<PAGE>
As filed with the Securities and Exchange Commission on November 30, 2000
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. [29]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. [31]
(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) 895-5000
Richard T. Hale
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):
X on November 30, 2000 pursuant to paragraph (b) of Rule 485
---
Page 1 of 16
<PAGE>
Deutsche Asset Management
Mutual Fund
Prospectus
November 30, 2000
Premier Class
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.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Overview
--------------------------------------------------------------------------------
of European Equity
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.
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.
--------------------------------------------------------------------------------
European Equity--Premier Class
Overview of European Equity
<TABLE>
<S> <C>
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 European Equity
Objective................................................................... 7
Strategy.................................................................... 7
Principal Investments....................................................... 7
Investment Process.......................................................... 7
Other Investments........................................................... 8
Risks....................................................................... 8
Management of the Fund...................................................... 9
</TABLE>
<TABLE>
<S> <C>
Portfolio Managers.......................................................... 10
Calculating the Fund's Share Price.......................................... 10
Performance Information..................................................... 11
Dividends and Distributions................................................. 11
Tax Considerations.......................................................... 11
Buying and Selling Fund Shares.............................................. 11
Financial Highlights........................................................ 14
</TABLE>
--------------------------------------------------------------------------------
3
<PAGE>
Overview of European Equity
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.
WHO SHOULD CONSIDER INVESTING IN THE FUND
European Equity Premier Class requires a minimum investment of $5,000,000. You
may only 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. 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.
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.
--------------------------------------------------------------------------------
4
<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 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 September 3, 1996. The bar chart shows the actual
return of the Fund's Institutional Class 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 Morgan Stanley Capital
International (MSCI) Europe Index over the last one 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, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
YEAR-BY-YEAR-RETURNS
Institutional Class/1/
(each full calendar year since inception)
[GRAPH]
1997 1998 1999/2/
---- ---- ----
15.54% 22.89% 45.43%
Since inception, the Fund's highest return in any calendar quarter was 39.68%
(fourth quarter 1999) and its lowest quarterly return was (16.78%)(third quarter
1998). Past performance offers no indication of how the Fund will perform in the
future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999/3/
<TABLE>
<CAPTION>
Since Inception
Sept. 3,
1 Year 1996/4/
<S> <C> <C>
European Equity--
Institutional Class 45.43% 29.71%
----------------------------------------------
MSCI Europe Index 16.23% 24.69%
----------------------------------------------
</TABLE>
/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 year-to-date performance as
of September 30, 2000 for the
Institutional Class was 98.86%. The
Fund's performance in 2000 was
significantly impacted by gains from
initial public offerings (IPOs)
during a period when the
Institutional Class' 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 Institutional Class'
performance also benefited from a
one-time gain from accounting for the
cancellation of certain shareholder
trades in February 2000.
/3/ Effective December 23, 1999,
Deutsche Asset Management, Inc.
replaced Deutsche Asset Management
Investment Services Limited as the
investment adviser to the Fund.
/4/ MSCI Europe Index performance is
calculated from August 30, 1996.
--------------------------------------------------------------------------------
5
<PAGE>
Overview of European Equity
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 shares of European Equity.
Expense Example. The example on this page illustrates the expenses you will
incur on a $10,000 investment in Premier 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/Expenses are based on the actual expenses of the Institutional Class
including the restated Other Expenses for the current fiscal year. Premier
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 2.52% and 3.22%, 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, October 31, 2000, to waive
their fees or reimburse expenses so that total expenses will not exceed 0.95%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES/1/
<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets
<S> <C>
Management Fees 0.70%
---------------------------------------------------------------
Distribution and
Service (12b-1) Fees None
---------------------------------------------------------------
Other Expenses 2.52%/1/
---------------------------------------------------------------
Total Annual Fund
Operating Expenses 3.22%/1/
---------------------------------------------------------------
Less: Fee Waivers or Expense Reimbursements (2.27%)/2/
---------------------------------------------------------------
Net Expenses 0.95%
---------------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE/3/
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$97 $779 $1,486 $3,365
---------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
6
<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.
