has different sales charges and expenses, allowing you to choose the class
that best meets your needs. (See "Sales Charges."). The Fund offers shares
through securities dealers and through financial institutions that act as
shareholder servicing agents. You may also buy shares directly from the Fund
through the Fund's Transfer Agent. The Fund also offers other classes with
different fees, expenses and investment minimums.
The Fund by itself does not constitute a balanced investment program. It can,
however, afford exposure to investment opportunities not available to someone
who invests in U.S. securities alone. Diversifying your investments may improve
your long-run investment return and lower the volatility of your overall
investment portfolio.
An investment in European Equity is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
Overview of European Equity
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
Because the Class A, B and C Shares are a newly offered class of shares with no
performance history, the following bar chart and table show the performance
history of the Fund's Institutional Class shares, which has been in existence
since the Fund's inception on September 3, 1996. The table compares the average
annual return of the Fund's Institutional Class shares with that of the Morgan
Stanley Capital International (MSCI) Europe Index over the last year and since
inception. The Index is a passive measure of combined national stock market
returns. It does not factor in the costs of buying, selling and holding stocks--
costs which are reflected in the Fund's results.
------------------------------------------------------
The MSCI Europe Index of major markets in Europe is a widely accepted benchmark
of international stock performance. It is a model, not an actual portfolio. It
tracks stocks in Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the United
Kingdom.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
15.54% 22.89% 45.43% ____%
1997 1998 1999 2000/2/
Since inception, the Fund's highest return for its Institutional Class Shares in
any calendar quarter was ------% (_____quarter ----) and its lowest quarterly
return was (------%) (_____quarter -----). Past performance offers no indication
of how the Fund will perform in the future.
------------
/1/ Institutional Class performance is presented because Class A, B and C Shares
have no performance history. Except with respect to the impact of sales
charges and other expenses, it is expected that the future performance of
Class A, B and C shares will be substantially similar to the performance of
the Institutional Class because the shares are invested in the same
portfolio of securities. The bar chart and table do not reflect (i) 12b-1
fees at an aggregate annual rate of up to 0.25% of the Fund's average daily
net assets for Class A shares and 0.75% of the Fund's average daily net
assets for Class B and C shares, (ii) sales charges and (iii) a 0.25%
shareholder servicing fee for Class B and C Shares. If they did, returns
would be less than those shown. Institutional Class shares are offered under
a separate prospectus, which is available upon request.
/2/ Past performance is not indicative of future results. The Fund's recent
performance was achieved during favorable market conditions that may not be
sustained. The Fund's performance in 2000 was significantly impacted by
gains from initial public offerings (IPOs) during a period when the Fund's
assets were relatively small and the market for IPOs was strong. There is no
assurance that any future investments in IPOs by the Fund will have a
similar effect on its future performance. The Fund's performance also
benefited from a one-time gain from accounting for the cancellation of
certain shareholder trades in February 2000.
<PAGE>
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000/1/
Since Inception
1 Year (9/3/1996)/2/
European Equity--
Institutional Class/3/ _____% _____%
....................................................................
MSCI Europe Index _____% _____%
------------
/1/ Effective December 23, 1999, Deutsche Asset Management, Inc. replaced
Deutsche Asset Management Investment Services Limited as the investment
adviser to the Fund.
/2/ MSCI Europe Index performance is calculated from September 30, 1996.
/3/ The Institutional Class performance figures have been adjusted to include
the impact of the maximum fees and expenses of the Class A Shares.
<PAGE>
FEES AND EXPENSES OF THE FUND
The Fees and Expenses table describes the fees and estimated expenses that you
may pay if you buy Class A, B and C Shares of European Equity.
FEES AND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER FEES Class A Shares Class B Shares Class C Shares
(fees paid directly from your investment) Initial Sales Deferred Sales Deferred Sales
Charge Charge Charge
---------------- ---------------- ----------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as 5.50%/1/ None None
a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a 1.00%/1/ 5.00%/2/ 1.00%/3/
percentage of original purchase price or redemption
proceeds, whichever is lower)
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
Management Fees 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) fees 0.25% 0.75% 0.75%
Other Expenses/4/ (including a 0.25% shareholder
servicing fee for Class B and Class C Shares) 0.80% 1.15% 1.15%
Total Annual Fund Operating Expenses 2.05% 2.16% 2.16%
Less: Fee Waivers or Expense Reimbursements/5/ (0.55%) (0.55%) (0.55%)
Net Expenses 1.50% 2.25% 2.25%
</TABLE>
------------
/1/ Purchases of $1 million or more of Class A Shares are not subject to an
initial sales charge but may be subject to a contingent deferred sales
charge of 1.00% or 0.50% if you redeem your shares within one year and two
years, respectively. (See "Sales Charges--Redemption Price.")
/2/ Contingent deferred sales charges for Class B Shares decline over time and
reach zero after six years. After seven years, Class B Shares convert
automatically to Class A Shares. (See "Sales Charges" and "How to Choose the
Class That is Right for You.")
/3/ You will be required to pay a contingent deferred sales charge if you redeem
your Class C Shares within one year after purchase. (See "Sales Charges--
Redemption Price.")
/4/ Expenses are based on the actual expenses of the Institutional Class
including the Other Expenses for the current fiscal year. Class A, B and C
Shares are new classes of shares with no operating history. For the fiscal
year ended October 31, 2000, Other Expenses and Total Annual Fund Operating
Expenses of Institutional Class Shares were ___% and ___%, respectively, of
the average daily net assets of the Institutional Class Shares. Expenses for
the Institutional Class Shares do not reflect Sales Charges, 12b-1 fees and
a 0.25% shareholder servicing fee paid by the Class A, B and C Shares.
/5/ The investment adviser and administrator have contractually agreed, for the
16 month period from October 31, 2000 to waive their fees or reimburse
expenses so that total expenses will not exceed 1.50% for Class A Shares and
2.25% for Class B and C Shares.
<PAGE>
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Class A, B and C shares of the Fund. The numbers assume
that (a) the Fund earned an annual return of 5% over the periods shown, (b) the
Fund's operating expenses remained the same and (c) you reinvest all dividends
and distributions.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
EXPENSE EXAMPLE/6/
You would pay the following expenses if you redeemed your shares at the end of
each period:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ $ $ $
--------------------------------------------------------------------------
Class B Shares $ $ $ $
--------------------------------------------------------------------------
Class C Shares $ $ $ $
--------------------------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $ $ $ $
--------------------------------------------------------------------------
Class B Shares $ $ $ $
--------------------------------------------------------------------------
Class C Shares $ $ $ $
--------------------------------------------------------------------------
</TABLE>
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charges
at all. (See "Sales Charges") If you hold your shares for a long time, the
combination of the initial sales charge you paid and the recurring 12b-1 fees
may exceed the maximum sales charges permitted by the Conduct Rule for the
National Association of Securities Dealers, Inc.
------------
/6/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
<PAGE>
A detailed look
at European Equity
OBJECTIVE
The Fund seeks capital appreciation. Any dividend and interest income is
incidental to the pursuit of its objective. While we seek capital appreciation,
we cannot offer any assurance of achieving this objective. The Fund's objective
is not a fundamental policy. We must notify shareholders before we change it,
but we do not require their approval to do so.
STRATEGY
The Fund invests for the long term. We employ a strategy of growth at a
reasonable price--combining what we believe to be the best of "value" and
"growth" investment approaches. This core philosophy involves attempting to
identify both undervalued stocks and catalysts that will function to realize the
inherent value of these companies. We seek to identify companies that combine
strong potential for earnings growth with reasonable investment value. Such
companies typically exhibit increasing rates of profitability and cash flow, yet
their share prices compare favorably to other stocks in a given market and to
their peers.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 65% of its total assets in
stock and other securities with equity characteristics. Companies in which the
Fund invests are generally based in the developed countries of Europe, including
the countries that make up the MSCI Europe Index. The Fund may invest a portion
of its assets in companies based in the emerging markets of Eastern and Central
Europe and the Mediterranean region. Although the Fund intends to diversify its
investments across different countries, the Fund may invest a significant
portion of its assets in a single country.
The Fund may invest in companies of any market capitalization.
------------------------------------------------------
<PAGE>
Equity securities and other securities with equity characteristics include
common stock, preferred stock, warrants, purchased call options and other rights
to acquire stock.
An emerging market is commonly defined as one that experienced comparatively
little industrialization or that has a relatively new stock market and a low
level of quoted market capitalization. Bulgaria, Croatia, Estonia and Lithuania
are examples of emerging markets from Eastern and Central Europe in which the
Fund may invest. Greece, Egypt, Morocco and Tunisia are examples of emerging
markets in the Mediterranean region in which the Fund may invest.
Market capitalization is determined by the market price of a company's issued
and outstanding common stock and is calculated by multiplying the number of
shares a company has outstanding by the current market price of the company's
shares.
<PAGE>
INVESTMENT PROCESS
Company research lies at the heart of our investment process. Our process brings
an added dimension to this fundamental research. It draws on the insight of
experts from a range of financial disciplines--regional stock market
specialists, global industry specialists, economists and quantitative analysts.
They challenge, refine and amplify each other's ideas. Their close collaboration
is a critical element of our investment process. We utilize a team approach to
investing and believe strongly in fundamental analysis as a starting point to
valuing a company.
Our analysis of trends and possible breaks with traditional patterns allows for
the identification of investments which may be undervalued because changes in
legislation, technological developments, industry rationalization or other
structural shifts have created potential opportunities which the market has not
yet discovered. Emphasis is placed on visiting companies and conducting in-
depth research of industries and regions. This involves identifying investment
trends or major social developments that are likely to have a significant
positive impact on certain technologies, products and services.
In choosing stocks and other equity securities, we consider a number of factors,
including:
. stock price relative to the company's rate of earnings growth;
. valuation relative to other European companies and market averages;
. valuation relative to global peers;
. merger and acquisition trends; and
. trends related to the impact of the introduction of the new European
currency, the euro, on the finance, marketing and distribution strategies of
European companies.
The Fund's investment team has a sell discipline which maintains upside and
downside target prices, which are adjusted to keep pace with changes in company,
industry and market circumstances. Historically, the Fund has had a low
portfolio turnover rate.
------------------------------------------------------
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period.
------------------------------------------------------
<PAGE>
A Detailed Look at European Equity
OTHER INVESTMENTS
We may invest in various instruments commonly known as "derivatives" to increase
or decrease the Fund's exposure to a securities market, index or currency. In
particular, the Fund may use futures, options and forward currency transactions.
We may use derivatives in circumstances when we believe they offer an economical
means of gaining exposure to a particular securities market or index. We may
also invest in derivatives to attempt to reduce the Fund's exposure or to keep
cash on hand to meet shareholder redemptions or other needs while maintaining
exposure to the market.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock-market events. We could place up to 100% of the Fund's assets in U.S. or
foreign government money market investments, or other short-term bonds that
offer comparable safety, if the situation warranted. To the extent that we might
adopt such a position, and over the course of its duration, the Fund may not
meet its goal of capital appreciation.
RISKS
Below we have set forth some of the prominent risks associated with
international investing, along with those of investing in general. Although we
attempt both to assess the likelihood that these risks may actually occur and to
limit them, we cannot guarantee that we will succeed.
Primary Risks
Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market, including stocks held by the Fund.
Stock Selection Risk. A risk that pervades all investing is the risk that the
securities in the Fund's portfolio will decline in value.
------------------------------------------------------
Futures and options may be used as low-cost methods for gaining or reducing
exposure to a particular securities or currency market without investing
directly in those securities.
Forward currency transactions involve the purchase or sale of a foreign currency
at an exchange rate established currently, but with payment and delivery at a
specified future time. Forward currency transactions may be used in an attempt
to hedge against losses, or, where possible, to add to investment returns.
<PAGE>
Foreign Stock Market Risk. From time to time, foreign capital markets have
exhibited more volatility than those in the United States. Trading stocks on
some foreign exchanges is inherently more difficult than trading in the United
States for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits. While these
political risks have not occurred recently in the major countries in which
the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Stocks that trade infrequently or in low volumes can be more
difficult or more costly to buy, or to sell, than more liquid or active
stocks. This liquidity risk is a factor of the trading volume of a particular
stock, as well as the size and liquidity of the entire local market. On the
whole, foreign exchanges are smaller and less liquid than the U.S. market.
Relatively small transactions in some instances can have a disproportionately
large effect on the price and supply of shares. In certain situations, it may
become virtually impossible to sell a stock in an orderly fashion at a price
that approaches our estimate of its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
. Currency Risk. The Fund invests in foreign securities denominated in foreign
currencies. This creates the possibility that changes in foreign exchange
rates will affect the U.S. dollar value of foreign securities or the U.S.
dollar amount of income or gain received on these securities. We may seek to
minimize this risk by actively managing the currency exposure of the Fund,
which entails hedging or cross-hedging from time to time. There is no
guarantee that these currency management activities will be employed or that
they work, and their use could cause lower returns or even losses to the
Fund.
Region Focus Risk. Focusing on a single country or region involves increased
currency, political, regulatory and other risks. To the extent the Fund
concentrates its investments in a particular region, market swings in such a
targeted country or region will be likely to have a greater effect on Fund
performance than they would in a more geographically diversified equity fund.
Emerging Markets Risk. To the extent that the Fund invests in emerging markets
to enhance overall returns, it may face higher political, information and stock
market risks. In addition, profound social change and business practices that
depart from developed countries' norms have hindered the orderly growth of
emerging economies and their stock markets in the past. High levels of debt have
tended to make emerging economies heavily reliant on foreign capital and
vulnerable to capital flight.
<PAGE>
Secondary Risks
Small Company Risk. To the extent that the Fund invests in small capitalization
companies, it will be more susceptible to share price fluctuations, since small
company stocks tend to experience steeper fluctuations in price --down as well
as up--than the stocks of larger companies. A shortage of reliable information,
the same information gap that creates opportunity in small company investing,
can also pose added risk. Industrywide reversals may have a greater impact on
small companies, since they lack a large company's financial resources. Finally,
small company stocks are typically less liquid than large company stocks. A
small company's shares may be more difficult to sell, particularly when they are
performing poorly.
Futures and Options. Although not one of its principal investment strategies,
the Fund may invest in futures and options, which are types of derivatives.
Risks associated with derivatives include:
. the derivative is not well correlated with the security, index or currency
for which it is acting as a substitute;
. derivatives used for risk management may not have the intended effects and
may result in losses or missed opportunities; and
. the risk that the Fund cannot sell the derivative because of an illiquid
secondary market.
If the Fund invests in futures contracts and options for non-hedging purposes,
the margin and premiums required to make those investments will not exceed 5% of
the Fund's net asset value after taking into account unrealized profits and
losses on the contracts. The Fund may invest a portion of its assets in
companies based in the emerging markets of Eastern and Central Europe and the
Mediterranean region.
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
. changes in the relative strength and value of the U.S. dollar or other major
currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
<PAGE>
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank AG, Deutsche Funds Management, Inc., Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc.("DeAM, Inc."), and
Deutsche Asset Management Investment Services Limited ("DeAMIS").
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, DeAM, Inc.
with headquarters at 130 Liberty Street, New York, New York, acts as investment
adviser for the Fund. The Fund's investment adviser makes the Fund's investment
decisions. The Fund's investment adviser buys and sells securities for the Fund
and conducts the research that leads to the purchase and sale decisions. The
Fund's investment adviser is also responsible for selecting brokers and dealers
and for negotiating brokerage commissions and dealer charges.
DeAM, Inc. provides a full range of international investment advisory services
to institutional clients, and as of December 31, 2000, managed approximately
$_______in assets.
DeAM, Inc. is an indirect wholly owned subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
commercial banking, investment banking and insurance.
PORTFOLIO MANAGERS
DeAM, Inc. portfolio managers have been responsible for the day-to-day
management of the Fund's investments since December 23, 1999:
Michael Levy, Managing Director of Deutsche Asset Management and Lead Manager of
the Fund.
. Joined the investment adviser in 1993.
. Head of international equities, New York, responsible for overseeing the
management of over $7 billion of international and global equities.
. 29 years of business experience, 19 of them as an investment professional.
. Degrees in mathematics and geophysics from the University of Michigan.
Caroline Altmann, Director of Deutsche Asset Management and Co-Manager of the
Fund.
. Joined the investment adviser in 1999.
. 14 years of investment industry experience.
. Previously, portfolio manager, Clay Finlay from 1987 to 1999.
<PAGE>
. MBA from Columbia University.
. Head of global financial sector services analysis team with an emphasis on
Europe and Japan.
Clare Brody, CFA, Director of Deutsche Asset Management and Co-Manager of the
Fund.
. Joined the investment adviser in 1993.
. 9 years of investment industry experience.
. Global telecommunication services/equipment and pulp and paper analyst.
Matthias Knerr, CFA, Vice President of Deutsche Asset Management and Co-Manager
of the Fund.
. Joined the investment adviser in 1995.
. 5 years of investment industry experience.
. Finance and international business undergraduate degree from Pennsylvania
State University.
. Global engineering, construction, utility, telecommunications and automotive
analyst.
Oliver Kratz, Vice President of Deutsche Asset Management and Co-Manager of the
Fund.
. Joined the investment adviser in 1996 and the Fund in August 2000.
. 6 years of investment industry experience.
. Previously, Praktikant with McKinsey & Co; 1995.
. BA from Tufts University and Karlova Universidad; MALD, PhD from
Harvard University-Tufts University.
. Emerging Europe and Neuer Markt analyst.
Other Services. DeAM, Inc. also provides administrative services for the Fund.
In addition, DeAM, Inc.--or your broker or financial adviser--performs the
functions necessary to establish and maintain your account. In addition to
setting up the account and processing your purchase and sale orders, these
functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Brokers and financial advisers may charge additional fees to investors for those
services not otherwise included in the brokers or financial advisers
subdistribution or servicing agreements, such as cash management or special
trust or retirement-investment reporting.
<PAGE>
CALCULATING A FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the New York Stock Exchange is open for business.
The price you pay when you buy shares or receive when you redeem shares is the
NAV plus any applicable sales charge. When you buy Class A Shares, the price you
pay may be increased by a sales charge. When you redeem any class of shares,
the amount you receive may be reduced by a sales charge. Read the section on
sales charges for details on how and when these charges may or may not be
imposed. The formula for calculating the Fund's net asset value calls for
deducting all of the liabilities of a Fund's class of shares from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares of that class
outstanding. Prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Such price changes in the securities a Fund owns may
ultimately affect the net asset value of Fund shares when the New York Stock
Exchange re-opens.
The Fund uses a forward pricing procedure. Therefore, the price at which you buy
or sell shares is based on the next calculation of the NAV after the order is
received by the Fund or your broker, provided that your broker or financial
adviser forwards your order to the Fund in a timely manner.
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
------------------------------------------------------
The New York Stock Exchange is open every week, Monday through Friday, except
when the following holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the third Monday in
February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor
Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in
November) and Christmas Day.
------------------------------------------------------
PERRFORMANCE INFORMATION
The Fund's performance can be usedin advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
If a Fund earns net investment income or recognizes net capital gains, its
policy is to distribute to shareholders substantially all of that taxable income
and capital gain on an annual basis. We automatically reinvest all dividends and
any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by the Fund. Your taxes will vary from year to year,
based on the amount of capital gains distributions and dividends paid out by the
Fund. You owe the taxes whether you receive cash or choose to have distributions
and dividends reinvested. Distributions and dividends usually have the following
tax character:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRANSACTION TAX STATUS
--------------------------------------------------------------------
<S> <C>
Income Dividends Ordinary Income
--------------------------------------------------------------------
Short-term capital gains Ordinary Income
distributions
--------------------------------------------------------------------
Long-term capital gains Long-term capital gains
distributions
--------------------------------------------------------------------
</TABLE>
Every year the Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
TRANSACTION TAX STATUS
---------------------------------------------------------------------
<S> <C>
Your sale of shares owned more Generally, long-term capital
than one year gains or losses
---------------------------------------------------------------------
Your sale of shares owned for Generally, short-term capital
one year or less gains or losses subject to
special rules.
--------------------------------------------------------------------
</TABLE>
The tax considerations for tax deferred accounts or non-taxable entities will be
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
<PAGE>
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of
Deutsche Asset Management
<TABLE>
<S> <C>
By phone 1-800-730-1313
By mail Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By overnight mail Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
</TABLE>
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week
To Purchase Shares
You may buy any class of the Fund's shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Transfer Agent.
Defined contribution plans with assets of $75 million or more may not purchase
Class A shares.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders.
Minimum Account Investments
<TABLE>
<S> <C>
Initial Investment in Class A, B, or C shares $2,000
Subsequent Investments $ 100
IRA account, Initial Investment $1,000
Initial Investment for shareholders of other Deutsche Asset Management Funds'
Class A, B and C Shares $ 500
Automatic Investing Plan, Initial Investment $ 250
Monthly plan subsequent investments $ 100
Quarterly plan subsequent investments $ 250
Minimum Investment For Qualified Retirement Plans (such as 401(k), pension, $ 0
or profit sharing plans)
</TABLE>
<PAGE>
The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the minimum account investments.
Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or quarterly
investment in any class of shares. The amount you decide upon will be withdrawn
from your checking account using a pre-authorized check. When the money is
received by the Transfer Agent, it will be invested at that day's offering price
in the class of shares selected. Either you or the Fund may discontinue your
participation upon 30 days' notice.
Systematic Purchase Plan. You may also purchase any class of shares through a
Systematic Purchase Plan. Contact your securities dealer or servicing agent for
details.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
To Redeem Shares
You may redeem any class of the Fund's shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If you have an account with the Fund
that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section on telephone
transactions for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may require
the following documents before they redeem your shares:
. A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the shares exactly as their names appear on the account.
. If you are redeeming more than $50,000, a signature guarantee. You can obtain
one from most banks or securities dealers.
. Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust, or fiduciary.
<PAGE>
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next dividend
payable date. If you have redeemed all of your shares by that time, the dividend
will be paid to you in cash whether or not that is the payment option you have
selected.
If you redeem sufficient shares to reduce your investment to $500 or less, the
Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in-kind under certain
circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange to
have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
If your shares are in an account with the Transfer Agent, you may redeem them in
any amount up to $50,000 or exchange them for shares in another Deutsche Asset
Management fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges, but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that telephoned instructions are genuine. These procedures include requiring you
to provide certain personal identification information when you open your
account and before you effect each telephone transaction. You may be required to
provide additional telecopied instructions. If these procedures are employed,
neither the Fund nor the Transfer Agent will bear any liability for following
telephone instructions that either reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
SALES CHARGES
Purchase Price
The price you pay to buy shares will be the Fund's offering price which is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying.
Class A shares are subject to sales charges according to the following
schedule:
<PAGE>
<TABLE>
<CAPTION>
Class A Sales Charge as a % of
----------------------------------
Net Amount Class B Sales Class C Sales
Amount of Purchase Offering Price Invested Charge Charge
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $ 50,000 5.50% 5.82% None None
$ 50,000 - $ 99,999 4.50% 4.71% None None
$ 100,000 - $ 249,999 3.50% 3.63% None None
$ 250,000 - $ 499,999 2.50% 2.56% None None
$ 500,000 - $ 999,999 2.00% 2.04% None None
$1,000,000 and over None None None None
---------------------------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000 or
more in Class A Shares or when you buy any amount of Class B or C Shares, you
may pay a sales charge when you redeem your shares. Refer to the section on
redemption price for details. Your securities dealer may be paid a commission at
the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
Rights of Accumulation. If you are purchasing additional Class A Shares of this
Fund or Class A shares of any other Deutsche Asset Management fund or if you
already have investments in Class A shares, you may combine the value of your
purchases with the value of your existing Class A Share investments to determine
whether you qualify for reduced sales charges. (For this purpose your existing
Class A investments will be valued at the higher of cost or current value.) You
may also combine your Class A purchases and investments with those of your
spouse and your children under the age of 21 for this purpose. You must be able
to provide sufficient information to verify that you qualify for this right of
accumulation.
Letter of Intent. If you anticipate making additional purchases of Class A
Shares of this Fund or any other Deutsche Asset Management fund over the next 13
months, you may combine the value of your current purchase with the value of
your anticipated purchases to determine whether you qualify for a reduced sales
charge. You will be required to sign a letter of intent specifying the total
value of your anticipated purchases and to initially purchase at least 5% of the
total. When you make each purchase during the period, you will pay the sales
charge applicable to their combined value. If, at the end of the 13-month
period, the total value of your purchases is less than the amount you indicated,
you will be required to pay the difference between the sales charges you paid
and the sales charges applicable to the amount you actually did purchase. Some
of the shares you own will be redeemed to pay this difference.
Purchases at Net Asset Value. You may buy Class A Shares without paying a sales
charge under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
<PAGE>
2) If you are exchanging an investment in Class A Shares of another Deutsche
Asset Management fund for an investment in this Fund (see "Purchases by
Exchange" for a description of the conditions).
3) If you are a current or retired Director of this or any affiliated Fund, a
director, an employee, or a member of the immediate family of an employee of
any of the following (or their respective affiliates): the Fund's
distributor, the Adviser, or a broker-dealer authorized to sell shares of
the Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner, or
securities dealer purchasing shares on your behalf. To qualify for
this provision, you must be paying an account management fee for the
fiduciary or advisory services. You may be charged an additional fee
by your securities dealer or servicing agent if you buy shares in this
manner.
Purchases by Exchange
You may exchange Class A, B, or C Shares of any other Deutsche Asset Management
fund for an equal dollar amount of Class A, B, or C Shares, respectively,
without payment of the sales charges described above or any other charge up to
four times a year. You may enter both your redemption and purchase orders on the
same Business Day or, if you have already redeemed the shares of the other fund,
you may enter your purchase order within 90 days of the redemption. The Fund may
modify or terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing agent.
Contact them for details on how to enter your order. Before buying shares
through an exchange, you should obtain a copy of that fund's prospectus and read
it carefully. If your shares are in an account with the Fund's Transfer Agent,
you may also request an exchange directly through the Transfer Agent by mail or
by telephone.
Please note the following:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. Any deferred sales charge will continue to be measured from the time of your
original purchase. If the fund you exchange into has a higher deferred sales
charge, you will be subject to that charge. If you exchange at any time into
a fund with lower deferred sales charge, your sales charge will not be
reduced.
<PAGE>
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from the Service
Center or your service agent.
. Your exchange must meet the minimum investment amount for the class of shares
of the fund being purchased.
Redemption Price
The amount of any applicable sales charge will be deducted from your redemption
price according to the following schedule.
<TABLE>
<CAPTION>
Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge
(as % of the Lesser of Cost or Value)
----------------------------------------------------
Class A Shares Class B Shares Class C Shares
Years Since Purchase Sales Charge Sales Charge Sales Charge
----------------------------------------------------------------------------
<S> <C> <C> <C>
First................. 1.00%* 5.00% 1.00%
Second................ 0.50%* 4.00% None
Third................. None 3.00% None
Fourth................ None 3.00% None
Fifth................. None 2.00% None
Sixth................. None 1.00% None
Thereafter............ None None None
----------------------------------------------------------------------------
</TABLE>
* You will pay a deferred sales charge when you redeem Class A Shares only if
your shares were purchased at net asset value because they were part of an
investment of $1 million or more.
Determination of Deferred Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
. No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
. If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
. If you acquired your shares through an exchange of shares of another Deutsche
Asset Management fund, the period of time you held the original shares will
be combined with the period of time you held the shares being redeemed to
determine the years since purchase.
<PAGE>
. The sales charge is applied to the lesser of the cost of the shares or their
value at the time of your redemption. Therefore, you do not pay a sales
charge on amounts representing appreciation or depreciation.
Waiver of Sales Charge. You may redeem shares without paying a deferred sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Deutsche Asset
Management fund of the same class.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan are
12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
i. The account is registered in your name either individually, as a joint
tenant with rights of survivorship, as a participant in community
property, or as a minor child under the Uniform Gifts or Uniform
Transfers to Minors Acts.
ii. Either you or your representative notifies your securities dealer,
servicing agent, or the Transfer Agent that such circumstances exist.
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000, and your securities dealer has agreed to return to the Fund's
distributor any payments received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. This
conversion will be made on the basis of the relative net asset values of the
classes and will not be a taxable event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
Your decision as to which class of the Fund's shares is best for you should be
based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares. Except in the
case of investments of $1,000,000 or more, you pay no sales charge if you redeem
Class A Shares.
<PAGE>
If you choose Class B Shares, you will pay no sales charge when you buy your
shares, but your annual expenses will be higher than Class A Shares. You will
pay a sales charge if you redeem your shares within six years of purchase, but
the amount of the charge declines the longer you hold your shares and, at the
end of seven years, your shares convert to Class A Shares, thus eliminating the
higher expenses from that point on.
If you choose Class C Shares, you will pay no sales charge when you buy your
shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
In general, if you intend to invest more than $50,000, your combined sales
charges and expenses are lower with Class A Shares. If you intend to invest less
than $50,000 and expect to hold your shares for more than seven years, your
combined sales charges and expenses are lower with Class B Shares. If you intend
to invest less than $50,000 and expect to hold your shares for less than seven
years, your combined sales charges and expenses are lower with Class C Shares.
Your securities dealer is paid a fee when you buy shares. In addition, your
securities dealer is paid an annual fee as long as you hold your shares. For
Class A and B Shares, this fee begins when you purchase your shares. For Class C
Shares, this fee begins one year after you purchase your shares.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
Distribution Plan
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares and for shareholder service. Class A Shares pay an annual
distribution fee equal to 0.25% of average daily net assets. Class B and C
Shares pay an annual distribution fee equal to 0.75% of average daily net assets
and an annual shareholder servicing fee equal to 0.25% of average daily net
assets. Because these fees are paid out of net assets on an on-going basis, they
will, over time, increase the cost of your investment and may cost you more than
paying other types of sales charges.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents. Once
you place your order with a service agent, it is considered received by the
Service Center. It is then your service agent's responsibility to transmit
the order to the Service Center by the next business day. You should contact
your service agent if you have a dispute as to when your order was placed
with the fund.
. After we or your service agent receives your order, you will buy or sell your
shares at the next NAV calculated on a day the New York Stock Exchange is
open for business adjusted for any applicable sales charge.
<PAGE>
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. Please note that we
cannot accept starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of a fund
recently purchased by check may be delayed for up to 15 calendar days while
we wait for your check to clear.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
always within seven days.
. We reserve the right to close your account on 30 days' notice if it fails to
meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a signature
guarantee. Please contact your service agent or the Service Center for more
information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "inkind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. We reserve the right to reject purchases of Fund shares (including exchanges)
for any reason. We will reject purchases if we conclude that the purchaser
may be investing only for the short-term or for the purpose of profiting from
day to day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including exchanges)
or to suspend or postpone redemptions at times when both the New York Stock
Exchange and the Fund's custodian are closed.
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on your
fund's overall performance, its current holdings and its investing
strategies.
Institutional Class performance is presented because Class A, B and C shares
are newly offered classes of shares with no performance history. Class A, B and
C shares will have different performance. The table below helps you understand
the financial performance of the Institutional
<PAGE>
Class shares of the Fund for the past five fiscal periods. Certain information
selected reflects financial results for a single Institutional Class share of
the Fund. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Institutional shares of the
Fund, assuming reinvestment of all dividends and distributions. This information
has been audited by -------------------------, whose report, along with the
Fund's financial statements, is included in the Fund's annual report for
Institutional Class Shares. The annual report is available free of charge by
calling the Service Center at 1-800-730-1313.
<TABLE>
<CAPTION>
For the For the years ended October 31, For the
year ended period ended
FINANCIAL HIGHLIGHTS October 31, October 31,
2000 1999 1998 1997 1996/1/
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a Share Outstanding Throughout
each Period:
Net Asset Value, Beginning of
Period
------------------------------------------------------------------------------------------------------
Income From Investment Operations
Net Investment Income
------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gains (Losses)
------------------------------------------------------------------------------------------------------
Total From Investment Operations
------------------------------------------------------------------------------------------------------
Distributions to Shareholders
------------------------------------------------------------------------------------------------------
Net Investment Income
------------------------------------------------------------------------------------------------------
Net Realized Gains
------------------------------------------------------------------------------------------------------
Total Distributions
------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
------------------------------------------------------------------------------------------------------
Total Investment Return +
------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(000s omitted)
------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net Investment Income (Loss)
------------------------------------------------------------------------------------------------------
Expenses
------------------------------------------------------------------------------------------------------
Decrease Reflected in Above /3/
Expense Ratio Due to Absorbtion
of Expenses by the Fund's
investment adviser/2/
------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
------------------------------------------------------------------------------------------------------
</TABLE>
------------
/1/ The Fund's inception was September 3, 1996.
/2/ Deutsche Asset Management Inc. became the Fund's investment adviser on
December 23,1999. Prior to that date, Deutsche Asset Management Investment
Services Limited was the Fund's investment adviser.
/3/ Annualized.
+ Return is for the period indicated and has not been annualized.
<PAGE>
This page intentionally left blank.
<PAGE>
Additional information about the Fund's investments and performance is available
in the Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
or call our toll-free number: 1-800-730-1313
You can find reports and other information about the Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about the Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
European Equity--Class A, B and C Shares
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
2 Portland Square
Portland. ME 04101
CUSIP __________
811-8006
Pro(2/01)
<PAGE>
Deutsche Asset Management
Mutual Fund
Prospectus
February 28, 2001
Investment Class
Fixed Income
Short-Term Fixed Income
Municipal Bond
Short-Term Municipal Bond
High Yield Bond
Each formerly a Morgan Grenfell Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Table of Contents
-----------------
<TABLE>
<S> <C>
Fixed Income.......................................................... 3
Short-Term Fixed Income............................................... 11
Municipal Bond........................................................ 19
Short-Term Municipal Bond............................................. 27
High Yield Bond....................................................... 35
Information Concerning All Funds...................................... 43
Management of the Fund................................................ 43
Calculating the Fund's Share Price.................................... 43
Performance Information............................................... 44
Dividends and Distributions........................................... 44
Tax Considerations.................................................... 44
Buying and Selling Fund Shares........................................ 44
</TABLE>
<PAGE>
Overview
of Fixed Income
Goal: The Fund seeks a high level of income consistent with the preservation of
capital. Core Strategy: The Fund invests primarily in investment grade fixed
income securities.
INVESTMENT POLICIES AND STRATEGIES
The Fund invests, under normal circumstances, at least 80% of its assets in a
wide range of investment grade fixed income securities, including U.S.
government bonds, corporate bonds and debentures and mortgage-backed and
asset-backed securities. In selecting investments, we focus on identifying
securities and sectors which we believe are undervalued relative to the market
rather than relying on interest rate forecasts.
Fixed Income--Investment Class
Overview of Fixed Income
Goal........................................................... 3
Core Strategy.................................................. 3
Investment Policies and Strategies............................. 3
Principal Risks of Investing in the Fund....................... 4
Who Should Consider Investing in the Fund...................... 4
Total Returns, After Fees and Expenses......................... 5
Annual Fund Operating Expenses................................. 6
A Detailed Look at Fixed Income
Objective...................................................... 7
Strategy....................................................... 7
Principal Investments.......................................... 7
Investment Process............................................. 7
Other Investments.............................................. 8
Risks.......................................................... 8
Portfolio Managers............................................. 9
Financial Highlights........................................... 10
<PAGE>
Overview of Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest; and
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in Fixed Income if you are seeking to earn current
income higher than money market mutual funds over most time periods. There is,
of course, no guarantee that the Fund will realize its goal. Moreover, you
should be willing to accept the risks of investing in the fixed income market,
including credit risk and interest rate risk.
You should not consider investing in Fixed Income if you are pursuing a short-
term financial goal, if you are seeking capital appreciation or if you cannot
tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
fixed income investments. Diversifying your investments may lower the volatility
of your overall investment portfolio.
An investment in Fixed Income is not a deposit of any bank, and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
Overview of Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Investment Class shares for
each full calendar year since the Fund began selling Investment Class shares to
the public on February 11, 1998. The table compares the average annual return of
the Fund's Investment Class shares with that of the Lehman Brothers Aggregate
Bond Index over the last one year and since the inception of the class. The
Index is a model, not an actual portfolio. An index is a group of securities
whose overall performance is used as a standard to measure investment
performance. It does not factor in the costs of buying, selling and holding
securities--costs which are reflected in the Fund's results.
The Lehman Brothers Aggregate Bond Index represents U.S. domestic taxable
investment grade bonds which include securities from the following sectors: U.S.
Treasuries, agencies, corporate, mortgage-backed and asset-backed securities.
The Index includes over 5,500 public issued securities with a minimum one year
to final maturity and $150 million par amount outstanding. The average maturity
and duration of the index is in the intermediate range.
YEAR-BY-YEAR RETURNS
Investment Class
(each full calendar year since inception)
1999 -0.79%
2000 ____%
Since inception, the Fund's highest return in any calendar quarter was ___%
(____) and its lowest quarterly return was (___%)(______). Past performance
offers no indication of how the Fund will perform in the future.
<PAGE>
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 year (2/11/98)/1/
Fixed Income--Investment
Class
Lehman Brothers
Aggregate Bond Index
/1/ The Lehman Brothers Aggregate Bond Index average is calculated from February
28, 1998.
<PAGE>
Overview of Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold Investment Class shares of Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/ The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.80%.
/2/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.40%
Total Annual Fund
Operating Expenses 0.80%
Less: Fee Waivers or
Expense Reimbursements 0.00%/1/
Net Expenses 0.80%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
$82 $255 $444 $990
<PAGE>
A detailed look
at Fixed Income
OBJECTIVE
The Fund seeks a high level of income consistent with the preservation of
capital. The Fund invests for current income, not capital appreciation. While we
seek current income, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of five to ten years. Subject to its portfolio maturity
policy, the Fund may purchase individual securities with any stated maturity.
The dollar weighted average portfolio maturity may be shorter than the stated
maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features. In implementing this strategy, the Fund
may experience a high portfolio turnover rate.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Fixed income funds usually have a higher portfolio turnover rate as a group as
compared to equity funds because fixed income security maturities contribute to
turnover. High turnover can increase the Fund's transaction costs, thereby
lowering its returns.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 80% of its assets in
intermediate-term U.S. treasury, corporate, mortgage-backed and asset-backed,
taxable, municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities rated within the top three rating
categories. Fixed income investments include bonds, notes (including structured
notes), mortgage-related securities, asset-backed securities, convertible
securities, eurodollar and Yankee dollar instruments, preferred stocks and money
market instruments. Fixed income securities may be issued by U.S. and foreign
corporations or entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations; and foreign governments and
their subdivisions. These securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features.
<PAGE>
INVESTMENT PROCESS
Company research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on credit worthiness, cash flow and price,
to each bond;
. determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. use credit analysis to determine the issuer's ability to fulfill its
contracts; and
. subordinate sector weightings to individual bonds that may add above-market
value.
Fixed income securities are investment grade if:
. They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts.
<PAGE>
A Detailed Look at Fixed Income
OTHER INVESTMENTS
The Fund may invest up to 15% of its assets in investment grade fixed income
securities rated within the fourth highest rating category.
The Fund may invest up to 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers and governments, including American Depositary
Receipts (ADRs). The 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 we
determine that securities meeting the Fund's investment objective are not
otherwise readily available for purchase.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
RISKS
Below we have set forth some of the prominent risks associated with investing in
fixed income securities, as well as investing in general. Although we attempt
both to assess the likelihood that these risks may actually occur and to limit
them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. There is a greater risk that the Fund will lose money due to prepayment
risk because the Fund invests in mortgage-related securities.
<PAGE>
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security. There is a greater risk that the
Fund will lose money due to extension risk because the Fund invests in
mortgage-related securities.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
<PAGE>
A Detailed Look at Fixed Income
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Gary Bartlett, CFA, Director of Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Warren Davis, Director of Deutsche Asset Management, Inc. and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1995.
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1997.
. Prior to that, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government investments.
Daniel Taylor, CFA, Vice President of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1998.
. Prior to that, fixed income portfolio manager, asset backed securities
analyst and senior credit analyst, CoreStates Investments Advisors, from
1992 to 1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
A Detailed Look at Fixed Income
The table below helps you understand the financial performance of the
Investment Class shares of the Fund for the past two fiscal periods. Certain
information selected reflects financial results for a single Investment Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Investment Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by_______________, whose report, along with
the Fund's financial statements, is included in the Fund's annual report. The
annual report is available free of charge by calling the Service Center at 1-
800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
For the year ended October 31,
-----------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout each 2000 1999 1998
Period:
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period
-----------------------------------------------------------------------------------------------------
Income From Investment Operations
-----------------------------------------------------------------------------------------------------
Net Investment Income
-----------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses)
-----------------------------------------------------------------------------------------------------
Total from Investment Operations
-----------------------------------------------------------------------------------------------------
Distributions to Shareholders from
-----------------------------------------------------------------------------------------------------
Net Investment Income
-----------------------------------------------------------------------------------------------------
Net Realized Gains
-----------------------------------------------------------------------------------------------------
Total Distributions
-----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
-----------------------------------------------------------------------------------------------------
Total Investment Return
-----------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
-----------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s omitted)
-----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net Investment
Income
-----------------------------------------------------------------------------------------------------
Expenses
-----------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense Ratio Due to
Absorption of Expenses by DeAM, Inc. /4/
-----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-----------------------------------------------------------------------------------------------------
</TABLE>
/1/ The inception of Investment Class shares of the Fund was February 11, 1998.
/2/ Annualized.
/3/ Total return is not annualized.
/4/ DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview
of Short-Term Fixed Income
Goal: The Fund seeks a high level of income consistent with the preservation of
capital.
Core Strategy: The Fund invests primarily in investment grade short-term fixed
income securities.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
short-term U.S. Treasury, corporate, mortgage-backed and asset-backed, taxable
municipal and tax-exempt municipal bonds. We look for securities and sectors of
the short-term fixed income marketplace that are undervalued relative to the
market rather than rely on interest rate forecasting to select securities for
investment.
Short-Term Fixed Income--Investment Class
Overview of Short-Term Fixed Income
Goal.......................................................... 11
Core Strategy................................................. 11
Investment Policies and Strategies............................ 11
Principal Risks of Investing in the Fund...................... 12
Who Should Consider Investing in the Fund..................... 12
Total Returns, After Fees and Expenses........................ 13
Annual Fund Operating Expenses................................ 14
A Detailed Look at Short-Term Fixed Income
Objective..................................................... 15
Strategy...................................................... 15
Principal Investments......................................... 15
Investment Process............................................ 15
Other Investments............................................. 15
Risks......................................................... 16
Portfolio Managers............................................ 17
Financial Highlights.......................................... 18
<PAGE>
Overview of Short-Term Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest; and
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in Short-Term Fixed Income if you are seeking to
earn current income higher than money market mutual funds over most time periods
but are looking for less volatility in the value of your investment than Fixed
Income may provide.
You should not consider investing in Short-Term Fixed Income if you are pursuing
a long-term financial goal, if you are seeking capital appreciation or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
short-term fixed income investments. Diversifying your investments may improve
your long-run investment return and lower the volatility of your overall
investment portfolio.
An investment in Short-Term Fixed Income is not a deposit of any bank, and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
Overview of Short-Term Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
Because Investment Class shares are a newly offered class of shares with no
performance history, the following bar chart and table show the performance
history of the Fund's Institutional Class shares, which have been in existence
since the Fund's inception on March 13, 1995. The table compares the average
annual return of the Fund's Institutional Class shares with that of the Merrill
Lynch 6-Month Treasury Bill Index and the Merrill Lynch 1-Year Treasury Bill
Index over the last one year and since its inception. The Fund has changed its
benchmark from the Merrill Lynch 6-Month Treasury Bill Index to the Merrill
Lynch 1-Year Treasury Bill Index. This index more closely reflects the dollar
weighted average portfolio maturity of the Fund. The index is a model, not an
actual portfolio. An index is a group of securities whose overall performance is
used to measure investment performance. It does not factor in the costs of
buying, selling and holding securities--costs which are reflected in the Fund's
results.
The Merrill Lynch 6-Month Treasury Bill Index and the Merrill Lynch 1-Year
Treasury Bill Index are measures of the performance of the 6-month and 1-year
U.S. Treasury Bills, respectively, assuming all cash flows are reinvested on a
daily basis. Each Index is comprised of a single issue purchased at the
beginning of the month and held for the full month. At the end of the month,
that issue is sold and rolled into a newly selected issue. The issue at each
month-end rebalancing is the outstanding Treasury Bill that matures, closest to,
but not beyond 6 months or 1-year, respectively, from the rebalancing date.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
1996 5.48%
1997 6.77%
1998 6.54%
1999 4.47%
2000 ___%
Since inception, the Fund's highest return in any calendar quarter was ___%
(______) and its lowest quarterly return was ___% (______). Past performance
offers no indication of how the Fund will perform in the future.
<PAGE>
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
1 Inception
year (3/13/95)/2/
Short-Term Fixed Income--
Institutional Class/1/ ____% _____%
Merrill Lynch 6-Month
Treasury Bill Index ____% _____%
Merrill Lynch 1-Year
Treasury Bill Index ____% _____%
/1/Institutional Class performance is presented because Investment Class shares
have no performance history. Investment Class shares will have different
performance. The chart does not reflect service fees at an aggregate annual rate
of up to 0.25% of the Fund's average daily net assets for its Investment Class
shares. Institutional Class shares are offered under a separate prospectus,
which is available upon request.
/2/The Merrill Lynch 6-Month Treasury Bill Index average and the Merrill Lynch
1-Year Treasury Bill Index average are each calculated from March 31, 1995.
<PAGE>
Overview of Short-Term Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses that you may pay if you buy and hold Investment Class shares of
Short-Term Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/Restated to reflect estimated Other Expenses for the current fiscal year.
Investment Class shares are a new class of shares with no operating history. For
the fiscal year ended October 31, 2000, Other Expenses and Total Annual Fund
Operating Expenses were ____% and ____%, respectively, of the average daily net
assets of the Institutional Class shares. Expenses for the Institutional Class
shares do not reflect service fees paid by the Investment Class shares at an
aggregate annual rate of up to 0.25% of the average daily net assets of that
Class.
/2/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.80%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of Average
Daily Net Assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.90%/1/
Total Annual Fund
Operating Expenses 1.30%/1/
Less: Fee Waivers or
<PAGE>
Expense Reimbursements (0.50%)/2/
Net Expenses 0.80%
EXPENSE EXAMPLE/3/
1 Year 3 Years 5 Years 10 Years
$81 $361 $662 $1,517
<PAGE>
A detailed look
at Short-Term Fixed Income
OBJECTIVE
The Fund seeks a high level of income consistent with the preservation of
capital. The Fund invests for current income, not capital appreciation. While we
seek current income, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we do not require their approval to do so.
STRATEGY
In managing the fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of no longer than three years. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity of the Fund is
generally shorter than the stated maturity (usually about 1 year) due to several
factors, including but not limited to prepayment patterns, call dates and put
features. In implementing this strategy, the Fund may experience a high
portfolio turnover rate.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 80% of its total assets in
short-term U.S. Treasury, corporate, mortgage-backed and asset-backed, taxable
municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities rated within the top three rating
categories. Fixed income investments include bonds, notes (including structured
notes), mortgage-related securities, asset-backed securities, convertible
securities, eurodollar and Yankee dollar instruments, preferred stocks and money
market instruments. Fixed income securities may be issued by U.S. and foreign
corporations or entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations; and foreign governments and
their subdivisions. These securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features. The Fund may invest up to
40% of its total assets in asset-backed securities.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Fixed income funds usually have a higher portfolio turnover rate as a group as
compared to equity funds because fixed income security maturities contribute to
turnover. High turnover can increase the Fund's transaction costs, thereby
lowering its returns.
<PAGE>
INVESTMENT PROCESS
Company research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on credit worthiness, cash flow and price,
to each bond;
. determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. use credit analysis to determine the issue's ability to fulfill its
contracts; and
. subordinate sector weightings to individual bonds that may add above-market
value.
OTHER INVESTMENTS
The Fund may invest up to 15% of its assets in investment grade fixed income
securities rated within the fourth highest rating category.
The Fund may invest up to 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers. The 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 we determine that securities meeting the Fund's investment objective are
not otherwise readily available for purchase.
Fixed income securities are investment grade if:
. They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts.
<PAGE>
A Detailed Look at Short-Term Fixed Income
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
RISKS
Below we have set forth some of the prominent risks associated with investing in
fixed income securities, along with those of investing in general. Although we
attempt both to assess the likelihood that these risks may actually occur and to
limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. There is a greater risk that the Fund will lose money due to prepayment
risk because the Fund invests in mortgage-related securities.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security. There is a greater risk that the
Fund will lose money due to extension risk because the Fund invests in mortgage-
related securities.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative
<PAGE>
attractiveness of bonds as an investment. Investment grade debt securities
similar to those held in the Fund have experienced a moderate level of short-
term price fluctuation.
Secondary Risks
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
<PAGE>
A Detailed Look at Short-Term Fixed Income
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Gary Bartlett, CFA, Director of Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Warren Davis, Director of Deutsche Asset Management, Inc. and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1995.
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1997.
. Prior to that, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government investments.
Daniel Taylor, CFA, Vice President of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1998.
. Prior to that, fixed income portfolio manager, asset backed securities
analyst and senior credit analyst, CoreStates Investments Advisors, from
1992 to 1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
A Detailed Look at Short-Term Fixed Income
Institutional Class performance is presented because Investment Class shares are
a newly offered class of shares with no performance history. Investment Class
shares will have different performance. The table below helps you understand the
financial performance of the Institutional Class shares of the Fund for the past
five fiscal periods. Certain information selected reflects financial results for
a single Institutional Class share of the Fund. The total returns in the table
represent the rate of return that an investor would have earned on an investment
in the Institutional Class shares of the Fund, assuming reinvestment of all
dividends and distributions. This information has been audited by ___________,
whose report, along with the Fund's financial statements, is included in the
Fund's annual report. The annual report is available free of charge by calling
the Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
For the year ended October 31,
--------------------------------------------------------------------------------
For a Share Outstanding 2000 1999 1998 1997 1996 1995/1/
Throughout each Period:
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period
--------------------------------------------------------------------------------
Income From Investment
Operations
--------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------
Net Realized and
Unrealized Gains
(Losses) on Investment
--------------------------------------------------------------------------------
Total from Investment
Operations
--------------------------------------------------------------------------------
Distributions to
Shareholders from
--------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------
Net Realized Gains
--------------------------------------------------------------------------------
Total Distributions
--------------------------------------------------------------------------------
Net Asset Value, End of
Period
--------------------------------------------------------------------------------
Total Investment Return
--------------------------------------------------------------------------------
Supplemental Data and
Ratios:
--------------------------------------------------------------------------------
Net Assets, End of
Period (000s omitted)
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net Investment Income
--------------------------------------------------------------------------------
Expenses
--------------------------------------------------------------------------------
Decrease Reflected in Above
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
Expense Ratio Due to
Absorption of
Expenses by DeAM, Inc./4/
--------------------------------------------------------------------------------
Portfolio Turnover Rate
--------------------------------------------------------------------------------
/1/The Fund's inception was March 13, 1995.