--------------------------------------------------------------------------------
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.
The Fund may invest in companies of any market capitalization.
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 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.
--------------------------------------------------------------------------------
7
<PAGE>
A Detailed Look at European Equity
market circumstances. Historically, the Fund has had a low portfolio turnover
rate.
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.
--------------------------------------------------------------------------------
Portfolio Turnover. The portfolio turnover rate measures the frequency with
which the Fund sells and replaces its securities within a given period.
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.
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, 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. 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.
--------------------------------------------------------------------------------
8
<PAGE>
A Detailed Look at European Equity
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. 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.
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. Particularly when they are performing poorly, a small company's shares
may be more difficult to sell.
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.
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 Fund Management, Inc., 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 Advisers. 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. 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. The investment adviser/1/ received a fee of
0.70% of the average daily net assets for its services in the last fiscal year.
The investment adviser reimbursed a portion of its fee during the period.
DeAM, Inc. provides a full range of international investment advisory services
to institutional clients, and as of October 31, 2000, managed approximately
$17.3 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 fund, retail and
commercial banking, investment banking and insurance.
--------------------------------------------------------------------------------
/1/Deutsche Asset Management Investment Services Limited (DeAMIS) was the
Fund's investment adviser until December 23, 1999.
--------------------------------------------------------------------------------
9
<PAGE>
A Detailed Look at European Equity
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, Inc. 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, Inc. 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.
. 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, Inc. 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, Inc. 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, Inc. 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.
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 Funds. In
addition, 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.
Brokers and financial advisors may charge additional fees to investors for
those services not otherwise included in the brokers or financial advisors
subdistribution or 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 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 formula calls for deducting all of the liabilities of a Fund's class of
shares from the total value of its assets--the market
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
10
<PAGE>
A Detailed Look at European Equity
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 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 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 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 the 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
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 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 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 Generally, long-term
shares owned more capital gains or losses
than one year
---------------------------------------------
Your sale of Generally, short-term
shares owned for capital gains or losses
one year or less 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 advisor about
your investment.
BUYING AND SELLING FUND SHARES
You may only 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.
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.
--------------------------------------------------------------------------------
11
<PAGE>
A Detailed Look at European Equity
Minimum Account Investments
<TABLE>
<S> <C>
To open an account $5,000,000
To add to an account $1,000,000
Minimum account balance $1,000,000
</TABLE>
The Fund and its service providers reserve the right to, from time to time in
their discretion, waive or reduce the investment minimums. Shares of the Fund
may be offered to directors and trustees, of any mutual fund advised or
administered by Deutsche Asset Management, Inc. or its affiliates, or employees
of Deutsche Bank AG, their spouses and minor children, without regard to the
minimum investment requirements.
How to Open Your Fund Account
<TABLE>
<S> <C>
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 Deutsche European
Equity--Premier Class 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.
</TABLE>
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 Deutsche European Equity--Premier Class 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 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 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
$1,000,000 worth of shares in your account to keep it open. Unless exchanging
into another Deutsche Asset Management mutual 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.
<TABLE>
<S> <C>
Routing No: 021001033
Attn: Deutsche Asset Management/
Mutual funds
DDA No: 00-226-296
FBO: (Account name)
(Account number)
Credit: European Equity--Premier
Class--1731
</TABLE>
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. Your service agent may charge a fee for buying and
selling shares for you.
--------------------------------------------------------------------------------
12
<PAGE>
A Detailed Look at European Equity
. 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.
. 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.
. This Fund is a class of a multiclass fund. There are other classes with
different fees, expenditures and investment minimums.
. 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, 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, letter or wire.
. You will receive a written confirmation of each transaction from the Service
Center or your service agent.