/2/Annualized.
/3/Total return is not annualized.
/4/DeAM, Inc.--Deutsche Asset Management, Inc. the Fund's investment adviser.
<PAGE>
Overview
of Municipal Bond
Goal: The Fund seeks a high level of income exempt from regular federal income
tax, consistent with the preservation of capital.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities that pay interest exempt from federal income tax.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
investment grade municipal securities. Municipal securities are debt securities
issued by states and certain other municipal issuers, political subdivisions,
agencies and public authorities that pay interest which are exempt from federal
income tax. We focus on individual security selection rather than relying on
interest rate forecasting.
Municipal Bond--Investment Class
Overview of Municipal Bond
Goal............................................. 19
Core Strategy.................................... 19
Investment Policies and Strategies............... 19
Principal Risks of Investing in the Fund......... 20
Who Should Consider Investing in the Fund........ 20
Total Returns, After Fees and Expenses........... 21
Annual Fund Operating Expenses................... 22
A Detailed Look at Municipal Bond
Objective........................................ 23
Strategy......................................... 23
Principal Investments............................ 23
Investment Process............................... 23
Other Investments................................ 23
Risks............................................ 24
Portfolio Managers............................... 25
Financial Highlights............................. 26
<PAGE>
Overview of Municipal Bond
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. a greater-than-anticipated percentage of the Fund's investments could
produce taxable income, resulting in a lower tax-adjusted return; and
. unfavorable legislation could affect the tax-exempt status of municipal
bonds.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in Municipal Bond if you are seeking income that
is exempt from federal income tax. There is, of course, no guarantee that the
Fund will realize its goal of providing a high level of income exempt from
regular federal income tax.
You should not consider investing in Municipal Bond if you are pursuing a short-
term financial goal, if you seek capital appreciation or if you cannot tolerate
fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
municipal securities.
An investment in Municipal Bond is not a deposit of any bank, and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
Overview of Municipal Bond
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Investment Class shares for
each full calendar year since the Fund began selling Investment Class shares to
the public on July 30, 1997. The table compares the average annual return of the
Fund's Investment Class shares with that of the Lehman Brothers 5 Year G.O.
Index over the last one year and since inception of the Investment Class shares.
The Index is a model, not an actual portfolio. An index is a group of securities
whose overall performance is used to measure investment performance. It does not
factor in the costs of buying, selling and holding securities--costs which are
reflected in the Fund's results.
The Lehman Brothers 5-Year G.O. Index includes over 1,900 intermediate term
General Obligation tax-exempt municipal bonds with an average maturity range of
4 to 6 years. The index includes tax-exempt municipal issues with a minimum par
amount of $5 million.
YEAR-BY-YEAR RETURNS
Investment Class
(each full calendar year since inception)
1998 5.28%
1999 -1.56%
2000 ____%
Since inception, the Fund's highest return in any calendar quarter was ___%
(_____) and its lowest quarterly return was (___%) (______). Past performance
offers no indication of how the Fund will perform in the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 year (7/30/97)/1/
Municipal Bond--
Investment Class (%) %
Lehman 5 Year G.O. Index % %
/1/The Lehman 5 Year G.O. Index average is calculated from July 31, 1997.
<PAGE>
Overview of Municipal Bond
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold Investment Class shares of Municipal Bond.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.80%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.42%
Total Annual Fund
Operating Expenses 0.82%
----------------------------------------------
Less: Fee Waivers or
Expense Reimbursements (0.02%)/1/
Net Expenses 0.80%
EXPENSE EXAMPLE/2/
<PAGE>
1 Year 3 Years 5 Years 10 Years
$82 $260 $453 $1,011
<PAGE>
A detailed look
at Municipal Bond
OBJECTIVE
The Fund seeks a high level of income exempt from regular federal income tax,
consistent with the preservation of capital. The Fund's objective is not a
fundamental policy. We must notify shareholders before we change it, but we do
not require their approval to do so.
STRATEGY
In managing this fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of five to ten years. Subject to its portfolio maturity
policy, the Fund may purchase individual securities with any stated maturity.
The dollar weighted average portfolio maturity may be shorter than the stated
maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade municipal securities. Municipal
securities are debt securities issued by states and certain other municipal
issuers, political subdivisions, agencies and public authorities that pay
interest which is exempt from federal income tax. Under normal conditions, the
Fund invests at least 80% of net assets in municipal securities which pay
interest exempt from federal income tax and at least 65% of total assets in
municipal bonds.
CALLOUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
Fixed income securities are investment grade if:
. They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts. There is no restriction on the
<PAGE>
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax.
The Fund invests primarily in high quality bonds (those rated within the top
three rating categories) and may invest up to 15% of its assets in investment
grade bonds that are rated in the fourth highest category.
INVESTMENT PROCESS
Issuer research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. use credit analysis to determine the issuer's ability to fulfill
its contracts;
. compare each bond with a U.S. Treasury instrument to develop a
theoretical intrinsic value;
. look to exploit any inefficiencies between intrinsic value and market trading
price; and
. subordinate sector weightings to individual bonds that may add above-market
value.
OTHER INVESTMENTS
The 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. The payment of principal and interest on a private activity
or industrial development bond 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 financed as security for such payment.
Up to 20% of the fund's total assets may be invested in certain taxable
securities in order to maintain liquidity. The Fund may also purchase securities
on a when-issued basis.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
Portfolio Turnover: The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Historically, this Fund has not had a high portfolio turnover rate.
<PAGE>
A Detailed Look at Municipal Bond
RISKS
Below we have set forth some of the prominent risks associated with investing in
municipal securities, as well as investing in general. Although we attempt both
to assess the likelihood that these risks may actually occur and to limit them,
we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Tax Liability Risk. Distributions by the Fund that are derived from income from
taxable securities held by the Fund will generally be taxable to shareholders as
ordinary income. There is a risk that a greater percentage of the Fund's
investments will produce taxable income, resulting in a lower tax-adjusted
return. New federal or state legislation could adversely affect the tax-exempt
status of securities held by the Fund, resulting in higher tax liability for
shareholders. In addition, distribution of the Fund's income and gains will
generally be subject to state taxation.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
Private Activity and Industrial Development Bond Risks. The payment of principal
and interest on these 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 financed as security for such payment.
<PAGE>
When-Issued and Delayed Delivery Securities Risk. The Fund may purchase or sell
a security at a future date for a predetermined price. The market value of the
securities may change before delivery.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
<PAGE>
A Detailed Look at Municipal Bond
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Ted Manges, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1999. Prior to that, Manager of Trading
and Sales, Commerce Capital Markets, from 1995 to 1999.
. Analyst specializing in tax-exempt municipal bonds.
Daniel Scholl, Vice President, Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1998.
. Prior to that, Special Assistant for Economic Development to Governor Tom
Carper in Delaware, from 1996 to 1998. Prior to that, Executive Assistant
to Delaware's Secretary of Finance, from 1992 to 1996.
. Analyst specializing in tax exempt municipals.
. MGA, University of Pennsylvania.
Susan Beck, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1989.
. Fixed income research analyst.
<PAGE>
A Detailed Look at Municipal Bond
The table below helps you understand the financial performance of the Investment
Class shares of the Fund for the past three fiscal periods. Certain information
selected reflects financial results for a single Investment Class share of the
Fund. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Investment Class shares of
the Fund, assuming reinvestment of all dividends and distributions. This
information has been audited by_____________, whose report, along with the
Fund's financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the Service Center at
1-800-730-1313.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the year ended October 31,
-------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout each Period: 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period
-------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investment
-------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations
-------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------------
Net Realized Gains
-------------------------------------------------------------------------------------------------------------------------
Total Distributions
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
-------------------------------------------------------------------------------------------------------------------------
Total Investment Return
-------------------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
-------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (000s omitted)
-------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net Investment Income
-------------------------------------------------------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense Ratio Due to
Absorption of
Expenses by DeAM, Inc./4/
-------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The inception of Investment Class shares of the Fund was July 30, 1997.
/2/Annualized.
/3/Total return is not annualized.
/4/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview
of Short-Term Municipal Bond
Goal: The Fund seeks a high level of income exempt from regular federal income
tax, consistent with the preservation of capital.
Core Strategy: The Fund invests primarily in investment grade short-term fixed
income securities that pay interest exempt from federal income tax.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
short-term municipal securities. Municipal securities are debt securities issued
by states and certain other municipal issuers, political subdivisions, agencies
and public authorities that pay interest which is exempt from federal income
tax. We focus on individual security selection rather than rely on interest rate
forecasting.
Short-Term Municipal Bond--Investment Class
Overview of Short-Term Municipal Bond
Goal......................................... 27
Core Strategy................................ 27
Investment Policies and Strategies........... 27
Principal Risks of Investing in the Fund..... 28
Who Should Consider Investing in the Fund.... 28
Total Returns, After Fees and Expenses....... 29
Annual Fund Operating Expenses............... 30
A Detailed Look at Short-Term Municipal Bond
Objective.................................... 31
Strategy..................................... 31
Principal Investments........................ 31
Investment Process........................... 1
Other Investments............................ 31
Risks........................................ 32
Portfolio Managers........................... 33
Financial Highlights......................... 34
<PAGE>
Overview of Short-Term Municipal Bond
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio;
. a greater-than-anticipated percentage of the Fund's investments could
produce taxable income, resulting in a lower tax-adjusted return; and
. unfavorable legislation could affect the tax-exempt status of municipal
bonds.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in Short-Term Municipal Bond if you are seeking
income that is exempt from federal income tax. You are also seeking less
volatility in the value of your investment than an investment in Municipal Bond.
There is, of course, no guarantee that the Fund will realize its goal of
providing a high level of income exempt from regular federal income tax.
You should not consider investing in Short-Term Municipal Bond if you are
pursuing a long-term financial goal, if you seek capital appreciation or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
municipal securities.
An investment in Short-Term Municipal Bond is not a deposit of any bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
Overview of Short-Term Municipal Bond
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
of investing in the Fund by showing changes in the Fund's performance year to
year. The bar chart shows the actual return of the Fund's Investment Class
shares for each full calendar year since it began selling Investment Class
shares to the public on December 3, 1997. The table compares the average annual
return of the Fund's Investment Class shares with that of the IBC Financial All
Tax-Free Average Index over the last one year and since inception of Investment
Class shares of the Fund. The Index is a passive measure of combined stock
market returns. It does not factor in the costs of buying, selling and holding
securities, costs which are reflected in the Fund's results.
The IBC Financial All Tax-Free Average Index is the average of all tax-exempt
municipal money market funds that invest in obligations of tax-exempt entities,
including state and municipal authorities.
YEAR-BY-YEAR RETURNS
Investment Class
(each full calendar year since inception)
1998 4.75%
1999 0.93%
2000 ____%
Since inception, the Fund's highest return in any calendar quarter was 4.13%
(third quarter 1998) and its lowest quarterly return was (0.74%) (second quarter
1999). Past performance offers no indication of how the Fund will perform in the
future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
1 Inception
Year (12/3/97)/1/
Short-Term Municipal
Bond--Investment Class ____% ____%
IBC Financial All Tax-Free
Average ____% ____%
/1/ IBC Financial All Tax-Free Average is calculated from November 30, 1997.
<PAGE>
Overview of Short-Term Municipal Bond
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold Investment Class shares of Short-Term Municipal
Bond.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/ The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.80%.
/2/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.60%
Total Annual Fund
Operating Expenses 1.00%
Less: Fee Waivers or
Expense Reimbursements (0.20%)/1/
Net Expenses 0.80%
EXPENSE EXAMPLE/2/
<PAGE>
1 Year 3 Years 5 Years 10 Years
$82 $298 $532 $1,204
<PAGE>
A detailed look at Short-Term Municipal Bond
OBJECTIVE
The Fund seeks a high level of income exempt from regular federal income tax,
consistent with the preservation of capital. The Fund's objective is not a
fundamental policy. We must notify shareholders before we change it, but we do
not require their approval to do so.
STRATEGY
In managing the Fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than rely on interest rate forecasting.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of no longer than three years. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity may be shorter than the
stated maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features.
PRINCIPAL INVESTMENTS
The Fund invests primarily in short-term investment grade municipal securities.
Municipal securities are debt securities issued by states and certain other
municipal issuers, political subdivisions, agencies and public authorities that
pay interest which is exempt from federal income tax.
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Fixed income securities are investment grade if:
. They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after
<PAGE>
their purchase below the Fund's minimum acceptable credit rating. The Fund's
credit standards also apply to counterparties of OTC derivative contracts.
The Fund invests primarily in high quality bonds (those rated within the top
three rating categories) and may invest up to 15% of its assets in investment
grade bonds that are rated in the fourth highest category.
INVESTMENT PROCESS
Issuer research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. use credit analysis to determine the issuer's ability to fulfill its
contracts;
. compare each bond with a U.S. Treasury instrument to develop a theoretical
intrinsic value;
. look to exploit any inefficiencies between intrinsic value and market
trading price; and
. subordinate sector weightings to individual bonds that may add above-market
value.
OTHER INVESTMENTS
The 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. Up to 20% of the fund's total assets may be invested in
certain taxable securities in order to maintain liquidity. The Fund may also
purchase securities on a when-issued basis.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Historically, this Fund has not had a high portfolio turnover rate.
<PAGE>
A Detailed Look at Short-Term Municipal Bond
RISKS
Below we have set forth some of the prominent risks associated with investing in
municipal securities, as well as investing in general. Although we attempt both
to assess the likelihood that these risks may actually occur and to limit them,
we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Tax Liability Risk. Distributions by the Fund that are derived from income from
taxable securities held by the Fund will generally be taxable to shareholders as
ordinary income. There is a risk that a greater percentage of the Fund's
investments will produce taxable income, resulting in a lower tax-adjusted
return. New federal or state legislation could adversely affect the tax-exempt
status of securities held by the Fund, resulting in higher tax liability for
shareholders. In addition, distribution of the Fund's income and gains will
generally be subject to state taxation.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
Private Activity and Industrial Development Bond Risks. The payment of principal
and interest on these 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 financed as security for such payment.
When-Issued and Delayed Delivery Securities Risk. The Fund may purchase or sell
a security at a future date for a predetermined price. The market value of the
securities may change before delivery.
<PAGE>
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
<PAGE>
A Detailed Look at Short-Term Municipal Bond
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Ted Manges, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1999. Prior to that, Manager of Trading
and Sales, Commerce Capital Markets, from 1995 to 1999.
. Analyst specializing in tax-exempt municipal bonds.
Daniel Scholl, Vice President, Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1998.
. Prior to that, Special Assistant for Economic Development to Governor Tom
Carper in Delaware, from 1996 to 1998. Prior to that, Executive Assistant
to Delaware's Secretary of Finance, from 1992 to 1996.
. Analyst specializing in tax exempt municipals.
. MGA, University of Pennsylvania.
Susan Beck, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1989.
. Fixed income research analyst.
<PAGE>
A Detailed Look at Short-Term Municipal Bond
The table below helps you understand the financial performance of the Investment
Class shares of the Fund for the past two fiscal periods. Certain information
selected reflects financial results for a single Investment Class share of the
Fund. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Investment Class shares of
the Fund, assuming reinvestment of all dividends and distributions. This
information has been audited by_______________, whose report, along with the
Fund's financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the Service Center at
1-800-730-1313.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
For the year ended October 31,
--------------------------------------------------------------------------------
For a Share Outstanding Throughout each Period: 2000 1999 1998
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period
--------------------------------------------------------------------------------
Income From Investment Operations
--------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------
Net Realized and Unrealized Gains
(Losses) on Investment
--------------------------------------------------------------------------------
Total from Investment Operations
--------------------------------------------------------------------------------
Distributions to Shareholders from
--------------------------------------------------------------------------------
Net Investment Income
--------------------------------------------------------------------------------
Net Realized Gains
--------------------------------------------------------------------------------
Total Distributions
--------------------------------------------------------------------------------
Net Asset Value, End of Period
--------------------------------------------------------------------------------
Total Investment Return
--------------------------------------------------------------------------------
Supplemental Data and Ratios:
--------------------------------------------------------------------------------
Net Assets, End of
Period (000s omitted)
--------------------------------------------------------------------------------
Ratios to Average Net Assets: Net Investment
Income
--------------------------------------------------------------------------------
Expenses
--------------------------------------------------------------------------------
Decrease Reflected in Above Expense Ratio Due to
Absorption of Expenses by DeAM, Inc./4/
--------------------------------------------------------------------------------
Portfolio Turnover Rate
--------------------------------------------------------------------------------
/1/ Inception of Investment Class shares of the Fund was December 3, 1997.
/2/ Annualized.
/3/ Total return is not annualized.
/4/ DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview of High Yield Bond
High Yield Bond -- Investment Class
Goal............................................................ 35
Core Strategy................................................... 35
Investment Policies and Strategies.............................. 35
Principal Risks of Investing in the Fund........................ 36
Who Should Consider Investing in the Fund....................... 36
Total Returns, After Expenses................................... 37
Annual Fund Operating Expenses.................................. 38
A Detailed Look at High Yield Bond
Objective....................................................... 39
Strategy........................................................ 39
Principal Investments........................................... 39
Investment Process.............................................. 39
Other Investments............................................... 40
Risks........................................................... 40
Portfolio Manager............................................... 41
Financial Highlights............................................ 42
<PAGE>
Overview of High Yield Bond
Goal: The Fund seeks high current income and, as a secondary objective, capital
appreciation.
Core Strategy: The Fund invests primarily in U.S. dollar-denominated high yield
bonds of domestic and foreign issuers.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its goal by investing in a diversified portfolio of
high yield fixed income securities (junk bonds) with a dollar weighted effective
average portfolio maturity of seven to ten years. In managing the Fund, we
generally use both a "top-down" approach by considering macro trends in the
economy and a "bottom-up" approach by using fundamental credit analysis, to
select investments. We focus on careful cash flow and total return analysis, and
broad diversification among countries, sectors, industries and individual
issuers and maturities. We use an active process which emphasizes relative value
in a global environment, managing on a total return basis, and using intensive
research to identify stable to improving credit situations that may provide
yield compensation for the risk of investing in below investment grade bonds.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. the lower rated debt securities in which the Fund invests are considered
speculative and subject to greater volatility and risk of loss than
investment grade securities, particularly in deteriorating economic
periods.
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline. This risk is higher
for below investment grade bonds.
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest. This risk is higher for below investment
grade bonds.
. securities with longer effective maturities, like those in the Fund's
portfolio, are more sensitive to interest rate changes than those with
shorter effective maturities.
CALLOUT: Effective maturity is the average life of a security. Many bonds have
long maturity dates, but shorter average lives. Since these bonds behave
according to their average life, and not their maturity date, we estimate the
average life and apply an appropriate duration to the security.
<PAGE>
. the market for below investment grade bonds may be thinner than for higher
rated securities, which can adversely affect the prices at which below
investment grade bonds are sold and the Fund's ability to dispose of these
securities.
. deteriorating market conditions in a particular class of bonds or
developments in the stock market could also adversely affect the Fund by
reducing the relative attractiveness of bonds as an investment.
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing its
value. Foreign securities markets are often less liquid, more volatile and
subject to less government regulation than U.S. securities markets. These
risks are higher for securities of issuers located in the emerging markets
in which the Fund invests.
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in High Yield Bond if you are seeking to earn
current income higher than investment grade bond funds provide over most time
periods. Moreover, you should be willing to accept significantly greater
short-term fluctuation in the value of your investment than you would typically
experience investing in investment grade bond or money market funds.
You should not consider investing in High Yield Bond if you are pursuing a
short-term financial goal, if you primarily seek capital appreciation or if you
cannot tolerate fluctuations in the value of your investments. The Fund by
itself does not constitute a balanced investment program. It can, however,
afford you exposure to investment opportunities not available to someone who
invests in only investment grade fixed income securities. Diversifying your
investments may lower the volatility of your overall investment portfolio.
An investment in High Yield Bond is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
TOTAL RETURNS AFTER EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
of investing in the Fund. The bar chart shows the actual return of the Fund's
Investment Class shares for each full calendar year since the Fund's inception.
The table compares the average annual return of the Fund's Investment Class
shares with that of the CS First Boston High Yield Index over the last year and
since its inception on September 15, 1998. The Index is a passive measure of
combined national and international high yield bond market returns. It does not
factor in the costs of buying, selling and holding securities--costs that are
reflected in the Fund's results.
The CS First Boston High Yield Index is an unmanaged portfolio, priced using bid
prices from traders, constructed to mirror the global high yield debt market.
YEAR-BY-YEAR RETURNS
Investment Class/1/
(each full calendar year since inception)
1999
2000
For the period covered in the bar chart, the Fund's highest return was _____%
(____ quarter ____) and its lowest quarterly return was _____% (_____quarter
____). Past performance offers no indication of how the Fund will perform in the
future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
1 Year Since Inception
(September 15, 1998)/1/
High Yield Bond - Investment Class
CS First Boston High Yield Index
/1/ The CS First Boston High Yield Index average is calculated from March 18,
1998.
<PAGE>
FEES AND EXPENSES OF THE FUND
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold Investment Class shares of High Yield Bond.
The Other Expenses included in the Annual Fees and Expenses Table are estimated.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
FEES AND EXPENSES
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge Imposed on Purchases None
Maximum Sales Charge on Reinvested Dividends None
Maximum Short-Term Redemption Fee (as a percentage of amount 2.00%/1/
redeemed, as applicable)
Annual Fund Operating Expenses
(fees paid from Fund Assets)
Percentage of Average
Daily Net Assets
Management Fees 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses 0.50%
Total Annual Fund Operating Expenses 1.00%
Less Fee Waivers or Expense Reimbursements (0.10)%/2/
Net Expenses 0.90%
EXPENSE EXAMPLE/3/
1 Year 3 Years
$92 $308
/1/ The 2.00% short-term redemption fee applies to shares redeemed (either by
selling or exchanging into another fund) within 180 days of purchase
(approximately six months). The fee is withheld from redemption proceeds and
retained by the Fund.
/2/ The investment adviser and administrator have contractually agreed, for the
16 month period beginning October 31, 2000, to waive their fees or reimburse
expenses so that total expenses of the class will not exceed 0.50%.
/3/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
<PAGE>
A detailed look at High Yield Bond
OBJECTIVE
The Fund seeks high current income and, as a secondary objective, capital
appreciation. While we seek current income and, to a lesser extent, capital
appreciation, we cannot offer any assurance of achieving these objectives. The
Fund's objectives are not fundamental policies. We must notify shareholders
before we change them, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we generally use both a "top-down" and a "bottom-up"
approach to select investments. We use a "top-down" approach by considering
macro trends in the economy and a "bottom-up" approach by using fundamental
credit analysis to select investments. We focus on careful cash flow and total
return analysis, and broad diversification among countries, sectors, industries
and individual issuers and durations. We use an active process which emphasizes
relative value in a global environment, managing on a total return basis, and
using intensive research to identify stable to improving credit situations that
may provide yield compensation for the risk of investing in below investment
grade bonds (junk bonds).
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of seven to ten years. The Fund's average portfolio maturity
may be shortened by certain of the Fund's securities which have floating or
variable interest rates or include put features that provide the Fund the right
to sell the security at face value prior to maturity. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity may be shorter than the
stated maturity due to several factors, including but not limited to, prepayment
patterns, call dates and put features. In implementing this strategy, the Fund
may experience a high portfolio turnover rate.
CALLOUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
CALLOUT: Portfolio Turnover. The portfolio turnover rate measures the frequency
with which the Fund sells and replaces the value of its securities within a
given period. Fixed income funds usually have a higher portfolio turnover rate
as a group compared to equity funds because fixed income security maturities
contribute to turnover. High turnover can increase the Fund's transaction costs,
thereby lowering its returns or increasing your tax liability.
PRINCIPAL INVESTMENTS
The Fund invests primarily in U.S. dollar denominated high yield bonds of
domestic and foreign issuers. Under normal conditions, the Fund invests at least
65% of its total assets in U.S. dollar- denominated, domestic and foreign below
investment grade fixed income securities (junk bonds), including those whose
issuers are located in countries with new or emerging securities markets. The
Fund considers an emerging securities market to be one where the sovereign debt
<PAGE>
issued by the government in local currency terms is rated below investment
grade. Fixed income investments include bonds, notes (including structured
notes), mortgage-related securities, asset-backed securities, convertible
securities, eurodollar and Yankee dollar instruments, preferred stocks and money
market instruments. Fixed income securities may be issued by U.S. and foreign
corporations or entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations; and foreign governments and
their subdivisions. These securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features. The Fund's investments in
these securities may be of any credit quality and may include securities not
paying interest currently, and securities in default.
INVESTMENT PROCESS
The investment process involves using both a "top-down" approach, first focusing
on sector allocations and a "bottom-up" approach, by using relative value and
fundamental analysis, to select the best securities within each sector. To
select securities or investments, we:
. analyze economic conditions for improving or undervalued sectors and
industries;
. use independent credit research and on-site management visits to evaluate
individual issues' debt service, growth rate, and both downgrade and
upgrade potential;
. assess new issues versus secondary market opportunities; and
. seek issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
CALL OUT: Fixed income securities are rated below investment grade if they are
rated below the top four long-term rating categories of a nationally recognized
statistical rating organization or, if unrated, are determined to be of
equivalent quality by the investment adviser. These securities may be in default
and are considered speculative.
OTHER INVESTMENTS
The Fund may invest up to 25% of its total assets in non-U.S. dollar
denominated, below investment grade securities. 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 portfolio manager determines that securities
meeting the Fund's investment objectives are not otherwise readily available for
purchase. Money market securities include commercial paper, certificates of
deposit, banker's acceptances, repurchase agreements and other short-term debt
securities. The Fund may also purchase securities on a when-issued basis and
engage in short sales.
We may also use as secondary investments various instruments commonly known as
"derivatives." In particular, the Fund may use forward currency transactions and
currency
<PAGE>
options. We may use derivatives in circumstances when we believe they offer an
economical means of gaining exposure to a particular securities market or index.
We may also invest in derivatives to attempt to reduce the Fund's exposure or to
keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the market.
The Fund may engage in short sales in order to profit from an anticipated
decline in the value of a security. The Fund may also engage in short sales to
attempt to limit its exposure to a possible market decline in the value of its
portfolio securities through short sales of securities which the investment
adviser believes possess volatility characteristics similar to those being
hedged.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objectives.
CALLOUT: Forward currency transactions involve the purchase or sale of a foreign
currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or where possible, to add to investment
returns.
CALLOUT: A derivative contract will obligate or entitle the Fund to deliver or
receive an asset or a cash payment that is based on the change in value of a
designated security, index or currency. Examples of derivative contracts are
futures contracts, options, forward contracts, swaps, caps, collars and floors.
RISKS
Below we have set forth the prominent risks associated with investing in below
investment grade fixed income securities, as well as investing in general.
Although we attempt both to assess the likelihood that these risks may actually
occur and to limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated below the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than investment grade securities and
are more sensitive to changes in the issuer's capacity to pay.
<PAGE>
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more volatile because they are more sensitive to interest rate
changes than those with shorter effective maturities.
Pricing Risk. The market for below investment grade debt securities may be
thinner and less active than that for higher rated debt securities, which can
adversely affect the prices at which the below investment grade securities are
sold. If market quotations are not available, below investment grade debt
securities will be valued in accordance with procedures established by the Board
of Trustees. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Fund's ability to dispose
of these securities. Since the risk of default is higher for lower-rated
securities, the investment adviser's research and credit analysis are an
especially important part of managing securities of this type.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment.
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Emerging Market Risk. Because the Fund may invest in emerging markets, it may
face higher political, information, and market risks. In addition, profound
social changes and business practices that depart from norms in developed
countries' economies have hindered the orderly growth of emerging economies and
their securities markets in the past. High levels of debt tend to make emerging
economies heavily reliant on foreign capital and vulnerable to capital flight.
Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that changes in
foreign exchange rates will affect the U.S. dollar amount of income or gain
received on these investments. Additionally, a change in economic policy may
cause a greater fluctuation in the value of a country's currency than in bonds
denominated in that currency. We may, but need not, seek to minimize this risk
by actively managing the currency exposure of the Fund, which entails hedging
from time to time.
CALL OUT: Currency Management may be used in an attempt to offset investment
risks ("hedging") and, where possible, to add to investment returns. Currency
management activities include the use of forward contracts and may include the
use of other instruments. There is no guarantee that these currency management
activities will be employed or that they will work, and their use could cause
lower returns or even losses to the Fund.
<PAGE>
Secondary Risks
Short Sales. Short selling may produce higher than normal portfolio turnover
which may result in increased transaction costs to the Fund and may result in
gains or losses from the sale of securities.
Derivative Risks. The Fund may, but is not required to, use derivative contracts
for any of the following purposes:
. to hedge against adverse changes in the market value of securities held by
or to be bought for the Fund. These changes may be caused by changing
interest rates, security prices or currency exchange rates;
. as a substitute for purchasing or selling securities or foreign currencies;
. to shorten or lengthen the effective maturity or duration of the Fund's
fixed income portfolio; or
. in non-hedging situations, to attempt to profit from anticipated market
developments.
Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
Portfolio Manager
The following portfolio manager is responsible for the day-to-day management of
the Fund's investments:
Andrew Cestone, Director of DeAM, Inc.
. Joined the investment adviser in March 1998.
. Investment Analyst, Phoenix Investment Partners, from 1997 to 1998 and
Credit Officer, asset based lending group, Fleet Bank, from 1995 to 1997.
<PAGE>
The table below helps you understand the financial performance of the Investment
Class shares of the Fund for the past three fiscal periods. Certain information
selected reflects financial results for a single Investment Class share of the
Fund. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Investment Class shares of
the Fund, assuming reinvestment of all dividends and distributions. This
information has been audited by _______________, whose report, along with the
Fund's financial statements, is included in the Fund's annual report. The annual
report is available free of charge by calling the Service Center at
1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Period Ended For the Period Ended For the Period Ended
October 31, 2000 October 31, 1999 October 31, 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For a Share Outstanding
Throughout each Period: Net
Asset Value, Beginning of
Period
-------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized
Gain (Losses)
-------------------------------------------------------------------------------------------------------------------
Total From Investment
Operations
-------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
from Net Investment Income
-------------------------------------------------------------------------------------------------------------------
Net Realized Gains
-------------------------------------------------------------------------------------------------------------------
Total Distributions
-------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period
-------------------------------------------------------------------------------------------------------------------
Total Investment Return
-------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net Assets, End of Period
(000s omitted)
-------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
-------------------------------------------------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------
Decrease Reflected in
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Above Expense Ratio Due
to Absorption of Expenses
by DeAM, Inc./5/
-------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/Unaudited.
/2/The Fund's inception was September 15, 1998.
/3/Total return is not annualized.
/4/Annualized.
/5/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Information
concerning all Funds
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises for each Fund all of the
Fund's activities on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, Deutsche
Asset Management, Inc. (DeAM, Inc.) with headquarters at 130 Liberty Street, New
York, New York, acts as the investment adviser for each Fund. The investment
adviser makes the Fund's investment decisions. The Fund's investment adviser
buys and sells securities for the Fund and conducts the research that leads to
these purchase and sale decisions. The Fund's investment adviser is also
responsible for selecting brokers and dealers and for negotiating brokerage
commissions and dealer charges.
The Funds paid the following fees to DeAM, Inc. for investment advisory services
in the last fiscal year. The investment adviser reimbursed a portion of its fee
during the year.
Percentage of
Average Daily
Fund Net Assets
Fixed Income Fund 0.40%
Short-Term Fixed Income Fund 0.40%
Municipal Bond Fund 0.40%
Short-Term Municipal Bond Fund 0.40%
High Yield Bond Fund 0.50%
DeAM, Inc. provides a full range of international investment advisory services
to institutional clients, and as of ________, managed approximately $____
billion in assets.
DeAM, Inc. is an indirect wholly owned subsidiary of Deutsche Bank A.G. Deutsche
Bank A.G. is a major global banking institution that is engaged in a wide range
of financial services,
<PAGE>
including investment management, mutual fund, retail and commercial banking,
investment banking and insurance.
Organizational Structure. Each Fund is a series of an open-end investment
company organized as a Delaware business trust.
Other Services. DeAM, Inc.provides administrative services for the Funds. In
addition, either DeAM, Inc. or your broker or financial advisor performs the
functions necessary to establish and maintain your account. In addition to
setting up the account and processing your purchase and sale orders, these
functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the
Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with DeAM, Inc.
Service Agents may charge additional fees to investors for those services not
otherwise included in the broker's or financial advisor's servicing agreement,
such as cash management or special trust or retirement investment reporting.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of each Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
CALLOUT: The New York Stock Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), Presidents' Day (the third Monday
in February), Good Friday, Memorial Day (the last Monday in May), July 4th,
Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday
in November) and Christmas Day.
<PAGE>
Information Concerning all Funds
The formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities a Fund
owns may ultimately affect the price of Fund shares when the New York Stock
Exchange re-opens.
Each Fund uses a forward pricing procedure. Therefore, the price at which you
buy or sell shares is based on the next calculation of the NAV after the order
is received by the Fund or your broker, provided that your broker or financial
advisor forwards your order to the Fund in a timely manner.
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
High Yield Bond may charge a 2.00% short-term redemption fee of the value of the
shares redeemed (either by selling or exchanging into another fund) within 180
days (approximately six months) of purchase.
PERFORMANCE INFORMATION
The Funds' performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
The Funds' policy is to distribute to shareholders all of its net investment
income and net capital gains in the form of income and capital gain dividends.
Income dividends, if any, are declared daily and paid monthly. Capital gains
dividends will be paid at least annually. We automatically reinvest all
dividends and any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by a Fund, except for "exempt-interest dividends" from
Municipal Bond and Short-Term Municipal Bond. Your taxes will vary from year to
year, based on the amount of capital gains distributions
<PAGE>
and dividends paid out by your Fund. You owe the taxes whether you receive cash
or choose to have distributions and dividends reinvested. Distributions and
dividends usually have the following tax character.
TRANSACTION TAX STATUS
Income dividends Ordinary income
(except exempt-
interest dividends)
Short-term Ordinary income
capital gains distributions
Long-term capital gains Long-term capital gains
distributions
Municipal Bond and Short-Term Municipal Bond intend to distribute the tax-exempt
interest they earn as exempt-interest dividends, which are excluded from gross
income for federal income tax purposes but may be subject to alternative minimum
tax and state and local income tax. Their distributions from other sources, if
any, would be taxable as described above.
Every year your Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
TRANSACTION TAX STATUS
Your sale of shares Generally, long-
owned more term capital gains
than one year or losses
Your sale of shares Generally, short-
owned for one year or term capital gains
less or losses; losses subject to
special rules.
The tax considerations for tax deferred accounts or non-taxable entities are
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
<PAGE>
BUYING AND SELLING FUND SHARES
You may only purchase Investment Class shares of a Fund if you have a
shareholder account set up with a service agent such as a financial planner,
investment adviser, broker-dealer or other institution.
Service Plan
Each Fund has adopted a service plan for its Investment Class shares. Under the
plan, each Fund pays service fees at an aggregate annual rate of up to 0.25% of
the Fund's average daily net assets for its Investment Class shares. The fees
are compensation to service agents for providing personal services and/or
account maintenance services to their customers. In the event that your service
plan is terminated, your shares will be converted to Institutional Class shares
of the same Fund.
Information Concerning all Funds
Minimum Account Investments
A standard account $2,500
A retirement account $ 500
An automatic investment plan account $1,000
The Fund and its service agents reserve the right to, from time to time in their
discretion, waive or reduce the investment minimums.
Short-Term Redemption Fee
High Yield Bond may charge a 2.00% short-term redemption fee of the value of the
shares redeemed (either by selling or exchanging into another fund) within 180
days (approximately six months) of purchase. This fee will compensate High Yield
Bond for expenses directly related to redemption of Fund shares (such as
brokerage costs, charges for credit lines, and other redemption related costs).
The fee will also discourage short-term investments in the High Yield Bond which
will facilitate more efficient portfolio management.
The short-term redemption fee is withheld from redemption proceeds. This fee is
not a deferred sales charge and is not a commission. The fee is paid to the High
Yield Bond. The short-term redemption fee does not apply to:
. shares purchased before December 1, 2000;
. exchanges into another class of shares of High Yield Bond;
. shares acquired through reinvestment of dividends and other distributions;
<PAGE>
. shares of High Yield Bond in an account which is closed by us because it
fails to meet minimum balance requirements; and
. shares held by 401(k) plans, similar individual account plans or profit
sharing plans.
The fee may not be applied to shares held through certain omnibus accounts. With
regard to these accounts, High Yield Bond reserves the right, in its sole
discretion to impose (or not to impose) the short-term redemption fee in the
future. High Yield Bond will make this determination after considering, among
other things, the Fund's costs of processing redemptions from these accounts.
You should consult with your retirement plan administrator or omnibus account
representative to determine whether the redemption fee is applicable to your
shares.
High Yield Bond will use the "first-in, first out" method to determine your
holding period. Under this method, the date of redemption or exchange will be
compared with the earliest purchase date of shares held in your account. If your
holding period is less than 180 days, the short-term redemption fee will be
assessed on the net asset value of those shares calculated at the time the
redemption is affected.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents.
Once you place your order with a service agent, it is considered received
by the fund. It is then your service agent's responsibility to transmit the
order to the fund by the next business day. You should contact your service
agent if you have a dispute as to when your order was placed with the fund.
Your service agent may charge a fee for buying and selling shares for you.
. You may place orders to buy and sell over the phone by calling your service
agent. Please contact your service agent for more information.
. After your service agent receives your order, we buy or sell your shares at
the next price calculated on a day the New York Stock Exchange is open for
business.
. The payment of redemption proceeds (including exchanges) for shares of a
fund recently purchased by check may be delayed for up to 15 calendar days
while we wait for your check to clear.
. We process all sales orders free of charge.
. You can exchange all or part of your shares for shares in another Deutsche
Asset Management mutual fund up to four times a year (from the date of the
first exchange). When you exchange shares, you are selling shares in one
fund to purchase shares in another. Before buying shares through an
exchange, you should obtain a copy of that fund's prospectus and read it
carefully. You may order exchanges over the phone only if your account is
authorized to do so.
Please note the following conditions:
<PAGE>
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from your
service agent.
. We reserve the right to close your account on 30 days' notice if it fails
to meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a
signature guarantee. Please contact your service agent for more
information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent for
more information.
. We reserve the right to reject purchases of fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short-term or for the purpose of
profiting from day to day fluctuations in the fund's share price.
. We reserve the right to reject purchases of fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the fund's custodian are closed.
<PAGE>
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<PAGE>
Additional information about each Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about each Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
or call our toll-free number: 1-800-730-1313
You can find reports and other information about each Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about each Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
Fixed Income--Investment Class
Short-Term Fixed Income
Municipal Bond
Short-Term Municipal Bond
High Yield Bond
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
Two Portland Square
Portland, ME 04101
CUSIP #61735K760
61735K588
61735K737
61735K729
61735K596
<PAGE>
INVFIPRO (2/01)
811-08006
<PAGE>
Mutual Fund
Prospectus
February 28, 2001
Premier Class
High Yield Bond
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the Deutsche Bank Group
<PAGE>
High Yield Bond--Premier Class
Overview of High Yield Bond
Goal.........................................
Core Strategy...................................
Investment Policies and Strategies..................
Principal Risks of Investing in the Fund..............
Who Should Consider Investing in the Fund.............
Total Returns, After Expenses..........
Annual Fund Operating Expenses........................
A Detailed Look at High Yield Bond
Objective.....................................
Strategy.....................................
Principal Investments...............................
Investment Process.................................
Other Investments.................................
Risks........................................
Management of the Fund.............................
Calculating the Fund's Share Price....................
Performance Information............................
Dividends and Distributions........................
Tax Considerations..............................
Buying and Selling Fund Shares........................
Financial Highlights............................
<PAGE>
Overview of High Yield Bond
Goal: The Fund seeks high current income and, as a secondary objective, capital
appreciation.
Core Strategy: The Fund invests primarily in U.S. dollar-denominated high yield
bonds of domestic and foreign issuers.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its goal by investing in a diversified portfolio of
high yield fixed income securities (junk bonds) with a dollar weighted effective
average portfolio maturity of seven to ten years. In managing the Fund, we
generally use both a "top-down" approach by considering macro trends in the
economy and a "bottom-up" approach by using fundamental credit analysis, to
select investments. We focus on careful cash flow and total return analysis, and
broad diversification among countries, sectors, industries and individual
issuers and maturities. We use an active process which emphasizes relative value
in a global environment, managing on a total return basis, and using intensive
research to identify stable to improving credit situations that may provide
yield compensation for the risk of investing in below investment grade bonds.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. the lower rated debt securities in which the Fund invests are considered
speculative and subject to greater volatility and risk of loss than
investment grade securities, particularly in deteriorating economic
periods.
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline. This risk is higher
for below investment grade bonds.
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest. This risk is higher for below investment
grade bonds.
. securities with longer effective maturities, like those in the Fund's
portfolio, are more sensitive to interest rate changes than those with
shorter effective maturities.
. the market for below investment grade bonds may be thinner than for higher
rated securities, which can adversely affect the prices at which below
investment grade bonds are sold and the Fund's ability to dispose of these
securities.
. deteriorating market conditions in a particular class of bonds or
developments in the stock market could also adversely affect the Fund by
reducing the relative attractiveness of bonds as an investment.
CALLOUT: Effective maturity is the average life of a security. Many bonds have
long maturity dates, but shorter average lives. Since these bonds behave
according to their average life, and not their maturity date, we estimate the
average life and apply an appropriate duration to the security.
<PAGE>
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing its
value. Foreign securities markets are often less liquid, more volatile and
subject to less government regulation than U.S. securities markets. These
risks are higher for securities of issuers located in the emerging markets
in which the Fund invests.
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
High Yield Bond--Premier Class requires a minimum investment of $5 million. You
may only invest in the Class by setting up an account directly with the Fund's
transfer agent or through an omnibus account for which Deutsche Asset Management
has access to underlying shareholder and trading data. You should consider
investing in High Yield Bond if you are seeking to earn current income higher
than investment grade bond funds provide over most time periods. Moreover, you
should be willing to accept significantly greater short-term fluctuation in the
value of your investment than you would typically experience investing in
investment grade bond or money market funds.
You should not consider investing in High Yield Bond if you are pursuing a
short-term financial goal, if you primarily seek capital appreciation or if you
cannot tolerate fluctuations in the value of your investments. The Fund by
itself does not constitute a balanced investment program. It can, however,
afford you exposure to investment opportunities not available to someone who
invests only in investment grade fixed income securities. Diversifying your
investments may lower the volatility of your overall investment portfolio.
An investment in High Yield Bond is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
TOTAL RETURNS AFTER EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
of investing in the Fund. Because Premier Class shares are a newly offered class
of shares with no performance history, the following bar chart and table show
the performance history of the Fund's Institutional Class shares, which have
been in existence since the Fund's inception on March 16, 1998. The bar chart
shows the actual return of the Fund's Institutional Class shares for each full
calendar year since the Fund's inception. The table compares the average annual
return of the Fund's Institutional Class shares with that of the CS First Boston
High Yield Index over the last year and since its inception. The Index is a
passive measure of combined national and international high yield bond market
returns. It does not factor in the costs of buying, selling and holding
securities--costs that are reflected in the Fund's results.
The CS First Boston High Yield Index is an unmanaged portfolio, priced using bid
and asked prices from traders, constructed to mirror the global high yield debt
market.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
1999 15.72%
2000
For the period covered in the bar chart, the Fund's highest return for
Institutional Class shares in any calendar quarter was ___% (___ quarter ____ )
and its lowest quarterly return was ____% (__quarter __ ). Past performance
offers no indication of how the Fund will perform in the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
1 Year Since Inception
(March 16, 1998)/2/
High Yield Bond - Institutional Class/1/
CS First Boston High Yield Index
/1/ Institutional Class performance is presented because Premier Class shares
have no performance history. Premier Class shares will have substantially
similar performance because the shares are invested in the same portfolio of
securities. The annual returns will differ only to the extent that Premier Class
expenses are lower than Institutional Class expenses. Institutional Class shares
are offered under a separate prospectus, which is available upon request.
/2/ The CS First Boston High Yield Index average is calculated from March 18,
1998.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold Premier Class shares of High Yield Bond.
The Other Expenses included in the Annual Fees and Expenses Table are estimated.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Premier Class shares of the Fund. The numbers assume that
the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/ The investment adviser and administrator have contractually agreed, for the
16 month period beginning October 31, 2000, to waive their fees or reimburse
expenses so that total expenses of the class will not exceed 0.50%.
/2/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of Average
Daily Net Assets
Management Fees 0.50%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.21%
Total Annual Fund
Operating Expenses 0.71%
Less: Fee Waivers or Expense Reimbursements (0.21%)/1/
Net Expenses 0.50%
EXPENSE EXAMPLE/2/
1 Year 3 Years
$51 $206
<PAGE>
A detailed look at High Yield Bond
OBJECTIVE
The Fund seeks high current income and, as a secondary objective, capital
appreciation. While we seek current income and, to a lesser extent, capital
appreciation, we cannot offer any assurance of achieving these objectives. The
Fund's objectives are not fundamental policies. We must notify shareholders
before we change them, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we generally use both a "top-down" and a "bottom-up"
approach to select investments. We use a "top-down" approach by considering
macro trends in the economy and a "bottom-up" approach by using fundamental
credit analysis to select investments. We focus on careful cash flow and total
return analysis, and broad diversification among countries, sectors, industries
and individual issuers and maturities. We use an active process which emphasizes
relative value in a global environment, managing on a total return basis, and
using intensive research to identify stable to improving credit situations that
may provide yield compensation for the risk of investing in below investment
grade bonds (junk bonds).
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of seven to ten years. The Fund's average portfolio maturity
may be shortened by certain of the Fund's securities which have floating or
variable interest rates or include put features that provide the Fund the right
to sell the security at face value prior to maturity. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity may be shorter than the
stated maturity due to several factors, including but not limited to, prepayment
patterns, call dates and put features. In implementing this strategy, the Fund
may experience a high portfolio turnover rate.
CALLOUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
CALLOUT: Portfolio Turnover. The portfolio turnover rate measures the frequency
with which the Fund sells and replaces the value of its securities within a
given period. Fixed income funds usually have a higher portfolio turnover rate
as a group compared to equity funds because fixed income security maturities
contribute to turnover. High turnover can increase the Fund's transaction costs,
thereby lowering its returns or increasing your tax liability.
PRINCIPAL INVESTMENTS
The Fund invests primarily in U.S. dollar denominated high yield bonds of
domestic and foreign issuers. Under normal conditions, the Fund invests at least
65% of its total assets in U.S. dollar- denominated, domestic and foreign below
investment grade fixed income securities (junk bonds), including those whose
issuers are located in countries with new or emerging securities markets. The
Fund considers an emerging securities market to be one where the sovereign debt
issued by the government in local currency terms is rated below investment
grade. Fixed income
<PAGE>
investments include bonds, notes (including structured notes), mortgage-related
securities, asset-backed securities, convertible securities, eurodollar and
Yankee dollar instruments, preferred stocks and money market instruments. Fixed
income securities may be issued by U.S. and foreign corporations or entities;
U.S. and foreign banks; the U.S. government, its agencies, authorities,
instrumentalities or sponsored enterprises; state and municipal governments;
supranational organizations; and foreign governments and their subdivisions.
These securities may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in-kind and auction rate features. The Fund's investments in these
securities may be of any credit quality and may include securities not paying
interest currently, and securities in default.
INVESTMENT PROCESS
The investment process involves using both a "top-down" approach, first focusing
on sector allocations and a "bottom-up" approach, by using relative value and
fundamental analysis, to select the best securities within each sector. To
select securities or investments, we:
. analyze economic conditions for improving or undervalued sectors and
industries;
. use independent credit research and on-site management visits to evaluate
individual issues' debt service, growth rate, and both downgrade and
upgrade potential;
. assess new issues versus secondary market opportunities; and
. seek issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
CALLOUT: Fixed income securities are rated below investment grade if they are
rated below the top four long-term rating categories of a nationally recognized
statistical rating organization or, if unrated, are determined to be of
equivalent quality by the investment adviser. These securities may be in default
and are considered speculative.
OTHER INVESTMENTS
The Fund may invest up to 25% of its total assets in non-U.S. dollar
denominated, below investment grade securities. 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 portfolio manager determines that securities
meeting the Fund's investment objectives are not otherwise readily available for
purchase. Money market securities include commercial paper, certificates of
deposit, banker's acceptances, repurchase agreements and other short-term debt
securities. The Fund may also purchase securities on a when-issued basis and
engage in short sales.
We may also use as secondary investments various instruments commonly known as
"derivatives." In particular, the Fund may use forward currency transactions and
currency options. We may use derivatives in circumstances when we believe they
offer an economical means of gaining exposure to a particular securities market
or index. We may also invest in
<PAGE>
derivatives to attempt to reduce the Fund's exposure or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
market.
The Fund may engage in short sales in order to profit from an anticipated
decline in the value of a security. The Fund may also engage in short sales to
attempt to limit its exposure to a possible market decline in the value of its
portfolio securities through short sales of securities which the investment
adviser believes possess volatility characteristics similar to those being
hedged.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objectives.
CALLOUT: Forward currency transactions involve the purchase or sale of a foreign
currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or where possible, to add to investment
returns.
CALLOUT: A derivative contract will obligate or entitle the Fund to deliver or
receive an asset or a cash payment that is based on the change in value of a
designated security, index or currency. Examples of derivative contracts are
futures contracts, options, forward contracts, swaps, caps, collars and floors.
RISKS
Below we have set forth the prominent risks associated with investing in below
investment grade fixed income securities, as well as investing in general.
Although we attempt both to assess the likelihood that these risks may actually
occur and to limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated below the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than investment grade securities and
are more sensitive to changes in the issuer's capacity to pay.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more volatile because they are more sensitive to interest rate
changes than those with shorter effective maturities.
<PAGE>
Pricing Risk. The market for below investment grade debt securities may be
thinner and less active than that for higher rated debt securities, which can
adversely affect the prices at which the below investment grade securities are
sold. If market quotations are not available, below investment grade debt
securities will be valued in accordance with procedures established by the Board
of Trustees. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Fund's ability to dispose
of these securities. Since the risk of default is higher for lower-rated
securities, the investment adviser's research and credit analysis are an
especially important part of managing securities of this type.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment.
Foreign Investing. The risks of investing in foreign securities are generally
higher than those of investing in domestic securities. A foreign government
could expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Emerging Market Risk. Because the Fund may invest in emerging markets, it may
face higher political, information, and market risks. In addition, profound
social changes and business practices that depart from norms in developed
countries' economies have hindered the orderly growth of emerging economies and
their securities markets in the past. High levels of debt tend to make emerging
economies heavily reliant on foreign capital and vulnerable to capital flight.
Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that changes in
foreign exchange rates will affect the U.S. dollar amount of income or gain
received on these investments. Additionally, a change in economic policy may
cause a greater fluctuation in the value of a country's currency than in bonds
denominated in that currency. We may, but need not, seek to minimize this risk
by actively managing the currency exposure of the Fund, which entails hedging
from time to time.
CALL OUT: Currency Management may be used in an attempt to offset investment
risks ("hedging") and, where possible, to add to investment returns. Currency
management activities include the use of forward contracts and may include the
use of other instruments. There is no guarantee that these currency management
activities will be employed or that they will work, and their use could cause
lower returns or even losses to the Fund.
Secondary Risks
<PAGE>
Short Sales. Short selling may produce higher than normal portfolio turnover
which may result in increased transaction costs to the Fund and may result in
gains or losses from the sale of securities.
Derivative Risks. The Fund may, but is not required to, use derivative contracts
for any of the following purposes:
. to hedge against adverse changes in the market value of securities held by
or to be bought for the Fund. These changes may be caused by changing
interest rates, security prices or currency exchange rates;
. as a substitute for purchasing or selling securities or foreign currencies;
. to shorten or lengthen the effective maturity or duration of the Fund's
fixed income portfolio; or
. in non-hedging situations, to attempt to profit from anticipated market
developments.
Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank AG, Deutsche Fund Management, Bankers Trust Company,
DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, Deutsche
Asset Management, Inc. (DeAM, Inc.) with headquarters at 885 Third Avenue, New
York, New York, acts as the investment adviser for the Fund. As investment
adviser, DeAM, Inc. makes the Fund's investment decisions. It buys and sells
securities for the Fund and conducts the research that leads to these purchase
and sale decisions. The Fund's investment adviser is also responsible for
selecting brokers and dealers and for negotiating brokerage commissions and
dealer charges. The investment adviser will receive 0.50% of the Fund's average
daily net assets for its services in the fiscal year. The investment adviser may
reimburse a portion of its fee during the period.
<PAGE>
DeAM, Inc. provides a full range of international investment advisory services
to institutional clients, and as of ___________, managed approximately $_______
billion in assets.
DeAM, Inc. is an indirect wholly owned subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual funds, retail and
commercial banking, investment banking and insurance.
Portfolio Manager
The following portfolio manager is responsible for the day-to-day management of
the Fund's investments:
Andrew Cestone, Director of DeAM, Inc.
. Joined the investment adviser in March 1998.
. Investment Analyst, Phoenix Investment Partners, from 1997 to 1998 and
Credit Officer, asset based lending group, Fleet Bank, from 1995 to 1997.
Organizational Structure. The Fund is a series of an open-end investment company
organized as a Delaware business trust.
Other Services. DeAM, Inc. provides administrative services for the Fund. In
addition, either DeAM, Inc., or your service agent, performs the functions
necessary to establish and maintain your account. In addition to setting up the
account and processing your purchase and sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the
Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with DeAM, Inc.
Service agents may charge additional fees to investors for those services not
otherwise included in the service agent's servicing agreement, such as cash
management or special trust or retirement investment reporting.
CALCULATING THE FUND'S SHARE PRICE
<PAGE>
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the liabilities of the Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities the
Fund owns on days when you cannot buy or sell Fund shares may ultimately affect
the price of Fund shares when the New York Stock Exchange re-opens.
The Fund uses a forward pricing procedure. Therefore, the price at which you buy
or sell shares is based on the next calculation of the NAV after the order is
received by the Fund.
The New York Stock Exchange is open every week, Monday through Friday, except
when the following holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the third Monday in
February), Good Friday, Memorial Day (the last Monday in May), Independence Day,
Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday
in November) and Christmas Day.
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indices and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders all of its net investment
income and net capital gains in the form of income and capital gain dividends.
Income dividends, if any, are declared daily and paid monthly. Capital gains
dividends, if any, will be paid at least annually. We automatically reinvest all
dividends and any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
The Fund does not ordinarily pay any U.S. federal income tax. If you are a
taxable shareholder, you and other shareholders pay taxes on the income or
capital gains earned and distributed by the Fund. Your taxes will vary from year
to year, based on the amount of capital gains distributions
<PAGE>
and dividends paid out by your Fund. You owe the taxes whether you receive cash
or choose to have distributions and dividends reinvested. Distributions and
dividends usually have the following tax character:
TRANSACTION TAX STATUS
Income dividends (except Ordinary income
exempt-interest dividends)
Short-term capital gains
distributions Ordinary income
Long-term capital gains Long-term
distributions capital gains
Every year your Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
TRANSACTION TAX STATUS
Your sale of Generally, long-term capital
shares owned gains or losses
more than
one year
Your sale of Generally, short-term capital
shares owned gains or losses; losses
for one year or subject to special rules
less
The tax considerations for tax deferred accounts or non-taxable entities are
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
BUYING AND SELLING FUND SHARES
You may only invest in the Class by setting up an account directly with the
Fund's transfer agent or through an omnibus account for which Deutsche Asset
Management has access to underlying shareholder and trading data.
Contacting the Mutual Fund Service Center of Deutsche Asset Management
By Phone 1-800-730-1313
<PAGE>
By Mail Deutsche Asset Management
Service Center
P.O. Box 219210
Kansas City, MO 64121
By Overnight Mail Deutsche Asset Management
Service Center
210 West 10th Street, 8th floor
Kansas City, MO 64105-1716
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m. Eastern time each day the New York Stock Exchange
is open for business.
Minimum Account Investments
To open an account $5 million
To add to an account $1 million
Minimum account balance $1 million
Shares of the Fund may be purchased without regard to the investment minimums by
employees of Deutsche Bank AG, any of its affiliates or subsidiaries, their
spouses and minor children, and Directors or Trustees of any investment company
advised or administered by Deutsche Bank AG or any of its affiliates or
subsidiaries, their spouses and minor children. The Fund and its service
providers reserve the right to, from time to time, at their discretion, waive or
reduce the investment minimums.
How to Open Your Fund Account
By Mail Complete and sign the account application that
accompanies this prospectus. (You may obtain additional
applications by calling the Service Center.) Mail the
completed application along with a check payable to the Fund
you have selected to the Service Center. The addresses are
shown under "Contacting the Mutual Fund Service Center of
Deutsche Asset Management."
By Wire Call the Service Center to set up a wire account.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
Two Ways to Buy and Sell Shares in Your Account
MAIL:
Buying: Send your check, payable to the Deutsche Asset Management fund you have
selected, to the Service Center. The addresses are shown in this section under
"Contacting the Mutual Fund
<PAGE>
Service Center of Deutsche Asset Management." Be sure to include the fund number
and your account number (see your account statement) on your check. Please note
that we cannot accept starter checks or third-party checks. If you are investing
in more than one fund, make your check payable to "Deutsche Asset Management/
Mutual Funds" and include your account number, the names and numbers of the
funds you have selected, and the dollar amount or percentage you would like
invested in the fund.
Selling: To sell by mail, send a signed letter to the Service Center with your
name, your fund number and account number, the fund's name, and either the
number of shares you wish to sell or the dollar amount you wish to receive. You
must leave at least $1 million worth of shares in your account to keep it open.
Unless exchanging into another Deutsche Asset Management fund, you must submit a
written authorization to sell shares in a retirement account.
WIRE:
Buying: You may buy shares by wire only if your account is authorized to do so.
Please note that you or your service agent must call the Service Center at
1-800-730-1313 to notify us in advance of a wire transfer purchase. Inform the
Service Center representative of the amount of your purchase and receive a trade
confirmation number. Instruct your bank to send payment by wire using the wire
instructions noted below. All wires must be received by 4:00 p.m. Eastern time
the next business day.
Routing No: 021001033
Attn: Deutsche Asset Management/Mutual Funds
DDA No: 00226296
FBO: (Account name)
(Account number)
Credit: High Yield Bond--Premier Class 1730
Refer to your account statement for the account name, number and fund number.
Selling: You may sell shares by wire only if your account is authorized to do
so. For your protection, you may not change the destination bank account over
the phone. To sell by wire, contact your service agent or the Service Center at
1-800-730-1313. Inform the Service Center representative of the amount of your
redemption and receive a trade confirmation number. The minimum redemption by
wire is $1,000. We must receive your order by 4:00 p.m. Eastern time to wire
your account the next business day.
Important Information about Buying and Selling Shares
. You may buy and sell shares of the Fund through authorized service agents
as well as directly from us. The same terms and conditions apply.
Specifically, once you place your order with a service agent, it is
considered received by the Service Center. It is then your service agent's
responsibility to transmit the order to the Service Center. You should
contact your service agent if you have a dispute as to when your order was
placed with the Fund. Your service agent may charge a fee for buying and
selling shares for you.
<PAGE>
. You may place orders to buy and sell over the phone by calling your service
agent or the Service Center at 1-800-730-1313. If you pay for shares by
check and the check fails to clear, or if you order shares by phone and
fail to pay for them by 4:00 p.m. Eastern time the next business day, we
have the right to cancel your order, hold you liable or charge you or your
account for any losses or fees the Fund or its agents have incurred. To
sell shares, you must state whether you would like to receive the proceeds
by wire or check.
. After we or your service agent receives your order, we buy or sell your
shares at the next price calculated on a day the New York Stock Exchange is
open for business.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. We do not accept
starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of the
Fund recently purchased by check may be delayed for up to 15 calendar days
from date of purchase while we wait for your check to clear.
. We process all sales orders free of charge.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
no later than seven days.
. We reserve the right to close your account on 30 days' notice if it fails
to meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a
signature guarantee. Please contact your service agent or the Service
Center for more information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. During periods of heavy market activity, you may have trouble reaching the
Service Center by telephone. If this occurs, you should make your request
by mail.
. We reserve the right to reject purchases of Fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short term or to profit from day to
day fluctuations in the Fund's share price.
<PAGE>
. We reserve the right to reject purchases of Fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the Fund's custodian are closed.
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on
your fund's overall performance, its current holdings and its investing
strategies.
. Exchange Privilege: You can exchange all or part of your shares for shares
in another Deutsche Asset Management mutual fund up to four times a year
(from the date of the first exchange). When you exchange shares, you are
selling shares in one fund to purchase shares in another. Before buying
shares through an exchange, you should obtain a copy of that fund's
prospectus and read it carefully. You may order exchanges over the phone
only if your account is authorized to do so. You will receive a written
confirmation of each transaction from the Service Center or your service
agent.
Please note the following conditions:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone if your account has the exchange by
phone feature or by letter or wire.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past three fiscal periods.
Institutional Class performance is presented because Premier Class shares are a
newly offered class of shares with no performance history. Premier Class shares
will have different performance. Certain information selected reflects financial
results for a single Institutional Class share of the Fund. The total returns in
the table represent the rate of return that an investor would have earned on an
investment in the Institutional Class shares of the Fund, assuming reinvestment
of all dividends and distributions. The information for the periods ending
October 31, 2000, October 31, 1999 and October 31, 1998 has been audited by
_________________, whose report, along with the Fund's financial statements, is
included in the
<PAGE>
Fund's annual report. The annual report is available free of charge by calling
the Deutsche Asset Management Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Period Ended For the Period Ended For the Period Ended
October 31, 2000 October 31, 1999 October 31, 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For a Share Outstanding
Throughout each Period: Net
Asset Value, Beginning of
Period
-------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Losses)
-------------------------------------------------------------------------------------------------------------------
Total From Investment
Operations
-------------------------------------------------------------------------------------------------------------------
Distributions to
Shareholders from Net
Investment Income
-------------------------------------------------------------------------------------------------------------------
Net Realized Gains
-------------------------------------------------------------------------------------------------------------------
Total Distributions
-------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period
-------------------------------------------------------------------------------------------------------------------
Total Investment
Return
-------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental
Data: Net Assets, End
of Period (000s
omitted)
-------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
-------------------------------------------------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------------------------------------------------
Net Investment
Income
-------------------------------------------------------------------------------------------------------------------
Decrease Reflected in
Above Expense Ratio
Due to Absorption of
Expenses by DeAM,
Inc./5/
-------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
/1/Unaudited.
/2/The Fund's inception was March 16, 1998.
/3/Total return is not annualized.
/4/Annualized.
/5/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
This page intentionally left blank
<PAGE>
Additional information about the Fund's investments and performance is available
in the Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in the Fund, write to us at:
Deutsche Asset Management
Service Center
P.O. Box 219210
Kansas City, MO 64121
or call our toll-free number: 1-800-730-1313
You can find reports and other information about the Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about the Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
High Yield Bond--Premier Class
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc. CUSIP #61735K547
1773PRO (02/01)
811-8006
<PAGE>
Deutsche Asset Management
Mutual Fund
Prospectus
February 28, 2001
Institutional Class
Fixed Income
Short-Term Fixed Income
Municipal Bond
Short-Term Municipal Bond
High Yield Bond
Each formerly a Morgan Grenfell Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Fixed Income......................................................... 3
Short-Term Fixed Income.............................................. 11
Municipal Bond....................................................... 19
Short-Term Municipal Bond............................................ 27
High Yield Bond...................................................... 35
Information Concerning All of the Funds.............................. 43
Management of the Funds.............................................. 43
Calculating a Fund's Share Price..................................... 43
Dividends and Distributions.......................................... 44
Tax Considerations................................................... 44
Buying and Selling Fund Shares....................................... 44
</TABLE>
<PAGE>
Overview
of Fixed Income
Goal: The Fund seeks a high level of income consistent with the preservation of
capital.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities.
INVESTMENT POLICIES AND STRATEGIES
The Fund invests, under normal circumstances, at least 80% of its assets in a
wide range of investment grade fixed income securities, including U.S.
government bonds, corporate bonds and debentures and mortgage-backed and
asset-backed securities. In selecting investments, we focus on identifying
securities and sectors which we believe are undervalued relative to the market
rather than relying on interest rate forecasts.
Fixed Income--Institutional Class
Overview of Fixed Income
Goal............................................................... 3
Core Strategy...................................................... 3
Investment Policies and Strategies................................. 3
Principal Risks of Investing in the Fund........................... 4
Who Should Consider Investing in the Fund.......................... 4
Total Returns, After Fees and Expenses............................. 5
Annual Fund Operating Expenses..................................... 6
A Detailed Look at Fixed Income
Objective.......................................................... 7
Strategy........................................................... 7
Principal Investments.............................................. 7
Investment Process................................................. 7
Other Investments.................................................. 8
Risks.............................................................. 8
Portfolio Managers................................................. 9
Financial Highlights............................................... 10
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest; and
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Fixed Income Institutional Class requires a minimum investment of $250,000. You
should consider investing in Fixed Income if you are seeking to earn current
income higher than money market mutual funds over most time periods. There is,
of course, no guarantee that the Fund will realize its goal. Moreover, you
should be willing to accept the risks of investing in the fixed income market,
including credit risk and interest rate risk.
You should not consider investing in Fixed Income if you are pursuing a
short-term financial goal, if you are seeking capital appreciation or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
fixed income investments. Diversifying your investments may lower the volatility
of your overall investment portfolio.
An investment in Fixed Income is not a deposit of any bank, and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Institutional Class shares
for each full calendar year since the Fund began selling Institutional Class
shares to the public on September 18, 1992 (its inception date). The table
compares the average annual return of the Fund's Institutional Class shares with
that of the Lehman Brothers Aggregate Bond Index over the last one and five
years and since its inception. The Index is a model, not an actual portfolio. An
index is a group of securities whose overall performance is used as a standard
to measure investment performance. It does not factor in the costs of buying,
selling and holding securities--costs which are reflected in the Fund's results.
The Lehman Brothers Aggregate Bond Index represents U.S. domestic taxable
investment grade bonds which include securities from the following sectors: U.S.
Treasuries, agencies, corporate, mortgage-backed and asset-backed securities.
The Index includes over 5,500 public issued securities with a minimum one year
to final maturity and $150 million par amount outstanding. The average maturity
and duration of the index is in the intermediate range.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1993 13.67%
1994 - 1.93%
1995 18.17%
1996 4.49%
1997 9.46%
1998 7.91%
1999 - 0.55%
2000 ______%
Since inception, the Fund's highest return in any calendar quarter was _%
(_____) and its lowest quarterly return was % (______). Past performance offers
no indication of how the Fund will perform in the future.
<PAGE>
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 Year 5 Years (9/18/92)/1/
Fixed Income--
Institutional
Class % % %
Lehman Brothers
Aggregate Bond
Index % % %
/1/The Lehman Brothers Aggregate Bond Index average is calculated from
September 30, 1992.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold Institutional Class shares of Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.55%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.15%
Total Annual Fund
Operating Expenses 0.55%
Less: Fee Waivers or
Expense Reimbursements 0.00%/1/
Net Expenses 0.55%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
$56 $176 $307 $689
<PAGE>
A detailed look at Fixed Income
OBJECTIVE
The Fund seeks a high level of income consistent with the preservation of
capital. The Fund invests for current income, not capital appreciation. While we
seek current income, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of five to ten years. Subject to its portfolio maturity
policy, the Fund may purchase individual securities with any stated maturity.
The dollar weighted average portfolio maturity may be shorter than the stated
maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features. In implementing this strategy, the Fund
may experience a high portfolio turnover rate.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Fixed income funds usually have a higher portfolio turnover rate as a group as
compared to equity funds because fixed income security maturities contribute to
turnover. High turnover can increase the Fund's transaction costs, thereby
lowering its returns.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 80% of its assets in
intermediate-term U.S. treasury, corporate, mortgage-backed and asset-backed,
taxable, municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities rated within the top three rating
categories. Fixed income investments include bonds, notes (including structured
notes), mortgage-related securities, asset-backed securities, convertible
securities, eurodollar and Yankee dollar instruments, preferred stocks and money
market instruments. Fixed income securities may be issued by U.S. and foreign
corporations or entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations; and foreign governments and
their subdivisions. These securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and auction rate features.
<PAGE>
INVESTMENT PROCESS
Company research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on credit worthiness, cash flow and price,
to each bond;
. determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. use credit analysis to determine the issuer's ability to fulfill its
contracts; and
. subordinate sector weightings to individual bonds that may add above-market
value.
Fixed income securities are investment grade if:
. They are rated in one of the top four, long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts.
OTHER INVESTMENTS
The Fund may invest up to 15% of its assets in investment grade fixed income
securities rated within the fourth highest rating category.
The Fund may invest up to 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers and governments, including American Depositary
Receipts (ADRs). The 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 we
determine that securities meeting the Fund's investment objective are not
otherwise readily available for purchase.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-
<PAGE>
term bonds that offer comparable safety, if the situation warranted. To the
extent we might adopt such a position and over the course of its duration, the
Fund may not meet its investment objective.
RISKS
Below we have set forth some of the prominent risks associated with investing in
fixed income securities, as well as investing in general. Although we attempt
both to assess the likelihood that these risks may actually occur and to limit
them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. There is a greater risk that the Fund will lose money due to prepayment
risk because the Fund invests in mortgage-related securities.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security. There is a greater risk that the
Fund will lose money due to extension risk because the Fund invests in
mortgage-related securities.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
<PAGE>
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Gary Bartlett, CFA, Director of Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Warren Davis, Director of Deutsche Asset Management, Inc. and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1995.
<PAGE>
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1997.
. Prior to that, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government investments.
Daniel Taylor, CFA, Vice President of Deutsche Asset Management, Inc. and
Co-Manager of the Fund
. Joined the investment adviser in 1998.
. Prior to that, fixed income portfolio manager, asset backed securities
analyst and senior credit analyst, CoreStates Investments Advisors, from
1992 to 1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five years. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by ________________, whose report, along with
the Fund's financial statements, is included in the Fund's annual report. The
annual report is available free of charge by calling the Service Center at
1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
For the year ended October 31,
----------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding 2000 1999 1998 1997 1996 1995
Throughout each Period:
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, $ 10.88 $ 10.76 $ 10.51 $ 10.62 $ 9.93
Beginning of Period
----------------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations
----------------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.64 0.65 0.68 0.68 0.70
----------------------------------------------------------------------------------------------------------------------------
Net Realized and (0.54) 0.20 0.25 (0.04) 0.69
Unrealized Gains
(Losses) on Investment
----------------------------------------------------------------------------------------------------------------------------
Total from Investment 0.10 0.85 0.93 0.64 1.39
Operations
----------------------------------------------------------------------------------------------------------------------------
Distributions to
Shareholders from
----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.64) (0.65) (0.68) (0.68) (0.70)
----------------------------------------------------------------------------------------------------------------------------
Net Realized Gains (0.17) (0.08) (0.07)
----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.81) (0.73) (0.68) (0.75) (0.70)
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.17 $ 10.88 $ 10.76 $ 10.51 $ 10.62
----------------------------------------------------------------------------------------------------------------------------
Total Investment Return 0.86% 8.25% 9.22% 6.27% 14.53%
----------------------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of $1,258,869 $1,263,215 $1,103,121 $758,003 $494,221
Period (000s omitted)
----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net 6.08% 6.01% 6.50% 6.52% 6.81%
Investment Income
----------------------------------------------------------------------------------------------------------------------------
Expenses 0.55% 0.56% 0.60% 0.61% 0.63%
----------------------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense 0.01% 0.05% 0.06% 0.09%
Ratio Due to Absorption of
Expenses by DeAM, Inc./1/
----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 157% 122% 178% 176% 182%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
/1/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview
of Short-Term Fixed Income
Goal: The Fund seeks a high level of income consistent with the preservation of
capital.
Core Strategy: The Fund invests primarily in investment grade short-term fixed
income securities.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
short-term U.S. Treasury, corporate, mortgage-backed and asset-backed, taxable
municipal and tax-exempt municipal bonds. We look for securities and sectors of
the short-term fixed income marketplace that are undervalued relative to the
market rather than rely on interest rate forecasting to select securities for
investment.
Short-Term Fixed Income--Institutional Class
Overview of Short-Term Fixed Income
Goal................................................ 11
Core Strategy....................................... 11
Investment Policies and Strategies.................. 11
Principal Risks of Investing in the Fund............ 12
Who Should Consider Investing in the Fund........... 12
Total Returns, After Fees and Expenses.............. 13
Annual Fund Operating Expenses...................... 14
A Detailed Look at Short-Term Fixed Income
Objective........................................... 15
Strategy............................................ 15
Principal Investments............................... 15
Investment Process.................................. 15
Other Investments................................... 16
Risks............................................... 16
Portfolio Managers.................................. 17
Financial Highlights................................ 18
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest; and
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Short-Term Fixed Income Institutional Class requires a minimum investment of
$250,000. You should consider investing in Short-Term Fixed Income if you are
seeking to earn current income higher than money market mutual funds over most
time periods but are looking for less volatility in the value of your investment
than Fixed Income may provide.
You should not consider investing in Short-Term Fixed Income if you are pursuing
a long-term financial goal, if you are seeking capital appreciation or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
short-term fixed income investments. Diversifying your investments may improve
your long-run investment return and lower the volatility of your overall
investment portfolio.
An investment in Short-Term Fixed Income is not a deposit of any bank, and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Institutional Class shares
for each full calendar year since the Fund began selling Institutional Class
shares to the public on March 13, 1995 (its inception date). The table compares
the average annual return of the Fund's Institutional Class shares with that of
the Merrill Lynch 6-Month Treasury Bill Index and the Merrill Lynch 1-Year
Treasury Bill Index over the last one year and since its inception. The Fund has
changed its benchmark from the Merrill Lynch 6-Month Treasury Bill Index to the
Merrill Lynch 1-Year Treasury Bill Index. This index more closely reflects the
dollar weighted average portfolio maturity of the Fund. The index is a model,
not an actual portfolio. An index is a group of securities whose overall
performance is used to measure investment performance. It does not factor in the
costs of buying, selling and holding securities-- costs which are reflected in
the Fund's results.
The Merrill Lynch 6-Month Treasury Bill Index and the Merrill Lynch 1-Year
Treasury Bill Index are each measures of the performance of the 6-month and
1-year Treasury Bills, respectively, assuming all cash flows are reinvested on a
daily basis. Each Index is comprised of a single issue purchased at the
beginning of the month and held for the full month. At the end of the month,
that issue is sold and rolled into a newly selected issue. The issue at each
month-end rebalancing is the outstanding Treasury Bill that matures, closest to,
but not beyond 6 months and 1-year, respectively, from the rebalancing date.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1996 5.48%
1997 6.77%
1998 6.54%
1999 4.47%
2000 ____%
Since inception, the Fund's highest return in any calendar quarter was ____%
(______) and its lowest quarterly return was ___% (______). Past performance
offers no indication of how the Fund will perform in the future.
<PAGE>
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 Year (3/13/95)/1/
Short-Term Fixed Income--
Institutional Class ____% ____%
Merrill Lynch 6-Month
Treasury Bill Index ____% ____%
Merrill Lynch 1-Year
Treasury Bill Index ____% ____%
/1/ The Merrill Lynch 6-Month Treasury Bill Index average and the Merrill Lynch
1-Year Treasury Bill Index average are each calculated from March 31, 1995.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses that you may pay if you buy and hold Institutional Class shares of
Short-Term Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/ Restated to reflect estimated Other Expenses for the current fiscal year.
For the fiscal year ended October 31, 2000, Other Expenses and Total Annual Fund
Operating Expenses were ____% and ____%, respectively, of the average daily net
assets of the Institutional Class shares.
/2/ The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.55%.
/3/ For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of Average
Daily Net Assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.65%/1/
Total Annual Fund
Operating Expenses 1.05%/1/
Less: Fee Waivers or
Expense Reimbursements (0.50%)/2/
Net Expenses 0.55%
<PAGE>
EXPENSE EXAMPLE/3/
1 Year 3 Years 5 Years 10 Years
$56 $283 $528 $1,232
<PAGE>
A detailed look
at Short-Term Fixed Income
OBJECTIVE
The Fund seeks a high level of income consistent with the preservation of
capital. The Fund invests for current income, not capital appreciation. While we
seek current income, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we do not require their approval to do so.
STRATEGY
In managing the fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of no longer than three years. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity of the Fund is
generally shorter than the stated maturity (usually about 1 year) due to several
factors, including but not limited to prepayment patterns, call dates and put
features. In implementing this strategy, the Fund may experience a high
portfolio turnover rate.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Fixed income funds usually have a higher portfolio turnover rate as a group as
compared to equity funds because fixed income security maturities contribute to
turnover. High turnover can increase the Fund's transaction costs, thereby
lowering its returns.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund invests at least 80% of its total assets in
short-term U.S. Treasury, corporate, mortgage-backed and asset-backed, taxable
municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities rated within the top three rating
categories. Fixed income investments include bonds, notes (including structured
notes), mortgage-related securities, asset-backed securities, convertible
securities, eurodollar and Yankee dollar instruments, preferred stocks and money
market instruments. Fixed income securities may be issued by U.S. and foreign
corporations or entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations; and foreign governments and
their subdivisions. These securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in-kind and
<PAGE>
auction rate features. The Fund may invest up to 40% of its total assets in
asset-backed securities.
INVESTMENT PROCESS
Company research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on credit worthiness, cash flow and price,
to each bond;
. determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. use credit analysis to determine the issue's ability to fulfill its
contracts; and
. subordinate sector weightings to individual bonds that may add above-market
value.
Fixed income securities are investment grade if:
. They are rated in one of the top four, long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
ounterparties of OTC derivative contracts.
OTHER INVESTMENTS
The Fund may invest up to 15% of its assets in investment grade fixed income
securities rated within the fourth highest rating category.
The Fund may invest up to 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers. The 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 we determine that securities meeting the Fund's investment objective are
not otherwise readily available for purchase.
<PAGE>
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
RISKS
Below we have set forth some of the prominent risks associated with investing in
fixed income securities, along with those of investing in general. Although we
attempt both to assess the likelihood that these risks may actually occur and to
limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. There is a greater risk that the Fund will lose money due to prepayment
risk because the Fund invests in mortgage-related securities.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security. There is a greater risk that the
Fund will lose money due to extension risk because the Fund invests in
mortgage-related securities.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
<PAGE>
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Gary Bartlett, CFA, Director of Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Warren Davis, Director of Deutsche Asset Management, Inc. and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1995.
<PAGE>
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management, Inc. and Co-
Manager of the Fund
. Joined the investment adviser in 1997.
. Prior to that, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government investments.
Daniel Taylor, CFA, Vice President of Deutsche Asset Management, Inc. and Co-
Manager of the Fund
. Joined the investment adviser in 1998.
. Prior to that, fixed income portfolio manager, asset backed securities
analyst and senior credit analyst, CoreStates Investments Advisors, from
1992 to 1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five fiscal periods. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by _______________, whose report, along with
the Fund's financial statements, is included in the Fund's annual report. The
annual report is available free of charge by calling the Service Center at
1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
For the year ended October 31,
--------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout 2000 1999 1998 1997 1996 1995/1/
each Period:
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, $ 10.13 $ 10.06 $ 10.00 $ 10.01 $ 10.00
Beginning of Period
--------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.59 0.60 0.58 0.60 0.37
--------------------------------------------------------------------------------------------------------------------------
Net Realized and (0.14) 0.07 0.06 (0.01) 0.01
Unrealized Gains
(Losses) on Investment
--------------------------------------------------------------------------------------------------------------------------
Total from Investment 0.45 0.67 0.64 0.59 0.38
Operations
--------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from
--------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.60) (0.60) (0.58) (0.60) (0.37)
--------------------------------------------------------------------------------------------------------------------------
Net Realized Gains (0.02)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.60) (0.58) (0.60) (0.37)
--------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.96 $ 10.13 $ 10.06 $ 10.00 $ 10.01
--------------------------------------------------------------------------------------------------------------------------
Total Investment Return 4.49% 6.85% 6.61% 6.09% 3.82%/3/
--------------------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
--------------------------------------------------------------------------------------------------------------------------
Net Assets, End of $26,753 $20,201 $17,083 $ 6,751 $ 4,140
Period (000s omitted)
--------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net 6.03% 5.92% 5.77% 6.00% 5.86%/2/
Investment Income
--------------------------------------------------------------------------------------------------------------------------
Expenses 1.29% 0.93% 1.09% 1.29% 2.84%/2/
--------------------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense 0.74% 0.38% 0.56% 0.76% 2.32%/2/
Ratio Due to Absorption of
Expenses by DeAM, Inc./4/
--------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 142% 98% 186% 124% 90%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
/1/The Fund's inception was March 13, 1995.
/2/Annualized.
/3/Total return is not annualized.
/4/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview
of Municipal Bond
Goal: The Fund seeks a high level of income exempt from regular federal income
tax, consistent with the preservation of capital.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities that pay interest exempt from federal income tax.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
investment grade municipal securities. Municipal securities are debt securities
issued by states and certain other municipal issuers, political subdivisions,
agencies and public authorities that pay interest which are exempt from federal
income tax. We focus on individual security selection rather than relying on
interest rate forecasting.
Municipal Bond--Institutional Class
Overview of Municipal Bond
Goal........................................................ 19
Core Strategy............................................... 19
Investment Policies and Strategies.......................... 19
Principal Risks of Investing in the Fund.................... 20
Who Should Consider Investing in the Fund................... 20
Total Returns, After Fees and Expenses...................... 21
Annual Fund Operating Expenses.............................. 22
A Detailed Look at Municipal Bond
Objective................................................... 23
Strategy.................................................... 23
Principal Investments....................................... 23
Investment Process.......................................... 23
Other Investments........................................... 23
Risks....................................................... 24
Portfolio Managers.......................................... 25
Financial Highlights........................................ 26
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. a greater-than-anticipated percentage of the Fund's investments could
produce taxable income, resulting in a lower tax-adjusted return; and
. unfavorable legislation could affect the tax-exempt status of municipal
bonds.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Municipal Bond Institutional Class requires a minimum investment of $250,000.
You should consider investing in Municipal Bond if you are seeking income that
is exempt from federal income tax. There is, of course, no guarantee that the
Fund will realize its goal of providing a high level of income exempt from
regular federal income tax.
You should not consider investing in Municipal Bond if you are pursuing a
short-term financial goal, if you seek capital appreciation or if you cannot
tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
municipal securities.
An investment in Municipal Bond is not a deposit of any bank, and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Institutional Class shares
for each full calendar year since the Fund began selling Institutional Class
shares to the public on December 13, 1991 (its inception date). The table
compares the average annual return of the Fund's Institutional Class shares with
that of the Lehman Brothers 5 Year G.O Index over the last one and five years
and since its inception. The Index is a model, not an actual portfolio. An index
is a group of securities whose overall performance is used to measure investment
performance. It does not factor in the costs of buying, selling and holding
securities--costs which are reflected in the Fund's results.
The Lehman Brothers 5-Year G.O. Index includes over 1,900 intermediate term
General Obligation tax-exempt municipal bonds with an average maturity range of
4 to 6 years. The index includes tax-exempt municipal issues with a minimum par
amount of $5 million.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1992 11.99%
1993 12.31%
1994 - 0.99%
1995 13.34%
1996 5.84%
1997 8.18%
1998 5.44%
1999 - 1.25%
2000 _____%
Since inception, the Fund's highest return in any calendar quarter was ___%
(________) and its lowest quarterly return was (___%) (________). Past
performance offers no indication of how the Fund will perform in the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 year 5 years (12/13/91)/1/
Municipal Bond--
Institutional Class % % %
Lehman 5 Year G.O Index % % %
/1/The Lehman 5 Year G.O. Index average is calculated from December 31, 1991.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold Institutional Class shares of Municipal Bond.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.55%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.18%
Total Annual Fund
Operating Expenses 0.58%
Less: Fee Waivers or
Expense Reimbursements (0.03%)/1/
Net Expenses 0.55%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
$56 $183 $324 $723
<PAGE>
A detailed look
at Municipal Bond
OBJECTIVE
The Fund seeks a high level of income exempt from regular federal income tax,
consistent with the preservation of capital. The Fund's objective is not a
fundamental policy. We must notify shareholders before we change it, but we do
not require their approval to do so.
STRATEGY
In managing this fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than relying on interest rate forecasts.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of five to ten years. Subject to its portfolio maturity
policy, the Fund may purchase individual securities with any stated maturity.
The dollar weighted average portfolio maturity may be shorter than the stated
maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade municipal securities. Municipal
securities are debt securities issued by states and certain other municipal
issuers, political subdivisions, agencies and public authorities that pay
interest which is exempt from federal income tax. Under normal conditions, the
Fund invests at least 80% of net assets in municipal securities which pay
interest exempt from federal income tax and at least 65% of total assets in
municipal bonds. There is no restriction on the percentage of assets that may be
invested in obligations the interest on which is a preference item for purposes
of the federal alternative minimum tax.
The Fund invests primarily in high quality bonds (those rated within the top
three rating categories) and may invest up to 15% of its assets in bonds that
are rated in the fourth highest category.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Fixed income securities are investment grade if:
. They are rated in one of the top four long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
<PAGE>
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts.
INVESTMENT PROCESS
Issuer research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. use credit analysis to determine the issuer's ability to fulfill its
contracts;
. compare each bond with a U.S. Treasury instrument to develop a theoretical
intrinsic value;
. look to exploit any inefficiencies between intrinsic value and market
trading price; and
. subordinate sector weightings to individual bonds that may add above-market
value.
OTHER INVESTMENTS
The 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. The payment of principal and interest on a private activity
or industrial development bond 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 financed as security for such payment.
Up to 20% of the fund's total assets may be invested in certain taxable
securities in order to maintain liquidity. The Fund may also purchase securities
on a when-issued basis.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Historically, this Fund has not had a high portfolio turnover rate.
RISKS
<PAGE>
Below we have set forth some of the prominent risks associated with investing in
municipal securities, as well as investing in general. Although we attempt both
to assess the likelihood that these risks may actually occur and to limit them,
we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Tax Liability Risk. Distributions by the Fund that are derived from income from
taxable securities held by the Fund will generally be taxable to shareholders as
ordinary income. There is a risk that a greater percentage of the Fund's
investments will produce taxable income, resulting in a lower tax-adjusted
return. New federal or state legislation could adversely affect the tax-exempt
status of securities held by the Fund, resulting in higher tax liability for
shareholders. In addition, distribution of the Fund's income and gains will
generally be subject to state taxation.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
Private Activity and Industrial Development Bond Risks. The payment of principal
and interest on these 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 financed as security for such payment.
When-Issued and Delayed Delivery Securities Risk. The Fund may purchase or sell
a security at a future date for a predetermined price. The market value of the
securities may change before delivery.
<PAGE>
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Ted Manges, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1999. Prior to that, Manager of Trading
and Sales, Commerce Capital Markets, from 1995 to 1999.
. Analyst specializing in tax-exempt municipal bonds.
Daniel Scholl, Vice President, Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1998.
. Prior to that, Special Assistant for Economic Development to Governor Tom
Carper in Delaware, from 1996 to 1998. Prior to that, Executive Assistant
to Delaware's Secretary of Finance, from 1992 to 1996.
. Analyst specializing in tax exempt municipals.
. MGA, University of Pennsylvania.
Susan Beck, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1989.
. Fixed income research analyst.
<PAGE>
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five years. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by ____________________________, whose report,
along with the Fund's financial statements, is included in the Fund's annual
report. The annual report is available free of charge by calling the Service
Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
For the year ended October 31,
---------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout 2000 1999 1998 1997 1996 1995
each Period:
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, $ 11.30 $ 11.12 $ 10.99 $ 10.86 $ 10.37
Beginning of Period
---------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
---------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.51 0.53 0.57 0.60 0.61
---------------------------------------------------------------------------------------------------------------------
Net Realized and (0.59) 0.18 0.22 0.13 0.49
Unrealized Gains
(Losses) on Investment
---------------------------------------------------------------------------------------------------------------------
Total from Investment (0.08) 0.71 0.79 0.73 1.10
Operations
---------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from
---------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.51) (0.53) (0.57) (0.60) (0.61)
---------------------------------------------------------------------------------------------------------------------
Net Realized Gains (0.05) (0.09)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.53) (0.66) (0.60) (0.61)
---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.66 $ 11.30 $ 11.12 $ 10.99 $ 10.86
---------------------------------------------------------------------------------------------------------------------
Total Investment Return (0.78%) 6.58% 7.49% 6.90% 10.90%
---------------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
---------------------------------------------------------------------------------------------------------------------
Net Assets, End of $622,896 $ 570,743 $361,461 $252,152 $221,058
Period (000s omitted)
---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net 4.62% 4.71% 5.19% 5.50% 5.75%
Investment Income
---------------------------------------------------------------------------------------------------------------------
Expenses 0.58% 0.58% 0.61% 0.61% 0.62%
---------------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense 0.03% 0.04% 0.07% 0.06% 0.08%
Ratio Due to Absorption of
Expenses by DeAM, Inc./1/
---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 42% 67% 66% 63%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
/1/DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview
of Short-Term Municipal Bond
Goal: The Fund seeks a high level of income exempt from regular federal income
tax, consistent with the preservation of capital.
Core Strategy: The Fund invests primarily in investment grade short-term fixed
income securities that pay interest exempt from federal income tax.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing primarily in
short-term municipal securities. Municipal securities are debt securities issued
by states and certain other municipal issuers, political subdivisions, agencies
and public authorities that pay interest which is exempt from federal income
tax. We focus on individual security selection rather than rely on interest rate
forecasting.
Short-Term Municipal Bond--Institutional Class
Overview of Short-Term Municipal Bond
Goal............................................ 27
Core Strategy................................... 27
Investment Policies and Strategies.............. 27
Principal Risks of Investing in the Fund........ 28
Who Should Consider Investing in the Fund....... 28
Total Returns, After Fees and Expenses.......... 29
Annual Fund Operating Expenses.................. 30
A Detailed Look at Short-Term Municipal Bond
Objective....................................... 31
Strategy........................................ 31
Principal Investments........................... 31
Investment Process.............................. 31
Other Investments............................... 31
Risks........................................... 32
Portfolio Managers.............................. 33
Financial Highlights............................ 34
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio;
. a greater-than-anticipated percentage of the Fund's investments could
produce taxable income, resulting in a lower tax-adjusted return; and
. unfavorable legislation could affect the tax-exempt status of municipal
bonds.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Short-Term Municipal Bond Institutional Class requires a minimum investment of
$250,000. You should consider investing in Short-Term Municipal Bond if you are
seeking income that is exempt from federal income tax. You are also seeking less
volatility in the value of your investment than an investment in Municipal Bond.
There is, of course, no guarantee that the Fund will realize its goal of
providing a high level of income exempt from regular federal income tax.
You should not consider investing in Short-Term Municipal Bond if you are
pursuing a long-term financial goal, if you seek capital appreciation or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
municipal securities.
An investment in Short-Term Municipal Bond is not a deposit of any bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
of investing in the Fund by showing changes in the Fund's performance year to
year. The bar chart shows the actual return of the Fund's Institutional Class
shares for each full calendar year since it began selling Institutional Class
shares to the public on March 6, 1995 (its inception date). The table compares
the average annual return of the Fund's Institutional Class shares with that of
the IBC Financial All Tax-Free Average Index over the last one year and since
inception. The Index is a passive measure of combined stock market returns. It
does not factor in the costs of buying, selling and holding securities, costs
which are reflected in the Fund's results.
The IBC Financial All Tax-Free Average Index is the average of all tax-exempt
municipal money market funds that invest in obligations of tax-exempt entities,
including state and municipal authorities.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1996 5.59%
1997 6.94%
1998 5.13%
1999 1.20%
2000 ____%
Since inception, the Fund's highest return in any calendar quarter was ____%
(____ quarter _____) and its lowest quarterly return was (____%) (_____ quarter
_____). Past performance offers no indication of how the Fund will perform in
the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 Year (3/6/95)1
Short-Term Municipal
Bond--Institutional Class ___% ____%
IBC Financial All Tax-Free
Average ___% ____%
/1/IBC Financial All Tax-Free Average is calculated from February 28, 1995.
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
you may pay if you buy and hold Institutional Class shares of Short-Term
Municipal Bond.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
/1/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.55%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of Average
Daily Net Assets
Management Fees 0.40%
Distribution and
Service (12b-1) Fees None
Other Expenses 0.40%
Total Annual Fund
Operating Expenses 0.80%
Less: Fee Waivers or
Expense Reimbursements (0.25%)/1/
Net Expenses 0.55%
EXPENSE EXAMPLE/2/
1 year 3 years 5 years 10 years
$56 $230 $419 $964
<PAGE>
A detailed look
at Short-Term Municipal Bond
OBJECTIVE
The Fund seeks a high level of income exempt from regular federal income tax,
consistent with the preservation of capital. The Fund's objective is not a
fundamental policy. We must notify shareholders before we change it, but we do
not require their approval to do so.
STRATEGY
In managing the Fund, we generally use a "bottom-up" approach. We focus on the
securities and sectors we believe are undervalued relative to the market, rather
than rely on interest rate forecasting.
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of no longer than three years. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity may be shorter than the
stated maturity due to several factors, including but not limited to prepayment
patterns, call dates and put features.
PRINCIPAL INVESTMENTS
The Fund invests primarily in short-term investment grade municipal securities.
Municipal securities are debt securities issued by states and certain other
municipal issuers, political subdivisions, agencies and public authorities that
pay interest which is exempt from federal income tax.
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax.
The Fund invests primarily in high quality bonds (those rated within the top
three rating categories) and may invest up to 15% of its assets in investment
grade bonds that are rated in the fourth highest category.
Maturity measures the time remaining until an issuer must repay a bond's
principal in full.
Fixed income securities are investment grade if:
. They are rated in one of the top four, long-term rating categories of a
nationally recognized statistical rating organization.
. They have received a comparable short-term or other rating.
<PAGE>
. They are unrated securities that the Investment Adviser believes to be of
comparable quality to rated investment grade securities.
If a security receives different ratings, the Fund will treat the security as
being rated in the highest rating category. The Fund may choose not to sell
securities that are downgraded after their purchase below the Fund's minimum
acceptable credit rating. The Fund's credit standards also apply to
counterparties of OTC derivative contracts.
INVESTMENT PROCESS
Issuer research lies at the heart of our investment process. In selecting
individual securities for investment, we:
. assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. use credit analysis to determine the issuer's ability to fulfill its
contracts;
. compare each bond with a U.S. Treasury instrument to develop a theoretical
intrinsic value;
. look to exploit any inefficiencies between intrinsic value and market
trading price; and
. subordinate sector weightings to individual bonds that may add above-market
value.
OTHER INVESTMENTS
The 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. Up to 20% of the fund's total assets may be invested in
certain taxable securities in order to maintain liquidity. The Fund may also
purchase securities on a when-issued basis.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objective.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Fund sells and replaces the value of its securities in a given period.
Historically, this Fund has not had a high portfolio turnover rate.
RISKS
<PAGE>
Below we have set forth some of the prominent risks associated with investing in
municipal securities, as well as investing in general. Although we attempt both
to assess the likelihood that these risks may actually occur and to limit them,
we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Tax Liability Risk. Distributions by the Fund that are derived from income from
taxable securities held by the Fund will generally be taxable to shareholders as
ordinary income. There is a risk that a greater percentage of the Fund's
investments will produce taxable income, resulting in a lower tax-adjusted
return. New federal or state legislation could adversely affect the tax-exempt
status of securities held by the Fund, resulting in higher tax liability for
shareholders. In addition, distribution of the Fund's income and gains will
generally be subject to state taxation.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Secondary Risks
Private Activity and Industrial Development Bond Risks. The payment of principal
and interest on these 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 financed as security for such payment.
When-Issued and Delayed Delivery Securities Risk. The Fund may purchase or sell
a security at a future date for a predetermined price. The market value of the
securities may change before delivery.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their fair value in the judgement of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we
<PAGE>
have valued the securities too highly, you may end up paying too much for Fund
shares when you buy. If we underestimate their price, you may not receive the
full market value for your Fund shares when you sell.
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
David Baldt, CFA, Managing Director of Deutsche Asset Management, Inc. and Lead
Manager of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group.
Ted Manges, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1999. Prior to that, Manager of Trading
and Sales, Commerce Capital Markets, from 1995 to 1999.
. Analyst specializing in tax-exempt municipal bonds.
Daniel Scholl, Vice President, Deutsche Asset Management, Inc. and Co-Manager
of the Fund
. Joined the investment adviser in 1998.
. Prior to that, Special Assistant for Economic Development to Governor Tom
Carper in Delaware, from 1996 to 1998. Prior to that, Executive Assistant
to Delaware's Secretary of Finance, from 1992 to 1996.
. Analyst specializing in tax exempt municipals.
. MGA, University of Pennsylvania.
Susan Beck, Vice President of Deutsche Asset Management, Inc. and Co-Manager of
the Fund
. Joined the investment adviser in 1989.
. Fixed income research analyst.
<PAGE>
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five fiscal periods. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by _________________, whose report, along with
the Fund's financial statements, is included in the Fund's annual report. The
annual report is available free of charge by calling the Service Center at
1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
For the year ended October 31,
-------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout 2000 1999 1998 1997 1996 1995/1/
each Period:
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period
-------------------------------------------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gains
(Losses) on Investment
-------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations
-------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income
-------------------------------------------------------------------------------------------------------------------------
Net Realized Gains
-------------------------------------------------------------------------------------------------------------------------
Total Distributions
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
-------------------------------------------------------------------------------------------------------------------------
Total Investment Return
-------------------------------------------------------------------------------------------------------------------------
Supplemental Data and Ratios:
-------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (000s omitted)
-------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets: Net
Investment Income
-------------------------------------------------------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------------------------------------------------------
Decrease Reflected in Above Expense
Ratio Due to Absorption of
Expenses by DeAM, Inc./4/
-------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
/1/ The Fund's inception was March 6, 1995.
/2/ Annualized.
/3/ Total return is not annualized.
/4/ DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Overview of High Yield Bond
High Yield Bond--Institutional Class
Goal.................................................................
Core Strategy........................................................
Investment Policies and Strategies...................................
Principal Risks of Investing in the Fund.............................
Who Should Consider Investing in the Fund............................
Total Returns, After Expenses........................................
Annual Fund Operating Expenses.......................................
A Detailed Look at High Yield Bond
Objective............................................................ 39
Strategy............................................................. 39
Principal Investments................................................ 39
Investment Process................................................... 39
Other Investments.................................................... 40
Risks................................................................ 40
Portfolio Manager.................................................... 41
Financial Highlights................................................. 42
Goal: The Fund seeks high current income and, as a secondary objective, capital
appreciation.
Core Strategy: The Fund invests primarily in U.S. dollar-denominated high yield
bonds of domestic and foreign issuers.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its goal by investing in a diversified portfolio of
high yield fixed income securities (junk bonds) with a dollar weighted effective
average portfolio maturity of seven to ten years. In managing the Fund, we
generally use both a "top-down" approach by considering macro trends in the
economy and a "bottom-up" approach by using fundamental credit analysis, to
select investments. We focus on careful cash flow and total return analysis, and
broad diversification among countries, sectors, industries and individual
issuers and durations. We use an active process which emphasizes relative value
in a global environment, managing on a total return basis, and using intensive
research to identify stable to improving credit situations that may provide
yield compensation for the risk of investing in below investment grade bonds.
PRINCIPAL RISKS OF INVESTING IN THE FUND
<PAGE>
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio.
. the lower rated debt securities in which the Fund invests are considered
speculative and subject to greater volatility and risk of loss than
investment grade securities, particularly in deteriorating economic
periods.
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline. This risk is higher
for below investment grade bonds.
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest. This risk is higher for below investment
grade bonds.
. securities with longer effective maturities, like those in the Fund's
portfolio, are more sensitive to interest rate changes than those with
shorter effective maturities.
. the market for below investment grade bonds may be thinner than for higher
rated securities, which can adversely affect the prices at which below
investment grade bonds are sold and the Fund's ability to dispose of these
securities.