--------------------------------------------------------------------------------
13
<PAGE>
A Detailed Look at European Equity
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. The table below helps you understand the
financial performance of the Institutional Class shares of the Fund for the
past four 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 (except as noted) 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 and
semi-annual reports are available free of charge by calling the Service Center
at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
Six Months
Ended For the Years Ended For the
April 30, 2000 October 31, Period Ended
(Unaudited) 1999 1998 1997 October 31, 1996/1/
<S> <C> <C> <C> <C> <C>
For a Share Outstanding
Throughout each Period:
Net Asset Value,
Beginning of Period $11.43 $13.50 $12.81 $10.60 $10.00
------------------------------------------------------------------------------------
Income from Investment
Operations
Net Investment Income (1.29) 0.29 0.15 0.25 --
------------------------------------------------------------------------------------
Net Realized and
Unrealized Gains
(Losses) 21.48 2.04 1.68 2.11 0.60
------------------------------------------------------------------------------------
Total from Investment
Operations 20.19 2.33 1.83 2.36 0.60
------------------------------------------------------------------------------------
Distributions to
Shareholders
Net Investment Income (0.13) (0.29) (0.24) (0.03) --
------------------------------------------------------------------------------------
Net Realized Gains (2.77) (4.11) (0.90) (0.12) --
------------------------------------------------------------------------------------
Total Distributions (2.90) (4.40) (1.14) (0.15) --
------------------------------------------------------------------------------------
Net Asset Value, End of
Period $28.72 $11.43 $13.50 $12.81 $10.60
------------------------------------------------------------------------------------
Total Investment Return 151.27% 21.18% 15.36% 22.48% 6.00%+
------------------------------------------------------------------------------------
Supplemental Data and
Ratios:
Net Assets, End of
Period (000s omitted) $41,615 $897 $5,387 $39,330 $17,902
------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net Investment Income
(Loss) 1.25% 1.23% 1.12% 1.71% (0.41)%/2/
------------------------------------------------------------------------------------
Expenses 2.80% 1.64% 1.13% 1.17% 1.40%/2/
------------------------------------------------------------------------------------
Decrease Reflected in
Above Expense Ratio Due
to Absorbtion of
Expenses by DeAMIS/3/ 1.55% 0.74% 0.23% 0.27% 0.50%/2/
------------------------------------------------------------------------------------
Portfolio Turnover Rate 321% 80% 49% 45% 5%
------------------------------------------------------------------------------------
</TABLE>
/1/The Fund's inception was September 3, 1996.
/2/Annualized.
/3/DeAMIS-Deutsche Asset Management Investment Services Limited, the Fund's
investment adviser until December 23, 1999.
+Return is for the period indicated and has not been annualized.
--------------------------------------------------------------------------------
14
<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 November 30, 2000, 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--Premier Class CUSIP 61735K539
Morgan Grenfell Investment Trust 811-8006
Distributed by: 1731PRO (11/00)
ICC Distributors, Inc.
2 Portland Square
Portland, ME 04101
<PAGE>
MORGAN GRENFELL INVESTMENT TRUST
No-Load Open-End Funds
One South Street
Baltimore, Maryland 21202
STATEMENT OF ADDITIONAL INFORMATION
November 30, 2000
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 eight 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
- Core Global Fixed Income Fund, previously Morgan Grenfell Core Global
Fixed Income 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, Investment or Premier Class
shares Prospectuses dated February 28, 2000 or European Equity Premier Class
dated November 30, 2000 (each, a "Prospectus" and collectively, the
"Prospectuses"). The unaudited semi-annual financial statements and audited
financial statements for each Fund are included in the Funds' semi-annual and
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION......................................................................................................... 3
ADDITIONAL INFORMATION ON FUND INVESTMENTS AND STRATEGIES AND RELATED RISKS.......................................... 4
INVESTMENT RESTRICTIONS.............................................................................................. 32
TRUSTEES AND OFFICERS................................................................................................ 35
INVESTMENT ADVISORY AND OTHER SERVICES............................................................................... 38
SERVICE PLAN......................................................................................................... 43
PORTFOLIO TRANSACTIONS............................................................................................... 45
PURCHASE AND REDEMPTION OF SHARES.................................................................................... 48
PERFORMANCE INFORMATION.............................................................................................. 50
TAXES................................................................................................................ 54
GENERAL INFORMATION ABOUT THE TRUST.................................................................................. 61
ADDITIONAL INFORMATION............................................................................................... 68
FINANCIAL STATEMENTS................................................................................................. 68
APPENDIX A DESCRIPTION OF RATINGS CATEGORIES OF MOODY'S INVESTORS SERVICE, INC. AND STANDARD & POOR'S RATINGS GROUP.. 70
APPENDIX B QUALITY DISTRIBUTION FOR EMERGING MARKETS DEBT FUND....................................................... 72
</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.