. deteriorating market conditions in a particular class of bonds or
developments in the stock market could also adversely affect the Fund by
reducing the relative attractiveness of bonds as an investment.
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing its
value. Foreign securities markets are often less liquid, more volatile and
subject to less government regulation than U.S. securities markets. These
risks are higher for securities of issuers located in the emerging markets
in which the Fund invests.
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
CALLOUT: Effective maturity is the average life of a security. Many bonds have
long maturity dates, but shorter average lives. Since these bonds behave
according to their average life, and not their maturity date, we estimate the
average life and apply an appropriate duration to the security.
WHO SHOULD CONSIDER INVESTING IN THE FUND
High Yield Bond--Institutional Class requires a minimum investment of $250,000.
You should consider investing in High Yield Bond if you are seeking to earn
current income higher than investment grade bond funds provide over most time
periods. Moreover, you should be willing to accept significantly greater
short-term fluctuation in the value of your investment than you would typically
experience investing in investment grade bond or money market funds.
You should not consider investing in High Yield Bond if you are pursuing a
short-term financial goal, if you primarily seek capital appreciation or if you
cannot tolerate fluctuations in the value of your investments. The Fund by
itself does not constitute a balanced investment program. It can, however,
afford you exposure to investment opportunities not available to someone who
<PAGE>
invests in only investment grade fixed income securities. Diversifying your
investments may lower the volatility of your overall investment portfolio.
An investment in High Yield Bond is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
TOTAL RETURNS AFTER EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
of investing in the Fund by showing changes in the Fund's performance. The bar
chart shows the actual return of the Fund's Institutional Class shares, for each
full calendar year since the Fund's inception on March 16, 1998. The table
compares the average annual return of the Fund's Institutional Class shares with
that of the CS First Boston High Yield Index over the last year and since its
inception. The Index is a passive measure of combined national and international
high yield bond market returns. It does not factor in the costs of buying,
selling and holding securities--costs that are reflected in the Fund's results.
The CS First Boston High Yield Index is an unmanaged portfolio, priced using bid
from traders, constructed to mirror the global high yield debt market.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
1999
2000
For the period covered in the bar chart, the Fund's highest return was % (_____
quarter ____) and its lowest quarterly return was % (____ quarter ____). Past
performance offers no indication of how the Fund will perform in the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
1 Year Since Inception
(March 16, 1998)/1/
High Yield Bond - Institutional Class
CS First Boston High Yield Index
/1/ The CS First Boston High Yield Index average is calculated from March 18,
1998.
<PAGE>
FEES AND EXPENSES OF THE FUND
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold Institutional Class shares of High Yield
Bond. The Other Expenses included in the Annual Fees and Expenses Table are
estimated.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. The numbers assume
that the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual costs and investment returns may be higher or lower.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge Imposed on Purchases None
Maximum Sales Charge on Reinvested Dividends None
Maximum Short-Term Redemption Fee (as a percentage of amount 2.00%/1/
redeemed, as applicable)
Annual Fund Operating Expenses
(expenses paid from Fund assets)
Percentage of Average
Daily Net Assets
Management Fees 0.50%
Distribution and Service (12b-1) Fees None
Other Expenses 0.25%
Total Annual Fund Operating Expenses 0.75%
Less Fee Waivers or Expense Reimbursements (0.10%)/2/
Net Expenses 0.65%
/1/The 2.00% short-term redemption fee applies to shares redeemed (either by
selling or exchanging into another fund) within 180 days of purchase
(approximately six months). The fee is withheld from redemption proceeds and
retained by the Fund.
/2/The investment adviser and administrator have contractually agreed, for the
16 month period beginning October 31, 2000, to waive their fees or reimburse
expenses so that total expenses of the class will not exceed 0.50%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
EXPENSE EXAMPLE/3/
1 Year 3 Years
$66 $230
<PAGE>
A detailed look at High Yield Bond
OBJECTIVE
The Fund seeks high current income and, as a secondary objective, capital
appreciation. While we seek current income and, to a lesser extent, capital
appreciation, we cannot offer any assurance of achieving these objectives. The
Fund's objectives are not fundamental policies. We must notify shareholders
before we change them, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we generally use both a "top-down" and a "bottom-up"
approach to select investments. We use a "top-down" approach by considering
macro trends in the economy and a "bottom-up" approach by using fundamental
credit analysis to select investments. We focus on careful cash flow and total
return analysis, and broad diversification among countries, sectors, industries
and individual issuers and durations. We use an active process which emphasizes
relative value in a global environment, managing on a total return basis, and
using intensive research to identify stable to improving credit situations that
may provide yield compensation for the risk of investing in below investment
grade bonds (junk bonds).
Portfolio Maturity. We intend to maintain a dollar weighted effective average
portfolio maturity of seven to ten years. The Fund's average portfolio maturity
may be shortened by certain of the Fund's securities which have floating or
variable interest rates or include put features that provide the Fund the right
to sell the security at face value prior to maturity. Subject to its portfolio
maturity policy, the Fund may purchase individual securities with any stated
maturity. The dollar weighted average portfolio maturity may be shorter than the
stated maturity due to several factors, including but not limited to, prepayment
patterns, call dates and put features. In implementing this strategy, the Fund
may experience a high portfolio turnover rate.
CALLOUT: Maturity measures the time remaining until an issuer must repay a
bond's principal in full.
CALLOUT: Portfolio Turnover. The portfolio turnover rate measures the frequency
with which the Fund sells and replaces the value of its securities within a
given period. Fixed income funds usually have a higher portfolio turnover rate
as a group compared to equity funds because fixed income security maturities
contribute to turnover. High turnover can increase the Fund's transaction costs,
thereby lowering its returns or increasing your tax liability.
PRINCIPAL INVESTMENTS
The Fund invests primarily in U.S. dollar denominated high yield bonds of
domestic and foreign issuers. Under normal conditions, the Fund invests at least
65% of its total assets in U.S. dollar- denominated, domestic and foreign below
investment grade fixed income securities (junk bonds), including those whose
issuers are located in countries with new or emerging securities markets. The
Fund considers an emerging securities market to be one where the sovereign debt
issued by the government in local currency terms is rated below investment
grade. Fixed income
<PAGE>
investments include bonds, notes (including structured notes), mortgage-related
securities, asset-backed securities, convertible securities, eurodollar and
Yankee dollar instruments, preferred stocks and money market instruments. Fixed
income securities may be issued by U.S. and foreign corporations or entities;
U.S. and foreign banks; the U.S. government, its agencies, authorities,
instrumentalities or sponsored enterprises; state and municipal governments;
supranational organizations; and foreign governments and their subdivisions.
These securities may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in-kind and auction rate features. The Fund's investments in these
securities may be of any credit quality and may include securities not paying
interest currently, and securities in default.
INVESTMENT PROCESS
The investment process involves using both a "top-down" approach, first focusing
on sector allocations and a "bottom-up" approach, by using relative value and
fundamental analysis, to select the best securities within each sector. To
select securities or investments, we:
. analyze economic conditions for improving or undervalued sectors and
industries;
. use independent credit research and on-site management visits to evaluate
individual issues' debt service, growth rate, and both downgrade and
upgrade potential;
. assess new issues versus secondary market opportunities; and
. seek issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
CALLOUT: Fixed income securities are rated below investment grade if they are
rated below the top four long-term rating categories of a nationally recognized
statistical rating organization or, if unrated, are determined to be of
equivalent quality by the investment adviser. These securities may be in default
and are considered speculative.
OTHER INVESTMENTS
The Fund may invest up to 25% of its total assets in non-U.S. dollar
denominated, below investment grade securities. 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 portfolio manager determines that securities
meeting the Fund's investment objectives are not otherwise readily available for
purchase. Money market securities include commercial paper, certificates of
deposit, banker's acceptances, repurchase agreements and other short-term debt
securities. The Fund may also purchase securities on a when-issued basis and
engage in short sales.
We may also use as secondary investments various instruments commonly known as
"derivatives." In particular, the Fund may use forward currency transactions and
currency options. We may use derivatives in circumstances when we believe they
offer an economical
<PAGE>
means of gaining exposure to a particular securities market or index. We may
also invest in derivatives to attempt to reduce the Fund's exposure or to keep
cash on hand to meet shareholder redemptions or other needs while maintaining
exposure to the market.
The Fund may engage in short sales in order to profit from an anticipated
decline in the value of a security. The Fund may also engage in short sales to
attempt to limit its exposure to a possible market decline in the value of its
portfolio securities through short sales of securities which the investment
adviser believes possess volatility characteristics similar to those being
hedged.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
bond market events. We could place up to 100% of the Fund's assets in U.S. money
market investments, or other short-term bonds that offer comparable safety, if
the situation warranted. To the extent we might adopt such a position and over
the course of its duration, the Fund may not meet its investment objectives.
CALLOUT: Forward currency transactions involve the purchase or sale of a foreign
currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or where possible, to add to investment
returns.
CALLOUT: A derivative contract will obligate or entitle the Fund to deliver or
receive an asset or a cash payment that is based on the change in value of a
designated security, index or currency. Examples of derivative contracts are
futures contracts, options, forward contracts, swaps, caps, collars and floors.
RISKS
Below we have set forth the prominent risks associated with investing in below
investment grade fixed income securities, as well as investing in general.
Although we attempt both to assess the likelihood that these risks may actually
occur and to limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated below the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than investment grade securities and
are more sensitive to changes in the issuer's capacity to pay.
<PAGE>
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more volatile because they are more sensitive to interest rate
changes than those with shorter effective maturities.
Pricing Risk. The market for below investment grade debt securities may be
thinner and less active than that for higher rated debt securities, which can
adversely affect the prices at which the below investment grade securities are
sold. If market quotations are not available, below investment grade debt
securities will be valued in accordance with procedures established by the Board
of Trustees. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Fund's ability to dispose
of these securities. Since the risk of default is higher for lower-rated
securities, the investment adviser's research and credit analysis are an
especially important part of managing securities of this type.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment.
Foreign Investing. The risks of investing in foreign securities are generally
higher than investing in domestic securities. A foreign government could
expropriate or nationalize assets, impose withholding or other taxes on
dividend, interest or other payments and prohibit transactions in the country's
currency. In many foreign countries, securities markets are less liquid, more
volatile and subject to less government regulation than U.S. securities markets.
Emerging Market Risk. Because the Fund may invest in emerging markets, it may
face higher political, information, and market risks. In addition, profound
social changes and business practices that depart from norms in developed
countries' economies have hindered the orderly growth of emerging economies and
their securities markets in the past. High levels of debt tend to make emerging
economies heavily reliant on foreign capital and vulnerable to capital flight.
Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that changes in
foreign exchange rates will affect the U.S. dollar amount of income or gain
received on these investments. Additionally, a change in economic policy may
cause a greater fluctuation in the value of a country's currency than in bonds
denominated in that currency. We may, but need not, seek to minimize this risk
by actively managing the currency exposure of the Fund, which entails hedging
from time to time.
CALL OUT: Currency Management may be used in an attempt to offset investment
risks ("hedging") and, where possible, to add to investment returns. Currency
management activities include the use of forward contracts and may include the
use of other instruments. There is no guarantee that these currency management
activities will be employed or that they will work, and their use could cause
lower returns or even losses to the Fund.
<PAGE>
Secondary Risks
Short Sales. Short selling may produce higher than normal portfolio turnover
which may result in increased transaction costs to the Fund and may result in
gains or losses from the sale of securities.
Derivative Risks. The Fund may, but is not required to, use derivative contracts
for any of the following purposes:
. to hedge against adverse changes in the market value of securities held by
or to be bought for the Fund. These changes may be caused by changing
interest rates, security prices or currency exchange rates;
. as a substitute for purchasing or selling securities or foreign currencies;
. to shorten or lengthen the effective maturity or duration of the Fund's
fixed income portfolio; or
. in non-hedging situations, to attempt to profit from anticipated market
developments.
Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
<PAGE>
Portfolio Manager
The following portfolio manager is responsible for the day-to-day management of
the Fund's investments:
Andrew Cestone, Director of DeAM, Inc.
. Joined the investment adviser in March 1998.
. Investment Analyst, Phoenix Investment Partners, from 1997 to 1998 and
Credit Officer, asset based lending group, Fleet Bank, from 1995 to 1997.
<PAGE>
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past two fiscal periods. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
The information for the periods ending October 31, 2000, October 31, 1999 and
October 31, 1998 has been audited by _______________, whose report, along with
the Fund's financial statements, is included in the Fund's annual report. The
annual report is available free of charge by calling the Deutsche Asset
Management Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
For the Period Ended For the Period Ended For the Period Ended
October 31, 2000 October 31, 1999 October 31, 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For a Share
Outstanding
Throughout each
Period: Net Asset
Value, Beginning of
Period
---------------------------------------------------------------------------------------------------------------------------------
Net Investment
Income
---------------------------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Losses)
---------------------------------------------------------------------------------------------------------------------------------
Total From Investment
Operations
---------------------------------------------------------------------------------------------------------------------------------
Distributions to
Shareholders from Net
Investment Income
---------------------------------------------------------------------------------------------------------------------------------
Net Realized Gains
---------------------------------------------------------------------------------------------------------------------------------
Total Distributions
---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End
of Period
---------------------------------------------------------------------------------------------------------------------------------
Total Investment
Return
---------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental
Data: Net Assets, End
of Period (000s
omitted)
---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
---------------------------------------------------------------------------------------------------------------------------------
Expenses
---------------------------------------------------------------------------------------------------------------------------------
Net Investment
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
Income
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease Reflected in
Above Expense Ratio
Due to Absorption of
Expenses by DeAM,
Inc./5/
---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover
Rate
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Unaudited.
/2/ The Fund's inception was March 16, 1998.
/3/ Total return is not annualized.
/4/ Annualized.
/5/ DeAM, Inc.--Deutsche Asset Management, Inc., the Fund's investment adviser.
<PAGE>
Information
concerning all Funds
MANAGEMENT OF THE FUNDS
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises for each Fund all of the
Fund's activities on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, Deutsche
Asset Management, Inc. (DeAM, Inc.) with headquarters at 130 Liberty Street, New
York, New York, acts as the investment adviser for each Fund. As investment
adviser, DeAM, Inc. makes the Fund's investment decisions. It buys and sells
securities for the Fund and conducts the research that leads to these purchase
and sale decisions. The Fund's investment adviser is also responsible for
selecting brokers and dealers and for negotiating brokerage commissions and
dealer charges. The investment adviser received the following fees as a
percentage of the average daily net assets for each Fund for its services in the
last fiscal year. The investment adviser reimbursed a portion of its fee during
the period.
Percentage of
Average Daily
Fund Net Assets
Fixed Income Fund 0.40%
Short-Term Fixed Fund 0.40%
Municipal Bond Fund 0.40%
Short-Term Municipal Bond Fund 0.40%
High Yield Bond Fund 0.50%
DeAM, Inc. provides a full range of international investment advisory services
to institutional clients, and as of _________ , managed approximately $___
billion in assets.
DeAM, Inc. is an indirect wholly owned subsidiary of Deutsche Bank A.G. Deutsche
Bank A.G. is a major global banking institution that is engaged in a wide range
of financial services, including investment management, mutual fund, retail and
commercial banking, investment banking and insurance.
<PAGE>
Organizational Structure. Each Fund is a series of an open-end investment
company organized as a Delaware business trust.
Other Services. DeAM, Inc. provides administrative services for the Funds. In
addition, either DeAM, Inc. or your broker or financial advisor performs the
functions necessary to establish and maintain your account. In addition to
setting up the account and processing your purchase and sale orders, these
functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the
Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with DeAM, Inc.
Service Agents may charge additional fees to investors for those services not
otherwise included in the broker's or financial advisor's servicing agreement,
such as cash management or special trust or retirement investment reporting.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of each Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
CALL OUT: The New York Stock Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), Presidents' Day (the third Monday
in February), Good Friday, Memorial Day (the last Monday in May), July 4th,
Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday
in November) and Christmas Day.
The formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities a Fund
owns may ultimately affect the price of Fund shares when the New York Stock
Exchange reopens.
<PAGE>
Each Fund uses a forward pricing procedure. Therefore, the price at which you
buy or sell shares is based on the next calculation of the NAV after the order
is received by the Fund or your broker, provided that your broker or financial
advisor forwards your order to the Fund in a timely manner.
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
High Yield Bond may charge a 2.00% short-term redemption fee of the value of the
shares redeemed (either by selling or exchanging into another fund) within 180
days (approximately six months) of purchase.
PERFORMANCE INFORMATION
The Funds' performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
The Funds' policy is to distribute to shareholders all of its net investment
income and net capital gains in the form of income and capital gain dividends.
Income dividends, if any, are declared daily and paid monthly. Capital gains
dividends will be paid at least annually. We automatically reinvest all
dividends and any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by a Fund, except for "exempt-interest dividends" from
Municipal Bond and Short-Term Municipal Bond. Your taxes will vary from year to
year, based on the amount of capital gains distributions and dividends paid out
by your Fund. You owe the taxes whether you receive cash or choose to have
distributions and dividends reinvested. Distributions and dividends usually have
the following tax character.
TRANSACTION TAX STATUS
Income dividends Ordinary income
(except exempt-interest dividends)
Short-term capital Ordinary income
<PAGE>
Gains distributions
Long-term capital Long-term capital gains
Gains distributions
Municipal Bond and Short-Term Municipal Bond intend to distribute the tax-exempt
interest they earn as exempt-interest dividends, which are excluded from gross
income for federal income tax purposes but may be subject to alternative minimum
tax and state and local income tax. Their distributions from other sources, if
any, would be taxable as described above.
Every year your Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
TRANSACTION TAX STATUS
Your sale of Generally, long-term
shares owned capital gains or losses
more than one year
Your sale of Generally, short-term
shares owned capital gains or losses;
for one year or losses subject to
less special rules.
The tax considerations for tax deferred accounts or non-taxable entities are
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of Deutsche Asset Management
By phone 1-800-730-1313
By mail Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By overnight mail Service Center
210 West 10th Street, 8th floor
Kansas City, MO 64105-1716
Our representatives are available to assist you personally Monday through
<PAGE>
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week.
Minimum Account Investments
To open an account $250,000
To add to an account $ 25,000
Minimum account balance $ 50,000
Institutional Class shares of the Fund may be purchased without regard to the
investment minimums by: 1) employees of Deutsche Bank A.G., any of its
affiliates or subsidiaries, their spouses and minor children, and 2) Directors
or Trustees of any investment company advised or administered by Deutsche Bank
A.G. or any of its affiliates or subsidiaries, their spouses and minor children.
The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the minimum account investments.
How to Open Your Fund Account
By mail Complete and sign the account application that accompanies this
prospectus. (You may obtain additional applications by calling
the Service Center.) Mail the completed application along with a
check payable to the Deutsche Asset Management Fund you have
selected to the Service Center. The addresses are shown under
"Contacting the Deutsche Asset Management Funds."
By wire Call the Service Center to set up a wire account.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
Two Ways to Buy and Sell Shares in Your Account
MAIL:
Buying: Send your check, payable to the Deutsche Asset Management Fund you have
selected to the Service Center. The addresses are shown above under "Contacting
the Mutual Fund Service Center of Deutsche Asset Management." Be sure to include
the fund number and your account number (see your account statement) on your
check. Please note that we cannot accept starter checks or third-party checks.
If you are investing in more than one fund, make your check payable to "Deutsche
Asset Management Funds" and include your account number, the names and numbers
of the funds you have selected, and the dollar amount or percentage you would
like invested in each fund.
Selling: Send a signed letter to the Service Center with your name, your fund
number and account number, the fund's name, and either the number of shares you
wish to sell or the dollar
<PAGE>
amount you wish to receive. You must leave at least $50,000 worth of shares in
your account to keep it open. Unless exchanging into another Deutsche Asset
Management Fund, you must submit a written authorization to sell shares in a
retirement account.
WIRE:
Buying: You may buy shares by wire only if your account is authorized to do so.
Please note that you or your service agent must call the Service Center at
1-800-730-1313 to notify us in advance of a wire transfer purchase. Inform the
Service Center representative of the amount of your purchase and receive a trade
confirmation number. Instruct your bank to send payment by wire using the wire
instructions noted below. All wires must be received by 4:00 p.m. Eastern time
the next business day.
Routing No: 021001033
Attn: Deutsche Asset Management Funds
DDA No: 00226296
FBO: (Account name)
(Account number)
Credit: [Fund name and Fund number]
Refer to your account statement for the account name, number and fund number.
Selling: You may sell shares by wire only if your account is authorized to do
so. For your protection, you may not change the destination bank account over
the phone. To sell by wire, contact your service agent or the Service Center at
1-800-730-1313. Inform the Service Center representative of the amount of your
redemption and receive a trade confirmation number. The minimum redemption by
wire is $1,000. We must receive your order by 4:00 p.m. Eastern time to wire
your account the next business day.
Short-Term Redemption Fee
High Yield Bond may charge a 2.00% short-term redemption fee of the value of the
shares redeemed (either by selling or exchanging into another fund) within 180
days (approximately six months) of purchase. This fee will compensate High Yield
Bond for expenses directly related to redemption of Fund shares (such as
brokerage costs, charges for credit lines, and other redemption related costs).
The fee will also discourage short-term investments in the High Yield Bond which
will facilitate more efficient portfolio management.
The short-term redemption fee is withheld from redemption proceeds. This fee is
not a deferred sales charge and is not a commission. The fee is paid to the High
Yield Bond. The short-term redemption fee does not apply to:
. shares purchased before December 1, 2000;
<PAGE>
. exchanges into another class of shares of High Yield Bond;
. shares acquired through reinvestment of dividends and other distributions;
. shares of High Yield Bond in an account which is closed by us because it
fails to meet minimum balance requirements; and
. shares held by 401(k) plans, similar individual account plans or profit
sharing plans.
The fee may not be applied to shares held through certain omnibus accounts. With
regard to these accounts, High Yield Bond reserves the right, in its sole
discretion to impose (or not to impose) the short-term redemption fee in the
future. High Yield Bond will make this determination after considering, among
other things, the Fund's costs of processing redemptions from these accounts.
You should consult with your retirement plan administrator or omnibus account
representative to determine whether the redemption fee is applicable to your
shares.
High Yield Bond will use the "first-in, first out" method to determine your
holding period. Under this method, the date of redemption or exchange will be
compared with the earliest purchase date of shares held in your account. If your
holding period is less than 180 days, the short-term redemption fee will be
assessed on the net asset value of those shares calculated at the time the
redemption is affected.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents as
well as directly from us. The same terms and conditions apply.
Specifically, once you place your order with a service agent, it is
considered received by the Service Center. It is then your service agent's
responsibility to transmit the order to the Service Center by the next
business day. You should contact your service agent if you have a dispute
as to when your order was placed with the fund.
. You may place orders to buy and sell over the phone by calling your service
agent or the Service Center at 1-800-730-1313. If you pay for shares by
check and the check fails to clear, or if you order shares by phone and
fail to pay for them by 4:00 p.m. Eastern time the next business day, we
have the right to cancel your order, hold you liable or charge you or your
account for any losses or fees a fund or its agents have incurred. To sell
shares, you must state whether you would like to receive the proceeds by
wire or check.
. After we or your service agent receives your order, we buy or sell your
shares at the next price calculated on a day the New York Stock Exchange is
open for business.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. Please note that we
cannot accept starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of a
fund recently purchased by check may be delayed for up to 15 calendar days
while we wait for your check to clear.
<PAGE>
. We process all sales orders free of charge.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
always within seven days.
. We reserve the right to close your account on 30 days' notice if it fails
to meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a
signature guarantee. Please contact your service agent or the Service
Center for more information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. During periods of heavy market activity, you may have trouble reaching the
Service Center by telephone. If this occurs, you should make your request
by mail.
. We reserve the right to reject purchases of Fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short-term or for the purpose of
profiting from day to day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the Fund's custodian are closed.
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on
your fund's overall performance, its current holdings and its investing
strategies.
Exchange Privilege. You can exchange all or part of your shares for shares of
another Deutsche Asset Management mutual fund up to four times a year (from the
date of the first exchange). When you exchange shares, you are selling shares in
one fund to purchase shares in another. Before buying shares through an
exchange, you should be sure to get a copy of that fund's prospectus and read it
carefully. You may only order exchanges over the phone if your account is
authorized to do so.
Please note the following conditions:
<PAGE>
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from the
Service Center or your service agent.
<PAGE>
This page intentionally left blank
<PAGE>
Additional information about each Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about each Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Service Center
P.O. Box 219210
Kansas City, MO 64121
or call our toll-free number: 1-800-730-1313
You can find reports and other information about each Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about each Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
Fixed Income - Institutional Class
Short-Term Fixed Income - Institutional Class
Municipal Bond - Institutional Class
Short-Term Municipal Bond - Institutional Class
High Yield Bond - Institutional Class
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
Two Portland Square CUSIP #61735K836
Portland, ME 04101 61735K828
61735K810
61735K794
61735K646
INSTFIPRO (2/01)
<PAGE>
811-8006
<PAGE>
Deutsche Asset Management
Mutual Fund
Prospectus
February 28, 2001
Institutional Class
Global Fixed Income
International Fixed Income
Each formerly a Morgan Grenfell Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.]
A Member of the Deutsche Bank Group [/]
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Table of Contents
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<TABLE>
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Global Fixed Income.........................................................
International Fixed Income..................................................
Information Concerning the Funds............................................
Management of the Funds.....................................................
Calculating a Fund's Share Price............................................
Performance Information.....................................................
Dividends and Distributions.................................................
Tax Considerations..........................................................
Buying and Selling Fund Shares..............................................
</TABLE>
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Overview
of Global Fixed Income
Goal: The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities of issuers located throughout the world.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing in investment
grade fixed income securities of issuers located throughout the world. In
managing the Fund, we use a combination of "top-down" and "bottom-up" analyses
to select securities. This approach places equal emphasis on country selection,
currency management, yield curve analysis and individual security selection. The
portfolio management team intends to maintain a portfolio duration of (+/-)1 1/2
years around the Fund"s benchmark index.
The Fund may invest more than 50% of its total assets in securities denominated
in any of the following currencies: the euro, the Yen, the Sterling or the US
Dollar. The Fund may also invest up to 15% of its total assets in fixed income
securities rated below investment grade, including the securities of issuers in
emerging securities markets.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward.
Global Fixed Income--Institutional Class
Overview of Global Fixed Income
Goal........................................................................
Core Strategy...............................................................
Investment Policies and Strategies..........................................
Principal Risks of Investing in the Fund....................................
Who Should Consider Investing in the Fund...................................
Total Returns, After Fees and Expenses......................................
Annual Fund Operating Expenses..............................................
A Detailed Look at Global Fixed Income
<PAGE>
Objective..................................................................
Strategy...................................................................
Principal Investments......................................................
Investment Process.........................................................
Other Investments..........................................................
Risks......................................................................
Portfolio Managers.........................................................
Financial Highlights.......................................................
<PAGE>
Overview of Global Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the value
of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation to
pay principal and/or interest. This risk is greater for the Fund since it
generally holds more below investment grade securities (junk bonds) than a
typical fixed income fund;
. interest rates could increase, causing the prices of fixed income securities
to decline, thereby reducing the value of the Fund's portfolio;
. the fixed income market could perform poorly in one or more of the countries
in which the Fund has invested; or
. since the Fund is non-diversified and may invest a greater percentage of its
assets in a particular issuer, region or currency, the Fund may be more
susceptible to developments affecting any single issuer, region or currency
of portfolio securities;
. the Fund's investments may also be subject to prepayment, extension and
maturity risk; or
. securities that we have selected could perform poorly.
Beyond the risks common to all investing, an investment in the Fund could also
lose money or underperform alternative investments as a result of risks in the
foreign countries and, to a more limited extent, the emerging markets, in which
the Fund invests. For example:
. adverse political, economic or social developments could undermine the value
of the Fund's investments or prevent the Fund from realizing their full
value;
. since the Fund may focus its investments in Europe and in Japan, the United
States and the United Kingdom, it could be particularly susceptible to the
effects of political and economic developments in this region and these
countries;
. foreign accounting and financial reporting standards differ from those in the
U.S. and could convey incomplete information when compared to information
typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Global Fixed Income Institutional Class requires a minimum investment of
$250,000. You should consider investing in Global Fixed Income if you are
seeking to earn current income higher than money market mutual funds over most
time periods. There is, of course, no guarantee that the Fund will realize its
goal. Moreover, you should be willing to accept the risks of investing in the
fixed income market, including credit risk and interest rate risk.
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You should not consider investing in Global Fixed Income if you are pursuing a
short-term financial goal or if you cannot tolerate fluctuations in the value of
your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
international fixed income investments. Diversifying your investments may lower
the volatility of your overall investment portfolio.
An investment in Global Fixed Income is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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Overview of Global Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Institutional Class shares
for each full calendar year since the Fund began selling Institutional Class
shares to the public on January 4, 1994 (its inception date). The table compares
the average annual return of the Fund's Institutional Class shares with that of
the Lehman Brothers Global Aggregate Bond Index (LB GABI) over the last one
year, five years and since inception. The Fund has changed its benchmark from
the Salomon World Government Bond Index to the Lehman Brothers Global Aggregate
Bond Index (LB GABI). This index more closely reflects the market sectors in
which the Fund invests. The index is a passive measure of global investment
grade bond market returns. It does not factor in the costs of buying, selling
and holding fixed income securities--costs which are reflected in the Fund's
results.
The Lehman Brothers Global Aggregate Bond Index (LB GABI) provides a broad-based
measure of the international investment-grade bond market. The index combines
the U.S. Aggregate Index with dollar-denominated versions of the Pan-European
Index and the Japanese, Canadian, Australian, and New Zealand components of the
Global Treasury Index.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1995 17.76%
1996 5.23%
1997 1.04%
1998 13.30%
1999 - 5.90%
2000
Since inception, the Fund's highest return in any calendar quarter was ____%
(_____ quarter ____) and its lowest quarterly return was (____%) (____ quarter
_____). Past performance offers no indication of how the Fund will perform in
the futue.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 Year 5 Year (1/4/94)/1/
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Global Fixed
Income--
Institutional
Class
Lehman Brothers
Global Aggregate
Bond Index
(LB GABI)/2/
Salomon World
Government Bond
Index
/1/ The Salomon World Government Bond Index average is calculated from December
31, 1993.
/2/ Effective January 1, 2001, the Fund changed its benchmark from Salomon
World Government Bond Index to Lehman Brothers Global Aggregate Bond Index (LB
GABI).
<PAGE>
Overview of Global Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses that you may pay if you buy and hold Institutional Class shares of
Global Fixed Income.
Expense Example. The example on this page illustrates the expenses you will
incur on a $10,000 investment in Institutional Class shares of the Fund. It
assumes that the Fund earned an annual return of 5% over the periods shown, that
the Fund's operating expenses remained the same and you sold your shares at the
end of the period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual investment return and costs may be higher or lower.
/1/The investment adviser and the administrator have contractually agreed, for
the 16-month period from the Fund's fiscal year end of October 31, 2000, to
waive their fees or reimburse expenses so that total expenses will not exceed
0.60%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management 0.50%
Distribution and
Service (12b-1) Fees N0NE
Other Expenses ____%
Total Annual Fund
Operating Expense ____%
Less: Fee Waivers or
Expense Reimbursements (___%)/1/
Net Expenses 0.60%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
$ 61 $ 360 $ 680 $ 1,588
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A detailed look
at Global Fixed Income
OBJECTIVE
The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income. While we seek
total return, we cannot offer any assurance of achieving this objective. The
Fund's objective is not a fundamental policy. We must notify shareholders before
we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we use a combination of "top-down" and "bottom-up"
analyses to select securities. This approach places equal emphasis on country
selection, currency management, yield curve analysis and individual security
selection. The portfolio management team analyzes macro-economic factors such as
inflation, interest rates, monetary and fiscal policies, taxation and political
climate. Fundamental analysis enables the team to focus on individual security
selection.
The currency portion of the Fund's position in fixed income securities is
generally designed to enhance returns during periods of relative U.S. dollar
weakness and to protect returns during periods of relative U.S. dollar strength.
The team may take a position in a country's currency, without owning securities
within the market.
Portfolio Duration. The portfolio management team intends to maintain a
portfolio duration of (+/-)1 1/2 years around the Fund's benchmark index.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade fixed income securities of
issuers located throughout the world. The Fund's fixed income securities include
government securities, corporate fixed income securities, bonds, notes
(including structured notes), mortgage-related securities, asset-backed
securities, convertible securities, preferred stocks, taxable and tax-exempt
municipal securities, securities of supranational organizations and other
obligations to repay borrowed money within a certain time with or without
interest. The Fund invests primarily in investment grade securities that, at the
time of purchase, are either rated in one of the three highest categories by a
major independent rating agency, or in unrated securities that the Investment
Adviser considers of comparable quality. The Fund may also invest in investment
grade fixed income securities rated in the fourth highest category. In the event
that a security is downgraded, we will determine whether to hold or sell such
security, provided that the Fund will not hold more than 15% of its total assets
in securities that are rated below investment grade.
Duration measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates.
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Investment grade fixed income securities are rated by a national ratings
organization within one of the top four categories, or if unrated, judged by the
adviser to be of comparable credit quality.
The Fund may invest more than 50% of its total assets in securities denominated
in any of the following currencies: the euro, the Yen, the Sterling or the US
Dollar. The Fund may also invest a portion of its assets in countries based in
the emerging markets of Latin America, the Middle East, Europe, Asia and Africa
if the Investment Adviser believes that their return potential more than
compensates for the extra risks associated with these markets.
INVESTMENT PROCESS
In selecting securities for the Fund, the portfolio management team considers
macro-economic factors such as:
. inflation,
. interest rates,
. monetary and fiscal policies,
. taxation and
. political climate.
We seek to identify those securities that will offer, in our opinion, the
greatest potential capital appreciation on a three month outlook.
In selecting non-government securities for the Fund, company research lies at
the heart of our investment process. In selecting individual non-governmental
securities for investment, we:
. Assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. Determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. Use credit analysis to determine the issuer's ability to fulfill its
contracts; and
. Subordinate sector weightings to individual bonds that may add above-market
value.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward. Because the
Fund does not typically hold a security to maturity, the Fund may experience a
high portfolio turnover rate.
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period. Like
most global fixed income funds, the
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Fund's management approach, which may include short-term trading, could cause
the Fund's portfolio turnover rate to be above average. High turnover can
increase the Fund's transaction costs, thereby lowering its returns or
increasing your tax liability.
12
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A Detailed Look at Global Fixed Income
OTHER INVESTMENTS
The Fund may also invest up to 15% of its total assets in fixed income
securities rated below investment grade (junk bonds), including the securities
of issuers in emerging securities markets.
The Fund may also invest up to 35% of its total assets in domestic and foreign
cash equivalents.
We may also use as secondary investments various instruments commonly known as
"derivatives" to control volatility and achieve desired currency weightings in a
cost-effective manner. We may use derivatives to increase or decrease the Fund's
exposure to a securities market or index. In particular, the Fund may use
forward currency transactions and currency options. We may use derivatives in
circumstances when we believe they offer an economical means of gaining exposure
to a particular securities market or index. We may also invest in derivatives to
attempt to reduce the Fund's exposure or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
market events. We could place up to 100% of the Fund's assets in U.S. or foreign
government money market investments, or other short-term bonds that offer
comparable safety, if the situation warranted. To the extent that we might adopt
such a position, and over the course of its duration, the Fund may not meet its
goal of total return.
RISKS
Below we have set forth some of the prominent risks associated with fixed income
and global investing, along with those of investing in genera1. Although we
attempt both to assess the likelihood that these risks may actually occur and to
limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
CALLOUT: Forward currency transactions involve the purchase or sale of a foreign
currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or, where possible, to add to investment
returns.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to
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make timely payments on the interest and principal on the bonds they have
issued. Fixed income securities rated in the fourth highest category have
speculative characteristics. These securities and below investment grade
securities (junk bonds) involve a greater risk of loss than higher quality
securities and are more sensitive to changes in the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. It may also create a capital gains tax liability because bond issuers
usually pay a premium for the right to pay off bonds early.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Foreign Market Risk. From time to time, foreign capital markets have exhibited
more volatility than those in the United States. Trading securities on some
foreign exchanges is inherently more difficult than trading in the United States
for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of
profits to investor's abroad, and extended diplomatic disputes to include
trade and financial relations, and imposed high taxes on corporate profits.
While these political risks have not occurred recently in the major
countries in which the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Securities that trade infrequently or in low volumes can be
more difficult or more costly to buy, or to sell, than more liquid or
active securities. This liquidity risk is a factor of the trading volume of
a particular security, as well as the size and liquidity of the entire
local market. On the whole, foreign exchanges are smaller and less liquid
than the U.S. market. Relatively small transactions in some instances can
have a disproportionately large effect on the price and supply of shares.
In certain situations, it may become virtually impossible to sell a
security in an orderly fashion at a price that approaches our estimate of
its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
. Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that
changes in foreign exchange rates will affect the U.S. dollar value of
foreign investments or the U.S. dollar amount of income or gain received on
these investments. Additionally, a change in economic policy may cause a
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<PAGE>
greater fluctuation in a country's currency than in bonds denominated in
that currency. We seek to minimize this risk by actively managing the
currency exposure of the Fund, which entails hedging from time to time.
Region Focus Risk. Focusing on a single country or region involves increased
currency, political, regulatory and other risks. To the extent the Fund
concentrates its investments in Europe and in Japan, the United States or the
United Kingdom, market swings in such a targeted country or region will be
likely to have a greater effect on Fund performance than they would in a more
geographically diversified fixed income fund.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Security Selection Risk. A risk that pervades all investing is the risk that the
securities in the Fund's portfolio will decline in value. The Fund may
underperform relative to its stated benchmark, due to our securities choices and
choices in asset allocation.
Non-diversification Risk. The Fund is non-diversified. Compared with other
funds, the Fund may invest a greater percentage of its assets in a particular
issuer. This will cause the Fund to be more susceptible to developments
affecting any single issuer of portfolio securities.
Secondary Risks
Emerging Markets Risk. To the extent that the Fund invests in emerging markets
to enhance overall returns, it may face higher political, information and market
risks. In addition, profound social change and business practices that depart
from developed countries' economies norms have hindered the orderly growth of
emerging economies and their markets in the past. High levels of debt have
tended to make emerging economies heavily reliant on foreign capital and
vulnerable to capital flight. For all these reasons, the Fund carefully limits
and balances its commitment to these markets.
Currency management is used in an attempt to offset investment risks ("hedging")
and to add to investment returns. Currency management activities include the use
of forward contracts and may include the use of other instruments. There is no
guarantee that these currency management activities will be employed or that
they work, and their use could cause lower returns or even losses to the Fund.
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their fair value in the judgement of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell them. If we value
these securities too highly when you buy shares of the Fund, you may end up
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paying too much for your Fund shares. If we underestimate their price when you
sell, you may not receive the full market value for your Fund shares.
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
. changes in the relative strength and value of the U.S. dollar or other
major currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Derivative Risk. Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market
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A Detailed Look at Global Fixed Income
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
Annette Fraser, Director, Deutsche Asset Management and Lead Manager of the
Fund.
. Joined the investment adviser in 1990.
. Specializes in core European markets.
. 10 years of experience as an investment professional.
Ian Clarke, Director, Deutsche Asset Management and Co-Manager of the Fund.
. Joined the investment adviser in 1999.
. Chief investment officer, fixed income in the UK.
. Specializes in global fixed income asset allocation strategy.
. 15 years of investment industry experience.
. Previously, Executive Director, Morgan Stanley Dean Witter from 1992 to 1999
and prior to that, Director, United Bank of Kuwait plc from 1983 to 1992.
David Baldt, CFA, Managing Director, Deutsche Asset Management. and Co-Manager
of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group
Gary Bartlett, CFA, Director, Deutsche Asset Management and Co-Manager of the
Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management and Co-Manager of
the Fund
. Joined the investment adviser in 1997.
. Previously, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government instruments.
<PAGE>
Warren Davis, Director, Deutsche Asset Management and Co-Manager of the Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Daniel Taylor, CFA, Vice President, Deutsche Asset Management. and Co-Manager of
the Fund
. Joined the investment adviser in 1998.
. Previously, fixed income portfolio manager, asset backed securities analyst
and senior credit analyst, CoreStates Investment Advisors, from 1992 to 1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
A Detailed Look at Global Fixed Income
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five years. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the Fund's annual
report. The annual report is available free of charge by calling the Service
Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Year Ended October 31,
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
For a Share Outstanding
Throughout each Period:
Net Asset Value, Beginning of
Period
Income from Investment Operations
Net Investment Income
Net Realized and Unrealized Gains
(Losses)
Total from Investment Operations
Distributions to Shareholders
from Net Investment Income
Net Realized Gains
Total Distributions
Net Asset Value, End of Period
Total Investment Return
Supplemental Data and Ratios:
Net Assets, End of Period (000s
omitted)
Ratios to Average Net Assets:
Net Investment Income
</TABLE>
<PAGE>
Expenses
Decrease Reflected in Above
Expense Ratio Due to
Absorption of Expenses by
DAMIS/1/
Portfolio Turnover Rate
/1/DAMIS --Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser.
<PAGE>
Overview
of International Fixed Income
Goal: The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities of issuers located in countries other than the United States.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing in investment
grade fixed income securities of issuers located throughout the world. In
managing the Fund, we use a combination of "top-down" and "bottom-up" analyses
to select securities. This approach places equal emphasis on country selection,
currency management, yield curve analysis and individual security selection. The
portfolio management team intends to maintain a portfolio duration of (+/-)1 1/2
years around the Fund's benchmark index.
The Fund may invest more than 25% of its total assets in securities denominated
in the euro, as well as in the securities of issuers located in each of Japan,
the United States and the United Kingdom.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward.
INTERNATIONAL FIXED INCOME--Institutional Class
Overview of International Fixed Income
Goal.........................................
Core Strategy................................
Investment Policies and Strategies...........
Principal Risks of Investing in the Fund.....
Who Should Consider Investing in the Fund....
Total Returns, After Fees and Expenses.......
Annual Fund Operating Expenses...............
A Detailed Look at International Fixed Income
Objective....................................
Strategy.....................................
Principal Investments........................
Investment Process...........................
Other Investments............................
<PAGE>
Risks........................................
Managers.....................................
Financial Highlights.........................
<PAGE>
Overview of International Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio;
or
. since the Fund is non-diversified and may invest a greater percentage of
its assets in a particular issuer, the Fund may be more susceptible to
developments affecting any single issuer of portfolio securities.
Beyond the risks common to all investing, an investment in the Fund could also
lose money or underperform alternative investments as a result of risks in the
foreign countries in which the Fund invests. For example:
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing their
full value;
. since the Fund may focus its investments in Europe and in Japan and the
United Kingdom, it could be particularly susceptible to the effects of
political and economic developments in this region and these countries;
. foreign accounting and financial reporting standards differ from those in
the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
International Fixed Income Institutional Class requires a minimum investment of
$250,000. You should consider investing in International Fixed Income if you are
seeking to earn current income higher than money market mutual funds over most
time periods. There is, of course, no guarantee that the Fund will realize its
goal. Moreover, you should be willing to accept the risks of investing in the
fixed income market, including credit risk and interest rate risk.
You should not consider investing in International Fixed Income if you are
pursuing a short-term financial goal or if you cannot tolerate fluctuations in
the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
international fixed income
<PAGE>
investments. Diversifying your investments may lower the volatility of your
overall investment portfolio.
An investment in International Fixed Income is not a deposit of any bank, and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
Overview of International Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
The bar chart shows the actual return of the Fund's Institutional Class shares
for each full calendar year since the Fund began selling Institutional Class
shares to the public on March 15, 1994 (its inception date). The table compares
the average annual return of the Fund's Institutional Class shares with that of
the Salomon World Government Bond (non-U.S.) Index over the last one year, five
years and since inception. The index is a passive measure of government bond
market returns. It does not factor in the costs of buying, selling and holding
fixed income securities--costs which are reflected in the Fund's results.
The Salomon World Government Bond (non-U.S.) Index is an unmanaged foreign
securities index representing major government bond markets other than the
United States and is a widely accepted benchmark of international government
fixed income performance. It is a model, not an actual portfolio.
YEAR-BY-YEAR RETURNS
Institutional Class
(each full calendar year since inception)
1995 17.81%
1996 5.54%
1997 -3.31%
1998 17.44%
1999 -6.99%
2000
Since inception, the Fund's highest return in any calendar quarter was ____%
(____ quarter ____) and its lowest quarterly return was (___%)(____ quarter
____). Past performance offers no indication of how the Fund will perform in the
future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
Since
Inception
1 Year 5 Year (3/15/94)/1/
International
Fixed Income--
<PAGE>
Institutional
Class
Salomon World
Government Bond
(non-U.S.) Index
/1/The Salomon World Government Bond (non-U.S.) Index average is calculated from
March 31, 1994.
<PAGE>
Overview of International Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses you may pay if you buy and hold Institutional Class shares of
International Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Institutional Class shares of the Fund. It assumes that
the Fund earned an annual return of 5% over the periods shown, the Fund's
operating expenses remained the same and you sold your shares at the end of the
period.
You may use this hypothetical example to compare the Fund's expense ratio with
other funds. Your actual investment returns and costs may be higher or lower.
/1/Restated to reflect estimated Other Expenses for the current fiscal year. For
the fiscal year ended October 31, 2000, Other Expenses and Total Annual Fund
Operating Expenses were _____% and ____%, respectively, of the average daily net
assets of the Institutional Class shares.
/2/The investment adviser and the administrator have contractually agreed, for
the 16-month period from the Fund's fiscal year end of October 31, 2000, to
waive their fees or reimburse expenses so that total expenses will not exceed
0.55%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees
Distribution and
Service (12b-1) Fees
Other Expenses /1/
Total Annual Fund
Operating Expenses /1/
Less: Fee Waivers or
Expense Reimbursements /2/
Net Expenses 0.55%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
<PAGE>
A detailed look
at International Fixed Income
OBJECTIVE
The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income. While we seek
total return, we cannot offer any assurance of achieving this objective. The
Fund's objective is not a fundamental policy. We must notify shareholders before
we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we use a combination of "top-down" and "bottom-up"
analyses to select securities. This approach places equal emphasis on country
selection, currency management, yield curve analysis and individual security
selection. The portfolio management team analyzes macro-economic factors such as
inflation, interest rates, monetary and fiscal policies, taxation and political
climate as well as fundamental analysis of individual companies.
The currency portion of the Fund's position in fixed income securities is
generally designed to enhance returns during periods of relative U.S. dollar
weakness and to protect returns during periods of relative U.S. dollar strength.
The team may take a position in a country's currency, without owning securities
within the market.
Portfolio Duration. The portfolio management team intends to maintain a
portfolio duration of (+/-)1 1/2 years around the Fund's benchmark index.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade fixed income securities of
issuers located throughout the world other than the United States. The Fund's
fixed income securities include government securities, corporate fixed income
securities and obligations to repay borrowed money within a certain time with or
without interest. The Fund invests primarily in investment grade securities
that, at the time of purchase, are either rated in one of the three highest
categories by a major independent rating agency, or in unrated securities that
the Investment Adviser considers of comparable quality. The Fund may also invest
in investment grade fixed income securities rated in the fourth highest
category. In the event that a security is downgraded, we will determine whether
to hold or sell such security, provided that the Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade.
Duration measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates.
Investment grade fixed income securities are rated by a national ratings
organization within one of the top four categories, or if unrated, judged by the
adviser to be of comparable credit quality.
<PAGE>
The Fund may invest more than 25% of its total assets in securities denominated
in the euro, as well as in the securities of issuers located in each of Japan
and the United Kingdom.
INVESTMENT PROCESS
In selecting securities for the Fund, the portfolio management team considers
macro-economic factors such as:
. inflation,
. interest rates,
. monetary and fiscal policies,
. taxation and
. political climate.
We seek to identify those securities that will offer, in our opinion, the
greatest potential capital appreciation on a three month outlook.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward. Because the
Fund does not typically hold a security to maturity, the Fund may experience a
high portfolio turnover rate.
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period. Like
most global fixed income funds, the Fund's management approach, which may
include short-term trading, could cause the Fund's portfolio turnover rate to be
above average. High turnover can increase the Fund's transaction costs, thereby
lowering its returns. It may also increase your tax liability.
<PAGE>
A Detailed Look at International Fixed Income
OTHER INVESTMENTS
The Fund may invest up to 35% of its total assets in domestic and foreign cash
equivalents and in U.S. fixed income securities.
We may also use as secondary investments, various instruments commonly known as
"derivatives" to control volatility and achieve desired currency weightings in a
cost-effective manner. We may also use derivatives to increase or decrease the
Fund's exposure to a securities market or index. In particular, the Fund may use
forward currency transactions and currency options. We may use derivatives in
circumstances when we believe they offer an economical means of gaining exposure
to a particular securities market or index. We may also invest in derivatives to
attempt to reduce the Fund's exposure or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
market events. We could place up to 100% of the Fund's assets in U.S. or foreign
government money market investments, or other short-term bonds that offer
comparable safety, if the situation warranted. To the extent we might adopt such
a position and over the course of its duration, the Fund may not meet its goal
of total return.
RISKS
Below we have set forth some of the prominent risks associated with fixed income
investing and investing outside the United States, as well as investing in
general. Although we attempt both to assess the likelihood that these risks may
actually occur and to limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed-income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Forward currency transactions involve the purchase or sale of a foreign currency
at an exchange rate established currently, but with payment and delivery at a
specified future time.
<PAGE>
Forward currency transactions may be used in an attempt to hedge against losses,
or, where possible, to add to investment returns.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. It may also create a capital gains tax liability because bond issuers
usually pay a premium for the right to pay off bonds early.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security.
Foreign Market Risk. From time to time, foreign capital markets have exhibited
more volatility than those in the United States. Trading securities on some
foreign exchanges is inherently more difficult than trading in the United States
for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits. While these
political risks have not occurred recently in the major countries in which
the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Securities that trade infrequently or in low volumes can be
more difficult or more costly to buy, or to sell, than more liquid or active
securities. This liquidity risk is a factor of the trading volume of a
particular security, as well as the size and liquidity of the entire local
market. On the whole, foreign exchanges are smaller and less liquid than the
U.S. market. Relatively small transactions in some instances can have a
disproportionately large effect on the price and supply of shares. In certain
situations, it may become virtually impossible to sell a security in an
orderly fashion at a price that approaches our estimate of its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
A Detailed Look at International Fixed Income
. Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that changes
in foreign exchange rates will affect the U.S. dollar value of foreign
investments or the U.S. dollar amount of income or gain received on these
investments. Additionally, a change in economic policy may cause a greater
fluctuation in a country's currency than in bonds denominated in that
currency. Additionally, a change in economic policy may cause a greater
fluctuation in a country's currency than in bonds denominated in that
currency.