-2-
<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company that currently consists
of fifteen separate investment series, including the following eight series (the
"Funds"):
International Select Equity Fund
European Equity Fund
International Small Cap Equity Fund
Emerging Markets Equity Fund
(collectively, the "Equity Funds")
Core Global Fixed Income Fund
Global Fixed Income Fund
International Fixed Income Fund
Emerging Markets Debt Fund
(collectively, the "Fixed Income Funds").
Each of the Fixed Income Funds is "non-diversified" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"). Each of the Equity
Funds is "diversified" within the meaning of the 1940 Act.
Deutsche Asset Management Investment Services Limited (the "Adviser" or
"DeAMIS") serves as investment adviser to the Funds other than the European
Equity Fund. Deutsche Asset Management, Inc. ("DeAM, Inc.") serves as
investment adviser to the European Equity Fund. 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.
-3-
<PAGE>
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 Fund
--------------------------------
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 EAFE 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 Fund
--------------------
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 Fund
-----------------------------------
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.
-4-
<PAGE>
Emerging Markets Equity Fund
----------------------------
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.
Core Global Fixed Income Fund
---------------------------------
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 three highest
categories by a major independent rating agency, or in unrated securities that
the 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 any security is downgraded, the adviser 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 (junk
bonds). Up to 35% of the Fund's total assets may be invested in domestic and
foreign cash equivalents. 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, the United States, 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.
Global Fixed Income Fund
------------------------
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 25% of its
total assets in securities denominated in the euro, as well as in the securities
of companies located in each of Japan, the United States, 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.
-5-
<PAGE>
International Fixed Income Fund
-------------------------------
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 Fund
--------------------------
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
country or 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.
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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, although the Emerging Local Currency
Debt Fund does not expect generally to enter into such contracts for 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.
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The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward currency
contracts in an attempt to protect the value of a Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which a Fund can achieve at some future point in time. The precise
projection of short-term currency market movements is not possible, and short-
term hedging provides a means of fixing the dollar value of only a portion of a
Fund's foreign assets.
A 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
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contracts. In such event, the Funds' ability to utilize forward currency
contracts may be restricted.
A Fund generally will not enter into a forward currency contract with a term of
greater than one year. 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
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(referred to as "premiums") for granting the rights evidenced by the options.
However, in return for the premium, the Fund assumes certain risks. For example,
in the case of a written call option, the Fund forfeits the right to any
appreciation in the underlying security while the option is outstanding. A put
option gives to its purchaser the right to compel the Fund to purchase an
underlying security from the option holder at the specified price at any time
during the option period. In contrast, a call option written by the Fund gives
to its purchaser the right to compel the Fund to sell an underlying security to
the option holder at a specified price at any time during the option period.
Upon the exercise of a put option written by a Fund, the Fund may suffer a loss
equal to the difference between the price at which the Fund is required to
purchase the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. All options written
by a Fund are covered. In the case of a call option, this means that the Fund
will own the securities subject to the option or an offsetting call option as
long as the written option is outstanding, or will have the absolute and
immediate right to acquire the securities that are subject to the written
option. In the case of a put option, this means that the Fund will deposit cash
or liquid securities or a combination of both in a segregated account with the
custodian with a value at least equal to the exercise price of the put option.
PURCHASED OPTIONS. The Funds may also purchase put and call options on
securities. The advantage to the purchaser of a call option is that it may
hedge against an increase in the price of securities it ultimately wishes to
buy. The advantage to the purchaser of a put option is that it may hedge
against a decrease in the price of portfolio securities it ultimately wishes to
sell.