<PAGE>
We seek to minimize this risk by actively managing the currency exposure of
the Fund, which entails hedging from time to time.
Region Focus Risk. Focusing on a single country or region involves increased
currency, political, regulatory and other risks. To the extent the Fund
concentrates its investments in Europe and in Japan or the United Kingdom,
market swings in such a targeted country or region will be likely to have a
greater effect on Fund performance than they would in a more geographically
diversified fixed income fund.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Non-diversification Risk. The Fund is non-diversified. Compared with other
funds, the Fund may invest a greater percentage of its assets in a particular
issuer. This will cause the Fund to be more susceptible to developments
affecting any single issuer of portfolio securities.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Currency management is used in an attempt to offset investment risks ("hedging")
and to add to investment returns. Currency management activities include the use
of forward contracts and may include the use of other instruments. There is no
guarantee that these currency management activities will be employed or that
they work, and their use could cause lower returns or even losses to the Fund.
Secondary Risks
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their fair value in the judgement of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell them. If we value
these securities too highly when you buy shares of the Fund, you may end up
paying too much for your Fund shares. If we underestimate their price when you
sell, you may not receive the full market value for your Fund shares.
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
<PAGE>
. changes in the relative strength and value of the U.S. dollar or other major
currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Derivative Risk. Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it is
acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
<PAGE>
A Detailed Look at International Fixed Income
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
Annette Fraser, Director, Deutsche Asset Management Investment Services Limited
and Lead Manager of the Fund.
. Joined the investment adviser in 1990.
. Specializes in core European markets.
. 10 years of experience as an investment professional.
Ian Clarke, Director, Deutsche Asset Management Investment Services Limited and
Co-Manager of the Fund.
. Joined the investment adviser in 1999.
. Chief investment officer, fixed income in the UK.
. Specializes in global fixed income asset allocation strategy.
. 15 years of investment industry experience.
. Previously, Executive Director, Morgan Stanley Dean Witter from 1992 to 1999
and prior to that, Director, United Bank of Kuwait plc from 1983 to 1992.
<PAGE>
A Detailed Look at International Fixed Income
The table below helps you understand the financial performance of the
Institutional Class shares of the Fund for the past five years. Certain
information selected reflects financial results for a single Institutional Class
share of the Fund. The total returns in the table represent the rate of return
that an investor would have earned on an investment in the Institutional Class
shares of the Fund, assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Fund's financial statements, is included in the Fund's annual
report. The annual report is available free of charge by calling the Service
Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
For the Year Ended October 31,
2000 1999 1998 1997 1996 1995
For a Share Outstanding Throughout
each Period:
Net Asset Value, Beginning of
Period
Income From Investment Operations
Net Investment Income
Net Realized and Unrealized Gains
(Losses)
Total from Investment Operations
Distributions to Shareholders from
Net Investment Income
Net Realized Gains
Total Distributions
Net Asset Value, End of Period
Total Investment Return
Supplemental Data and Ratios:
Net Assets, End of Period (000s
omitted)
Ratios to Average Net Assets:
<PAGE>
Net Investment Income
Expenses
Decrease Reflected in Above Expense
Ratio Due to Absorption of Expenses
by DAMIS/1/
Portfolio Turnover Rate
/1/DAMIS--Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser.
<PAGE>
Information
concerning all Funds
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, D.B. Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, Deutsche
Asset Management Investment Services Limited (DAMIS) with headquarters at One
Appold Street, London, England, acts as investment adviser for each Fund. DAMIS
makes each Fund's investment decisions. It buys and sells securities for each
Fund and conducts the research that leads to the purchase and sale decisions.
DAMIS is also responsible for selecting brokers and dealers and for negotiating
brokerage commissions and dealer charges.
The investment adviser received the following fees as a percentage of the
average daily net assets for each Fund for its services in the last fiscal year.
The investment adviser reimbursed a portion of its fee during the period.
Percentage of
Average Daily
Fund Net Assets
------------------------------------------------
Global Fixed Income Fund
International Fixed Income Fund
DAMIS provides a full range of institutional investment advisory services to
institutional clients, and as of October 31, 2000, managed approximately $____
billion in assets.
DAMIS is an indirect wholly-owned subsidiary of Deutsche Bank A.G. Deutsche Bank
A.G. is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual fund, retail and
commercial banking, investment banking and insurance.
Organizational Structure. Each Fund is a series of an open-end investment
company organized as a Delaware business trust.
<PAGE>
Other Services. Deutsche Asset Management, Inc. ("DeAMIS"), an affiliate of
DeAMIS, provides administrative services for the Funds. In addition, DeAMIS--or
your broker or financial advisor--performs the functions necessary to establish
and maintain your account. In addition to setting up the account and processing
your purchase and sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Brokers and financial advisors may charge additional fees to investors for those
services not otherwise included in the brokers or financial advisors servicing
agreement, such as cash management or special trust or retirement-investment
reporting.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of each Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities a Fund
owns may ultimately affect the price of Fund shares when the New York Stock
Exchange re-opens.
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.
Information Concerning all Funds
<PAGE>
Each Fund uses a forward pricing procedure. Therefore, the price at which you
buy or sell shares is based on the next calculation of the NAV after the order
is received by the Fund or your broker, provided that your broker or financial
advisor forwards your order to the Fund in a timely manner.
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
If a Fund earns net investment income or recognizes net capital gains, its
policy is to distribute to shareholders substantially all of that taxable income
and capital gain on an annual basis. We automatically reinvest all dividends and
any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by the Fund. Your taxes will vary from year to year,
based on the amount of capital gains distributions and dividends paid out by the
Fund. You owe the taxes whether you receive cash or choose to have distributions
and dividends reinvested. Distributions and dividends usually have the following
tax character:
TRANSACTION TAX STATUS
Income dividends Ordinary income
Short-term capital Ordinary income
gains distributions
Long-term capital Long-term capital gains
gains distributions
<PAGE>
Every year the Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
TRANSACTION TAX STATUS
Your sale of Generally, long-term
shares owned capital gains or losses
more than one year
Your sale of Generally, short-term
shares owned capital gains or losses:
for one year or losses subject to
less special rules.
The tax considerations for tax deferred accounts or non-taxable entities will be
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of Deutsche Asset Management
By phone 1-800-730-1313
By mail Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By overnight mail Service Center
210 West 10th Street, 8th floor
Kansas City, MO 64105-1716
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week.
Minimum Account Investments
To open an account $250,000
To add to an account $25,000
Minimum account balance $50,000
<PAGE>
Institutional class shares of the Fund may be purchased without regard to the
investment minimums by: 1) employees of Deutsche Bank A.G., any of its
affiliates or subsidiaries, their spouses and minor children, and 2) Directors
or Trustees of any investment company advised or administered by Deutsche Bank
A.G. or any of its affiliates or subsidiaries, their spouses and minor children.
The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the minimum account investments.
Information Concerning all Funds
How to Open Your Fund Account
By mail Complete and sign the account application that accompanies this
prospectus. (You may obtain additional applications by calling the
Service Center.) Mail the completed application along with a check
payable to the Deutsche Asset Management Fund you have selected to
the Service Center. The addresses are shown under "Contacting the
Deutsche Asset Management Funds."
By wire Call the Service Center to set up a wire account.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
Two Ways to Buy and Sell Shares in Your Account
MAIL:
Buying: Send your check, payable to the Deutsche Asset Management Fund you have
selected to the Service Center. The addresses are shown above under "Contacting
the Mutual Fund Service Center of Deutsche Asset Management." Be sure to include
the fund number and your account number (see your account statement) on your
check. Please note that we cannot accept starter checks or third-party checks.
If you are investing in more than one fund, make your check payable to "Deutsche
Asset Management Funds" and include your account number, the names and numbers
of the funds you have selected, and the dollar amount or percentage you would
like invested in each fund.
Selling: Send a signed letter to the Service Center with your name, your fund
number and account number, the fund's name, and either the number of shares you
wish to sell or the dollar amount you wish to receive. You must leave at least
$50,000 worth of shares in your account to keep it open. Unless exchanging into
another Deutsche Asset Management Fund, you must submit a written authorization
to sell shares in a retirement account.
WIRE:
<PAGE>
Buying: You may buy shares by wire only if your account is authorized to do so.
Please note that you or your service agent must call the Service Center at 1-
800-730-1313 to notify us in advance of a wire transfer purchase. Inform the
Service Center representative of the amount of your purchase and receive a trade
confirmation number. Instruct your bank to send payment by wire using the wire
instructions noted below. All wires must be received by 4:00 p.m. Eastern time
the next business day.
Routing No: 021001033
Attn: Deutsche Asset Management/ Mutual Funds
DDA No: 00226296
FBO: (Account name)
(Account number)
Credit: [Fund name and Fund number]
Refer to your account statement for the account name, number and fund number.
Selling: You may sell shares by wire only if your account is authorized to do
so. For your protection, you may not change the destination bank account over
the phone. To sell by wire, contact your service agent or the Service Center at
1-800 730-1313. Inform the Service Center representative of the amount of your
redemption and receive a trade confirmation number. The minimum redemption by
wire is $1,000. We must receive your order by 4:00 p.m. Eastern time to wire
your account the next business day.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents as
well as directly from us. The same terms and conditions apply. Specifically,
once you place your order with a service agent, it is considered received by
the Service Center. It is then your service agent's responsibility to
transmit the order to the Service Center by the next business day. You should
contact your service agent if you have a dispute as to when your order was
placed with the fund.
. You may place orders to buy and sell over the phone by calling your service
agent or the Service Center at 1-800-730-1313. If you pay for shares by check
and the check fails to clear, or if you order shares by phone and fail to pay
for them by 4:00 p.m. Eastern time the next business day, we have the right
to cancel your order, hold you liable or charge you or your account for any
losses or fees a fund or its agents have incurred. To sell shares, you must
state whether you would like to receive the proceeds by wire or check.
. After we or your service agent receives your order, we buy or sell your
shares at the next price calculated on a day the New York Stock Exchange is
open for business.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. Please note that we
cannot accept starter checks or third-party checks.
<PAGE>
Information Concerning all Funds
. The payment of redemption proceeds (including exchanges) for shares of a fund
recently purchased by check may be delayed for up to 15 calendar days while
we wait for your check to clear.
. We process all sales orders free of charge.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but
always within seven days.
. We reserve the right to close your account on 30 days' notice if it fails to
meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a signature
guarantee. Please contact your service agent or the Service Center for more
information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. During periods of heavy market activity, you may have trouble reaching the
Service Center by telephone. If this occurs, you should make your request by
mail.
. We reserve the right to reject purchases of Fund shares (including exchanges)
for any reason. We will reject purchases if we conclude that the purchaser
may be investing only for the short-term or for the purpose of profiting from
day to day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including exchanges)
or to suspend or postpone redemptions at times when both the New York Stock
Exchange and the Fund's custodian are closed
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on your
fund's overall performance, its current holdings and its investing
strategies.
<PAGE>
. Exchange Privilege. You can exchange all or part of your shares for shares in
another Deutsche Asset Management mutual fund up to four times a year (from
the date of the first exchange). When you exchange shares, you are selling
shares in one fund to purchase shares in another. Before buying shares
through an exchange, you should obtain a copy of that fund's prospectus and
read it carefully. You may order exchanges over the phone only if your
account is authorized to do so.
Please note the following conditions:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from the Service
Center or your service agent.
<PAGE>
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<PAGE>
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<PAGE>
Additional information about each Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about each Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Service Center
P.O. Box 219210
Kansas City, MO 64121
or call our toll-free number: 1-800-730-1313
You can find reports and other information about each Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about each Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
Core Global Fixed Income--Institutional Class
Global Fixed Income
International Fixed Income
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
Two Portland Square CUSIP #61735K620
Portland, ME 04101 61735K208
61735K505
INSINTLFIPRO
811-8006
<PAGE>
Mutual Fund
Prospectus
February 28, 2001
Investment Class
Global Fixed Income
International Fixed Income
Each formerly a Morgan Grenfell Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the Deutsche Bank Group [/]
<PAGE>
Table of Contents
-----------------
Global Fixed Income.............................................
International Fixed Income......................................
Information Concerning the Funds................................
Management of the Fund..........................................
Calculating the Fund's Share Price..............................
Performance Information.........................................
Dividends and Distributions.....................................
Tax Considerations..............................................
Buying and Selling Fund Shares..................................
<PAGE>
Overview
of Global Fixed Income
Goal: The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities of issuers located throughout the world.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing in investment
grade fixed income securities of issuers located throughout the world. In
managing the Fund, we use a combination of "top-down" and "bottom-up" analyses
to select securities. This approach places equal emphasis on country selection,
currency management, yield curve analysis and individual security selection. The
portfolio management team intends to maintain a portfolio duration of (+/-) 1
1/2 years around the Fund's benchmark index.
The Fund may invest more than 50% of its total assets in securities denominated
in any of the following currencies: the euro, the Yen, the Sterling or the US
Dollar. The Fund may also invest up to 15% of its total assets in fixed income
securities rated below investment grade, including the securities of issuers in
emerging securities markets.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward.
Global Fixed Income--Investment Class
Overview of Global Fixed Income
Goal................................................................
Core Strategy.......................................................
Investment Policies and Strategies..................................
Principal Risks of Investing in the Fund............................
Who Should Consider Investing in the Fund...........................
Total Returns, After Fees and Expenses..............................
Annual Fund Operating Expenses......................................
A Detailed Look at Global Fixed Income
Objective...........................................................
Strategy............................................................
<PAGE>
Principal Investments...............................................
Investment Process..................................................
Other Investments...................................................
Risks...............................................................
Portfolio Managers..................................................
Financial Highlights................................................
<PAGE>
Overview of Global Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest. This risk is greater for the Fund since
it generally holds more below investment grade securities (junk bonds) than
a typical fixed income fund;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio;
. the fixed income market could perform poorly in one or more of the
countries in which the Fund has invested; or
. since the Fund is non-diversified and may invest a greater percentage of
its assets in a particular issuer, region or currency, the Fund may be more
susceptible to developments affecting any single issuer, region or currency
of portfolio securities;
. the Fund's investments may also be subject to prepayment, extension and
maturity risk; or
. securities that we have selected could perform poorly.
Beyond the risks common to all investing, an investment in the Fund could also
lose money or underperform alternative investments as a result of risks in the
foreign countries and, to a more limited extent, the emerging markets, in which
the Fund invests. For example:
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing their
full value;
. since the Fund may focus its investments in Europe and in Japan, the United
States and the United Kingdom, it could be particularly susceptible to the
effects of political and economic developments in this region and these
countries;
. foreign accounting and financial reporting standards differ from those in
the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in Global Fixed Income if you are seeking to earn
current income higher than money market mutual funds over most time periods.
There is, of course, no guarantee that the Fund will realize its goal. Moreover,
you should be willing to accept the risks of investing in the fixed income
market, including credit risk and interest rate risk.
<PAGE>
You should not consider investing in Global Fixed Income if you are pursuing a
short-term financial goal or if you cannot tolerate fluctuations in the value of
your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
international fixed income investments. Diversifying your investments may lower
the volatility of your overall investment portfolio.
An investment in Global Fixed Income is not a deposit of any bank, and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
<PAGE>
Overview of Global Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
Because Investment Class shares are a newly offered class of shares with no
performance history, the following bar chart and table show the performance
history of the Fund's Institutional Class shares, which have been in existence
since the Fund's inception on January 4, 1994. The table compares the average
annual return of the Fund's Institutional Class shares with that of the Lehman
Brothers Global Aggregate Bond Index (LB GABI) over the last one year, five
years and since inception. The Fund has changed its benchmark from the Salomon
World Government Bond Index to the Lehman Brothers Global Aggregate Bond Index
(LB GABI). This index more closely reflects the market sectors in which the Fund
invests. The index is a passive measure of global investment grade bond market
returns. It does not factor in the costs of buying, selling and holding fixed
income securities costs which are reflected in the Fund"s results.
The Lehman Brothers Global Aggregate Bond Index (LB GABI) provides a broad-based
measure of the international investment-grade bond market. The index combines
the U.S. Aggregate Index with dollar-denominated versions of the Pan-European
Index and the Japanese, Canadian, Australian, and New Zealand components of the
Global Treasury Index.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
1995 17.76%
1996 5.23%
1997 1.04%
1998 13.30%
1999 - 5.90%
2000
Since inception, the Fund's highest return in any calendar quarter was ___%
(____ quarter ____) and its lowest quarterly return was (____%) (____ quarter
_____). Past performance offers no indication of how the Fund will perform in
the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 2000
Since
Inception
1 Year 5 Years (1/4/94)/2/
Global Fixed
<PAGE>
Income--
Institutional
Class
Lehman Brothers
Global Aggregate
Bond Index
(LB GABI)/2/
Salomon World/3/
Government Bond
Index
/1/ Institutional Class performance is presented because Investment Class shares
have no performance history. Investment Class shares will have different
performance. The chart does not reflect service fees at an aggregate annual rate
of up to 0.25% of the Fund's average daily net assets for its Investment Class
shares. Institutional Class shares are offered under a separate prospectus,
which is available upon request.
/2/ Effective January 1, 2001, the Fund will change its benchmark from Salomon
World Government Bond Index to Lehman Brothers Global Aggregate Bond Index (LB
GABI).
/3/ The Salomon World Government Bond Index average is calculated from December
31, 1993.
<PAGE>
Overview of Global Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses that you may pay if you buy and hold Investment Class shares of Global
Fixed Income.
Expense Example. The example on this page illustrates the expenses you will
incur on a $10,000 investment in Investment Class shares of the Fund. It assumes
that the Fund earned an annual return of 5% over the periods shown, that the
Fund's operating expenses remained the same and you sold your shares at the end
of the period.
You may use this hypothetical example to compare the Fund's expense history with
other funds. Your actual investment return and costs may be higher or lower.
/1/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.85%.
/2/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees 0.05%
Distribution and
Service (12b-1) Fees None
Other Expenses 1.14%
Total Fund Operating 1.64%/1/
Expense
Less: Fee Waivers or (0.79%)/2/
Expense Reimbursements
Net Expenses 0.85%
EXPENSE EXAMPLE/2/
1 Year 3 Years 5 Years 10 Years
$ 61 $ 360 $ 680 $ 1,588
<PAGE>
A detailed look
at Global Fixed Income
OBJECTIVE
The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income. While we seek
total return, we cannot offer any assurance of achieving this objective. The
Fund's objective is not a fundamental policy. We must notify shareholders before
we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we use a combination of "top-down" and "bottom-up"
analyses to select securities. This approach places equal emphasis on country
selection, currency management, yield curve analysis and individual security
selection. The portfolio management team analyzes macro-economic factors such as
inflation, interest rates, monetary and fiscal policies, taxation and political
climate. Fundamental analysis enables the team to focus on individual security
selection.
The currency portion of the Fund's position in fixed income securities is
generally designed to enhance returns during periods of relative U.S. dollar
weakness and to protect returns during periods of relative U.S. dollar strength.
The team may take a position in a country's currency, without owning securities
within the market.
Portfolio Duration. The portfolio management team intends to maintain a
portfolio duration of (+/-) 1 1/2 years around the Fund"s benchmark index.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade fixed income securities of
issuers located throughout the world. The Fund's fixed income securities include
government securities, corporate fixed income securities, bonds, notes
(including structured notes), mortgage-related securities, asset-backed
securities, convertible securities, preferred stocks, taxable and tax-exempt
municipal securities, securities of supranational organizations and other
obligations to repay borrowed money within a certain time with or without
interest. The Fund invests primarily in investment grade securities that, at the
time of purchase, are either rated in one of the three highest categories by a
major independent rating agency, or in unrated securities that the Investment
Adviser considers of comparable quality. The Fund may also invest in investment
grade fixed income securities rated in the fourth highest category. In the event
that a security is downgraded, we will determine whether to hold or sell such
security, provided that the Fund will not hold more than 15% of its total assets
in securities that are rated below investment grade.
Duration measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates.
<PAGE>
Investment grade fixed income securities are rated by a national ratings
organization within one of the top four categories, or if unrated, judged by the
adviser to be of comparable credit quality.
The Fund may invest more than 50% of its total assets in securities denominated
in any of the following currencies: the euro, the Yen, the Sterling or the US
Dollar. The Fund may also invest a portion of its assets in countries based in
the emerging markets of Latin America, the Middle East, Europe, Asia and Africa
if the Investment Adviser believes that their return potential more than
compensates for the extra risks associated with these markets.
INVESTMENT PROCESS
In selecting securities for the Fund, the portfolio management team considers
macro-economic factors such as:
. inflation,
. interest rates,
. monetary and fiscal policies,
. taxation and
. political climate.
We seek to identify those securities that will offer, in our opinion, the
greatest potential capital appreciation on a three month outlook.
In selecting non-government securities for the Fund, company research lies at
the heart of our investment process. In selecting individual securities for
investment, we:
. Assign a relative value, based on creditworthiness, cash flow and price, to
each bond;
. Determine the intrinsic value of each issue by examining credit, structure,
option value and liquidity risks. We look to exploit any inefficiencies
between intrinsic value and market trading price;
. Use credit analysis to determine the issuer's ability to fulfill its
contracts; and
. Subordinate sector weightings to individual bonds that may add above-market
value.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward. Because the
Fund does not typically hold a security to maturity, the Fund may experience a
high portfolio turnover rate.
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period. Like
most global fixed income funds, the Fund's management approach, which may
include short-term trading, could cause the Fund's
<PAGE>
portfolio turnover rate to be above average. High turnover can increase the
Fund's transaction costs, thereby lowering its returns or increasing your tax
liability.
<PAGE>
A Detailed Look at Global Fixed Income
OTHER INVESTMENTS
The Fund may also invest up to 15% of its total assets in fixed income
securities rated below investment grade (junk bonds), including the securities
of issuers in emerging securities markets.
The Fund may also invest up to 35% of its total assets in domestic and foreign
cash equivalents.
We may also use as secondary investments various instruments commonly known as
"derivatives" to control volatility and achieve desired currency weightings in a
cost-effective manner. We may use derivatives to increase or decrease the Fund's
exposure to a securities market or index. In particular, the Fund may use
forward currency transactions and currency options. We may use derivatives in
circumstances when we believe they offer an economical means of gaining exposure
to a particular securities market or index. We may also invest in derivatives to
attempt to reduce the Fund's exposure or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
market events. We could place up to 100% of the Fund's assets in U.S. or foreign
government money market investments, or other short-term bonds that offer
comparable safety, if the situation warranted. To the extent that we might adopt
such a position, and over the course of its duration, the Fund may not meet its
goal of total return.
CONTACT: Forward currency transactions involve the purchase or sale of a foreign
currency at an exchange rate established currently, but with payment and
delivery at a specified future time. Forward currency transactions may be used
in an attempt to hedge against losses, or, where possible, to add to investment
returns.
RISKS
Below we have set forth some of the prominent risks associated with fixed income
and global investing, along with those of investing in genera1. Although we
attempt both to assess the likelihood that these risks may actually occur and to
limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
<PAGE>
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities and below investment grade securities (junk bonds) involve a greater
risk of loss than higher quality securities and are more sensitive to changes in
the issuer's capacity to pay.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. It may also create a capital gains tax liability because bond issuers
usually pay a premium for the right to pay off bonds early.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Foreign Market Risk. From time to time, foreign capital markets have exhibited
more volatility than those in the United States. Trading securities on some
foreign exchanges is inherently more difficult than trading in the United States
for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of
profits to investor's abroad, and extended diplomatic disputes to include
trade and financial relations, and imposed high taxes on corporate profits.
While these political risks have not occurred recently in the major
countries in which the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Securities that trade infrequently or in low volumes can be
more difficult or more costly to buy, or to sell, than more liquid or
active securities. This liquidity risk is a factor of the trading volume of
a particular security, as well as the size and liquidity of the entire
local market. On the whole, foreign exchanges are smaller and less liquid
than the U.S. market. Relatively small transactions in some instances can
have a disproportionately large effect on the price and supply of shares.
In certain situations, it may become virtually impossible to sell a
security in an orderly fashion at a price that approaches our estimate of
its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
. Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that
changes in foreign exchange rates will
<PAGE>
affect the U.S. dollar value of foreign investments or the U.S. dollar
amount of income or gain received on these investments. Additionally, a
change in economic policy may cause a greater fluctuation in a country's
currency than in bonds denominated in that currency. We seek to minimize
this risk by actively managing the currency exposure of the Fund, which
entails hedging from time to time.
Region Focus Risk. Focusing on a single country or region involves increased
currency, political, regulatory and other risks. To the extent the Fund
concentrates its investments in Europe and in Japan, the United States or the
United Kingdom, market swings in such a targeted country or region will be
likely to have a greater effect on Fund performance than they would in a more
geographically diversified fixed income fund.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Security Selection Risk. A risk that pervades all investing is the risk that the
securities in the Fund's portfolio will decline in value. The Fund may
underperform relative to its stated benchmark, due to our securities choices and
choices in asset allocation.
Non-diversification Risk. The Fund is non-diversified. Compared with other
funds, the Fund may invest a greater percentage of its assets in a particular
issuer. This will cause the Fund to be more susceptible to developments
affecting any single issuer of portfolio securities.
Secondary Risks
Emerging Markets Risk. To the extent that the Fund invests in emerging markets
to enhance overall returns, it may face higher political, information and market
risks. In addition, profound social change and business practices that depart
from developed countries' economies norms have hindered the orderly growth of
emerging economies and their markets in the past. High levels of debt have
tended to make emerging economies heavily reliant on foreign capital and
vulnerable to capital flight. For all these reasons, the Fund carefully limits
and balances its commitment to these markets.
Currency management is used in an attempt to offset investment risks ("hedging")
and to add to investment returns. Currency management activities include the use
of forward contracts and may include the use of other instruments. There is no
guarantee that these currency management activities will be employed or that
they work, and their use could cause lower returns or even losses to the Fund.
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their fair value in the judgement of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell
<PAGE>
them. If we value these securities too highly when you buy shares of the Fund,
you may end up paying too much for your Fund shares. If we underestimate their
price when you sell, you may not receive the full market value for your Fund
shares.
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
. changes in the relative strength and value of the U.S. dollar or other
major currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Derivative Risk. Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
<PAGE>
A Detailed Look at Global Fixed Income
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
Annette Fraser, Director, Deutsche Asset Management and Lead Manager of the
Fund.
. Joined the investment adviser in 1990.
. Specializes in core European markets.
. 10 years of experience as an investment professional.
Ian Clarke, Director, Deutsche Asset Management and Co-Manager of the Fund.
. Joined the investment adviser in 1999.
. Chief investment officer, fixed income in the UK.
. Specializes in global fixed income asset allocation strategy.
. 15 years of investment industry experience.
. Previously, Executive Director, Morgan Stanley Dean Witter from 1992 to
1999 and prior to that, Director, United Bank of Kuwait plc from 1983 to
1992.
David Baldt, CFA, Managing Director, Deutsche Asset Management and Co-Manager
of the Fund
. Joined the investment adviser in 1989.
. Chief Investment Officer of the Fixed Income Group
Gary Bartlett, CFA, Director, Deutsche Asset Management and Co-Manager of the
Fund
. Joined the investment adviser in 1992.
. Analyst specializing in taxable municipal and government investments.
. MBA, Drexel University.
Thomas Flaherty, Director of Deutsche Asset Management and Co-Manager of the
Fund
. Joined the investment adviser in 1995.
. Analyst specializing in corporate bonds and mortgages.
J. Christopher Gagnier, Director of Deutsche Asset Management and Co-Manager of
the Fund
. Joined the investment adviser in 1997.
. Previously, portfolio manager, Paine Webber, from 1984 to 1997.
. Analyst specializing in asset backed securities and government instruments.
<PAGE>
Warren Davis, Director, Deutsche Asset Management and Co-Manager of the Fund
. Joined the investment adviser in 1995.
. Analyst specializing in mortgage and asset backed securities.
. MBA, Drexel University.
Daniel Taylor, CFA, Vice President, Deutsche Asset Management and Co-Manager of
the Fund
. Joined the investment adviser in 1998.
. Previously, fixed income portfolio manager, asset backed securities analyst
and senior credit analyst, CoreStates Investment Advisors, from 1992 to
1998.
. Analyst specializing in asset backed securities and government securities.
<PAGE>
Institutional Class performance is presented because Investment Class shares are
a newly offered class of shares with no performance history. Investment Class
shares will have different performance. The table below helps you understand the
financial performance of the Institutional Class shares of the Fund for the past
five years. Certain information selected reflects financial results for a single
Institutional Class share of the Fund. The total returns in the table represent
the rate of return that an investor would have earned on an investment in the
Institutional Class shares of the Fund, assuming reinvestment of all dividends
and distributions. This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, is included in
the Fund's annual report. The annual report is available free of charge by
calling the Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
For the Year Ended October 31,
2000 1999 1998 1997 1996 1995
For a Share Outstanding
Throughout each Period:
Net Asset Value, Beginning of
Period
Income from Investment Operations
Net Investment Income
Net Realized and Unrealized Gains
(Losses)
Total from Investment Operations
Distributions to Shareholders From
Net Investment Income
Net Realized Gains
Total Distributions
Net Asset Value, End of Period
Total Investment Return
Supplemental Data and Ratios:
Net Assets, End of Period (000s
omitted)
<PAGE>
Ratios to Average Net Assets:
Net Investment Income
Expenses
Decrease Reflected in Above
Expense Ratio Due to Absorption
of Expenses by DeAMIS/1/
Portfolio Turnover Rate
/1/DeAMIS.--Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser.
<PAGE>
Overview
of International Fixed Income
Goal: The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income.
Core Strategy: The Fund invests primarily in investment grade fixed income
securities of issuers located in countries other than the United States.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its investment objective by investing in investment
grade fixed income securities of issuers located throughout the world. In
managing the Fund, we use a combination of "top-down" and "bottom-up" analyses
to select securities. This approach places equal emphasis on country selection,
currency management, yield curve analysis and individual security selection. The
portfolio management team intends to maintain a portfolio duration of (+/-) 1
1/2 years around the Fund's benchmark index.
The Fund may invest more than 25% of its total assets in securities denominated
in the euro, as well as in the securities of issuers located in each of Japan,
the United States and the United Kingdom.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward.
International Fixed Income--Investment Class
Overview of International Fixed Income
Goal...................................................
Core Strategy..........................................
Investment Policies and Strategies.....................
Principal Risks of Investing in the Fund...............
Who Should Consider Investing in the Fund..............
Total Returns, After Fees and Expenses.................
Annual Fund Operating Expenses.........................
A Detailed Look at International Fixed Income
<PAGE>
Objective....................................
Strategy.....................................
Principal Investments........................
Investment Process...........................
Other Investments............................
Risks........................................
Portfolio Managers...........................
Financial Highlights.........................
<PAGE>
Overview of International Fixed Income
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. an issuer's creditworthiness could decline, which in turn may cause the
value of a security in the Fund's portfolio to decline;
. the issuer of a security owned by the Fund could default on its obligation
to pay principal and/or interest;
. interest rates could increase, causing the prices of fixed income
securities to decline, thereby reducing the value of the Fund's portfolio;
or
. since the Fund is non-diversified and may invest a greater percentage of
its assets in a particular issuer, the Fund may be more susceptible to
developments affecting any single issuer of portfolio securities.
Beyond the risks common to all investing, an investment in the Fund could also
lose money or underperform alternative investments as a result of risks in the
foreign countries in which the Fund invests. For example:
. adverse political, economic or social developments could undermine the
value of the Fund's investments or prevent the Fund from realizing their
full value;
. since the Fund may focus its investments in Europe and in Japan and the
United Kingdom, it could be particularly susceptible to the effects of
political and economic developments in this region and these countries;
. foreign accounting and financial reporting standards differ from those in
the U.S. and could convey incomplete information when compared to
information typically provided by U.S. companies; or
. the currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment
to U.S. investors.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in International Fixed Income if you are seeking
to earn current income higher than money market mutual funds over most time
periods. There is, of course, no guarantee that the Fund will realize its goal.
Moreover, you should be willing to accept the risks of investing in the fixed
income market, including credit risk and interest rate risk.
You should not consider investing in International Fixed Income if you are
pursuing a short-term financial goal or if you cannot tolerate fluctuations in
the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking exposure to
international fixed income
<PAGE>
investments. Diversifying your investments may lower the volatility of your
overall investment portfolio.
An investment in International Fixed Income is not a deposit of any bank, and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
Overview of International Fixed Income
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk of
investing in the Fund by showing changes in the Fund's performance year to year.
Because Investment Class shares are a newly offered class of shares with no
performance history, the following bar chart and table show the performance
history of the Fund's Institutional Class shares, which have been in existence
since the Fund's inception on March 15, 1994. The table compares the average
annual return of the Fund's Institutional Class shares with that of the Salomon
World Government Bond (non-U.S.) Index over the last one year, five years and
since inception. Bear in mind that the Index is a passive measure of government
bond market returns. It does not factor in the costs of buying, selling and
holding fixed income securities--costs which are reflected in the Fund's
results.
The Salomon World Government Bond (non-U.S.) Index is an unmanaged foreign
securities index representing major government bond markets other than the
United States and is a widely accepted benchmark of international government
fixed income performance. It is a model, not an actual portfolio.
YEAR-BY-YEAR RETURNS
Institutional Class/1/
(each full calendar year since inception)
1995 17.81%
1996 5.54%
1997 - 3.31%
1998 17.44%
1999 - 6.99%
2000
Since inception, the Fund's highest return in any calendar quarter was _____%
(____ quarter ____) and its lowest quarterly return was (____%) (_____quarter
____). Past performance offers no indication of how the Fund will perform in the
future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
Since
Inception
1 Year 5 Years (3/15/94)/2/
International
<PAGE>
Fixed Income--
Institutional
Class
Salomon World
Government Bond
(non-U.S.) Index
/1/Institutional Class performance is presented because Investment Class shares,
have no performance history. Investment Class shares will have different
performance. The chart does not reflect service fees at an aggregate annual rate
of up to 0.25% of the Fund's average daily net assets for its Investment Class
shares. Institutional Class shares are offered under a separate prospectus,
which is available upon request.
/2/The Salomon World Government Bond (non-U.S.) Index average is calculated from
March 31, 1994.
<PAGE>
Overview of International Fixed Income
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and estimated
expenses you may pay if you buy and hold Investment Class shares of
International Fixed Income.
Expense Example. The example below illustrates the expenses you will incur on a
$10,000 investment in Investment Class shares of the Fund. It assumes that the
Fund earned an annual return of 5% over the periods shown, the Fund's operating
expenses remained the same and you sold your shares at the end of the period.
You may use this hypothetical example to compare the Fund's expense ratio with
other funds. Your actual investment returns and costs may be higher or lower.
/1/Restated to reflect estimated Other Expenses for the current fiscal year.
Investment Class shares are a new class of shares with no operating history. For
the fiscal year ended October 31, 2000, Other Expenses and Total Annual Fund
Operating Expenses were ____% and ____%, respectively, of the average daily net
assets of the Institutional Class shares. Expenses for the Institutional Class
shares do not reflect service fees paid by the Investment Class shares at an
aggregate annual rate of up to 0.25% of the average daily net assets of that
Class.
/2/The investment adviser and administrator have contractually agreed, for the
16-month period from the Fund's fiscal year end of October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.80%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
Percentage of average
daily net assets
Management Fees
Distribution and
Service (12b-1) Fees
Other Expenses 1
Total Fund Operating
Expenses 1
<PAGE>
Less: Fee Waivers or
Expense Reimbursements /2/
Net Expenses 0.80%
EXPENSE EXAMPLE/3/
1 Year 3 Years 5 Years 10 Years
<PAGE>
A detailed look
at International Fixed Income Fund
OBJECTIVE
The Fund seeks total return, including opportunities for growth of capital
consistent with reasonable investment risk and current income. While we seek
total return, we cannot offer any assurance of achieving this objective. The
Fund's objective is not a fundamental policy. We must notify shareholders before
we change it, but we do not require their approval to do so.
STRATEGY
In managing the Fund, we use a combination of "top-down" and "bottom-up"
analyses to select securities. This approach places equal emphasis on country
selection, currency management, yield curve analysis and individual security
selection. The portfolio management team analyzes macro-economic factors such as
inflation, interest rates, monetary and fiscal policies, taxation and political
climate as well as fundamental analysis of individual companies.
The currency portion of the Fund's position in fixed income securities is
generally designed to enhance returns during periods of relative U.S. dollar
weakness and to protect returns during periods of relative U.S. dollar strength.
The team may take a position in a country's currency, without owning securities
within the market.
Portfolio Duration. The portfolio management team intends to maintain a
portfolio duration of (+/-) 1 1/2 years around the Fund's benchmark index.
PRINCIPAL INVESTMENTS
The Fund invests primarily in investment grade fixed income securities of
issuers located throughout the world other than the United States. The Fund's
fixed income securities include government securities, corporate fixed income
securities and obligations to repay borrowed money within a certain time with or
without interest. The Fund invests primarily in investment grade securities
that, at the time of purchase, are either rated in one of the three highest
categories by a major independent rating agency, or in unrated securities that
the Investment Adviser considers of comparable quality. The Fund may also invest
in investment grade fixed income securities rated in the fourth highest
category. In the event that a security is downgraded, we will determine whether
to hold or sell such security, provided that the Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade.
Duration measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates.
<PAGE>
Investment grade fixed income securities are rated by a national ratings
organization within one of the top four categories, or if unrated, judged by the
adviser to be of comparable credit quality.
The Fund may invest more than 25% of its total assets in securities denominated
in the euro, as well as in the securities of issuers located in each of Japan
and the United Kingdom.
INVESTMENT PROCESS
In selecting securities for the Fund, the portfolio management team considers
macro-economic factors such as:
. inflation,
. interest rates,
. monetary and fiscal policies,
. taxation and
. political climate.
We seek to identify those securities that will offer, in our opinion, the
greatest potential capital appreciation on a three month outlook.
The Fund follows a rigorous sell strategy. We set for each security a target
price objective and for each currency, a target exchange rate objective. These
objectives represent our opinions of the intrinsic value of the security or the
currency. Securities are sold or currencies exchanged when they meet their
target price objectives or when we revise price objectives downward. Because the
Fund does not typically hold a security to maturity, the Fund may experience a
high portfolio turnover rate.
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period. Like
most global fixed income funds, the Fund's management approach, which may
include short-term trading, could cause the Fund's portfolio turnover rate to be
above average. High turnover can increase the Fund's transaction costs, thereby
lowering its returns. It may also increase your tax liability.
<PAGE>
A Detailed Look at International Fixed Income Fund
OTHER INVESTMENTS
The Fund may invest up to 35% of its total assets in domestic and foreign cash
equivalents and in U.S. fixed income securities.
We may also use as secondary investments, various instruments commonly known as
"derivatives" to control volatility and achieve desired currency weightings in a
cost-effective manner. We may also use derivatives to increase or decrease the
Fund's exposure to a securities market or index. In particular, the Fund may use
forward currency transactions and currency options. We may use derivatives in
circumstances when we believe they offer an economical means of gaining exposure
to a particular securities market or index. We may also invest in derivatives to
attempt to reduce the Fund's exposure or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
Temporary Defensive Position. We may from time to time adopt a temporary
defensive position in response to extraordinary adverse political, economic or
market events. We could place up to 100% of the Fund's assets in U.S. or foreign
government money market investments, or other short-term bonds that offer
comparable safety, if the situation warranted. To the extent we might adopt such
a position and over the course of its duration, the Fund may not meet its goal
of total return.
RISKS
Below we have set forth some of the prominent risks associated with fixed income
investing and investing outside the United States, as well as investing in
general. Although we attempt both to assess the likelihood that these risks may
actually occur and to limit them, we cannot guarantee that we will succeed.
Primary Risks
Interest Rate Risk. Interest rate risk is the risk that fixed-income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued. Fixed income securities
rated in the fourth highest category have speculative characteristics. These
securities involve a greater risk of loss than higher quality securities and are
more sensitive to changes in the issuer's capacity to pay.
Forward currency transactions involve the purchase or sale of a foreign currency
at an exchange rate established currently, but with payment and delivery at a
specified future time.
<PAGE>
Forward currency transactions may be used in an attempt to hedge against losses,
or, where possible, to add to investment returns.
Prepayment Risk. As interest rates decline, the issuers of securities held by
the Fund may prepay principal earlier than scheduled, forcing the Fund to
reinvest in lower yielding securities. Thus, prepayment may reduce the Fund's
income. It may also create a capital gains tax liability because bond issuers
usually pay a premium for the right to pay off bonds early.
Extension Risk. As interest rates increase, slower than expected principal
payments may extend the average life of fixed income securities. This will have
the effect of locking in a below-market interest rate, increase the security's
duration and reduce the value of the security.
Foreign Market Risk. From time to time, foreign capital markets have exhibited
more volatility than those in the United States. Trading securities on some
foreign exchanges is inherently more difficult than trading in the United States
for several reasons including:
. Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits. While these
political risks have not occurred recently in the major countries in which
the Fund invests, they may in the future.
. Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States and may present an
incomplete or misleading picture of a foreign company compared to U.S.
standards.
. Liquidity Risk. Securities that trade infrequently or in low volumes can be
more difficult or more costly to buy, or to sell, than more liquid or active
securities. This liquidity risk is a factor of the trading volume of a
particular security, as well as the size and liquidity of the entire local
market. On the whole, foreign exchanges are smaller and less liquid than the
U.S. market. Relatively small transactions in some instances can have a
disproportionately large effect on the price and supply of shares. In certain
situations, it may become virtually impossible to sell a security in an
orderly fashion at a price that approaches our estimate of its value.
. Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S.
A Detailed Look at International Fixed Income Fund
. Currency Risk. The Fund invests in foreign currencies and in securities
denominated in foreign currencies. This creates the possibility that changes
in foreign exchange rates will affect the U.S. dollar value of foreign
investments or the U.S. dollar amount of income or gain received on these
investments. Additionally, a change in economic policy may cause a greater
fluctuation in a country's currency than in bonds denominated in that
currency.
<PAGE>
Additionally, a change in economic policy may cause a greater
fluctuation in a country's currency than in bonds denominated in that
currency. We seek to minimize this risk by actively managing the currency
exposure of the Fund, which entails hedging from time to time.
Region Focus Risk. Focusing on a single country or region involves increased
currency, political, regulatory and other risks. To the extent the Fund
concentrates its investments in Europe and in Japan or the United Kingdom,
market swings in such a targeted country or region will be likely to have a
greater effect on Fund performance than they would in a more geographically
diversified fixed income fund.
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held in the Fund
have experienced a moderate level of short-term price fluctuation.
Non-diversification Risk. The Fund is non-diversified. Compared with other
funds, the Fund may invest a greater percentage of its assets in a particular
issuer. This will cause the Fund to be more susceptible to developments
affecting any single issuer of portfolio securities.
Currency management is used in an attempt to offset investment risks ("hedging")
and to add to investment returns. Currency management activities include the use
of forward contracts and may include the use of other instruments. There is no
guarantee that these currency management activities will be employed or that
they work, and their use could cause lower returns or even losses to the Fund.
Maturity Risk. Prices of fixed income securities with longer effective
maturities are more sensitive to interest rate changes than those with shorter
effective maturities.
Secondary Risks
Pricing Risk. When price quotations for particular securities are not readily
available, we determine their value by the method that most accurately reflects
their fair value in the judgement of the Board of Trustees. This procedure
implies an unavoidable risk that our prices are higher or lower than the prices
that the securities might actually command if we were to sell them. If we value
these securities too highly when you buy shares of the Fund, you may end up
paying too much for your Fund shares. If we underestimate their price when you
sell, you may not receive the full market value for your Fund shares.
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
<PAGE>
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include:
. changes in the relative strength and value of the U.S. dollar or other major
currencies;
. adverse effects on the business or financial condition of European issuers
that the Fund holds in its portfolio; and
. unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Derivative Risk. Risks associated with derivatives include:
. that the derivative is not well correlated with the security for which it is
acting as substitute.
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
<PAGE>
A Detailed Look at International Fixed Income Fund
PORTFOLIO MANAGERS
The following portfolio managers are responsible for the day-to-day management
of the Fund:
Annette Fraser, Director, Deutsche Asset Management Investment Services Limited
and Lead Manager of the Fund.
. Joined the investment adviser in 1990.
. Specializes in core European markets.
. 10 years of experience as an investment professional.
Ian Clarke, Director, Deutsche Asset Management Investment Services Limited and
Co-Manager of the Fund.
. Joined the investment adviser in 1999.
. Chief investment officer, fixed income in the UK.
. Specializes in global fixed income asset allocation strategy.
. 15 years of investment industry experience.
. Previously, Executive Director, Morgan Stanley Dean Witter from 1992 to 1999
and prior to that Director, United Bank of Kuwait plc from 1983 to 1992.
<PAGE>
A Detailed Look at International Fixed Income Fund
Institutional Class performance is presented because Investment Class shares are
a newly offered class of shares with no performance history. Investment Class
shares will have different performance. The table below helps you understand the
financial performance of the Institutional Class shares of the Fund for the past
five years. Certain information selected reflects financial results for a single
Institutional Class share of the Fund. The total returns in the table represent
the rate of return that an investor would have earned on an investment in the
Institutional Class shares of the Fund, assuming reinvestment of all dividends
and distributions. This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, is included in
the Fund's annual report. The annual report is available free of charge by
calling the Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
For the year ended October 31,
2000 1999 1998 1997 1996 1995
For a Share Outstanding Throughout
each Period:
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Realized and Unrealized Gains
(Losses)
Total from Investment Operations
Distributions to Shareholders
Net Investment Income
Net Realized Gains
Total Distributions
Net Asset Value, End of Period
Total Investment Return
Supplemental Data and Ratios:
Net Assets, End of Period (000s
omitted)
Ratios to Average Net Assets:
<PAGE>
Net Investment Income
Expenses
Decrease Reflected in Above Expense
Ratio Due to Absorption of
Expenses by DeAMIS/1/
Portfolio Turnover Rate
/1/DeAMIS-Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser.
<PAGE>
Information
concerning all Funds
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, D.B. Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
Board of Trustees. A Board of Trustees supervises all of the Fund's activities
on behalf of the Fund's shareholders.
Investment Adviser. Under the supervision of the Board of Trustees, Deutsche
Asset Management Investment Services Limited (DeAMIS) with headquarters at One
Appold Street, London, England, acts as investment adviser for each Fund. DeAMIS
makes each Fund's investment decisions. DeAMIS buys and sells securities for
each Fund and conducts the research that leads to the purchase and sale
decisions. DeAMIS is also responsible for selecting brokers and dealers and for
negotiating brokerage commissions and dealer charges.
The investment adviser received the following fees as a percentage of the
average daily net assets for each Fund for its services in the last fiscal year.
The investment adviser reimbursed a portion of its fee during the period.
Percentage of
Average Daily
Fund Net Assets
Global Fixed Income Fund 0.50%
International Fixed Income Fund 0.50%
DeAMIS provides a full range of international investment advisory services to
institutional clients, and as of October 31, 2000, managed approximately
$____billion in assets.
DeAMIS is an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. Deutsche Bank AG is a
major global banking institution that is engaged in a wide range of financial
services, including investment management, mutual fund, retail and commercial
banking, investment banking and insurance.
Organizational Structure. Each Fund is a series of an open-end investment
company organized as a Delaware business trust.
<PAGE>
Other Services. Deutsche Asset Management, Inc. ("DeAMIS"), an affiliate of
DeAMIS, provides administrative services for the Funds. In addition, DeAMIS--or
your broker or financial advisor--performs the functions necessary to establish
and maintain your account. In addition to setting up the account and processing
your purchase and sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Brokers and financial advisors may charge additional fees to investors for those
services not otherwise included in the brokers or financial advisors servicing
agreement, such as cash management or special trust or retirement-investment
reporting.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of each Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market value of the securities it
holds, plus its cash reserves--and dividing the result by the number of shares
of that class outstanding. Prices for securities that trade on foreign exchanges
can change significantly on days when the New York Stock Exchange is closed and
you cannot buy or sell Fund shares. Such price changes in the securities a Fund
owns may ultimately affect the price of Fund shares when the New York Stock
Exchange re-opens.
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the
first Monday in September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day.
Information Concerning all Funds
Each Fund uses a forward pricing procedure. Therefore, the price at which you
buy or sell shares is based on the next calculation of the NAV after the order
is received by the Fund or your
<PAGE>
broker, provided that your broker or financial advisor forwards your order to
the Fund in a timely manner.
We value the securities in a Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their fair value in the judgment of the Board of Trustees.
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
If a Fund earns net investment income or recognizes net capital gains, its
policy is to distribute to shareholders all or substantially all of that income
and capital gain on an annual basis. We automatically reinvest all dividends and
any capital gains, unless you tell us otherwise.
TAX CONSIDERATIONS
A Fund does not ordinarily pay any U.S. federal income tax. If you are a taxable
shareholder, you and other shareholders pay taxes on the income or capital gains
earned and distributed by the Fund. Your taxes will vary from year to year,
based on the amount of capital gains distributions and dividends paid out by the
Fund. You owe the taxes whether you receive cash or choose to have distributions
and dividends reinvested. Distributions and dividends usually have the following
tax character:
TRANSACTION TAX STATUS
Income dividends Ordinary income
Short-term capital Ordinary income
gains distributions
Long-term capital Long-term capital gains
gains distributions
Every year your Fund will send you information on the distributions for the
previous year. In addition, the sale (including a redemption or exchange) of
Fund shares is a taxable transaction for you.
<PAGE>
TRANSACTION TAX STATUS
Your sale of Generally, long-term
shares owned capital gains or losses
more than one year
Your sale of Generally, short-term
shares owned capital gains or losses,
for one year or losses subject to
less special rules.
The tax considerations for tax deferred accounts or non-taxable entities will be
different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about your
investment.
BUYING AND SELLING FUND SHARES
You may only purchase Investment Class shares of a Fund if you have a
shareholder account set up with a service agent such as a financial planner,
investment adviser, broker-dealer or other institution.
Service Plan
Each Fund has adopted a service plan for its Investment Class shares. Under the
plan, each Fund pays service fees at an aggregate annual rate of up to 0.25% of
the Fund's average daily net assets for its Investment Class shares. The fees
are compensation to service agents for providing personal services and/or
account maintenance services to their customers. In the event that your service
plan is terminated, your shares will be converted to Institutional Class shares
of the same Fund.