Each Fund may enter into closing transactions in order to offset an open option
position prior to exercise or expiration by selling an option it has purchased
or by entering into an offsetting option. If a Fund cannot effect closing
transactions, it may have to retain a security in its portfolio it would
otherwise sell or deliver a security it would otherwise retain. The Funds may
purchase and sell options traded on recognized foreign exchanges. The Funds may
also purchase and sell options traded on U.S. exchanges and, to the extent
permitted by law, options traded over-the-counter.
YIELD CURVE OPTIONS. The Funds may enter into options on the yield spread or
yield differential between two securities. These options are referred to as
yield curve options. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
CURRENCY OPTIONS. The Funds may purchase and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter) to
manage portfolio exposure to changes in U.S. dollar exchange rates. Call
options on foreign currency written by a Fund will be covered, which means that
the Fund will own an equal amount of the underlying foreign currency. With
respect to put options on foreign currency written by a Fund, the Fund will
deposit cash or liquid securities or a combination of both in a segregated
account with the custodian in an amount equal to the amount the Fund would be
required to pay upon exercise of the put option.
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STOCK INDEX OPTIONS The Funds may purchase and write exchange-listed put and
call options on stock indices to hedge against risks of market-wide price
movements. A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. Examples
of well-known foreign stock indices are the Toronto Stock Exchange Composite 100
and the Financial Times Stock Exchange 100. Options on stock indices are
similar to options on securities. However, because options on stock indices do
not involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer in cash a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying index on the exercise
date.
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. The Emerging Markets Debt Fund may invest in loan
obligations issued or guaranteed by sovereign governments or their agencies and
instrumentalities. The ownership of these loans is registered in the books of
an agent bank and/or the borrower and transfers of ownership are effected by
assignment agreements. Documentation for these assignments includes a signed
notice of assignment, which is sent to the agent and/or borrower for
registration shortly after the execution of the assignment agreement. Prior to
the notice of assignment being registered with the agent and/or borrower, the
borrower or its agent will make any payments of principal and interest to the
last registered owner.
Given the volume of secondary market trading in registered loans, the agent
and/or borrower's books may be out of date, making it difficult for a Fund to
establish independently whether the seller of a registered loan is the owner of
the loan. For this reason, the Fund will require a contractual warranty from
the seller to this effect. In addition, to assure the Fund's ability to receive
principal and interest owed to it but paid to a prior holder because of delays
in registration, the Fund will purchase registered loans only from parties that
agree to pay the amount of such principal and interest to the Fund upon demand
after the borrower's payment of such principal and interest to any prior holder
has been established.
Generally, registered loans trade in the secondary market with interest (i.e.,
the right to accrued but unpaid interest is transferred to purchasers).
Occasionally, however, the Fund may sell a registered loan and retain the right
to such interest ("sell a loan without interest"). To assure the Fund's ability
to receive such interest, the Fund will make such sales only to parties that
agree to pay the amount of such interest to the Fund upon demand after the
borrower's payment of such interest to any subsequent holder of the loan has
been established. In this rare situation, the Fund's ability to receive such
interest (and, therefore, the value of shareholders' investments in the Fund
attributable to such interest) will depend on the creditworthiness of both the
borrower and the party who purchased the loan from the Fund.
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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
The International Small Cap Equity Fund invests a significant portion of its
assets in smaller, lesser-known, foreign companies which the Adviser believes
offer greater growth potential than larger, more mature, better-known companies.
Investing in the securities of these companies, however, also involves greater
risk and the possibility of greater portfolio price volatility. Among the
reasons for the greater price volatility of these small companies and unseasoned
stocks are the less certain growth prospects of smaller firms, the lower degree
of liquidity in the markets for such stocks and the greater sensitivity of small
companies to changing economic conditions in their geographic region. For
example, securities of these companies involve higher investment risk than that
normally associated with larger firms due to the greater business risks of small
size and limited product lines, markets, distribution channels and financial and
managerial resources.