Minimum Account Investments
A standard account $2,500
A retirement account $ 500
An automatic investment plan account $1,000
Information Concerning all Funds
The Fund and its service agents reserve the right to, from time to time in their
discretion, waive or reduce the investment minimums.
<PAGE>
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents. Once
you place your order with a service agent, it is considered received by the
fund. It is then your service agent's responsibility to transmit the order to
the fund by the next business day. You should contact your service agent if
you have a dispute as to when your order was placed with the fund. Your
service agent may charge a fee for buying and selling shares for you.
. You may place orders to buy and sell over the phone by calling your service
agent. Please contact your service agent for more information.
. After your service agent receives your order, we buy or sell your shares at
the next price calculated on a day the New York Stock Exchange is open for
business.
. The payment of redemption proceeds (including exchanges) for shares of a fund
recently purchased by check may be delayed for up to 15 calendar days while
we wait for your check to clear.
. We process all sales orders free of charge.
. You can exchange all or part of your shares for shares in another Deutsche
Asset Management mutual fund up to four times a year (from the date of the
first exchange). When you exchange shares, you are selling shares in one fund
to purchase shares in another. Before buying shares through an exchange, you
should obtain a copy of that fund's prospectus and read it carefully. You may
order exchanges over the phone only if your account is authorized to do so.
Please note the following conditions:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone, letter or wire, if your account has the
exchange by phone feature.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
. You will receive a written confirmation of each transaction from your service
agent.
. We reserve the right to close your account on 30 days' notice if it fails to
meet minimum balance requirements for any reason other than a change in
market value.
. If you sell shares by mail or wire, you may be required to obtain a signature
guarantee. Please contact your service agent for more information.
<PAGE>
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent for more
information.
. We reserve the right to reject purchases of fund shares (including exchanges)
for any reason. We will reject purchases if we conclude that the purchaser
may be investing only for the short-term or for the purpose of profiting from
day to day fluctuations in the fund's share price.
. We reserve the right to reject purchases of fund shares (including exchanges)
or to suspend or postpone redemptions at times when both the New York Stock
Exchange and the fund's custodian are closed.
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Additional information about each Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about each Fund in the current Statement
of Additional Information, dated February 28, 2001, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference. To receive your free copy of the Statement of
Additional Information, the annual or semi-annual report, or if you have
questions about investing in a Fund, write to us at:
Service Center
P.O. Box 219210
Kansas City, MO 64121
or call our toll-free number: 1-800-730-1313
You can find reports and other information about each Fund on the EDGAR database
on the SEC website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing an electronic
request to [email protected] or by writing to the Public Reference Section of
the SEC, Washington, D.C. 20549-0102. Information about each Fund, including its
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
Core Global Fixed Income--Investment Class
Global Fixed Income
International Fixed Income
Morgan Grenfell Investment Trust
Distributed by:
ICC Distributors, Inc.
Two Portland Square INVINTLFIPRO (2/01)
Portland, ME 04101 801-8006
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
One South Street
Baltimore, Maryland 21202
STATEMENT OF ADDITIONAL INFORMATION
February 28, 2001
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 ("SAI") provides supplementary information pertaining to
the following seven separate investment portfolios of the Trust (the "Funds"):
- International Select Equity Fund, previously Morgan Grenfell
International Select Equity Fund
- European Equity Fund, previously Morgan Grenfell European Equity Growth
Fund
- International Small Cap Equity Fund, previously Morgan Grenfell
International Small Cap Equity Fund
- Emerging Markets Equity Fund, previously Morgan Grenfell Emerging
Markets Equity Fund
- Global Fixed Income Fund, previously Morgan Grenfell Global Fixed Income
Fund
- International Fixed Income Fund, previously Morgan Grenfell
International Fixed Income Fund
- Emerging Markets Debt Fund, previously Morgan Grenfell Emerging Markets
Debt Fund
This Statement of Additional Information is not a prospectus, and should be read
only in conjunction with the Funds' Institutional Class, Investment Class,
Premier Class or Class A, B and C shares Prospectuses dated February 28, 2001
(each, a "Prospectus" and collectively, the "Prospectuses"). The audited
financial statements for each Fund, except for the newly offered European Equity
Class A, B and C shares and International Select Equity Class A, B and C shares,
are included in the Funds' annual reports, which we have filed electronically
with the Securities and Exchange Commission and which are incorporated by
reference into this Statement of Additional Information. A copy of each
Prospectus and Annual Report may be obtained without charge from Deutsche Asset
Management, Inc., the Trust's Administrator, by calling 1-800-730-1313 or
writing to Morgan Grenfell Investment Trust, P.O. Box 219210, Kansas City, MO
64121.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION......................................................................................................... 4
ADDITIONAL INFORMATION ON FUND INVESTMENTS AND STRATEGIES AND RELATED RISKS.......................................... 5
INVESTMENT RESTRICTIONS.............................................................................................. 33
TRUSTEES AND OFFICERS................................................................................................ 36
INVESTMENT ADVISORY AND OTHER SERVICES............................................................................... 39
DISTRIBUTION OF FUND SHARES.......................................................................................... 42
SERVICE PLAN......................................................................................................... 47
PORTFOLIO TRANSACTIONS............................................................................................... 49
PURCHASE AND REDEMPTION OF SHARES.................................................................................... 52
PERFORMANCE INFORMATION.............................................................................................. 54
TAXES................................................................................................................ 58
GENERAL INFORMATION ABOUT THE TRUST.................................................................................. 65
ADDITIONAL INFORMATION............................................................................................... 76
FINANCIAL STATEMENTS................................................................................................. 76
APPENDIX A DESCRIPTION OF RATINGS CATEGORIES OF MOODY'S INVESTORS SERVICE, INC. AND STANDARD & POOR'S RATINGS GROUP.. 78
APPENDIX B QUALITY DISTRIBUTION FOR EMERGING MARKETS DEBT FUND....................................................... 80
</TABLE>
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 Prospectuses in connection with the offering made by the Prospectuses and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Trust or its Distributor. None of the
Prospectuses 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 1-800-730-1313 to
determine availability in your state.
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INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of fifteen separate investment series, including the following seven series (the
"Funds"):
International Select Equity
European Equity
International Small Cap Equity
Emerging Markets Equity
(collectively, the "Equity Funds")
Global Fixed Income
International Fixed Income
Emerging Markets Debt
(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.
Deutsche Asset Management Investment Services Limited (the "Adviser" or
"DeAMIS") serves as investment adviser to all of the Funds other than European
Equity. Deutsche Asset Management, Inc. ("DeAM, Inc.") serves as investment
adviser to European Equity. ICC Distributors, Inc. (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 shares of a Fund without first reading the Prospectus. Capitalized
terms used herein and not otherwise defined have the same meaning ascribed to
them in the Prospectus.
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ADDITIONAL INFORMATION ON FUND INVESTMENTS
AND STRATEGIES AND RELATED RISKS
The following supplements the information contained in the Prospectuses
concerning the investment objectives and policies of each Fund.
International Select Equity
---------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the equity and equity related securities of foreign companies located in the
countries that make up the MSCI EAFER Index. Up to 35% of the Fund's total
assets may include cash equivalents, U.S. investment grade fixed income
securities (rated in one of the four highest categories by one of the major
independent rating agencies, or in unrated securities that the adviser considers
of comparable quality), and equity and equity related securities of U.S.
issuers.
The Fund may use derivatives, including futures, options and foreign currency
transactions to lessen its exposure to changing currency rates, security prices,
interest rates and other factors that affect security values.
European Equity
---------------
Under normal conditions, the Fund invests at least 65% of its assets in the
equity and equity related securities of European companies. Up to 35% of the
Fund's total assets may include cash equivalents, investment grade fixed income
securities (rated in one of the four highest categories by one of the major
independent rating agencies, or in unrated securities that the adviser considers
of comparable quality), and securities of non-European issuers (including the
U.S.). The Fund may invest a significant portion of its assets in a single
country.
International Small Cap Equity
------------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the equity and equity related securities of small capitalization companies
located in countries other than the United States. Small capitalization
companies are: (i) companies ranked according to market capitalization outside
the top 25% of issuers listed on a stock exchange, (ii) companies listed on a
secondary market and (iii) companies whose securities are not listed on a stock
exchange or secondary market. Up to 35% of the Fund's total assets may include
cash equivalents, investment grade fixed income securities (rated in one of the
four highest categories by one of the major independent rating agencies, or in
unrated securities that the adviser considers of comparable quality) and equity
securities of large and medium capitalization companies located outside the U.S.
and companies of any size located in the U.S. The Fund may invest more than 25%
of its assets in securities of small cap companies located in each of Japan and
the United Kingdom. The Fund may use derivatives, including futures, options
and foreign currency transactions to lessen its exposure to changing currency
exchange rates, security prices, interest rates and other factors that affect
security values.
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Emerging Markets Equity
------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the equity and equity related securities of growth-oriented companies located in
emerging securities markets. Up to 35% of the Fund's total assets may include
cash equivalents, investment grade fixed income securities (rated in one of the
four highest categories by one of the major independent rating agencies, or in
unrated securities that the adviser considers of comparable quality) and equity
and equity related securities traded in developed markets (including the U.S.).
The Fund may invest more than 25% of its assets in securities of Mexican,
Brazilian and Taiwanese companies. The Fund may use derivatives, including
futures, options and foreign currency transactions to lessen its exposure to
changing currency exchange rates, security prices, interest rates and other
factors that affect security values.
Global Fixed Income
-------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
investment grade fixed income securities of issuers located throughout the
world. The Fund invests primarily in investment grade fixed income securities
that, at the time of purchase, are either rated in one of the four highest
categories by a major independent rating agency, or in unrated securities that
the adviser considers of comparable quality. The Fund may invest up to 15% of
its total assets in fixed income securities rated below investment grade (high
yield/high risk bonds), including the securities of issuers in emerging
securities markets. Up to 35% of the Fund's total assets may be invested in
domestic and foreign cash equivalents. The Fund may invest more than 50% of its
total assets in securities denominated in the euro, the Yen, Sterling and the
U.S. Dollar. The Fund uses derivatives, including forward contracts and currency
options to control volatility and achieve desired currency weightings in a cost-
effective manner.
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International Fixed Income
--------------------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the fixed income securities of foreign issuers. The Fund invests in investment
grade fixed income securities that, at the time of purchase, are rated in one of
the three highest categories by a major independent rating agency, or in unrated
securities the adviser considers of comparable quality. The Fund may invest up
to 10% of its total assets in investment grade fixed income securities rated in
the fourth highest category. Up to 35% of the Fund's total assets may be
invested in domestic and foreign cash equivalents and in U.S. fixed income
securities. The Fund may invest more than 25% of its total assets in securities
denominated in the euro, as well as in the securities of companies located in
each of Japan and the United Kingdom. The Fund uses derivatives, including
forward contracts and currency options to control volatility and achieve desired
currency weightings in a cost-effective manner.
Emerging Markets Debt
---------------------
Under normal circumstances, the Fund invests at least 65% of its total assets in
the (high yield/high risk) fixed income securities of issuers located in
countries with new or emerging securities markets. These include performing and
non-performing loans, Eurobonds, Brady Bonds (dollar denominated securities used
to refinance foreign government bank loans) and other fixed income securities of
foreign governments and their agencies as well as some corporate debt
instruments. Up to 35% of the Fund's total assets may be invested in domestic
and foreign cash equivalents and U.S. investment grade fixed income securities.
The Fund may invest more than 25% of its total assets in the sovereign debt
securities of companies located in each of Argentina, Brazil and Mexico. Fixed
income securities in which the Fund may invest may be of any credit quality,
including securities not paying interest currently, zero coupon bonds, pay-in-
kind securities and securities in default. The loans and debt instruments in
which the Fund may invest may be denominated in the currency of a developed
countryor in a local currency.
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
-6-
<PAGE>
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.
For purposes of each Fund's investment objective, 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. Each of the
international equity funds intends to invest in at least three foreign
countries. Each of the global equity funds intends to invest in at least three
countries (including the U.S.). Each of the Equity Funds intends to invest at
least 60% of its total assets directly in stocks.
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
-7-
<PAGE>
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 INVESTING. Each Fund may focus its investments in a
particular region and/or in one or more foreign countries. Focusing a Fund's
investments in a particular region or country will subject the Fund, to a
greater extent than if its investments in such region or country were more
limited, to the risks of adverse securities markets, exchange rates and social,
political or economic developments which may occur in that region or country.
CURRENCY MANAGEMENT TECHNIQUES
GENERAL. The performance of foreign currencies relative to that of the U.S.
dollar is an important factor in each Fund's performance and the Adviser may
manage the Fund's exposure to various currencies to seek to take advantage of
the yield, risk and return characteristics that different currencies can
provide. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, a Fund's net asset value to
fluctuate as well, notwithstanding the performance of a Fund's underlying
assets. Currency exchange rates generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected by intervention, or failure to
intervene, by U.S. or foreign governments or central banks, or by currency
controls or political developments in the United States or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to reflect
the Fund's net position after giving effect to currency transactions, is
denominated in the currency of a foreign country, the Fund will be more
susceptible to the risk of adverse economic and political developments in that
country.
In an attempt to manage exposure to currency exchange rate fluctuations, the
Funds may enter into forward foreign currency exchange contracts or currency
swap agreements, purchase securities indexed to foreign currencies, and buy and
sell options and futures contracts relating to foreign currencies and options on
such futures contracts. 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.
-8-
<PAGE>
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
cash, 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. 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 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, but currency dealers
seek to obtain a "spread" or profit on each transaction.
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. When purchase or sold for non-hedging
purposes, forward currency contracts are speculative. 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
-9-
<PAGE>
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 Fixed Income Fund may sell U.S. dollars and buy a 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).
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. 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.
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.
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<PAGE>
A Fund generally will not enter into a forward currency contract with a term of
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.
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.
Forward currency contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward currency contract is
not guaranteed by an exchange or clearinghouse, a default on the contract would
deprive a Fund of unrealized profits, transaction costs or the benefits of a
currency hedge or force a Fund to cover its purchase or sale commitments, if
any, at the current market price. The Funds will not enter into forward
currency contracts unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is determined to be investment grade
by the Adviser. The Adviser will monitor the claims-paying ability of the
counterparty on an ongoing basis.
A Fund'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.
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.
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.
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
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option, the Fund forfeits the right to any appreciation in the underlying
security while the option is outstanding. A put option gives to its purchaser
the right to compel the Fund to purchase an underlying security from the option
holder at the specified price at any time during the option period. In contrast,
a call option written by the Fund gives to its purchaser the right to compel the
Fund to sell an underlying security to the option holder at a specified price at
any time during the option period. Upon the exercise of a put option written by
a Fund, the Fund may suffer a loss equal to the difference between the price at
which the Fund is required to purchase the underlying security and its market
value at the time of the option exercise, less the premium received for writing
the option. All options written by a Fund are covered. In the case of a call
option, this means that the Fund will own the securities subject to the option
or an offsetting call option as long as the written option is outstanding, or
will have the absolute and immediate right to acquire the securities that are
subject to the written option. In the case of a put option, this means that the
Fund will deposit cash or liquid securities or a combination of both in a
segregated account with the custodian with a value at least equal to the
exercise price of the put option.
PURCHASED OPTIONS. The Funds may also purchase put and call options on
securities. The advantage to the purchaser of a call option is that it may
hedge against an increase in the price of securities it ultimately wishes to
buy. The advantage to the purchaser of a put option is that it may hedge
against a decrease in the price of portfolio securities it ultimately wishes to
sell.
Each Fund may enter into closing transactions in order to offset an open option
position prior to exercise or expiration by selling an option it has purchased
or by entering into an offsetting option. If a Fund cannot effect closing
transactions, it may have to retain a security in its portfolio it would
otherwise sell or deliver a security it would otherwise retain. The Funds may
purchase and sell options traded on recognized foreign exchanges. The Funds may
also purchase and sell options traded on U.S. exchanges and, to the extent
permitted by law, options traded over-the-counter.
YIELD CURVE OPTIONS. The Funds may enter into options on the yield spread or
yield differential between two securities. These options are referred to as
yield curve options. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
CURRENCY OPTIONS. The Funds may purchase and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter) to
manage portfolio exposure to changes in U.S. dollar exchange rates. Call
options on foreign currency written by a Fund will be covered, which means that
the Fund will own an equal amount of the underlying foreign currency. With
respect to put options on foreign currency written by a Fund, the Fund will
deposit cash or liquid securities or a combination of both in a segregated
account with the custodian in an amount equal to the amount the Fund would be
required to pay upon exercise of the put option.
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STOCK INDEX OPTIONS The Funds may purchase and write exchange-listed put and
call options on stock indices to hedge against risks of market-wide price
movements. A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. Examples
of well-known foreign stock indices are the Toronto Stock Exchange Composite 100
and the Financial Times Stock Exchange 100. Options on stock indices are
similar to options on securities. However, because options on stock indices do
not involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer in cash a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying index on the exercise
date.
OTHER CONSIDERATIONS. 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 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
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commission paid by the Fund) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of this asset or deferred credit will be marked-to-market on an
ongoing basis to reflect the current value of the option purchased or written.
The current value of a traded option is the last sale price or, in the absence
of a sale, the average of the closing bid and asked prices. If an option
purchased by the Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If the Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds to the Fund from the exercise will be
increased by the net premium originally received, and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on securities,
securities indices and currencies. For example, there are significant
differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded OTC or on a
U.S. or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which the
underlying securities and currencies are traded. To the extent that the options
markets close before the markets for the underlying securities and currencies,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio transactions. The risks
described above also apply to options on futures, which are discussed below.
FUTURES CONTRACTS AND RELATED OPTIONS
To hedge against changes in interest rates or securities prices and for certain
non-hedging purposes, the Funds may purchase and sell various kinds of futures
contracts, and purchase and write call and put options on any of such futures
contracts. The Funds may also enter into closing purchase and sale transactions
with respect to any of such contracts and options. The futures contracts may be
based on various securities (such as U.S. Government securities),
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securities indices, currencies and other financial instruments, currencies and
indices. The Funds will engage in futures and related options transactions only
for bona fide hedging or other non-hedging purposes as defined in regulations
promulgated by the CFTC. All futures contracts entered into by the Funds are
traded on U.S. exchanges or boards of trade that are licensed and regulated by
the CFTC or on foreign exchanges approved by the CFTC.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell a particular financial instrument
for an agreed price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
Futures contracts obligate the long or short holder to take or make delivery of
a specified quantity of a commodity or financial instrument, such as a security
or the cash value of a securities index, during a specified future period at a
specified price.
When interest rates are rising or securities prices are falling, a Fund can seek
to offset a decline in the value of its current portfolio securities through the
sale of futures contracts. When interest rates are falling or securities prices
are rising, a Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the Funds may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures on securities are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price and rate of return on portfolio
securities and securities that a Fund proposes to acquire. The Funds may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates or a
decline in market prices that would adversely affect the value of a Fund's
portfolio securities. 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.
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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, 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.
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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.
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.
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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 Related Options--Other
Considerations", 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.
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.
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
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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.
BRADY BONDS. Each 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.
REGISTERED LOANS. Emerging Markets Debt 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, Emerging Markets Debt 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, Emerging Markets Debt 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, Emerging Markets Debt 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, Emerging Markets Debt 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 Emerging
Markets Debt'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 Emerging Markets Debt.
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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.
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. The
Adviser will 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
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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
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 recognized statistical ratings organizations.
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, 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 Securities and Exchange
Commission (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 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.
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
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direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
ZERO COUPON AND DEFERRED INTEREST BONDS. The Funds may invest in zero coupon
bonds and deferred interest bonds. Zero coupon and deferred interest bonds are
debt obligations which are issued at a significant discount from face value.
The original discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment
of interest, deferred interest bonds generally provide for a period of delay
before the regular payment of interest begins. Although this period of delay is
different for each deferred interest bond, a typical period is approximately
one-third of the bond's term to maturity. Such investments benefit the issuer
by mitigating its initial need for cash to meet debt service, but some also
provide a higher rate of return to attract investors who are willing to defer
receipt of such cash. Zero coupon and deferred interest bonds are more volatile
than instruments that pay interest regularly. The Funds will accrue income on
such investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is generally received
at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Funds' distribution obligations. See "Taxes."
RISK FACTORS OF LOWER QUALITY SECURITIES "JUNK BONDS". The Emerging Markets
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 Investor Service, Inc.
("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."
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
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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 Core Global Fixed Income
Fund, Global Fixed Income Fund, and the Emerging Markets Debt Fund will continue
to hold fixed income securities that have been downgraded below investment grade
if more than 5% of that Fund's net assets would consist of such securities.
CONVERTIBLE SECURITIES AND PREFERRED STOCK
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.
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
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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.
WARRANTS
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 AND ASSET-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.
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.
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
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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
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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.
SMALL CAPITALIZATION COMPANIES
International Small Cap Equity 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.
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
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brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government securities, the holder will resell the stripped
securities in custodial receipt programs with a number of different names,
including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate of
Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
generally held in book-entry form at a Federal Reserve Bank. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government securities for federal tax and securities purposes.
In the case of CATS and TIGRS, the Internal Revenue Service ("IRS") has reached
this conclusion for the purpose of applying the tax diversification requirements
applicable to regulated investment companies such as the Funds. CATS and TIGRS
are not considered U.S. Government securities by the Staff of the Commission,
however. Further, the IRS conclusion is contained only in a general counsel
memorandum, which is an internal document of no precedential value or binding
effect, and a private letter ruling, which also may not be relied upon by the
Funds. The Trust is not aware of any binding legislative, judicial or
administrative authority on this issue.
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).
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
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that the market value of all securities subject to the repurchase agreement
equals or exceeds the repurchase price.
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" PURCHASES AND FORWARD COMMITMENTS (DELAYED DELIVERY)
Each Fund may purchase securities on a when-issued, delayed delivery or forward
commitment basis. 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.
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
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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
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 time deposits maturing in
more than seven days and securities that are not readily marketable.
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. 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
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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.
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.
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
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<PAGE>
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.
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 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."
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.
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
-31-
<PAGE>
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.
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.
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.
-32-
<PAGE>
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.
(7) Invest in commodities or commodity contracts or in puts, calls, or
combinations of both, except interest rate futures contracts, options on
securities, securities indices, currency and other financial instruments,
futures contracts on securities, securities indices, currency and other
financial instruments and options on such futures contracts, forward foreign
currency exchange contracts, forward commitments, securities index put or
call warrants and repurchase agreements entered into in accordance with the
Fund's investment policies.
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<PAGE>
(8) Invest 25% or more of the value of the Fund's total assets in the securities
of one or more issuers conducting their principal business activities in the
same industry or group of industries. This restriction does not apply to
investments in obligations of the U.S. Government or any of its agencies or
instrumentalities.
In addition, each 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.
In addition, European Equity will adhere to the following fundamental investment
restriction:
Notwithstanding the investment policies and restrictions of the Fund, upon
approval of the Board of Trustees, the Fund may invest all or part of its
investable assets in a management investment company with substantially the same
investment objective, policies and restrictions as 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.
(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
-34-
<PAGE>
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.
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>
Name and Address Positions with Trust Principal Occupation During Past
Five Years
----------------------------------------------------------------------------------------------
<S> <C> <C>
Paul K. Freeman (2) Trustee Project Leader,
7257 South Tucson Way International Institute for Applied
Englewood, CO 80112 (age 48) Systems Analysis (since 1998); Chief
Executive Officer, The Eric Group
Inc. (environmental insurance)
(1986-1998).
-------------------------------------------------------------------------------------------------
Graham E. Jones (1)(2) Trustee Senior Vice President, BGK Realty
330 Garfield Street Inc. (since 1995); Financial Manager,
Santa Fe, NM 87501 Practice Management Systems (medical
(age 65) information services) (1988-95);
Director, 11 closed-end funds managed
by Morgan Stanley Asset Management;
Trustee, 9 open-end mutual funds
managed by Weiss, Peck & Greer;
Trustee of 10 open-end mutual funds
managed by Sun Capital Advisers, Inc.
-------------------------------------------------------------------------------------------------
William N. Searcy (1)(2) Trustee Pension & Savings Trust Officer,
2330 Shawnee Mission Pkwy Sprint Corporation
Westwood, KS 66205 (telecommunications) (since 1989);
(age 53) Trustee of six open-end mutual funds
managed by Sun Capital Advisers, Inc.
-------------------------------------------------------------------------------------------------
Hugh G. Lynch Trustee Managing Director, International
767 Fifth Avenue Investments, General Motors
New York, NY 10153 Investment Management Corporation
(age 62) Director, Emerging Markets Growth
Fund managed by Capital
International, Inc. (since December
1994)
-------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address Positions with Trust Principal Occupation During Past
Five Years
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Edward T. Tokar (1) Trustee Vice President-Investments, Honeywell
101 Columbia Road International, Inc. (advanced
Morristown, NJ 07962 technology and manufacturer) (since
(age 52) 1985).
-------------------------------------------------------------------------------------------------
Richard T. Hale President Trustee of each of the other
One South Street investment companies within the
Baltimore, MD 21202 Deutsche Asset Management mutual fund
(age 55) complex;
Managing Director, Deutsche Asset
Management; Managing Director,
Deutsche Banc Alex. Brown
Incorporated;
Director and President, Investment
Company Capital Corp.
-------------------------------------------------------------------------------------------------
David W. Baldt Vice President Managing Director of Active Fixed
150 S. Independence Sq. Income, Deutsche Asset Management,
W. Philadelphia, PA 19106 Inc. (since 1989).
(age 50)
-------------------------------------------------------------------------------------------------
James H. Grifo Vice President Managing Director and Executive Vice
150 S. Independence Sq. President, Deutsche Asset Management,
W. Philadelphia, PA 19106 Inc. (since 1996); Senior Vice
(age 48) President, GT Global Financial
(1990 - 1996).
-------------------------------------------------------------------------------------------------
Charles A. Rizzo Treasurer Director, Deutsche Asset Management
One South Street (since 1998); Senior Manager,
Baltimore, MD 21202 PricewaterhouseCoopers LLP
(age 42) (1993 - 1998)
-------------------------------------------------------------------------------------------------
Amy M. Olmert (3) Asst. Treasurer Director, Deutsche Asset Management
One South Street Americas (since 1999); Vice
Baltimore, MD 21202 President, BT Alex. Brown Inc.
(age 36) (1997-1999); Senior Manager,
PricewaterhouseCoopers LLP
(1988-1997).
-------------------------------------------------------------------------------------------------
Daniel O. Hirsch Secretary Principal, Deutsche Asset Management
One South Street Americas (since 1999); Director,
Baltimore, MD 21202 Deutsche Bank Alex. Brown
(age 45) Incorporated and Investment Company
Capital Corp. (since 1998); Assistant
General Counsel, Office of the
General Counsel, United States
Securities and Exchange Commission
(1993-1998).
-------------------------------------------------------------------------------------------------
</TABLE>
-------------
1 Member of the Trust's Pricing Committee.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
-36-
<PAGE>
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 February 17, 2000, 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, currently Mr. Searcy,
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, 2000:
<TABLE>
<CAPTION>
Pension or Retirement
Benefits Accrued as Part Aggregate Compensation
Name of Trustees of Fund Expenses from the Trust/Complex*
---------------- ---------------- -----------------------
<S> <C> <C>
Paul K. Freeman $0 $17,000
Graham E. Jones $0 $18,000
William N. Searcy $0 $21,000
Hugh G. Lynch/1/ $0 $15,000
Edward T. Tokar $0 $15,000
</TABLE>
------------
* 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.
/1/ Of amounts payable to Mr. Lynch, $3,750, was deferred pursuant to a deferred
compensation plan.
-37-
<PAGE>
On August 17, 2000, the Trustees adopted a Deferred Compensation Plan. Pursuant
to the Deferred Compensation Plan, any Trustee who receives fees from the
Company is permitted to defer up to 100% of his annual compensation. As of the
date of this SAI, the Trust currently has one Trustee in the Deferred
Compensation Plan. The deferring Trustee may select from among the funds in the
Morgan Grenfell Investment Trust in which all or part of their deferral account
shall be deemed to be invested. Distributions from the deferring Trustee's
deferral accounts will be paid in cash, in generally quarterly installments over
a period of ten years.
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
DeAMIS of London, England acts as investment adviser to each Fund, except
European Equity. Deutsche Asset Management, Inc. acts as investment adviser to
European Equity. Effective October 6, 1999, Morgan Grenfell Investment Services
Limited, changed its name to Deutsche Asset Management Investment Services
Limited ("DeAMIS"). On December 2, 1999, a majority of the shareholders of the
European Equity approved a change of the Fund's investment adviser from DeAMIS
to Deutsche Asset Management, Inc. ("DeAM, Inc."). This change became effective
on December 23, 1999. Each of DeAMIS and DeAM, Inc. are referred to individually
as an "Adviser" and collectively as the "Advisers."
DeAMIS acts as investment adviser to each Fund, except European Equity, pursuant
to the terms of two Management Contracts between the Trust and DeAMIS. DeAM,
Inc. acts as investment adviser to European Equity pursuant to the terms of a
Management Contract between the Trust and DeAM, Inc.
Pursuant to the Management Contracts, each Adviser supervises and assists in the
management of the assets of each Fund and furnishes each Fund with research,
statistical, advisory and managerial services. Each Adviser determines on a
continuous basis, the allocation of each Fund's investments among countries.
Each 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 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:
-38-
<PAGE>
<TABLE>
<CAPTION>
Annual Rate
-----------
<S> <C>
International Select Equity 0.70%
European Equity 0.70%
International Small Cap Equity 1.00%
Emerging Markets Equity 1.00%
Global Fixed Income 0.50%
International Fixed Income 0.50%
Emerging Markets Debt 1.00%
</TABLE>
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 and the Administrator have contractually agreed, for the 16-month
period from each Fund's most recently completed fiscal year, to waive their fees
and reimburse expenses so that total expenses will not exceed those set forth in
the Fund's Prospectus. These contractual fee waivers may only be changed by the
Funds' Board of Trustees.
For the fiscal period ended October 31, 1998, International Select Equity,
European Equity, International Small Cap Equity, Emerging Markets Equity, Global
Fixed Income, Core Global Fixed Income, International Fixed Income and Emerging
Markets Debt paid net advisory fees of $0, $215,268, $302,152, $594,742,
$262,756, $13,051, $0, and $1,035,966, respectively. For the fiscal period ended
October 31, 1999, International Select Equity, European Equity, International
Small Cap Equity, Emerging Markets Equity, Global Fixed Income, Core Global
Fixed Income, International Fixed Income and Emerging Markets Debt paid advisory
fees of $138,068, $312,589, $229,335, $1,086,185, $279,603, $166,062, $113,859,
and $2,822,307, respectively. For the fiscal period ended October 31, 2000,
International Select Equity, European Equity, International Small Cap Equity,
Emerging Markets Equity, Global Fixed Income, International Fixed Income and
Emerging Markets Debt paid 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 16, 2000 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
-39-
<PAGE>
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.
DeAMIS is registered with the Commission as an investment adviser and provides a
full range of international investment advisory services to individual and
institutional clients. DeAM, Inc. is registered with the Commission as an
investment adviser and provides a full range of investment advisory services to
institutional clients. DeAM, Inc. serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.
Both DeAMIS and DeAM, Inc. indirect wholly-owned subsidiaries of Deutsche Bank
A.G., an international commercial and investment banking group. As of
December 31, 2000, DeAMIS managed approximately $--- billion in assets for
various individual and institutional accounts, including the following
registered investment company to which it acts as a subadviser: RSI
International Equity Fund. As of December 31, 2000, DeAM, Inc. managed
approximately $--- billion in assets for various individual and institutional
accounts, including the Morgan Grenfell SMALLCap Fund, a registered investment
company for which it acts as an investment adviser.
PORTFOLIO MANAGEMENT
The person or persons who are primarily responsible for the day-to-day
management of each Fund's portfolio and his or her relevant experience is
described in the Fund's Prospectus.
-40-
<PAGE>
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, 1998, the portfolio turnover rates for International Select Equity, European
Equity, International Small Cap Equity, Emerging Markets Equity, Global Fixed
Income, International Fixed Income and Emerging Markets Debt were 127%, 49%,
106%, 85%, 182%, 181% and 638%, respectively. For the fiscal period ended
October 31, 1999, the portfolio turnover rates for International Select Equity,
European Equity, International Small Cap Equity, Emerging Markets Equity, Global
Fixed Income, International Fixed Income and Emerging Markets Debt were 239%,
80%, 86%, 70%, 161%, 140% and 397%, respectively. For the fiscal period ended
October 31, 2000, the portfolio turnover rates for International Select Equity,
European Equity, International Small Cap Equity, Emerging Markets Equity, Global
Fixed Income, International Fixed Income and Emerging Markets Debt were %, %, %,
%, %, % and %, respectively.
THE ADMINISTRATOR
Deutsche Asset Management, Inc. ("DeAM, Inc." or the "Administrator"), One South
Street, Baltimore, Maryland 21202, serves as the Trust's administrator pursuant
to an Administration Agreement dated August 27, 1998. 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
a monthly fee at the following annual rates of the aggregate average daily net
assets of such Fund: 0.25% for the Fixed Income Funds; 0.30% for the Equity
Funds. The Administrator will pay Accounting Agency and Transfer Agency fees
out of the Administration fee. Previously, these fees were charged directly to
the Funds. Net Fund Operating Expenses will remain unchanged since the Adviser
has agreed to reduce its advisory fee and to make arrangements to limit certain
other expenses to the extent necessary to limit Fund Operating Expenses of each
Fund to the specified percentage of each Fund's net assets as demonstrated in
the Expenses Information tables in the prospectus. In its sole discretion the
Adviser may terminate or modify this voluntary agreement at any time.
For the fiscal period ended October 31, 2000, International Select Equity,
European Equity, International Small Cap Equity, Emerging Markets Equity, Global
Fixed Income, International Fixed Income and Emerging Markets Debt paid the
Administrator administration fees of $, $, $, $, $, $and $, respectively. For
the fiscal period ended October 31, 1999, International Select Equity, European
Equity, International Small Cap Equity, Emerging Markets Equity, Global Fixed
Income, International Fixed Income and Emerging Markets Debt paid the
Administrator administration fees of $59,172, $133,967, $68,801, $325,855,
$139,802, $56,929 and $705,369, respectively. Prior to November 1, 1998,
-41-
<PAGE>
SEI Financial Management Company was the Administrator for the funds. For the
fiscal year ended October 31, 1998, International Select Equity, European
Equity, International Small Cap Equity, Emerging Markets Equity, Global Fixed
Income, International Fixed Income and Emerging Markets Debt paid the
Administrator administration fees of $60,177, $60,177, $60,177, $70,980,
$68,216, $60,177, and $116,281 respectively. The administration fees described
in this paragraph were paid pursuant to a fee schedule that is different from
the one currently in effect (described above).
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 the Fund 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 (vi) interest, insurance premiums,
taxes or governmental fees; (vii) clerical expenses of issue, redemption or
repurchase of shares of the Funds; (viii) 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;
(ix) the fees and expenses of Trustees who are not affiliated with the Adviser;
(x) 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; (xi) costs in connection with annual or special
meetings of shareholders, including proxy material preparation printing and
mailing; (xii) charges and expenses of the Trust's auditor; (xiii) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Funds' business; and (xiv) expenses of an
extraordinary and nonrecurring nature.
TRANSFER AGENT
Investment Company Capital Corp. ("ICCC") One South Street, Baltimore, Maryland
21202, has been retained 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 AND DISTRIBUTION OF FUND SHARES
The Trust, on behalf of the Funds, has entered into a distribution agreement
(the "Distribution Agreement") pursuant to which ICC Distributors, Inc., Two
Portland Square, Portland, Maine
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04101 ("ICC Distributors" or the "Distributor"), as agent, serves as principal
underwriter for the continuous offering of shares of each Fund.
ICC Distributors serves as the exclusive distributor of the Fund's Shares
pursuant to a Distribution Agreement which provides for distribution of each
class of shares.
The Distribution Agreement provides that ICC Distributors shall; (i) use
reasonable efforts to sell Shares upon the terms and conditions contained in the
Distribution Agreement and each Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Board of Trustees and the Trust's Declaration of Trust and By-
Laws; and (v) provide the Board of Trustees with a written report of the amounts
expended in connection with the Distribution Agreement. ICC Distributors shall
devote reasonable time and effort to effect sales of Shares but shall not be
obligated to sell any specific number of Shares. The services of ICC
Distributors are not exclusive and ICC Distributors shall not be liable to the
Fund or its shareholders for any error of judgment or mistake of law, for any
losses arising out of any investment, or for any action or inaction of ICC
Distributors in the absence of bad faith, willful misfeasance, or gross
negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of the reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Trust and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Trust's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days' written
notice by the Trust, without penalty, by the vote of a majority of the Trust's
Independent Trustees or by a vote of a majority of the Trust's outstanding
Shares of the related Fund and/or class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each Series or class thereof of the Trust
provided that it is approved at least annually by (i) a vote of a majority of
the outstanding voting securities of the series and its related class of the
Trust or (ii) a vote of a majority of the Trust's Board of Trustees including a
majority of the Independent Trustees and, with respect to each Series and class
of the Trust for which there is a plan of distribution, so long as such plan of
distribution is approved at least annually by the Independent Directors in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement was most recently approved on November 16, 2000 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.
ICC Distributors and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such Participating Dealers
have agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Trust. Any Sub-Distribution Agreement may be terminated in the
same manner as the Distribution Agreement and shall automatically terminate in
the event of an assignment.
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CLASS A, B AND C SHARES ONLY
In addition, with respect to Class A, B and C Shares of European Equity and
International Select Equity, these Classes may enter into Shareholder Servicing
Agreements with certain financial institutions to act as Shareholder Servicing
Agents, pursuant to which ICC Distributors will allocate a portion of its
distribution fee as compensation for such financial institutions' ongoing
shareholder services. European Equity and International Select Equity may also
enter into Shareholder Servicing Agreements pursuant to which the Adviser or its
affiliates will provide compensation out of its own resources for ongoing
shareholder services. Currently, banking laws and regulations do not prohibit a
financial holding company affiliate from acting as distributor or Shareholder
Servicing Agent or in other capacities for investment companies. Should future
legislative, judicial or administrative action prohibit or restrict the
activities of the Shareholder Servicing Agents in connection with the
Shareholder Servicing Agreements, the Trust may be required to alter materially
or discontinue its arrangements with the Shareholder Servicing Agents. Such
financial institutions may impose separate fees in connection with these
services and investors should review the Prospectuses and this Statement of
Additional Information in conjunction with any such institution's fee schedule.
As compensation for providing distribution and shareholder services as described
above for the Class A Shares, ICC Distributors receives an annual fee, paid
monthly, equal to 0.25% of the average daily net assets of the Class A Shares.
With respect to the Class A Shares, ICC Distributors expects to allocate up to
all of its fee to Participating Dealers and Shareholder Servicing Agents. As
compensation for providing distribution and shareholder services as described
above for the Class B and C Shares, ICC Distributors receives an annual fee,
paid monthly, equal to 0.75% of their respective average daily net. In addition,
with respect to the Class B and C Shares, ICC Distributors receives a
shareholder servicing fee at an annual rate of 0.25% of their respective average
daily net assets. (See the Prospectus.)
European Equity and International Select Equity Class A, B and C Shares are
offered for the first time with this Statement of Additional Information and
prospectuses dated February 28, 2001, the Fund's distributor did not receive any
fees for providing distribution and shareholder services to Classes for the last
fiscal year.
Pursuant to Rule 12b-1 under the Investment Company Act, investment companies
may pay distribution expenses, directly or indirectly, only pursuant to a plan
adopted by the investment company's board of directors and approved by their
shareholders. European Equity and International Select Equity have adopted plans
of distribution for their Class A, B and C Shares (the "Plans"). Under each
plan, European Equity and International Select Equity pay a fee to ICC
Distributors for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and ICC Distributors is authorized to make
payments out of its fee to Participating Dealers and Shareholder Servicing
Agents. The Plans will remain in effect from year to year as specifically
approved (a) at least annually by European Equity and International Select
Equity's Board of Trustees and (b) by the affirmative vote of a majority of the
Independent Trustees, by votes cast in person at a meeting called for such
purpose.
In approving the Plans, the Trustees concluded, in the exercise of reasonable
business judgment, that there was a reasonable likelihood that the Plans would
benefit European Equity and
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International Select Equity and their shareholders. The Plans will be renewed
only if the Trustees make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreement without the approval of the shareholders of European
Equity and International Select Equity. The Plans may be terminated at any time
by the vote of a majority of European Equity and International Select Equity 's
Independent Trustees or by a vote of a majority of the European Equity and
International Select Equity 's outstanding Shares (as defined under "Capital
Stock").
During the continuance of the Plans, European Equity and International Select
Equity 's Board of Directors will be provided for their review, at least
quarterly, a written report concerning the payments made under the Plans to ICC
Distributors pursuant to the Distribution Agreement and to Participating Dealers
pursuant to any Sub-Distribution Agreements. Such reports shall be made by the
persons authorized to make such payments. In addition, during the continuance of
the Plans, the selection and nomination of European Equity and International
Select Equity 's Independent Trustees shall be committed to the discretion of
the Independent Trustees then in office.
Under the Plans, amounts allocated to Participating Dealers and Shareholder
Servicing Agents may not exceed amounts payable to ICC Distributors under the
Plans. Payments under the Plans are made as described above regardless of ICC
Distributors' actual cost of providing distribution services and may be used to
pay ICC Distributors' overhead expenses. If the cost of providing distribution
services to the Class A Shares is less than 0.25% of the Class A Shares' average
daily net assets for any period or if the cost of providing distribution
services to the Class B and C Shares is less than 0.75% of the classes'
respective average daily net assets for any period, the unexpended portion of
the distribution fees may be retained by ICC Distributors. The Plans do not
provide for any charges to European Equity and International Select Equity for
excess amounts expended by ICC Distributors and, if any of the Plans is
terminated in accordance with its terms, the obligation of European Equity and
International Select Equity to make payments to ICC Distributors pursuant to
such Plan will cease and the Fund will not be required to make any payments past
the date the Distribution Agreement terminates with respect to that class. In
return for payments received pursuant to the Plans, ICC Distributors pays the
distribution-related expenses of European Equity and International Select Equity
including one or more of the following: advertising expenses; printing and
mailing of prospectuses to other than current shareholders; compensation to
dealers and sales personnel; and interest, carrying or other financing charges.
CUSTODIAN
Brown Brothers Harriman and Co. (the "Custodian"), 40 Water Street, Boston,
Massachusetts 02109, serves as the Trust's custodian pursuant to a Custodian
Agreement. Under the Custodian Agreement, the Custodian (i) maintains a
separate account in the name of each Fund, (ii) holds and transfers portfolio
securities on account of each Fund, (iii) accepts receipts and makes
disbursements of money on behalf of each Fund, (iv) collects and receives all
income and other payments and distributions on account of each Fund's portfolio
securities and (v) makes periodic reports to the Trust's Board of Trustees
concerning each Fund's operations. The Custodian is authorized to select one or
more foreign or domestic banks or companies to serve as sub-custodian on behalf
of the Trust.
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SERVICE PLAN
(INVESTMENT SHARES ONLY)
Each Fund has adopted a service plan (the "Plan") with respect to its Investment
shares which authorizes it to compensate Service Organizations whose customers
invest in Investment 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 Investment shares beneficially owned by their
customers; (ii) establishing and maintaining individual accounts and records
with respect to the Investment 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 Investment shares; (v) receiving and
transmitting funds representing the purchase price or redemption proceeds of
such Investment shares; (vi) participant level recordkeeping, sub-accounting,
and other administrative services in connection with the entry of purchase and
redemption orders for the Plan; (vii) withholding sums required by applicable
authorities; (viii) providing daily violation services to the Plans; (ix)
paying and filing of all withholding and documentation required by appropriate
government agencies; (x) provision of reports, refunds and other documents
required by tax laws and the Employee Retirement Income Security Act of 1974
("ERISA"); and (xi) providing prospectuses, proxy materials and other documents
of the Funds to participants as may be required by law. If your service plan is
terminated, your shares will be converted to Institutional shares of the same
Fund.
As compensation for such services, each Service Organization of the Funds is
entitled to approve a service fee in an amount up to 0.25% (on an annualized
basis) of the average daily net assets of the Fund's Investment 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, Investment 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 periodically a written
report of the services performed by and fees paid to each Service Organization
under the Service Agreements and Service Plans.
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 Investment shares of the Fund. Service Organizations that are subject
to the jurisdiction of the SEC, the Department of Labor or state
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securities commissions are urged to consult their own legal advisers before
investing fiduciary assets in Investment 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,
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taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. Commission rates, being a component
of price, are considered together with such factors. Where transactions are
effected on a foreign securities exchange, the Funds employ brokers, generally
at fixed commission rates. Commissions on transactions on U.S. securities
exchanges are subject to negotiation. Where transactions are effected in the
over-the-counter market or third market, the Funds deal with the primary market
makers unless a more favorable result is obtainable elsewhere. Fixed income
securities purchased or sold on behalf of the Funds normally will be traded in
the over- the-counter market on a net basis (i.e. without a commission) through
dealers acting for their own account and not as brokers or otherwise through
transactions directly with the issuer of the instrument. Some fixed income
securities are purchased and sold on an exchange or in over-the-counter
transactions conducted on an agency basis involving a commission.
Pursuant to the Management Contracts, the Adviser agrees to select broker-
dealers in accordance with guidelines established by the Trust's Board of
Trustees from time to time and in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended. In assessing the terms available
for any transaction, the Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. 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, 2000, the Adviser paid the following brokerage
commissions for research services: for the Emerging Markets Equity $, for the
European Equity $, for the International Select Equity $ and for the
International Small Cap Equity $. During the fiscal period ended October 31,
1999, the Adviser paid the following brokerage commissions for research
services: for the Emerging Markets Equity $26,515, for the
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European Equity $6,289, for the International Select Equity $81,711 and for the
International Small Cap Equity $6,122.
Investment decisions for each Fund and for other investment accounts managed by
the Adviser are made independently of each other in the light of differing
conditions. However, the same investment decision may be made for two or more
of such accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then averaged as to price and allocated as to amount in a
manner deemed equitable to each such account. While in some cases this practice
could have a detrimental effect on the price or value of the security as far as
a Fund is concerned, in other cases it is believed to be beneficial to a Fund.
To the extent permitted by law, the Adviser may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Trustees and subject to the general
policies of the Funds and Section 17(e) of the 1940 Act, the Adviser may place
securities transactions with brokers with whom it is affiliated ("Affiliated
Brokers"). These brokers may include but are not limited to Morgan Grenfell
Asia and Morgan Grenfell Debt Arbitrage Trading.
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
A transaction would not be placed with 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
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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. For the
fiscal period ended October 31, 1998, the European Equity Fund paid brokerage
commissions in the amount of $54 to Deutsche Morgan Grenfell London, an
Affiliated Broker. This represents 1% of the aggregate brokerage commissions
paid by the Fund in the fiscal year and 1% of the aggregate dollar amount of
transactions effected by the Fund in the fiscal year.
For the fiscal period ended October 31, 2000, Emerging Markets Equity, European
Equity, International Select Equity and International Small Cap Equity paid
brokerage commissions in the amount of $___, $___, $___ and $___, respectively,
to Bankers Trust Company, an Affiliated Broker. This represents __%, __%, __%
and __%, respectively, of the aggregate brokerage commissions paid by each Fund
in the fiscal year and ___%, ___%, ___% and ___%, respectively, of the
aggregate dollar amount of transactions effected by each Fund in the fiscal
year.
For the fiscal period ended October 31, 2000, the International Small Cap Equity
paid brokerage commissions in the amount of $___ to Deutsche Morgan Grenfell
London, an Affiliated Broker. This represents ___% of the aggregate brokerage
commissions paid by the Fund in the fiscal year and ___% of the aggregate dollar
amount of transactions effected by the Fund in the fiscal year.
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 year ended October 31, 1998, International Select Equity,
European Equity, International Small Cap Equity, Emerging Markets Equity, Global
Fixed Income, International Fixed Income and Emerging Markets Debt paid
aggregate brokerage commissions of $23,210.14, $99,051.25, $289,584.88,
$623,475.42, $0, $0 and $0, respectively. For the fiscal period ended October
31, 1999, International Select Equity, European Equity, International Small Cap
Equity, Emerging Markets Equity, Global Fixed Income, International Fixed Income
and Emerging Markets Debt paid aggregate brokerage commissions of $252,586,
$176,478, $142,724, $880,921, $0, $0, and $0, respectively. For the fiscal
period ended October 31, 2000, International Select Equity, European Equity,
International Small Cap Equity, Emerging Markets Equity, Global Fixed Income,
International Fixed Income and Emerging Markets Debt paid aggregate brokerage
commissions of $, $, $, $, $, $, and $, respectively.
As of October 31, 2000, none of the Funds held securities of its regular broker-
dealers.
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PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by ICC Distributors, the Distributor. The
Funds offer six classes of shares, Institutional Class, Investment Class and
Premier Class shares, as well as Class A, B and C Shares. General information
on how to buy shares of the Funds is set forth in "Buying and Selling Fund
Shares" in each Fund's Prospectus. The following supplements that information.
Investors may invest in European Equity Premier Class by setting up an account
directly with the Fund's transfer agent or through an omnibus account for which
Deutsche Asset Management has access to underlying shareholder and trading data.
Investors may invest in Institutional shares by establishing a shareholder
account directly with the Fund's transfer agent. Investors may invest in
European Equity and International Equity Class A, B and C Shares by establishing
a shareholder account directly with the Fund's transfer agent or a securities
dealer or any financial institution that is authorized to act as a shareholder
servicing agent. In order to make an initial investment in Investment shares of
a Fund, an investor must establish an account with a service organization.
Additionally, each Fund has authorized brokers to accept purchase and redemption
orders for Institutional Class and Investment Class, as well as Class A, B and C
shares for each Fund. Brokers, including authorized brokers of service
organizations, are, in turn, authorized to designate other intermediaries to
accept purchase and redemption orders on a Fund's behalf. Investors who invest
through brokers, service organizations or their designated intermediaries may be
subject to minimums established by their broker, service organization or
designated intermediary.
Investors who establish shareholder accounts directly with the Fund's transfer
agent should submit purchase and redemption orders as described in the
Prospectus. Investors who invest through authorized brokers, service
organizations or their designated intermediaries should submit purchase and
redemption orders directly to their broker, service organization or designated
intermediary. The broker or intermediary may charge you a transaction fee. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker, service organization or, if applicable, an authorized
designee, accepts the order. Shares of any Fund may be purchased or redeemed on
any Business Day at the net asset value next determined after receipt of the
order, in good order, by the Transfer Agent, the service organization, broker or
designated intermediary. A "Business Day" means any day on which the New York
Stock Exchange (the "NYSE") is open. For an investor who has a shareholder
account with the Trust, the Transfer Agent must receive the investor's purchase
or redemption order before the close of regular trading on the NYSE for the
investor to receive that day's net asset value. For an investor who invests
through a mutual fund marketplace, the investor's authorized broker or
designated intermediary must receive the investor's purchase or redemption order
before the close of regular trading on the NYSE (generally 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, brokers and
designated intermediaries are responsible for promptly forwarding such
investors' purchase or redemption orders to the Transfer Agent.
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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 generally 4:00 p.m. Eastern time, on each day on
which the New York Stock Exchange ("NYSE") is open (a "Business Day"). If the
NYSE closes early, the fund will accelerate the calculation of the NAV and
transaction deadlines to the actual closing time. The NYSE is closed on
Saturdays and Sundays as well as the following holidays: New Year's Day, Martin
Luther King, Jr. 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 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.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, performance information, such as total return and yield for
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 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 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 share over a 30-day period
by the net asset value per 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 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.
YIELD
From time to time, the Fixed Income Funds may advertise their yield. Yield is
calculated separately for Premier shares, Investment shares and Institutional
shares of a Fund. Each type of share is subject to differing yields for the same
period. The yield of a class of shares of a Fund refers to the annualized
income generated by an investment in the class of 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:
a-b
YIELD = 2 [ ( ---- + 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.
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<PAGE>
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, 2000, the yields of Institutional shares
of Emerging Markets Debt, Global Fixed Income and International Fixed Income
were %, %, and % respectively. If the expense limitations for these Funds had
not been in effect during this period, the yields of Institutional shares of
Emerging Markets Debt, Global Fixed Income and International Fixed Income would
have been %, % and %, respectively.
For the 30-day period ended October 31, 2000, the yield of Investment shares of
Emerging Markets Debt was %. If the expense limitation for the Fund had not
been in effect during this period, the yield of Investment shares of Emerging
Markets Debt would have been %.
TOTAL RETURN
Average annual total return is calculated separately for each Share Class of a
Fund. Each class of share is subject to different fees and expenses and,
consequently, may have differing average annual total returns for the same
period. Each Fund that advertises "average annual total return" for a class of
its shares computes such return by determining the average annual compounded
rate of return during specified periods that equates the initial amount invested
to the ending redeemable value of such investment according to the following
formula:
ERV
T = [( --- ) 1/n - 1]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year (or other) periods at
the end of the applicable period (or a fractional portion
thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
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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, 2000, the average annual total return of
Institutional shares of International Select Equity, European Equity,
International Small Cap Equity, Emerging Markets Equity, Global Fixed Income,
International Fixed Income and Emerging Markets Debt were %, %, %, %, %, % and
%, respectively. For the five year period ended October 31, 2000, the average
annual total return of Institutional shares of International Small Cap Equity,
Emerging Markets Equity, Global Fixed Income, International Fixed Income and
Emerging Markets Debt were %, %, %, % and %, respectively. For their respective
periods from commencement of operations to October 31, 2000, the average annual
total returns for Institutional shares of International Select Equity, European
Equity, International Small Cap Equity, Emerging Markets Equity, Global Fixed
Income, International Fixed Income and Emerging Markets Debt were %, %, %, %, %,
% and %, respectively.
For the fiscal year ended October 31, 2000, the average annual total returns for
Investment shares of International Select Equity, European Equity and Emerging
Markets Equity 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 Investment shares of these Funds
for such periods would have been lower than the total return figures shown in
this paragraph.
For the fiscal year ended October 31, 2000, the average annual total returns for
Premier shares of International Select Equity was %. 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 Premier
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<PAGE>
shares of these Funds for such periods would have been lower than the total
return figures shown in this paragraph.
No return information is provided for Class A, B and C Shares because they are
being offered for the first time by this prospectus.
The Funds may from time to time advertise comparative performance as measured by
various publications, including, but not limited to, Barron's, The Wall Street
Journal, Weisenberger Investment Companies Service, Dow Jones Investment
Adviser, Dow Jones Asset Management, 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 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.,
Credit Suisse, First Boston Corporation, Morgan Stanley Dean Witter, Salomon
Smith Barney, 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. 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.
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Qualification of a Fund as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its gross
income for its taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stocks or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, and forward contracts) derived with 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 gain 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
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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 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 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,
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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 (not
in excess of its actual tax liability) even though not actually received by the
shareholders, 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
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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 or otherwise pays foreign taxes that cannot be passed through to
shareholders, it generally 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. Investments in passive foreign investment
companies may also produce ordinary income rather than capital gains, and the
deductibility of losses is subject to certain limitations. 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 discussed in this SAI, 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.
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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, 2000 the following Funds had available realized capital losses to
offset future net capital gains:
<TABLE>
<CAPTION>
Expiration
Date
----
<S> <C> <C>
Emerging Markets Equity Fund $____ 10/31/2006
Global Fixed Income Fund ____ 10/31/2007
Core Global Fixed Income Fund ____ 10/31/2007
International Fixed Income Fund ____ 10/31/2007
Emerging Markets Debt Fund ____ 10/31/2006
</TABLE>
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 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 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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Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions, and certain
prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
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U.S. SHAREHOLDERS--SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of 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. 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.
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
-63-
<PAGE>
is a nonresident alien individual, the shareholder is present in the United
States for 183 days or more during the taxable year and certain other conditions
are met.
Any gain realized by a non-U.S. shareholder upon a sale or redemption of shares
of a Fund will not be subject to U.S. federal income or withholding tax unless
the gain is effectively connected with the shareholder's trade or business in
the United States, or in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the United States for 183 days or more
during the taxable year and certain other conditions are met. Non-U.S.
investors should consult their tax advisers about the applicability of U.S.
federal income or withholding taxes to certain distributions received by them.
STATE AND LOCAL
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Fund may have tax consequences for
shareholders different from those of a direct investment in the Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
GENERAL INFORMATION ABOUT THE TRUST
GENERAL
The Trust is an open-end investment company organized as a Delaware business
trust on September 13, 1993. The Trust commenced operations on January 3, 1994.
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 SAI 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 three classes of shares: Institutional shares, Investment shares and
Premier shares. On February 28, 2000, the European Equity Growth Fund changed
its name to European Equity as indicated on the cover page of this Statement of
Additional Information.
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 Investment shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of Investment 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
-64-
<PAGE>
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.
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.
-65-
<PAGE>
As of December 31, 2000 the following shareholders owned the following
respective percentages of the outstanding Institutional shares of the indicated
Funds:
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
European Equity National Financial Services Corp for the
Exclusive Benefits of our Customers, 200
Liberty St, 1 World Financial Ctr, New York,
NY 100261-1003
----------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Special Custody
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
National Investor Services Corp for the
Exclusive Benefit of our Customers, 55 Water
St, Fl 32, New York, NY 10041-3288
-------------------------------------------------------------------------------------------------
International Select Equity Charles Schwab & Co., Inc. Special Custody
Account Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Bear Sterns Securities Corp. FBO 102-22352-10,
1 Metortech Center North, Brooklyn, NY
11201-3870
-------------------------------------------------------------------------------------------------
Deutsche Bank Securities, Inc. C/F
360-01618-83, 1251 6th Avenue, New York, NY
10020-1104
-------------------------------------------------------------------------------------------------
International Small Cap Public School Employees Retirement System C/O
Equity State Street PA Svcs, 30 N 3rd Street Ste 750,
Harrisburg, PA 17101-1712
-------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Ttee Black &
Decker Defined Benefit Plan, P O Box 1992,
Boston, MA 02105-1992
-------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Cust FBO: Pitney
Bowes Retirement Plan, One Enterprise Drive
W7A, North Quincy, MA 02171-2126
-------------------------------------------------------------------------------------------------
National Financial Services Corp. For
Exclusive Benefit of our Customers, Sal Vella,
200 Liberty Street, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
</TABLE>
-67-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Equity Northern Trust Company TR C/O Motorola
Employees Savings & Profit Sharing Trust
17-72410, P O Box 92956, Chicago, Il 60675-2956
-------------------------------------------------------------------------------------------------
Public Employees' Retirement Association Attn
Daryl Roberts, 1300 Logan Street, Denver, Co.
80203-2386
-------------------------------------------------------------------------------------------------
Global Fixed Income Museum of Fine Arts Boston, Mr. Thomas W.
Fitzgerald, 465 Huntington Avenue, Boston, MA
02115-5597
-------------------------------------------------------------------------------------------------
Boston Latin School Association, 41 West
Street 6th Floor, Boston, MA 02111
-------------------------------------------------------------------------------------------------
National Financial Services Corp for the
Exclusive Benefit of our Customers Attn Mutual
Funds No Loads 5th Floor 200 Liberty Street, 1
World Financial, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
</TABLE>
-68-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
International Fixed Income Chase Manhattan Bank TR FBO Federal-Mogul
Corporation Pension Masters Trust - B, 26555
Northwestern Hwy, Southfield, MI 48034-2146
-------------------------------------------------------------------------------------------------
Northern Trust & Barbara Trueman & Jack
Vanfossen & David Rismiller TR, James R.
Trueman IRREV Subchapter S Trust, 50 S.
Lasalle Street, P O Box 92956, Chicago, Il
60675-2956
-------------------------------------------------------------------------------------------------
Bay City Policeman & Fireman Retirement System
Defined Benefit Pension Plan C/O Kirk
Vandagens, 3331 W. Big Beaver Road, Ste 200,
Troy, MI 48084-2814
-------------------------------------------------------------------------------------------------
</TABLE>
-69-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Debt Bost & Co. A/C NYXF1703602, FBO Bell Atlantic
Master Trust, Mutual Fund Operations, P O Box
3198 Pittsburgh, PA 15230-3198
-------------------------------------------------------------------------------------------------
State of Wisconsin, Investment Board 121 E.
Wilson Street, P O Box 7847, Madison, WI
53707-7847
-------------------------------------------------------------------------------------------------
Los Angeles County Employees Retirement
Association, 300 N Lake Avenue Ste 850,
Pasadena, CA 91101-4109
-------------------------------------------------------------------------------------------------
Los Angeles City Employees Retirement Systems
360 E 2nd Street, 8th Floor, Los Angeles, CA
90012-4238
-------------------------------------------------------------------------------------------------
Public School Employees Retirement System C/O
State Street PA Svcs, 30 N. 3rd Street Ste 750
-------------------------------------------------------------------------------------------------
</TABLE>
-70-
<PAGE>
As of December 31, 2000, the following shareholders owned the following
respective percentages of the outstanding Investment shares of the indicated
Funds:
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
European Equity Charles Schwab & Co. Inc. Special Custody
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
National Financial Services Corp For the
Exclusive Benefit of our Customers Attn Mutual
Funds No Load 5th Floor, 200 Liberty Street, 1
World Financial Center, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
National Investor Services Corp for the
Exclusive Benefit of Customers 55 Water Street
Fl 32, New York, NY 10041-3299
-------------------------------------------------------------------------------------------------
International Select Equity National Financial Services Corp for the
Exclusive Benefit of our Customers, Attn
Mutual Funds-No Loads-5th Floor, 200 Liberty
Street, 1 World Financial CTR New York, NY
-------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Special Custody
Account Mutual Funds Department, 101
Montgomery Street, San Fancisco, CA 94104-4122 %
-------------------------------------------------------------------------------------------------
</TABLE>
-71-
<PAGE>
As of December 31, 2000, the following shareholders owned the following
respective percentages of the outstanding Premier shares of the indicated Funds:
<TABLE>
<CAPTION>
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
International Select Equity Public Employees Retirement Association Attn
Daryl Roberts, 1300 Logan Street, Denver, CO
80203-2386 %
-------------------------------------------------------------------------------------------------
</TABLE>
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
-72-
<PAGE>
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.
ANNUAL AND SEMI-ANNUAL REPORTS
Shareholders of each Fund receive an annual report containing audited financial
statements and semi-annual report. All transactions in all Share Classes 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.
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
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 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, 2000
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, 2000 are incorporated by reference into this Statement of Additional
Information from the Trust's
-73-
<PAGE>
2000 Annual Report to Shareholders for the year ended October 31, 2000 (filed
electronically on December 30, 2000; file no. 811-08006, and will be attached to
each copy of such Statement of Additional Information that is distributed.
-74-
<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.
-75-
<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.
-76-
<PAGE>
APPENDIX B
QUALITY DISTRIBUTION FOR EMERGING MARKETS DEBT FUND
As of the fiscal year ended October 31, 2000, the percentages of Emerging Market
Debt'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*:
<TABLE>
<CAPTION>
Percentage of Total
Standard & Poor's (Moody's) Ratings Investments
----------------------------------- -----------
<S> <C>
Not Rated...................................................... ___%
Rated by Standard & Poor's (Moody's):
BBB-........................................................... ___%
BB+, BB, BB-................................................... ___%
B+............................................................. ___%
CCC............................................................ ___%
Cash........................................................... ___%
</TABLE>
__________
* Based on the average of month-end portfolio holdings during the fiscal year
ended October 31, 1999. Asset composition does not represent actual holdings on
October 31, 2000; nor does it imply that the overall quality of portfolio
holdings is fixed.
-77-
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
One South Street
Baltimore, MD 21202
STATEMENT OF ADDITIONAL INFORMATION
February 28, 2001
Morgan Grenfell Investment Trust (the "Trust") is an open-end, management
investment company consisting of fifteen investment portfolios, each having
separate and distinct investment objectives and policies. This Statement of
Additional Information ("SAI") provides supplementary information pertaining to
the following investment portfolios of the Trust (each, a "Fund"):
- Fixed Income, previously Morgan Grenfell Fixed Income Fund
- Municipal Bond, previously Morgan Grenfell Municipal Bond Fund
- Short-Term Fixed Income, previously Morgan Grenfell Short-Term Fixed
Income Fund
- Short-Term Municipal Bond, previously Morgan Grenfell Short-Term
Municipal Bond Fund
- High Yield Bond, previously Morgan Grenfell High Yield Bond Fund
- Smaller Companies, previously Morgan Grenfell Smaller Companies Fund
- Micro Cap, previously Morgan Grenfell Micro Cap Fund
- Total Return Bond, previously Morgan Grenfell Total Return Bond Fund
This SAI is not a prospectus, and should be read only in conjunction with the
Institutional and Investment Class Prospectuses for each Fund and the Premier
Class Prospectuses for High Yield Bond and Total Return Bond, as amended or
supplemented from time to time (each, a "Prospectus" and collectively, the
"Prospectuses"). The audited financial statements for each Fund are included in
the Funds' annual and reports, which we have filed electronically with the
Securities and Exchange Commission and which are incorporated by reference into
the SAI. A copy of each Prospectus may be obtained without charge from Deutsche
Asset Management, Inc. ("DeAM, Inc."), the Trust's Administrator, by calling
1-800-730-1313 or writing to Morgan Grenfell Investment Trust, P.O. Box 219210,
Kansas City, Missouri 64121.
Page-1-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Introduction................................................................. 3
Additional Information on Fund Investments and Strategies and Related Risks.. 3
Investment Restrictions...................................................... 34
Trustees and Officers........................................................ 39
Investment Advisory and Other Services....................................... 42
Codes of Ethics.............................................................. 44
Service Plan................................................................. 47
Portfolio Transactions....................................................... 49
Purchase and Redemption of Shares............................................ 52
Performance Information...................................................... 54
Taxes........................................................................ 58
General Information About the Trust.......................................... 65
Additional Information....................................................... 70
Financial Statements......................................................... 70
Appendix A - Description of Ratings.......................................... 72
Appendix B - The Adviser's Micro Cap Investment Results...................... 78
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this SAI or in the Prospectuses in connection
with the offering made by each 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. Each 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 1-800-730-1313 to determine availability in your
state.
Page-2-
<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of fifteen separate investment portfolios. This SAI relates to the following
eight separate investment portfolios of the Trust (the "Funds"):
Fixed Income
Short-Term Fixed Income
High Yield Bond
Total Return Bond
(collectively, the "Fixed Income Funds")
Municipal Bond
Short-Term Municipal Bond
(collectively, the "Municipal Funds")
Smaller Companies
Micro Cap
(collectively, the "Equity Funds")
Each Fund, other than Total Return Bond, is classified as "diversified" within
the meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
Deutsche Asset Management, Inc. (the "Adviser" or "DeAM, Inc.") serves as
investment adviser to the Funds. ICC Distributors, Inc. (the "Distributor" or
"ICCD") serves as the Funds' principal underwriter and distributor. DeAM, Inc.
also serves as the Funds' administrator (the "Administrator").
The information contained in this SAI generally supplements the information
contained in the Prospectuses. No investor should invest in shares of a Fund
without first reading the Prospectuses. Capitalized terms used herein and not
otherwise defined have the same meaning ascribed to them in each Prospectus.
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
------------
Under normal conditions, the Fund invests at least 80% of its assets in
intermediate-term U.S. Treasury, corporate, mortgage-backed, asset-backed,
taxable municipal and tax-exempt municipal bonds. The Fund invests primarily in
investment grade fixed income securities that, at the time of purchase, are
either rated in one of the three highest rating categories by a major
independent agency, or in unrated securities the Adviser considers of comparable
quality. The
Page-3-
<PAGE>
Fund may invest up to 15% of its assets in investment grade fixed income
securities rated within the fourth highest rating category. In the event that
any security is downgraded, the Adviser will determine whether to hold or sell
such security, provided that that Fund will not hold more than 5% of its net
assets in securities that are rated below investment grade (junk-bonds). The
Fund may invest up to 25% of its total assets in U.S. dollar-denominated
securities of foreign issuers. The 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 are not otherwise readily available for purchase.
Short-Term Fixed Income
-----------------------
Under normal conditions, the Fund invests at least 80% of its assets in short-
term U.S. Treasury, corporate, mortgage-backed, asset-backed, taxable municipal
and tax-exempt municipal bonds. The Fund invests primarily in investment grade
fixed income securities that, at the time of purchase, are either rated in one
of the three highest rating categories by a major independent agency, or in
unrated securities the Adviser considers of comparable quality. The Fund, at
times, may invest a substantial percentage of its assets in asset-backed
securities. The Fund may invest up to 15% of its assets in investment grade
fixed income securities rated within the fourth highest rating category. In the
event that any security is downgraded, the Adviser will determine whether to
hold or sell such security, provided that that Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade (junk-
bonds). The Fund may invest up to 25% of its total assets in U.S. dollar-
denominated securities of foreign issuers. The 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 are not otherwise readily available for purchase.
Municipal Bond
--------------
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax. The
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. The Fund invests primarily in investment grade bonds that
are either rated in one of the three highest rating categories by one of the
major independent rating agencies, or in unrated securities that the Adviser
considers of comparable quality. The Fund may invest up to 15% of its assets in
investment grade bonds that are rated in the fourth highest category. In the
event that any security is downgraded, the Adviser will determine whether to
hold or sell such security, provided that that Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade (junk-
bonds). Up to 20% of the Fund's total assets may be invested in certain taxable
securities in order to maintain liquidity. Securities may be purchased on a
when-issued basis.
Page-4-
<PAGE>
Short-Term Municipal Bond
-------------------------
Under normal conditions, the Fund invests at least 80% of net assets in
municipal securities which pay interest exempt from federal income tax and at
least 65% of total assets in municipal bonds. There is no restriction on the
percentage of assets that may be invested in obligations the interest on which
is a preference item for purposes of the federal alternative minimum tax. The
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. The Fund invests primarily in investment grade bonds that
are either rated in one of the three highest rating categories by one of the
major independent rating agencies, or in unrated securities that the Adviser
considers of comparable quality. The Fund may invest up to 15% of its assets in
investment grade bonds that are rated in the fourth highest category. In the
event that any security is downgraded, the Adviser will determine whether to
hold or sell such security, provided that that Fund will not hold more than 5%
of its net assets in securities that are rated below investment grade (junk-
bonds). Up to 20% of the Fund's total assets may be invested in certain taxable
securities in order to maintain liquidity. Securities may be purchased on a
when-issued basis.
Total Return Bond
-----------------
Under normal conditions, the Fund invests at least 65% of its total assets in
U.S.-dollar denominated investment grade fixed income securities. The remainder
of the Fund's assets may be invested in fixed income securities of foreign
issuers, below investment grade fixed income securities (high yield bonds) of
U.S. and foreign issuers, including high yield bonds of issuers in countries
with new or emerging securities markets, or, to maintain liquidity, in cash or
money market instruments. The Fund may invest up to 25% of its total assets in
foreign investment grade fixed income securities. The Fund may invest up to 17%
of its assets in below investment grade fixed income securities of U.S. and
foreign issuers. The Fund may also invest up to 7% of its assets in high yield
bonds of issuers in countries with new or emerging securities markets. The Fund
may invest up to 35% of its assets in securities denominated in a foreign
currency. We may also use various instruments commonly known as "derivatives" as
secondary investments. In particular, the Fund may use forward currency
transactions and currency options.
High Yield Bond
---------------
Under normal conditions, the Fund invests at least 65% of its total assets in
U.S. dollar-denominated domestic and foreign below investment grade bonds (junk
bonds) including those in countries with new or emerging securities markets. The
Fund's investments in these securities may be of any credit quality and may
include securities not paying interest currently, zero coupon bonds, pay-in-kind
securities and securities in default. The Fund may invest up to 25% of its total
assets in non-U.S. dollar-denominated, below investment grade securities. The
Fund may also 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 portfolio
manager determines that securities meeting the Fund's investment objectives are
not otherwise readily available for purchase.
Smaller Companies
-----------------
Under normal conditions, the Fund invests at least 65% of its total assets in
the equity and equity related securities of U.S. small capitalization companies.
The Adviser defines the small
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capitalization equity securities universe as the bottom 20% of the total
domestic equity market capitalization (at the time of investment) using a
minimum market capitalization of $10 million. Up to 35% of the Fund's total
assets may be invested in investment grade fixed income securities, securities
of medium and large capitalization companies and in cash. Up to 5% of the Fund's
net assets may be invested in the securities of foreign issuers.
Micro Cap
---------
Under normal conditions, the Fund invests at least 65% of its total assets in
the common stocks of U.S. micro capitalization companies and securities
convertible into such stocks. The Adviser defines the Micro Capitalization
equity universe as the bottom 5% of the total domestic equity market
capitalization (at the time of investment) using a minimum market capitalization
of $10 million. Up to 25% of the Fund's total assets may be invested in the
securities of foreign companies that would be considered in the bottom 5% in
terms of market capitalization in the U.S. equity market. The Fund may invest up
to 35% of its assets in high quality debt instruments 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 considered high quality.
FIXED INCOME SECURITIES
GENERAL. Each Fund may invest in a broad range of U.S. and non-U.S. 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.
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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.
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. STRIPS are sold as zero coupon
securities. See "Zero Coupon Securities."
CUSTODIAL RECEIPTS. Each Fund other than the Equity Funds and the Municipal
Funds may invest in 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. 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. 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
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accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon
securities; for more information, see "Zero Coupon Securities."
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.
ZERO COUPON SECURITIES AND DEFERRED INTEREST BONDS. 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. 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 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. Zero coupon securities are redeemed at face
value at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accrued over the life of the security,
and the accrual constitutes the income earned on the security for both
accounting and tax purposes. 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. For example, 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.
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."
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. 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
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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."
VARIABLE AND FLOATING RATE 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 rate 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.
Debt instruments purchased by a Fund may be structured to have variable or
floating interest rates. These instruments may include variable rate 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. 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
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obligations they undertake to rate. Ratings, however, are general and are not
absolute standards of quality or value. Consequently, obligations with the same
rating, maturity and interest rate may have different market prices. See
Appendix A for a description of the ratings provided by Standard & Poor's,
Moody's and certain other recognized rating organizations.
Subsequent to its purchase by a Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. The Board of Trustees or the Adviser, pursuant to guidelines established
by the Board of Trustees, will consider such an event in determining whether the
Fund should continue to hold the security in accordance with the interests of
the Fund and applicable regulations of the Securities and Exchange Commission
(the "Commission").
LOWER QUALITY DEBT OBLIGATIONS "JUNK-BONDS". High Yield Bond and Total Return
Bond 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.
Below investment grade bonds (junk-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.
As discussed above, High Yield Bond and Total Return Bond 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 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.
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High Yield Bond and Total Return Bond 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.
If a fixed income security, that at the time of purchase satisfied the 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. Municipal Bond, Short-Term Municipal Bond, Fixed
Income and Short-Term Fixed Income will not continue to hold fixed income
securities that have been downgraded below investment grade if more than 5% of
the Fund's net assets would consist of such securities.
CONVERTIBLE AND PREFERRED SECURITIES
Subject to its investment objectives and policies, each Fund (other than
Municipal Bond and Short-Term Municipal Bond) may invest in convertible
securities, which may include corporate notes or preferred stocks but are
ordinarily long-term debt obligations of an 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 and
downgrade policy as the Fund's investments in non-convertible securities.
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Each Fund (other than Municipal Bond and Short-Term Municipal Bond), 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.
WARRANTS
Each Equity Fund, High Yield Bond and Total Return Bond 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. 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
The Municipal Funds and, to a more limited extent, Fixed Income, Short-Term
Fixed Income, High Yield Bond and Total Return Bond 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,
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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
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taxes in the state of issuance (as well as regular Federal income tax).
Municipal leases frequently involve special risks not normally associated with
general obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The debt
issuance limitations are deemed to be inapplicable because of the inclusion in
many leases or contracts of "non-appropriation" clauses that relieve the
governmental issuer of any obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. Thus, a Fund's investment
in municipal leases will be subject to the special risk that the governmental
issuer may not appropriate funds for lease payments.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in an unsatisfactory or delayed recoupment
of a Fund's original investment.
Certificates of participation represent undivided interests in municipal leases,
installment purchase contracts or other instruments. The certificates are
typically issued by a trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for the purpose of the Funds' respective limitations on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such Fund's limitation on investments in
illiquid securities. In determining the liquidity of municipal lease obligations
and certificates of participation, the Adviser will consider a variety of
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.
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MUNICIPAL NOTES. Municipal securities in the form of notes generally are used to
provide for short-term capital needs, in anticipation of an issuer's receipt of
other revenues or financing, and typically have maturities of up to three years.
Such instruments may include Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Tax and Revenue Anticipation Notes and Construction
Loan Notes. Tax Anticipation Notes are issued to finance the working capital
needs of governments. Generally, they are issued in anticipation of various tax
revenues, such as income, sales, property, use and business taxes, and are
payable from these specific future taxes. Revenue Anticipation Notes are issued
in expectation of receipt of other kinds of revenue, such as federal revenues
available under federal revenue sharing programs. Bond Anticipation Notes are
issued to provide interim financing until long-term bond financing can be
arranged. In most cases, the long-term bonds then provide the funds needed for
repayment of the notes. Tax and Revenue Anticipation Notes combine the funding
sources of both Tax Anticipation Notes and Revenue Anticipation Notes.
Construction Loan Notes are sold to provide construction financing. These notes
are secured by mortgage notes insured by the Federal Housing Authority; however,
the proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a
default. The obligations of an issuer of municipal notes are generally secured
by the anticipated revenues from taxes, grants or bond financing. An investment
in such instruments, however, presents a risk that the anticipated revenues will
not be received or that such revenues will be insufficient to satisfy the
issuer's payment obligations under the notes or that refinancing will be
otherwise unavailable.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on municipal
securities that have been pre-refunded are no longer paid from the original
revenue source for the securities. Instead, after pre-refunding the source of
such payments of the principal of and interest on these securities are typically
paid from 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.
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TENDER OPTION BONDS. A tender option bond is a municipal security (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the agreement
of a third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate.
However, an institution will not be obligated to accept tendered bonds in the
event of certain defaults or a significant downgrade in the credit rating
assigned to the issuer of the bond. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate. Each Municipal Fund intends to invest only in
tender option bonds the interest on which will, in the opinion of bond counsel,
counsel for the issuer of interests therein or counsel selected by the Adviser,
be exempt from regular federal income tax. However, because there can be no
assurance that the IRS will agree with such counsel's opinion in any particular
case, there is a risk that a Municipal Fund will not be considered the owner of
such tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the proper tax treatment of tender
option bonds and the associated fees, in relation to various regulated
investment company tax provisions is unclear. Each Municipal Fund intends to
manage its portfolio in a manner designed to eliminate or minimize any adverse
impact from the tax rules applicable to these investments.
AUCTION RATE SECURITIES. Auction rate securities consist of auction rate
municipal securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in municipal securities. Provided
that the auction mechanism is successful, auction rate securities usually permit
the holder to sell the securities in an auction at par value at specified
intervals. The dividend is reset by "Dutch" auction in which bids are made by
broker-dealers and other institutions for a certain amount of securities at a
specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
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%
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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 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 AND ASSET-BACKED SECURITIES
GENERAL. Fixed Income, Short-Term Fixed Income, High Yield Bond, Total Return
Bond and, to a more limited extent, the Municipal Funds may invest in mortgage-
backed securities. Mortgage-backed securities represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property.
Fixed Income, Short-Term Fixed Income, High Yield Bond and Total Return Bond 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
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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.
MORTGAGE-BACKED. 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 Fixed Income, Short-Term Fixed Income, High Yield Bond and Total Return
Bond 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). 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. Many CMOs are issued
with a number of classes or series which have different maturities and are
retired in sequence. 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. 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. Sometimes, however, CMO classes are
"parallel pay" (i.e., payments of principal are made to two or more classes
concurrently). Although some of the mortgages underlying CMOs may be supported
by various
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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. 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.
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 objective, 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.
Each of Total Return Bond, Fixed Income and Short-Term Fixed Income, may at
times, invest a significant percentage of its assets in CMOs.
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
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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. Each Fund other than the Equity 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.
STRIPPED MORTGAGE-BACKED SECURITIES. Each Fund other than the Equity 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, the
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 IOs 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 Fund's 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. Fixed Income, Short-Term Fixed Income, High Yield Bond
and Total Return Bond 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. Short-Term Fixed Income may, at times, invest
a significant percentage of its assets in asset-backed securities.
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SECURITIES OF FOREIGN ISSUERS
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 and supranational entities. [The non-U.S.
investments of the Equity Funds, High Yield Bond and Total Return Bond may be
denominated in any currency/ The investments of Fixed Income and Short-Term
Fixed Income in foreign securities may be denominated only in the U.S. dollar.]
Foreign securities may offer investment opportunities not available in the
United States, but such investments also involve significant risks not typically
associated with investing in domestic securities. In many foreign countries,
there is less publicly available information about foreign issuers, and there is
less government regulation and supervision of foreign stock exchanges, brokers
and listed companies. Also, in many foreign countries, companies are not subject
to uniform accounting, auditing, and financial reporting standards comparable to
those applicable to domestic issuers. Security trading practices and custody
arrangements abroad may offer less protection to the Fund's 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. For purposes of the Fund's investment objective, 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.
To the extent the investments of the Equity Funds and Total Return Bond 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
Total Return Bond 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. 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. Currently, Fixed Income and Short-Term Fixed Income intend to invest only
in obligations issued or guaranteed by the Asian Development
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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.
EQUITY AND EQUITY RELATED SECURITIES
The Funds may invest in common stock, preferred stock, warrants, purchased call
options and other rights to acquire stock. The market value of an equity
security will increase or decrease depending on market conditions. This affects
the value of the shares of a Fund, and the value of your investment. Smaller
Companies will invest at least 60% of its assets directly in stocks.
SMALL AND MICRO CAPITALIZATION COMPANIES
Smaller Companies and Micro Cap 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 and
Micro Cap 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.
INVESTMENTS IN AMERICAN, EUROPEAN, GLOBAL AND INTERNATIONAL DEPOSITORY RECEIPTS.
Total Return Bond and High Yield Bond 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
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may be denominated in a currency different from the currency in which the
underlying foreign security is denominated.
INVESTMENTS IN EMERGING MARKETS. High Yield Bond and Total Return Bond may
invest 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 the Funds' 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 INVESTING. Total Return Bond may focus its investments in a
particular region and/or in one or more foreign countries. Focusing the Fund's
investments in a particular region or country will subject the Fund, to a
greater extent than if its investments in such region or country were more
limited, to the risks of adverse securities markets, exchange rates and social,
political or economic developments which may occur in that region or country.
CURRENCY MANAGEMENT TECHNIQUES
To the extent that they invest in securities denominated or quoted in foreign
currencies, the Equity Funds, High Yield Bond and Total Return Bond may enter
into forward currency exchange contracts ("forward contracts") and buy and sell
currency options to hedge against currency exchange rate fluctuations. 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.
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GENERAL. The performance of foreign currencies relative to that of the U.S.
dollar is an important factor in a Fund's performance and the Adviser may manage
a 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, the Fund's net asset value to fluctuate as well,
notwithstanding the performance of the 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 the
Fund's total assets, adjusted to reflect the Fund's net position after giving
effect to currency transactions, is denominated in the currency of a foreign
country, the Fund will be more susceptible to the risk of adverse economic and
political developments in that country.
In an attempt to manage exposure to currency exchange rate fluctuations, the
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. The Fund 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 the Fund 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 the Fund are generally denominated in the currency of the
foreign market in which the investment is made. However, securities held by the
Fund may be denominated in the currency of a country other than the country in
which the security's issuer is located.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the Equity Funds and Total
Return Bond 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
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currency. Contracts to sell foreign currency could limit any potential gain
which might be realized by the Fund if the value of the hedged currency
increased.
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, but currency dealers
seek to obtain a "spread" or profit on each transaction.
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.
Total Return Bond may use forward currency transactions in an attempt to hedge
against losses, or where possible, to add to investment returns. The Equity
Funds 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.
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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 forward currency contracts are not
presently regulated by the Commodity Futures Trading Commission (the "CFTC"),
the CFTC may in the future assert authority to regulate these contracts. In such
event, the Funds' ability to utilize forward currency contracts may be
restricted. In addition, a particular forward currency contract and assets used
to cover such contract may be illiquid.
A Fund generally will not enter into a forward currency contract with a term of
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.
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.
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 Equity Funds and Total Return Bond'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.
CROSS HEDGING. At the discretion of the Adviser, a Fund 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 a Fund's total currency exposure or gaining exposure to a foreign
currency that is expected to appreciate.
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OPTIONS ON SECURITIES, SECURITIES INDICES AND FOREIGN CURRENCIES
GENERAL. Each Equity Fund, High Yield Bond and Total Return Bond 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 stock U.S. or non-
U.S. indices, or to U.S. or non-U.S. 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.
WRITTEN OPTIONS. Each Equity Fund, High Yield Bond and Total Return Bond 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 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 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. Each Equity Fund, High Yield Bond and Total Return Bond 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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OPTIONS ON STOCK INDICES OR CURRENCIES. 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. Examples of well-known stock
indices are the Standard & Poor's Index of 500 Common Stocks and the Wilshire
5000 Index. Examples of well known foreign stock indices are the Toronto Stock
Exchange Composite 100 and the Financial Times 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. The Equity Funds may also purchase and write put and call
options on currencies.
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.
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. A call option on currency written by a Fund is covered
if the Fund owns an equal amount of the underlying currency.
OTHER CONSIDERATIONS. 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.
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
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<PAGE>
commission paid by the Fund) received by the Fund is included in the liability
section of the Fund's statement of assets and liabilities as a deferred credit.
The amount of this asset or deferred credit will be marked-to-market on an
ongoing basis to reflect the current value of the option purchased or written.
The current value of a traded option is the last sale price or, in the absence
of a sale, the average of the closing bid and asked prices. If an option
purchased by the Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If the Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by the Fund expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Fund is exercised, the proceeds to the Fund from the exercise will be
increased by the net premium originally received, and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on securities,
securities indices and currencies. For example, there are significant
differences between the securities markets, currency markets and the
corresponding options markets that could result in imperfect correlations,
causing a given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or on a U.S.
or non-U.S. securities exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities; unusual or unforeseen circumstances may interrupt normal operations
on an exchange; the facilities of an exchange or the OCC may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for options may not conform to the hours during which the
underlying securities and currencies are traded. To the extent that the options
markets close before the markets for the underlying securities and currencies,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
The risks described above also apply to options on futures, which are discussed
below.
FUTURES CONTRACTS AND RELATED OPTIONS
GENERAL. When deemed advisable by the Adviser, a Fund 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 Fund may purchase and sell various kinds of
futures contracts. The Fund may also enter into closing
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purchase and sale transactions with respect to any 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 Fund may engage in futures and related
options transactions only for bona fide hedging or other non-hedging purposes as
defined in regulations of the Commodity Futures Trading Commission ("CFTC"). The
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. 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 affects 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
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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, 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. Each Equity Fund, High Yield Bond and Total Return Bond
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
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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 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 for 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 its 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 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 or option position prior to its or maturity 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 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 portfolio
securities. The Funds will attempt to minimize the risk that they will be unable
to close out a
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futures or related options position by entering into such transactions on a
national exchange with an active and liquid secondary market.
LIMITATIONS AND RISKS ASSOCIATED WITH TRANSACTIONS IN FORWARD CURRENCY EXCHANGE
CONTRACTS, 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
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 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.
The use of options, futures and foreign 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 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. 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. Options and futures traded on foreign exchanges generally are
not regulated by U.S. authorities, and may offer less liquidity and less
protection to the 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 the assets of High Yield Bond
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" below. Options, futures contracts and options on futures
contracts are derivative instruments.
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REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. In a repurchase agreement, a
Fund buys a security subject to the right and obligation to sell it back to the
other party at the same price plus accrued interest. The Fund's custodian will
hold the security as collateral for the repurchase agreement. Collateral must be
maintained at a value at least equal to 102% of the repurchase price, but
repurchase agreements involve some credit risk to a Fund if the other party
defaults on its obligation and the Fund is delayed in or prevented from
liquidating the collateral. A Fund will enter into repurchase agreements only
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on guidelines established and periodically
reviewed by the Trust's Board of Trustees.
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)
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.
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
Page -34-
<PAGE>
only with the intention of completing the transaction and actually purchasing
the securities. If deemed appropriate by the Adviser, however, a Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a gain or
loss, and distributions attributable to any such gain, 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 absent unusual market conditions. When a Fund engages in "when-
issued" and forward commitment transactions, it relies on the other party to the
transaction to consummate the trade. Failure of such party to do so may result
in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest or dividends on the securities it has committed to
purchase until the settlement date.
BORROWING
Each Fund may borrow for temporary or emergency purposes. Borrowings by Fixed
Income and Municipal Bond may not exceed 10% of the value of their respective
total assets. This borrowing may be unsecured. [Among the forms of borrowing in
which the Fund may engage is entering into reverse repurchase agreements.] 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 Fixed Income and
Municipal Bond will not make investments while borrowings are in excess of 5% of
total assets. Fixed Income and Municipal Bond 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
Page -35-
<PAGE>
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 and Municipal Bond, 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.
DIVERSIFICATION
Each Fund other than Total Return Bond 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" below. Accordingly, it is subject only to certain federal tax
diversification requirements and to the policies adopted by the Adviser. With
respect to 50% of its total assets, the Funds 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 5% of its
total assets, the 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 Total
Page -36-
<PAGE>
Return Bond 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 Short-Term Municipal Bond or
Municipal Bond 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.
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.
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. Investing in Rule
144A securities could have the effect of increasing the level of fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing those securities.
Page -37-
<PAGE>
ILLIQUID SECURITIES
Each Fund will not invest more than 15% of its net assets in illiquid
securities, which include repurchase agreements and time deposits maturing in
more than seven days and securities that are not readily marketable.
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 Total Return Bond has applied for an exemptive order with the
Commission to invest up to 17% of its shares in institutional shares of High
Yield Bond and up to 7% of its shares in institutional shares of Emerging
Markets Debt. There is no assurance that such order will be granted. 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.
Total Return Bond will not acquire securities of another investment company if,
at the time of acquisition, the other investment company owns securities of any
other investment company in excess of the limits contained in section
12(d)(1)(A) of the 1940 Act.
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.
BANK OBLIGATIONS
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
Page -38-
<PAGE>
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.
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 Fixed Income and Municipal Bond and
fundamental investment restriction (3) listed below for Fixed Income and
Municipal Bond.
In addition, the policy of Municipal Bond and Short-Term Municipal Bond to
invest at least 80% of each Fund's net assets in tax-exempt securities has been
designated as fundamental.
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, SHORT-TERM
MUNICIPAL BOND, HIGH YIELD BOND, TOTAL RETURN BOND 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
Page -39-
<PAGE>
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 Total Return Bond, 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
Page -40-
<PAGE>
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 (10% limitation for Municipal Bond and Short-Term Municipal
Bond). 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 FIXED INCOME AND MUNICIPAL BOND
Fundamental Investment Restrictions. The Trust may not, on behalf of Fixed
Income or Municipal Bond:
(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
Page -41-
<PAGE>
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.
Page -42-
<PAGE>
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
(1) A Fund may not invest in illiquid securities in an amount exceeding, in the
aggregate, 10% of Municipal Bond's total assets and 15% of Fixed Income'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.
<TABLE>
<CAPTION>
Name and Address Positions with Trust Principal Occupation During Past Five Years
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul K. Freeman (2) Trustee Project Leader,
7257 South Tucson Way International Institute for Applied Systems
Englewood, CO 80112 (age 48) Analysis (since 1998); Chief Executive
Officer, The Eric Group Inc. (environmental
insurance) (1986-1998).
-------------------------------------------------------------------------------------------------------------------
Graham E. Jones (1)(2) Trustee Senior Vice President, BGK Realty Inc. (since
330 Garfield Street 1995); Financial Manager, Practice Management
Santa Fe, NM 87501 Systems (medical information services)
(age 65) (1988-95); Director, 11 closed-end funds
managed by Morgan Stanley Asset Management;
Trustee, 9 open-end mutual funds managed by
Weiss, Peck & Greer; Trustee of 10 open-end
mutual funds managed by Sun Capital Advisers,
Inc.
-------------------------------------------------------------------------------------------------------------------
William N. Searcy (1)(2) Trustee Pension & Savings Trust Officer, Sprint
2330 Shawnee Mission Pkwy Corporation (telecommunications) (since
Westwood, KS 66205 1989); Trustee of six open-end mutual funds
(age 53) managed by Sun Capital Advisers, Inc.
-------------------------------------------------------------------------------------------------------------------
Hugh G. Lynch Trustee Managing Director, International Investments,
767 Fifth Avenue General Motors Investment Management
New York, NY 10153 Corporation
(age 62) Director, Emerging Markets Growth Fund
managed by Capital International, Inc. (since
December 1994)
-------------------------------------------------------------------------------------------------------------------
Edward T. Tokar (1) Trustee Vice President-Investments, Honeywell
101 Columbia Road International, Inc. (advanced technology and
Morristown, NJ 07962 manufacturer) (since 1985).
(age 52)
-------------------------------------------------------------------------------------------------------------------
Richard T. Hale President Trustee of each of the other investment
One South Street companies within the Deutsche Asset
Baltimore, MD 21202 Management mutual fund complex;
Managing Director, Deutsche Asset Management;
Managing Director, Deutsche Banc Alex. Brown
Incorporated;
Director and President, Investment Company
Capital Corp.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Page -43-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Positions with Trust Principal Occupation During Past Five Years
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David W. Baldt Vice President Managing Director of Active Fixed Income,
150 S. Independence Sq. Deutsche Asset Management, Inc. (since 1989).
W. Philadelphia, PA 19106
(age 50)
-------------------------------------------------------------------------------------------------------------------
James H. Grifo Vice President Managing Director and Executive Vice
150 S. Independence Sq. President, Deutsche Asset Management, Inc.
W. Philadelphia, PA 19106 (since 1996); Senior Vice President, GT
(age 48) Global Financial (1990 - 1996).
-------------------------------------------------------------------------------------------------------------------
Charles A. Rizzo Treasurer Director, Deutsche Asset Management (since
One South Street 1998); Senior Manager, PricewaterhouseCoopers
Baltimore, Maryland 21202 LLP from 1993 to 1998
(Age 42)
-------------------------------------------------------------------------------------------------------------------
Amy M. Olmert (3) Assistant Treasurer Director, Deutsche Asset Management Americas
One South Street (since 1999); Vice President, BT Alex. Brown
Baltimore, MD 21202 Inc. (1997-1999); Senior Manager,
(age 36) PricewaterhouseCoopers LLP (1988-1997).
-------------------------------------------------------------------------------------------------------------------
Daniel O. Hirsch Secretary Director, Deutsche Asset Management Americas
One South Street (since 1999); Director, Deutsche Bank Alex.
Baltimore, MD 21202 Brown Incorporated and Investment Company
(age 45) Capital Corp. (since 1998); Assistant General
Counsel, Office of the General Counsel,
United States Securities and Exchange
Commission (1993-1998).
-------------------------------------------------------------------------------------------------------------------
</TABLE>
------------
1 Member of the Trust's Pricing Committee.
2 Member of the Trust's Audit Committee.
3 Member of the Trust's Dividend Committee.
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.
Page -44-
<PAGE>
As of February 17, 2000, 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, currently Mr. Searcy,
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, 2000:
<TABLE>
<CAPTION>
Pension or Retirement
Benefits Accrued as Part of Aggregate Compensation from
Name of Trustees Fund Expenses the Trust/Complex*
----------------- --------------------------- ---------------------------
<S> <C> <C>
Paul K. Freeman $ 0 $ ------
Graham E. Jones $ 0 $ ------
William N. Searcy $ 0 $ ------
Hugh G. Lynch $ 0 $ ------/1/
Edward T. Tokar $ 0 $ ------
</TABLE>
------------
* 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.
On August 17, 2000, the Trustees adopted a Deferred Compensation Plan. Pursuant
to the Deferred Compensation Plan, any Trustee who receives fees from the
Company is permitted to defer up to 100% of his annual compensation. As of the
date of this SAI, the Trust currently has one Trustee in the Deferred
Compensation Plan. The deferring Trustee may select from among the funds in the
Morgan Grenfell Investment Trust in which all or part of their deferral account
shall be deemed to be invested. Distributions from the deferring Trustee's
deferral accounts will be paid in cash, in generally quarterly installments over
a period of ten years.
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
Effective October 6, 1999, the investment adviser to each Fund, Morgan Grenfell
Inc. changed its name to Deutsche Asset Management, Inc. ("DeAM, Inc."). DeAM,
Inc., 130 Liberty Street, New York, New York, acts as the investment adviser to
each Fund pursuant to the terms of Management Contracts, dated December 28,
1994, August 23, 1996, January 30, 1998 and
------------
/1/ Of amounts payable to Mr. Lynch, $_____________, was deferred pursuant to a
deferred compensation plan.
Page -45-
<PAGE>
November 16, 2000 (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:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Annual
Fund Rate
--------------------------------------------------------------------------
<S> <C>
Municipal Bond 0.40%
--------------------------------------------------------------------------
Short-Term Municipal Bond 0.40%
--------------------------------------------------------------------------
Fixed Income 0.40%
--------------------------------------------------------------------------
Short-Term Fixed Income 0.40%
--------------------------------------------------------------------------
High Yield Bond 0.50%
--------------------------------------------------------------------------
Smaller Companies 1.00%
--------------------------------------------------------------------------
Micro Cap 1.50%
--------------------------------------------------------------------------
Total Return Bond 0.45%
--------------------------------------------------------------------------
</TABLE>
If Total Return Bond receives exemptive relief from the commission to invest up
to 17% of its total assets in High Yield Bond Portfolio and up to 7% of its
total assets in the Emerging Markets Debt fund, its advisory fee will be
reduced.
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 and the Administrator have contractually agreed to waive their fees
and reimburse expenses so that total expenses will not exceed those set forth in
the Fund's Prospectus. For each class of each Fund the contractual fee waivers
cover the 16-month period from each Fund's most recently completed fiscal year.
These contractual fee waivers may only be changed by the Fund's Board of
Trustees. For the fiscal year ended October 31, 2000, Fixed Income, Municipal
Bond, Short-Term Fixed Income, Short-Term Municipal Bond, High Yield Bond and
Smaller Companies each paid the Adviser net advisory fees of $----, $--------,
$-------, $--------, $----- and $--------, respectively.For the fiscal year
ended October 31, 1999, Fixed Income, Municipal Bond, Short-Term Fixed Income,
Short-Term Municipal Bond, High Yield Bond and Smaller Companies each paid the
Adviser net advisory fees of $5,004,754, $2,598,550, $96,835, $343,523,
$1,232,710 and $63,602, respectively. For the fiscal year ended October 31,
1998, Fixed Income, Municipal Bond, Short-Term Fixed Income, Short-Term
Municipal Bond, High
Page -46-
<PAGE>
Yield Bond and Micro Cap each paid the Adviser net advisory fees of $4,688,049,
$1,734,753, $2,407, $45,706, $119,581 and $138,127, respectively. During the
fiscal period ended October 31, 1998, Smaller Companies paid no advisory fees.
For the fiscal period ended September 30, 1999, Micro Cap paid the Adviser net
advisory fees of $225,700. Total Return Bond was not in operation during any of
the indicated periods, and, accordingly, paid no advisory fees during such
periods.
Each Management Contract between DeAM, Inc. and the Trust was most recently
approved on November 16, 2000 by a vote of the Trust's Board of Trustees,
including a majority of those Trustees who were not parties to such Management
Contract or "interested persons" of any such parties. The Management Contract
for Total Return Bond was approved 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. After its initial term,
each Management Contract will continue in effect, with respect to each Fund,
only if such continuance is specifically approved annually by the Trustees,
including a majority of the Trustees who are not parties to the Management
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 Transactions."
DeAM, Inc. is registered with the Commission as an investment adviser and
provides a full range of investment advisory services to institutional clients.
DeAM, Inc. is an indirect wholly-owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. As
Page -47-
<PAGE>
of December 31, 2000, DeAM, Inc. managed approximately $--- billion in assets
for various individual and institutional accounts, including the SMALLCap Fund,
Inc., a registered, closed-end investment company for which it acts as
investment adviser.
SUBADVISER FOR TOTAL RETURN BOND
Deutsche Asset Management Investment Services Limited ("DeAMIS"), located at One
Appold StreetCircus, London, England, acts as Subadviser for the foreign
component of Total Return Bond pursuant to the terms of a subadvisory contract.
DeAMIS is registered with the Commission as an investment adviser and provides a
full range of investment advisory services to institutional clients. DeAMIS is
also an indirect wholly-owned subsidiary of Deutsche Bank AG. As of December
31, 2000, DeAMIS managed approximately $----- billion in assets for various
individual and institutional accounts, including the following registered
investment company to which it acts as a subadviser: RSI International Equity
Fund. Under the subadvisory contract, the Adviser, and not the Fund, will pay
the Subadviser 0.08% of the average daily net assets of Total Return Bond,
unless reduced, on a pro rata basis, by any fee waiver then in effect.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. The Trust's Code of Ethics permits access persons
of the Funds to invest in securities for their own accounts, but requires
compliance with the Code's preclearance requirements, subject to certain
exceptions. In addition, the Trust's Code provides for trading blackout periods
that prohibit trading by personnel within periods of trading by the Funds in the
same security. The Trust's Code prohibits short term trading profits, prohibits
personal investment in initial public offerings and requires prior approval with
respect to purchases of securities in private placements.
Each Fund's adviser and the Trust's distributor have also adopted a Code of
Ethics. The Codes of Ethics allow personnel to invest in securities for their
own accounts, but require compliance with the Codes' pre-clearance requirements
and other restrictions, including "blackout periods" and minimum holding
periods, subject to limited exceptions. DeAM, Inc. and the distributor's Codes
prohibit participation in all initial public offerings, and the DeAMIS Code
prohibits participation in initial public offerings distributed in the United
States. All Codes require prior approval for purchases of securities in private
placements.
PORTFOLIO MANAGEMENT
The person or persons who are primarily responsible for the day-to-day
management of each Fund's portfolio and his or her relevant experience is
described in the Fund's prospectus.
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
Page -48-
<PAGE>
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).
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, 2000, the portfolio turnover rates for Fixed Income, Municipal
Bond, Short-Term Fixed Income, Short-Term Municipal Bond, High Yield Bond and
Smaller Companies were %, %, %, %, % and % respectively. For the
fiscal period ended October 31, 1999, the portfolio turnover rates for Fixed
Income, Municipal Bond, Short-Term Fixed Income, Short-Term Municipal Bond, High
Yield Bond and Smaller Companies were 157%, 27%, 142%, 64%, 180% and 105%
respectively. For the fiscal period ended September 30, 1999, the portfolio
turnover rate for Micro Cap was 115%. For the fiscal period ended October 31,
1998, the portfolio turnover rates for Fixed Income, Municipal Bond, Short-Term
Fixed Income, Short-Term Municipal Bond, High Yield Bond, Smaller Companies and
Micro Cap were 122%, 42%, 98%, 26%, 131%, 108% and 85%, respectively.
THE ADMINISTRATOR
DeAM, Inc. (the "Administrator"), 150 South Independence Square West,
Philadelphia, PA 19106, serves as the Trust's administrator pursuant to an
Administration Agreement dated August 27, 1998. 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
a monthly fee at the following annual rates of the aggregate average daily net
assets of such Fund: 0.12% for the Fixed Income Funds; 0.22% for the Equity
Funds. The Administrator will pay Accounting Agency and Transfer Agency fees
out of the Administration fee. Previously, these fees were charged directly to
the Funds. Net Fund Operating Expenses will remain unchanged since the Adviser
has agreed to reduce its advisory fee and to make arrangements to limit certain
other expenses to the extent necessary to limit Fund Operating Expenses of each
Fund to the specified percentage of each Fund's net assets as demonstrated in
the Expense Information tables in the prospectus. For the fiscal year ended
October 31, 2000, Fixed Income, Short-Term Fixed Income, Municipal Bond, Short-
Term Municipal Bond, High Yield Bond and Smaller Companies paid the
Administrator administration fees of $-----, $-----, $-----, $-----, $---- and
$------, respectively. For the fiscal year ended October 31, 1999, Fixed
Income, Short-Term Fixed Income, Municipal Bond, Short-Term Municipal Bond, High
Yield Bond and Smaller
Page -49-
<PAGE>
Companies paid the Administrator administration fees of $1,501,426, $29,051,
$779,565, $103,057, $295,872 and $13,993, respectively. For the fiscal period
ended September 30, 1999, Micro Cap paid the Administrator administration fees
of $33,104.
Prior to November 1, 1998, SEI Financial Management Corporation was the
Administrator for the Funds. For the fiscal period ended October 31, 1998,
Fixed Income, Short-Term Fixed Income, Municipal Bond, Short-Term Municipal
Bond, High Yield Bond, Smaller Companies and Micro Cap paid the Administrator
administration fees of $941,106, $60,177, $331,733, $60,177, $26,888, $60,177
and $57,677, respectively. The administration fees described in this paragraph
were paid pursuant to a fee schedule that is different from the one currently in
effect (described above).
Total Return Bond was not in operation during any of the indicated periods, and,
accordingly, paid no administration fees during such period.
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 the Fund 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; (vi) interest, insurance premiums,
taxes or governmental fees; (vii) clerical expenses of issue, redemption or
repurchase of shares of the Funds; (viii) 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;
(ix) the fees and expenses of Trustees who are not affiliated with the Adviser;
(x) 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; (xi) costs in connection with annual or special
meetings of shareholders, including proxy material preparation, printing and
mailing; (xii) charges and expenses of the Trust's auditor; (xiii) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Trust's business; and (xiv) expenses of an
extraordinary and nonrecurring nature.
TRANSFER AGENT
Investment Company Capital Corp., One South Street, Baltimore, Maryland 21202
("ICCC"), has been retained to act as transfer and dividend disbursing agent
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.
Page -50-
<PAGE>
THE DISTRIBUTOR
The Trust, on behalf of the Funds, has entered into a distribution agreement
(the "Distribution Agreement") pursuant to which ICC Distributors, Inc. (the
"Distributor" or ICCD), Two Portland Square, Portland ME, 04101 as agent, serves
as principal underwriter for the continuous offering of shares of each Fund.
The Distributor has agreed to use its best efforts to solicit orders for the
purchase of shares of each Fund, although it is not obligated to sell any
particular amount of shares. Shares of the Funds are not subject to sales loads
or distribution fees. The Adviser, and not the Trust, is responsible for
payment of any expenses or fees incurred in the marketing and distribution of
shares of the Funds.
The Distribution Agreement will remain in effect for one year from its effective
date and will continue in effect thereafter only if such continuance is
specifically approved annually by the Trustees, including a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" of such parties. The Distribution Agreement was most recently approved
on November 16, 2000 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.
CUSTODIAN
Brown Brothers Harriman and Co. (the "Custodian"), 40 Water Street, Boston,
Massachusetts 02109, serves as the Trust's custodian pursuant to a Custodian
Agreement. Under its custody agreement with the Trust, the Custodian (i)
maintains separate accounts 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 Funds.
SERVICE PLAN
(INVESTMENT SHARES ONLY)
Each Fund has adopted a service plan (the "Plan") with respect to its Investment
shares which authorizes it to compensate Service Organizations whose customers
invest in Investment 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 Investment 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
Page -51-
<PAGE>
Fund; (iv) processing and issuing confirmations concerning customer orders to
purchase, redeem and exchange Investment shares; (v) receiving and transmitting
funds representing the purchase price or redemption proceeds of such Investment
shares; (vi) participant level recordkeeping, sub-accounting, and other
administrative services in connection with the entry of purchase and redemption
orders for the Plan; (vii) withholding sums required by applicable authorities;
(viii) providing daily violation services to the Plans; (ix) paying and filing
of all withholding and documentation required by appropriate government
agencies; (x) provision of reports, refunds and other documents required by tax
laws and the Employee Retirement Income Security Act of 1974 ("ERISA"); and
(xi) providing prospectuses, proxy materials and other documents of the Funds to
participants as may be required by law. In the event that your service plan is
terminated, your shares will be converted to Institutional Class shares of the
same Fund.
As compensation for such services, each Service Organization of the funds is
entitled to receive a service fee in an amount up to 0.25% (on an annualized
basis) of the average daily net assets of the Fund's Investment 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 periodically a written
report of services performed by and fees paid to each Service Organization under
the Service Agreements and Service Plans.
Pursuant to the Plans, Investment shares of a Fund that are beneficially owned
by customers of a Service Organization will convert automatically to
Institutional shares of the same Fund in the event that such Service
Organization's Service Agreement expires or is terminated. Customers of a
Service Organization will receive advance notice of any such conversion, and any
such conversion will be effected on the basis of the relative net asset values
of the two classes of shares involved.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974 ("ERISA") may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Investment shares of the Fund. Service Organizations that are subject
to the jurisdiction of the Commission, the Department of Labor or state
securities commissions are urged to consult their own legal advisers before
investing fiduciary assets in Investment 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 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)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
Page -52-
<PAGE>
and provides further that such fiduciary must act prudently and solely in the
interests of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes within the definition of "party in interest" with respect to a plan any
fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not only
prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it would also
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account.
Section 406(b)(3) supplements these provisions by prohibiting a plan fiduciary
from receiving any consideration for his own personal account from any party
dealing with the plan in connection with a transaction involving the assets of
the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which plan is otherwise responsible for paying). Thus, the
fiduciary duty issues involved in a plan fiduciary's receipt of the service fee
must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through 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.
Page -53-
<PAGE>
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. For the
fiscal year ended October 31, 2000, the Adviser paid the following brokerage
commissions for research services: for Smaller Companies approximately $---- and
for Micro Cap approximately $-----. During the fiscal year ended October 31,
1999, the Adviser paid the following brokerage commissions for research
services: for Smaller Companies approximately $10,562 and for Micro Cap
approximately $26,796.
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").
Page -54-
<PAGE>
Section 17(e) of the 1940 Act limits to "the usual and customary broker's
commission" the amount which can be paid by the Funds to an Affiliated Broker
acting as broker in connection with transactions effected on a securities
exchange. The Board, including a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser, has adopted procedures
designed to comply with the requirements of Section 17(e) of the 1940 Act and
Rule 17e-1 promulgated thereunder to ensure that the broker's commission is
"reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time...."
A transaction would not be placed with an Affiliated Broker if a Fund would have
to pay a commission rate less favorable than their contemporaneous charges for
comparable transactions for their other most favored, but unaffiliated,
customers except for accounts for which they act as a clearing broker, and any
of their customers determined, by a majority of the Trustees who are not
"interested persons" of the Fund or the Adviser, not to be comparable to the
Fund. With regard to comparable customers, in isolated situations, subject to
the approval of a majority of the Trustees who are not "interested persons" of
the Trust or the Adviser, exceptions may be made. Since the Adviser, as
investment adviser to the Funds, has the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by them as a basis for negotiating commissions at a rate
higher than that determined in accordance with the above criteria. The Funds
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Funds placed by Affiliated
Brokers are combined with orders of their respective clients, in order to obtain
a more favorable commission rate. When the same security is purchased for two
or more funds or customers on the same day, each fund or customer pays the
average price and commissions paid are allocated in direct proportion to the
number of shares purchased.
Affiliated Brokers furnish to the Trust at least annually a statement setting
forth the total amount of all compensation retained by them or any associated
person of them in connection with effecting transactions for the account of the
Funds, and the Board reviews and approves all such portfolio transactions on a
quarterly basis and the compensation received by Affiliated Brokers in
connection therewith. During the fiscal year ended October 31, 1998, no Fund
paid any brokerage commissions to any Affiliated Broker. For the fiscal period
ended October 31, 1999, Micro Cap paid brokerage commissions in the amount of
$894 to Bankers Trust Company, an Affiliated Broker. For the fiscal period
ended October 31, 2000, Micro Cap paid brokerage commissions in the amount of $-
--- to Bankers Trust Company, an Affiliated Broker.This represents -% of the
aggregate brokerage commissions paid by the Fund in the fiscal year and % of the
aggregate dollar amount of transactions effected by the Fund in the fiscal year.
For the fiscal period ended October 31, 1999, Smaller Companies paid brokerage
commissions in the amount of $258 to Bankers Trust Company, an Affiliated
Broker. For the fiscal period ended October 31, 2000, Smaller Companies paid
brokerage commissions in the amount of $--- to Bankers Trust Company, an
Affiliated Broker This represents -% of the aggregate brokerage commissions paid
by the Fund in the fiscal year and % of the aggregate dollar amount of
transactions effected by the Fund in the fiscal year.
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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, 1998, 1999 and 2000 Fixed Income,
Municipal Bond, Short-Term Fixed Income and Short-Term Municipal Bond paid no
brokerage commissions. For the fiscal periods ending October 31, 1998, 1999=and
2000 High Yield Bond paid no brokerage commissions. For the fiscal years ended
October 31, 1998, 1999 and 2000, Smaller Companies paid aggregate brokerage
commissions of $, $ and $, respectively. For the fiscal periods ended October
31, 1998, 1999 and 2000, Micro Cap paid aggregate brokerage commissions of $-,
$28,211, $32,822 and, respectively. Total Return Bond was not in operation
during the indicated periods, and, accordingly, paid no brokerage commissions.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by ICC Distributors, Inc., the Distributor.
The Funds offer three classes of shares Institutional, Investment and Premier
shares. General information on how to buy shares of the Funds is set forth in
"Managing Your Investment" in each Fund's Prospectus. The following supplements
that information.
Investors may invest in Institutional shares and Premier shares by establishing
a shareholder account with the Trust. In order to make an initial investment in
Investment shares of a Fund, an investor must establish an account with a
service organization. Additionally, each Fund has authorized brokers to accept
purchase and redemption orders for shares for each Fund. Brokers, including
authorized brokers of service organizations, are, in turn, authorized to
designate other intermediaries to accept purchase and redemption orders on a
Fund's behalf. Investors who invest through brokers, service organizations or
their designated intermediaries may be subject to minimums established by their
broker, service organization or designated intermediary.
Investors who establish shareholder accounts with the Trust should submit
purchase and redemption orders to the Transfer Agent as described in the
Prospectus. Investors who invest through authorized brokers, service
organizations or their designated intermediaries should submit purchase and
redemption orders directly to their broker, service organization or designated
intermediary. The broker or intermediary may charge you a transaction fee. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker, service organization or, if applicable, an authorized
designee, accepts the order. Shares of any Fund may be purchased or redeemed on
any Business Day at the net asset value next determined after receipt of the
order, in good order, by the Transfer Agent, the service organization, broker or
designated intermediary. A "Business Day" means any day on which the New York
Stock Exchange (the "NYSE") is open. For an investor who has a shareholder
account with the Trust, the Transfer Agent must receive the investor's purchase
or redemption order before the close of regular trading on the NYSE for the
investor to receive that day's net asset value. For an investor who invests
through a mutual fund marketplace, the investor's authorized broker or
designated intermediary must receive the investor's purchase or redemption order
before the close of regular
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<PAGE>
trading on the NYSE and promptly forward such order to the Transfer Agent for
the investor to receive that day's net asset value. Service organizations,
brokers and designated intermediaries are responsible for promptly forwarding
such investors' purchase or redemption orders to the Transfer Agent.
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, on each day on which the New York Stock Exchange ("NYSE")
is open (a "Business Day"). If the NYSE closes early, the fund will accelerate
the calculation of the NAV and transaction deadlines to the actual closing time.
The NYSE is closed on Saturdays and Sundays as well as the following holidays:
New Year's Day, Martin Luther King, Jr. 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 close of regular
trading or the NYSE 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
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<PAGE>
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
From time to time, performance information, such as total return and yield for
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 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 shares. A Fund's yield
reflects a Fund's overall rate of income on portfolio investments as a
percentage of the share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30-day period by the net
asset value per share on the last day of that period.
For the Municipal Funds, tax-equivalent yield may also be quoted. Tax-
equivalent yield is calculated by determining the rate of return that would have
to be achieved on a fully taxable investment to produce the after tax equivalent
of a Municipal Fund's yield, assuming certain tax brackets for a shareholder.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Fund may discuss
performance as reported by various financial publications. The performance of a
Fund may be compared in publications to the performance of various indices and
investments for which reliable performance data is available. In addition, the
performance of a Fund may be compared in publications to averages, performance
rankings or other information prepared by recognized mutual fund statistical
services.
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 shares, when redeemed, may be more or less than the
original cost. Any fees charged by banks or other institutional investors
directly to their customer accounts in connection with investments in shares of
a Fund are not at the direction or within the control of the Funds and will not
be included in the Funds' calculations of total return.
YIELD
From time to time, Fixed Income, Short-Term Fixed Income, each Municipal Fund,
High Yield Bond and Total Return Bond 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 each class of shares of a Fund. Each type
of share is subject to differing yields for the same period. The yield
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<PAGE>
of a class of 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
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:
a-b
YIELD = 2 [ ( ---- + 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, 1999, the yields for Institutional
shares of the Fixed Income, Municipal Bond, Short-Term Fixed Income, Short-Term
Municipal Bond and High Yield Bond were 6.79%, 5.71%, 6.50%, 4.84% and 13.01%,
respectively. If the expense limitations for these Funds had not been in effect
during this period, the yields for Institutional shares of these Funds would
have been 6.79%, 5.17%, 6.44%, 4.82% and 13.00%, respectively. For the same
period, the tax-equivalent yields for Institutional shares of Municipal Bond and
Short-Term Municipal Bond were 8.56% and 8.01%, respectively, assuming the
highest Federal Income Tax bracket for individuals (39.6%). If the expense
limitations for these Funds had not been in effect during this period, the tax-
equivalent yields for Institutional shares of these Funds would have been 8.56%
and 7.98%, respectively, assuming the same Federal Income Tax bracket.
For the 30-day period ended October 31, 1999, the yields for the Investment
shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond and High Yield
Bond were 6.54%, 4.93%, 4.59% and 12.76%, respectively. If the expense
limitations described in the Prospectus for this Fund had not been in effect
during this period, the yield for Investment shares of Fixed Income, Municipal
Bond, Short-Term Municipal Bond and High Yield Bond would be 6.54%, 4.93%,
4.57%, and 12.75%, respectively. For the same period, the tax-equivalent yields
for Investment shares of Municipal Bond and Short-Term Municipal Bond were 8.16%
and 7.60%, respectively, assuming the highest Federal Income Tax bracket for
individuals (39.6%). If the
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<PAGE>
expense limitations described in the Prospectus for this Fund had not been in
effect during this period, the tax-equivalent yields for Investment shares of
this Fund would have been 8.16% and 7.57%, respectively, assuming the same
Federal Income Tax bracket.
TOTAL RETURN
Average annual total return is calculated separately for each class of shares of
a Fund. Each type of share is subject to different fees and expenses and,
consequently, may have differing average annual total returns for the same
period. Each Fund that advertises "average annual total return" for a class of
its shares computes such return by determining the average annual compounded
rate of return during specified periods that equates the initial amount invested
to the ending redeemable value of such investment according to the following
formula:
ERV
T = [ ( --- ) 1/n - 1 ]
P
Where: T = average annual total return,
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year (or other) periods at the
end of the applicable period (or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises "aggregate total return" for a class of its shares
computes such returns by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
ERV
Aggregate Total Return = [ ( --- ) - 1 ]
P
The above calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
For the fiscal year ended October 31, 1999, the average annual total return of
Institutional shares of Fixed Income, Municipal Bond, Short-Term Fixed Income,
Short-Term Municipal Bond, High Yield Bond and Smaller Companies were 0.86%,
-0.78%, 4.49%, 1.33%, 16.54% and 25.03%, respectively. For the fiscal period
ended September 30, 1999, the average annual total return of Institutional
shares of Micro Cap were 65.67%. For the five-year period ended October 31,
1999, the average annual total returns of Institutional shares of Fixed Income
and Municipal
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<PAGE>
Bond were 7.75% and 6.15%, respectively. For their respective periods from
commencement of operations to October 31, 1999, the average annual total returns
of Institutional shares of Fixed Income, Municipal Bond, Short-Term Fixed
Income, Short-Term Municipal Bond, High Yield Bond and Smaller Companies were
7.35%, 7.16%, 6.05%, 5.16%, 4.48% and 13.81%, respectively. For the period ended
September 30, 1999, the average annual total return of Institutional shares of
Micro Cap were 20.64%. If expense limitations 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.
For the fiscal year ended October 31, 2000, the average annual returns for
Investment shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond,
High Yield Bond, Smaller Companies and Micro Cap were %, %, %, %, % and %,
respectively. For their respective periods from commencement of operations for
Investment shares to October 31, 2000, the average annual total returns for
Investment shares of Fixed Income, Municipal Bond, Short-Term Municipal Bond,
High Yield Bond and Smaller Companies were %, %, %, % and %, respectively. For
the fiscal period ended September 30, 1999, the average annual returns for
Investment shares of Micro Cap were %. For the period from commencement of
operations for Investment shares to September 30, 2000, the average annual total
returns for Micro Cap were %. If the expense limitations described in each
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 publications, including, but not limited to, Barron's, The Wall Street
Journal, Weisenberger Investment Companies Service, Dow Jones Investment
Adviser, Dow Jones Asset Management, 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 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., Credit Suisse First Boston Corporation, Morgan Stanley Dean Witter,
Salomon Smith Barney, 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
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<PAGE>
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 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 (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
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<PAGE>
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 gain 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 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
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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. 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. Investments in passive foreign investment
companies may also produce ordinary income rather than capital gains, and the
deductibility of losses is subject to certain limitations. 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 and interest rate 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.
High Yield Bond and Total Return Bond 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
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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, deferred interest securities,
increasing rate securities, pay-in-kind ("P.I.K.") 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 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
bond was issued. In that event, a portion of a Municipal Fund's distributions
attributable to interest such Fund received on such bond for the current year
and for prior years could be characterized or recharacterized as taxable income.
Each Fixed Income Fund and each Municipal Fund may purchase municipal securities
together with the right to resell the securities to the seller at an agreed upon
price or yield within a specified period prior to the maturity date of the
securities. Such a right to resell is commonly known as a "put" and is also
referred to as a "standby commitment." A Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, a Fund
may purchase beneficial interests in municipal securities held by trusts,
custodial arrangements or partnerships and/or combined with
Page -65-
<PAGE>
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, 2000 the following Funds had
available realized capital losses to offset future net capital gains: (and, in
the case of Micro Cap, September 30,2000)
<TABLE>
<CAPTION>
Expiration
Date
---------------
<S> <C>
Municipal Bond 10/31/2007
Fixed Income 10/31/2007
Short-Term Municipal Bond 10/31/2005-2007
Short-Term Fixed Income 10/31/2007
High Yield Bond 10/31/2006-2007
Smaller Companies 10/31/2006-2007
Micro Cap 10/31/2007
</TABLE>
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
Page -66-
<PAGE>
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, certain interest from interest rate swaps and income from 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 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.
Page -67-
<PAGE>
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.
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
Page -68-
<PAGE>
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.
GENERAL INFORMATION ABOUT THE TRUST
GENERAL
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.
Page -69-
<PAGE>
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 seven additional
series. Until December 28, 1994, Fixed Income and Municipal Bond 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 three classes of shares: Investment shares, Institutional shares and
Premier 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 Investment shares bear service fees
and each class may bear other expenses properly attributable to the particular
class. Also, holders of Investment 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.
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.
As of January --, 2000, the following shareholders owned the following
respective percentages of the outstanding Institutional shares of Fixed Income,
Municipal Bond, Short-Term Municipal Bond, Short-Term Fixed Income, High Yield
Bond, Smaller Companies and Micro Cap:
Page -70-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income - Charles Schwab & Co Inc., Special Custody
Institutional Class Account, Mutual Funds Department, 101
Montgomery St., San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Wendel & Co A/C 767923, c/o The Bank of New
York, Attn: Mutual Fund/Reorg Dept/ P.O. Box
1066 Wall Street Station, New York, NY
10268-1066
-------------------------------------------------------------------------------------------------
Municipal Bond - Charles Schwab & Co Inc., Special Custody
Institutional Class Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
National Financial Services Corp., For the
Exclusive Benefit of Our Customers, Attn:
Mutual Funds - No Loads - 5th Floor, 200
Liberty Street, 1 World Fin Ctr, New York, NY
10281-1003
-------------------------------------------------------------------------------------------------
Short-Term Municipal Bond Charles Schwab & Co Inc., Special Custody
- Institutional Class71. Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Batrus & Co., c/o Bankers Trust Co., P.O. Box
9005, Church Street Station, New York, NY 10006
-------------------------------------------------------------------------------------------------
Short-Term Fixed Income - Independence Trust Company, Cash Account, P.O.
Institutional Class Box 662188, Franklin, TN 37058-2188
-------------------------------------------------------------------------------------------------
First Union National Bank, Cash/Reinvest Acct,
Acct #988688883, 1525 W Wt Harris Blvd
#NC1151, Charlotte, NC 28262-8522
-------------------------------------------------------------------------------------------------
Batrus & Co, c/o Bankers Trust Co, P.O. Box
9005, Church Street Station, New York, NY
10006
-------------------------------------------------------------------------------------------------
First Union National Bank Cust FBO Jewish
Federation of Greater Philadelphia Charitable
Trust Fund A/C 1080825451 1525 W. WT Harris
Blvd. 3A4CMG-NC1151 Charlotte, NC 28262-8522
-------------------------------------------------------------------------------------------------
High Yield Bond -- Bost & Co A/C NYXF1783602 FBO Bell Atlantic
Institutional Class Master Trust Mutual Fund Operations P O Box
3198 Pittsburgh, PA 15230-3198
-------------------------------------------------------------------------------------------------
Public School Employees Retirement System C/O
Mellon Trust MTL Fnds Ops P O Box 3198
Pittsburgh, PA 15230-3198
-------------------------------------------------------------------------------------------------
Smaller Companies - Morgan Grenfell Capital Management Inc., 885
Institutional Class Third Ave 32nd Fl, New York, NY 10022-4834
-------------------------------------------------------------------------------------------------
Deutsche Bank Securities, Inc., C/F
360-01618-83, 1251 6th Ave, New York, NY
10020-1104
-------------------------------------------------------------------------------------------------
</TABLE>
Page -71-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Fidelity Investments Institutional Operations
Co Inc., As Agent for Certain Employee Benefit
Plans, 100 Magellan Way KWIC, Covington, KY
41015-1999
-------------------------------------------------------------------------------------------------
Micro Cap - Institutional Charles Schwab & Co, Inc., Special Custody
Class Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Currie & Co, c/o Fiduciary Trust Company Intl,
P.O. Box 3199, Church Street Station, New
York, NY 10008-3199
-------------------------------------------------------------------------------------------------
Fidelity Investments Institutional Operations
Co Inc as agent for certain employee benefit
plans, 100 Magellan Way KWIC, Covington, KY
41015-1999
-------------------------------------------------------------------------------------------------
</TABLE>
As of January, 2000, the following shareholders owned the following respective
percentages of the outstanding Investment shares of the following funds:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income -- National Financial Services Corp for the
Investment Class Exclusive Benefit of our Customers, ATTN
Mutual FDS - No Loads, 5th Fl, 200 Liberty St,
1 World Fin Ctr, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Municipal Bond -- National Financial Services Corp for the
Investment Class Exclusive Benefit of our Customers, ATTN
Mutual FDS, No Loads, 5th Fl, 200 Liberty St,
1 World Fin Ctr, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Short-Term Municipal Bond National Investor Services Corp for Exclusive
-- Investment Class Benefit of Customers, 55 Water St., Fl 32, New
York, NY 10041-3299
-------------------------------------------------------------------------------------------------
National Financial Services Corp for the
Exclusive Benefit of our Customers, ATTN
Mutual FDS, No Loads, 5th Fl, 200 Liberty St,
1 World Fin Ctr, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
</TABLE>
Page -72-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
High Yield Bond -- Charles Schwab & Co. Inc. Special Custody
Investment Class Account Mutual Funds Department 101 Montgomery
Street San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Smaller Companies -- National Financial Svcs Corp for Exclusive
Investment Class Benefit of our Customers, Sal Vella, 200
Liberty St, New York, NY 10281-1000
-------------------------------------------------------------------------------------------------
Charles Schwab & Co, Inc., Special Custody
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
Micro Cap -- Charles Schwab & Co, Inc., Special Custody
Investment Class Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
National Investor Services Corp for Exclusive
Benefit of Customers, 55 Water St., Fl 32, New
York, NY 10041-3299
-------------------------------------------------------------------------------------------------
</TABLE>
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.
ANNUAL AND SEMI-ANNUAL REPORTS
Shareholders of each Fund receive an annual report containing audited financial
statements and a semi-annual report. All transactions in Institutional shares
and Premier shares of a Fund and
Page -73-
<PAGE>
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.
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
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, 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 the audited financial statements for Micro Cap for the year ended
September 30, 2000 are included in, and incorporated by reference into,
this Statement of Additional Information in reliance upon reports of
PricewaterhouseCoopers LLP, the Fund's independent auditors, as experts in
accounting and auditing. The audited financial statements for the other Funds
for the year ended October 31, 2000 are included in, and incorporated by
reference into, this Statement of Additional Information in reliance upon the
reports of PricewaterhouseCoopers LLP, the Fund's independent auditors, as
experts in accounting and auditing.
The audited annual financial statements of the Funds for the periods ended on
and prior to October 31, 2000 are included in, and incorporated by reference
into, this Statement of Additional Information from the 2000 Annual Report to
Shareholders of Micro Cap for the year ended September 30, 1999 (filed
electronically on November 30, 2000, file no. -) and the 2000 Annual Report to
Shareholders of the other Funds for the year ended October 31, 2000 (filed
Page -74-
<PAGE>
electronically on December 30, 2000; -), and will be attached to each copy of
such Statement of Additional Information that is distributed.
Page -75-
<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) and Fitch IBCA, Duff &
Phelps ("Fitch") at the date of this SAI 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 necessarily 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
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from `Aa' through `Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating 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 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, 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.
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.
Page -76-
<PAGE>
B: Bonds which are rated B generally lack characteristics of the 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.
STANDARD & POOR'S
Ratings from `AA' to `CCC' may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
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.
Bond rated `BB', `B', `CCC', and `CC' are regarded as having significant
speculative characteristics. Such bonds will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: Bonds rated BB are less vulnerable in the near term than other lower-rated
bonds. However, they face major ongoing uncertainties and exposure to adverse
business, financial, or economic conditions which could lead to the issuer's
inadequate capacity to meet its financial commitments.
B: Bonds rated B are more vulnerable than bonds rated BB, but the issuer
currently has the capacity to meet its financial commitments. Adverse business,
financial, or economic conditions will likely impair the issuer's capacity or
willingness to meet its financial commitments.
CCC: Bonds rated CCC are currently vulnerable, and are dependent upon favorable
business, financial, and economic conditions to meet financial commitments.
Page -77-
<PAGE>
CC: Bonds rated CC are currently highly vulnerable.
FITCH
Plus or minus may be appended to a rating to denote relative status with
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, to categories below `CCC', or to short-term ratings other than
`F1'.
Investment Grade
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. A C rating signals imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the
Page -78-
<PAGE>
following serve as general guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of outstanding amounts and accrued
interest, "DD" indicated potential recoveries in the range of 50%-90% and "D"
the lowest recovery potential, i.e., below 50%.
Entities in this category have defaulted on some or all of their obligations.
Entities rated "DDD" have the highest prospect for resumption of performance or
continued operation with or without a formal reorganization process. Entities
rated "DD" and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a higher portion of
their outstanding obligations, while entities rated "D" have a poor prospect of
repaying all obligations.
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
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
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:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure 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.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in
Page -79-
<PAGE>
changes in the level of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S
A-1: An obligor rated A-1 has strong capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
extremely strong.
A-2: An obligor rated A-2 has satisfactory capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3: An obligor rated A-3 has adequate capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
B: An obligor rated B is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitments; however, it faces major ongoing uncertainties which could
lead to the obligor's inadequate capacity to meet its financial commitments.
C: An obligor rated C is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for it to meet its
financial commitments.
FITCH
F1: Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2: Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3: Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B: Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C: High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D: Default. Denotes actual or imminent payment default.
Page -80-
<PAGE>
III. SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
MOODY'S
In municipal debt issuance, there are three rating categories for short-
term obligations that are considered investment grade. These ratings are
designated as Moody's Investment Grade (MIG) and are divided into three levels -
MIG 1 through MIG 3.
MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
STANDARD & POOR'S
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.
SP-3 Speculative capacity to pay principal and interest.
Page -81-
<PAGE>
APPENDIX B
THE ADVISER'S MICRO CAP INVESTMENT RESULTS
Set forth below are investment results for Micro Cap and a composite of accounts
managed by Micro Cap Equity Team of DeAM, Inc. in accordance with Micro Cap
investment strategy (the "DeAM, Inc. Micro Cap Composite"). For comparison
purposes, performance information is also shown for Micro Cap and the Russell
2000 (an index of small capitalization stocks). The Russell 2000 is comprised of
issuers that are ranked according to market capitalization in the bottom 10% of
the U.S. equity market. In contrast, Micro Cap's principal investments are
common stocks of issuers that are ranked (at time of purchase) in the bottom 5%
of U.S. equity market.
Each of the Adviser's discretionary, microcap accounts (other than Micro Cap,
which commenced operations on December 18, 1996) is included in the DeAM, Inc.
Micro Cap Composite. These accounts had the same investment objective as Micro
Cap and were managed using substantially similar, though not necessarily
identical, investment strategies and techniques as those contemplated for Micro
Cap. Because of the similarities in investment strategies and techniques, the
Adviser believes that the accounts included in the DeAM, Inc. Micro Cap
Composite are sufficiently comparable to Micro Cap to make the performance data
listed below relevant to prospective investors.
The investment results presented on the next page for the DeAM, Inc. Micro Cap
Composite includes Micro Cap's investment results and are not intended to
predict or suggest the returns that will be experienced by Micro Cap or the
return an investor may achieve by investing in shares of the Fund. Most of the
accounts included in the DeAM, Inc. Micro Cap 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 DeAM, Inc. Micro Cap
Composite might have been lower.
The investment results of the DeAM, Inc. Micro Cap Composite were calculated in
accordance with the Association for Investment Management and Research (AIMR)
Performance Presentation Standards and 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). Micro Cap's
estimated total annual operating expenses are higher than the highest investment
advisory fee charged to any account included in the DeAM, Inc. Micro Cap
Composite. As a result, it is expected that fees and expenses will reduce Micro
Cap's performance to a greater extent than investment advisory fees have reduced
the performance of accounts included in the DeAM, Inc. Micro Cap Composite.
Page -82-
<PAGE>
PERFORMANCE OF MICRO CAP
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
TOTAL RETURN FOR YEAR ENDED
DECEMBER 31, 1999 77.53%
-------------------------------------------------------------------------------
ANNUALIZED TOTAL RETURN FOR
PERIOD FROM DECEMBER 18, 1996 TO 29.41%
DECEMBER 31, 1999
-------------------------------------------------------------------------------
</TABLE>
INVESTMENT TRUST
Micro Cap
Performance of DeAM, Inc. Micro Cap Composite And Russell 2000
AVERAGE ANNUAL TOTAL RETURN
DeAM, Inc. MICRO CAP COMPOSITE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
YEAR (NET OF FEES) RUSSELL 2000
------------------------------------------------------------------------------
<S> <C> <C>
1999 75.30 43.09
------------------------------------------------------------------------------
1998 1.14 1.23
------------------------------------------------------------------------------
1997 20.53 12.95
------------------------------------------------------------------------------
1996 52.70 11.26
------------------------------------------------------------------------------
1995 56.38 31.04
------------------------------------------------------------------------------
1994 15.39 2.43
------------------------------------------------------------------------------
1993 20.28 13.36
------------------------------------------------------------------------------
1992 5.58 7.77
------------------------------------------------------------------------------
1991 77.47 51.19
------------------------------------------------------------------------------
1990 0.50 17.41
------------------------------------------------------------------------------
ANNUALIZED TOTAL RETURN FOR 22.01 12.29
PERIOD FROM DECEMBER 31,
1987 TO DECEMBER 31, 1999
------------------------------------------------------------------------------
</TABLE>
Page -83-
<PAGE>
INVESTMENT TRUST
One South Street
Baltimore, MD 21202
INVESTMENT ADVISER
Deutsche Asset Management, Inc.
130 Liberty Street
New York, NY 10006
ADMINISTRATOR
Deutsche Asset Management, Inc.
150 South Independence Square West
Philadelphia, Pennsylvania 19106
DISTRIBUTOR
ICC Distributors, Inc.
Two Portland Square
Portland, ME 04101
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
TRANSFER AGENT
Investment Company Capital Corp.
One South Street
Baltimore, Maryland 21202
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 100036
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--1-800-730-1313
Telephone Exchanges--1-800-730-1313
Share Price and Performance
Information--1-800-730-1313
Page -84-
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
Except as noted, the following exhibits are being filed herewith:
(a). Agreement and Declaration of Trust of Registrant dated September 13,
1993, as amended. /1/
(b). Amended By-Laws of Registrant. /1/
(c). See Articles III, IV, and V of the Agreement and Declaration of Trust
(exhibit (a)) and Article II of the Amended By-Laws (exhibit (b)).
/1/
(d)(1). Management Contract dated January 3, 1994, as amended as of April 25,
1994, April 1, 1995 and September 1, 1995, between Deutsche Asset
Management Investment Services Limited (formerly Morgan Grenfell
Investment Services Limited) and Registrant, on behalf of
International Select Equity Fund, Global Equity Fund, European Equity
Fund (formerly European Equity Growth Fund), New Asia Fund,
International Small Cap Equity Fund, Japanese Small Cap Equity Fund,
European Small Cap Equity Fund, Emerging Markets Equity Fund, Global
Fixed Income Fund, International Fixed Income Fund and Emerging
Markets Debt Fund. /1/
(d)(1)(i) Amendment dated August 22, 2000, to Management Contract dated January
3,1994, as amended April 25, 1994, April 1, 1995 and September 1,
1995 between Deutsche Asset Management Investment Services Limited
and Registrant, on behalf of International Select Equity, European
Equity, International Small Cap Equity, Emerging Markets Equity Fund,
Global Fixed Income, International Fixed Income and Emerging Markets
Debt. /8/
(d)(2). Management Contract dated as of December 28, 1994 between Deutsche
Asset Management, Inc. (formerly Morgan Grenfell Inc.) and
Registrant, on behalf of Fixed Income Fund and Municipal Bond Fund.
/1/
(d)(3). Management Contract dated as of December 28, 1994 between Deutsche
Asset Management, Inc. (formerly Morgan Grenfell Inc.) and
Registrant, on behalf of Large Cap Growth Fund, Smaller Companies
Fund, Short-Term Fixed Income Fund and Short-Term Municipal Bond
Fund. /1/
(d)(4). Management Contract between Deutsche Asset Management, Inc. (formerly
Morgan Grenfell Inc. dated August 23, 1996) and Registrant, on behalf
of Micro Cap Fund. /2/
Page 2 of 11
<PAGE>
(d)(5). Management Contract between Deutsche Asset Management, Inc.
(formerly Morgan Grenfell Inc.) and Registrant dated August 23,
1996, on behalf of Total Return Bond Fund and High Yield Bond Fund.
/3/
(d)(6). Subadvisory Contract between Deutsche Asset Management Investment
Services Limited (formerly Morgan Grenfell Investment Services
Ltd.), Deutsche Asset Management Investment, Inc. (formerly Morgan
Grenfell Inc.) and Registrant, on behalf of Total Return Bond Fund.
/4/
(d)(7). Management Contract between Deutsche Asset Management, Inc. and
Registrant, on behalf of European Equity Fund. /7/
(e)(1). Distribution Agreement between ICC Distributors, Inc. and
Registrant, on behalf of all of its series. /7/
(e)(1)(i) Appendix A, revised as of October 29, 2000, to Distributor's
Agreement between ICC Distributors, Inc. and Registrant, on behalf
of all of its series. /10/
(f). Not Applicable.
(g). Custody Agreement dated as of August 24, 1998 between Brown Brothers
Harriman & Co. and Registrant, on behalf of all of its series. /4/
(h)(1). Administration Agreement dated as of August 27, 1998 between
Deutsche Asset Management, Inc. (formerly Morgan Grenfell Inc.) and
Registrant, on behalf of all of its series. /4/
(h)(2). Transfer Agency Agreement dated November 22, 1999, between
Investment Company Capital Corp. and Registrant, on behalf of each
of its series. /7/
(h)(2)(i) Appendix A dated October 29, 2000 to Transfer Agency Agreement dated
November 22, 1999, between Investment Company Capital Corp. and
Registrant, on behalf of each of its series-filed herewith.
(h)(3). Accounting Agency Agreement dated September 8, 1998 among Brown
Brothers Harriman & Co., Morgan Grenfell Inc. (formerly Morgan
Grenfell Capital Management, Inc.) and Registrant on behalf of all
of its series. /4/
(h)(3)(i) Amendments dated September 1, 2000, September 13, 2000, September
18, 2000, and September 22, 2000, to Accounting Agency Agreement
dated September 8, 1998 among Brown Brothers Harriman & Co.,
Deutsche Asset Management, Inc.(formerly Morgan Grenfell, Inc.) and
Registrant. /8/
(h)(3)(ii) Accounting Services Agreement dated September 1, 2000, among
Investment Company Capital Corp., Deutsche Asset Management, Inc.
and Registrant on behalf of Short-Term Fixed Income, Short-Term
Municipal Bond, Municipal Bond and Fixed Income. /8/
(h)(3)(iii) Appendix A dated November 30, 2000 to Accounting Services Agreement
dated September 1, 2000, among Investment Company Capital Corp.,
Deutsche Asset Management, Inc. and Registrant on behalf of Short-
Term Fixed Income, Short-Term Municipal Bond, Municipal Bond, Fixed
Income and Total Return Bond. /9/
(h)(3)(iv) Delegation Agreement dated as of August 24, 1998 between Brown
Brothers Harriman & Co. and Registrant on behalf of International
Select Equity Fund, Global Equity Fund, European Equity Fund, New
Asia Fund, International Small Cap Equity Fund, Japanese Small Cap
Equity Fund, European Small Cap Equity Fund, Morgan Grenfell
Emerging Markets Equity Fund, Core Global Fixed Income Fund, Global
Fixed Income Fund, International Fixed Income Fund, Morgan Grenfell
Emerging Markets Debt and Emerging Local Currency Debt Fund. /4/
Page 3 of 11
<PAGE>
(h)(3)(v) Appendix A to Accounting Services Agreement dated December1, 2000,
among Investment Company Capital Corp., Deutsche Asset Management,
Inc. and Registrant on behalf of Global Fixed Income, International
Fixed Income, Emerging Markets Debt- to be filed with the
registration statement under Rule 485(b) of the 1933 Act.
(h)(4) Expense Limitation Agreement dated September 30, 1999, between
Deutsche Asset Management, Inc. and Registrant, on behalf of each
class of shares of Micro Cap. /8/
(h)(4)(i) Expense Limitation Agreement dated October 31, 1999, between
Deutsche Asset Management, Inc. and Registrant, on behalf of each
class of shares of Fixed Income, Municipal Bond, Short-Term Fixed
Income, Short-Term Municipal Bond, High Yield Bond and Smaller
Companies. /8/
(h)(4)(ii) Expense Limitation Agreement dated October 31, 1999, among Deutsche
Asset Management, Inc., Deutsche Asset Management Investment
Services Limited and Registrant, on behalf of each class of shares
of International Select Equity, European Equity, Emerging Markets
Equity, Global Fixed Income, International Fixed Income, Emerging
Markets Debt and International Small Cap Equity. /8/
(h)(4)(iii) Expense Limitation Agreement dated September 29, 2000, between
Deutsche Asset Management, Inc. and Registrant, on behalf of High
Yield Bond Premier Class. /8/
(h)(4)(iv) Expense Limitation Agreement dated October 29, 2000, between
Deutsche Asset Management, Inc. and Registrant, on behalf of Total
Return Bond Institutional Class and Premier Class. /9/
(h)(4)(v) Appendix A to Expense Limitation Agreement dated October 31, 2000,
between Deutsche Asset Management, Inc. and Registrant on behalf of
European Equity Premier Class. /10/
(h)(4)(vi) Appendix A to Expense Limitation Agreement dated October 31, 2000,
between Deutsche Asset Management, Inc. and Registrant on behalf of
European Equity Class A, B and C Shares and International Select
Equity Class A, B and C Shares-to be filed with the registration
statement under rule 485(b) of the 1933 Act.
(i). Not Applicable.
(j). Not Applicable
(k). Not Applicable.
(l). Share Purchase Agreement dated as of December 29, 1993 between
Registrant and SEI Financial Management Corporation. /6/
(m). To be filed with the registration statement under rule 485(b) of the
1933 Act.
(n) Not Applicable
(o). Amended Rule 18f-3 Plan dated August 17, 2000. /8/
(o)(i) Amended Rule 18f-3 Plan - to be filed with the registration
statement under rule 485(b) of the 1933 Act.
(p). Fund and Advisers' Codes of Ethics. /8/;
(q). Powers of Attorney. /10/
-------------------
/1/ Filed as an exhibit to Post-Effective Amendment no. 9 to Registrant's
Registration Statement on February 15, 1996 (accession number 0000950146-96-
00221) and incorporated by reference herein.
Page 4 of 11
<PAGE>
/2/ Filed as an exhibit to Post-Effective Amendment no. 12 to Registrant's
Registration Statement on November 1, 1996 (accession number 0000950146-96-
001933) and incorporated by reference herein.
/3/ Filed as an exhibit to Post-Effective Amendment no. 18 to Registrant's
Registration Statement on December 12, 1997 (accession number0000950146-97-
001909) and incorporated by reference herein.
/4/ Filed as an exhibit to Post-Effective Amendment no. 20 to Registrant's
Registration Statement on December 28, 1998 (accession number 0001047469-98-
045270) and incorporated by reference herein.
/5/ Filed as an exhibit to Post-Effective Amendment no. 10 to Registrant's
Registration Statement on June 11, 1996 (accession number0000950146-96-000954)
and incorporated by reference herein.
/6/ Filed as an exhibit to Post-Effective Amendment no. 16 to Registrant's
Registration Statement on February 11, 1997 (accession number 0000950146-97-
000164) and incorporated by reference herein.
/7/ Filed as an exhibit to Post-Effective Amendment no. 22 to Registrant's
Registration Statement on December 23, 1999 (accession number 0000928385-99-
003687) and incorporated by reference herein.
/8/ Filed as an exhibit to Post-Effective Amendment No. 26 to Registrant's
Registration Statement on September 29, 2000 (accession number 0000950169-00-
001215) and incorporated by reference herein.
/9/ Filed as an exhibit to Post-Effective Amendment No. 28 to Registrant's
Registration Statement on October 27, 2000 (accession number 0000950109-00-
004256) and incorporated by reference herein.
/10/ Filed as an exhibit to Post-Effective Amendment No. 29 to Registrant's
Registration Statement on November 30, 2000 (accession number 0000950169-00-
001351) and incorporated by reference herein.
Item 24. Persons Controlled By or Under Common Control With Registrant
The Registrant does not directly or indirectly control any person.
Item 25. 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
Page 5 of 11
<PAGE>
All of the information required by this item is set forth in the Form ADV, as
amended, of Deutsche Asset Management Investment Services Limited (formerly
Morgan Grenfell Investment Services Limited) (File No. 801-12880) and in the
Form ADV, as amended, of Deutsche Asset Management, Inc. (formerly Morgan
Grenfell 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 27. PRINCIPAL UNDERWRITER
(a) ICC Distributors, Inc., the Distributor for shares of the Registrant, also
acts as principal underwriter for the following open-end investment companies:
BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio, BT
Investment Portfolios, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Communications Fund, Inc., Flag Investors Emerging Growth Fund, Inc.,
the Flag Investors Total Return U.S. Treasury Fund Shares of Total Return U.S.
Treasury Fund, Inc., the Flag Investors Managed Municipal Fund Shares of Managed
Municipal Fund, Inc., Flag Investors Short-Intermediate Income Fund, Inc., Flag
Investors Value Builder Fund, Inc., Flag Investors Real Estate Securities Fund,
Inc., Flag Investors Equity Partners Fund, Inc., Flag Investors Funds, Inc.
(formerly known as Deutsche Funds, Inc.), Flag Investors Portfolios Trust
(formerly known as Deutsche Portfolios), The Glenmede Funds, Inc. and The
Glenmede Portfolios.
(b) Unless otherwise stated, the principal business address for the following
persons is Two Portland Square, Portland, Maine 04101.
--------------------------------------------------------------------------------
Name and Principal Business Position and Offices with Positions and Offices.
Address Underwriter with Registrant
-------------------------------------------------------------------------------
John Y. Keffer President None
--------------------------------------------------------------------------------
Ronald H. Hirsch Treasurer None
--------------------------------------------------------------------------------
Nanette K. Chern Chief Compliance Officer None
-------------------------------------------------------------------------------
David I. Goldstein Secretary None
--------------------------------------------------------------------------------
Benjamin L. Niles Vice President None
--------------------------------------------------------------------------------
Frederick Skillin Assistant Treasurer None
--------------------------------------------------------------------------------
Marc D. Keffer Assistant Secretary None
--------------------------------------------------------------------------------
Page 6 of 11
<PAGE>
-----------------------------
(c) None
Item 28. 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 Deutsche Asset Management, One
South Street, Baltimore, Maryland 21202. 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 custodian: Brown Brothers Harriman & Co., 40
Water Street, Boston, Massachusetts 02109, except for certain transfer agency
and records which are in the physical possession of Investment Company Capital
Corp., One South Street, Baltimore, Maryland 21202, the Registrant's transfer
agent, and Deutsche Asset Management, Inc., the Trust's administrator, 885 Third
Ave., New York, NY 10022.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKING
Not Applicable.
Page 7 of 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, 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 Baltimore and State of Maryland, on
December 29, 2000.
MORGAN GRENFELL INVESTMENT TRUST
By: /s/ Richard T. Hale
--------------------------
Richard T. Hale
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment to the Registrant's Registration Statement has been
signed by the following persons in the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ Richard T. Hale President and Chief December 29, 2000
------------------- Executive Officer
Richard T. Hale
/s/ Charles A. Rizzo Treasurer December 29, 2000
--------------------
Charles A. Rizzo
/s/ Paul K. Freeman Trustee December 29, 2000
-------------------
Paul K. Freeman
/s/ Graham E. Jones*
------------------- Trustee December 29, 2000
Graham E. Jones
/s/ Hugh G. Lynch*
----------------- Trustee December 29, 2000
Hugh G. Lynch
/s/ William N. Searcy*
--------------------- Trustee December 29, 2000
William N. Searcy
/s/ Edward T. Tokar* Trustee December 29, 2000
--------------------
Edward T. Tokar
*By: Dated: December 29, 2000
/s/ Daniel O. Hirsch
--------------------
Daniel O. Hirsch
Power-of-Attorney
Page 8 of 11