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CUSTODIAL RECEIPTS
Each of the Funds may acquire U.S. Government securities and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
securities, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRs") and "Certificate of Accrual on Treasury Securities"
("CATS"). The stripped coupons are sold separately from the underlying
principal, which is usually sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. The underlying U.S.
Treasury bonds and notes themselves are generally held in book-entry form at a
Federal Reserve Bank. Counsel to the underwriters of these certificates or
other evidences of ownership of U.S. Treasury securities have stated that, in
their opinion, purchasers of the stripped securities most likely will be deemed
the beneficial holders of the underlying U.S. Government securities for federal
tax and securities purposes. In the case of CATS and TIGRS, the Internal
Revenue Service ("IRS") has reached this conclusion for the purpose of applying
the tax diversification requirements applicable to regulated investment
companies such as the Funds. CATS and TIGRS are not considered U.S. Government
securities by the Staff of the Commission, however. Further, the IRS conclusion
is contained only in a general counsel memorandum, which is an internal document
of no precedential value or binding effect, and a private letter ruling, which
also may not be relied upon by the Funds. The Trust is not aware of any binding
legislative, judicial or administrative authority on this issue.
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
-27-
<PAGE>
obligor, in this case, the seller of the obligation. In addition to the risk of
bankruptcy or insolvency proceedings, there is the risk that the seller may fail
to repurchase the security. However, if the market value of the obligation falls
below the repurchase price (including accrued interest), the seller of the
obligation will be required to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
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
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<PAGE>
so may result in the Fund incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest or dividends on the securities it has committed to
purchase until the settlement date.
REVERSE REPURCHASE AGREEMENTS
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."
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<PAGE>
LENDING PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 33 1/3% of the
value of the Fund's total assets. A Fund's loans of securities will be
collateralized by cash, cash equivalents or U.S. Government securities. The
cash or instruments collateralizing the Fund's loans of securities will be
maintained at all times in a segregated account with the Trust's custodian, in
an amount at least equal to the current market value of the loaned securities.
From time to time, a Fund may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Fund and is acting as a "placing
broker." No fee will be paid to affiliated persons of the Fund. The Board of
Trustees will make a determination that the fee paid to the placing broker is
reasonable.
By lending portfolio securities, a Fund can increase its income by continuing to
receive amounts equal to the interest or dividends on the loaned securities as
well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
Government securities are used as collateral. A Fund will comply with the
following conditions whenever it loans securities: (i) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as amounts equal to the dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower except
that, if a material event will occur affecting the investment in the loaned
securities, the Fund must terminate the loan in time to vote the securities on
such event.
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
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<PAGE>
within one year (including repurchase agreements collateralized by such
securities), commercial paper of U.S. or foreign issuers, and cash equivalents.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by U.S. or foreign corporations and finance companies. The
commercial paper purchased by the Funds consists of U.S. dollar-denominated
obligations of domestic or foreign issuers. Each Fund may also invest in
commercial paper which at the date of investment is rated at least A-2 by
Standard & Poor's or P-2 by Moody's, or their equivalent ratings, or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which are rated, at the time of purchase, A or better by Standard &
Poor's or Moody's, or their equivalents, and other debt instruments, including
unrated instruments, not specifically described if such instruments are deemed
by the Adviser to be of comparable quality.
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
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<PAGE>
substantial body of federal law and regulation. As a result of governmental
regulations, U.S. branches of U.S. banks, among other things, generally are
required to maintain specified levels of reserves, and are subject to other
supervision and regulation designed to promote financial soundness.
U.S. savings and loan associations, the CDs of which may be purchased by the
Funds, are supervised and subject to examination by the Office of Thrift
Supervision. U.S. savings and loan associations are insured by the Savings
Association Insurance Fund which is administered by the FDIC and backed by the
full faith and credit of the U.S. Government.
Non-U.S. bank obligations include Eurodollar Certificates of Deposit ("ECDs"),
which are U.S. dollar-denominated certificates of deposit issued by offices of
non-U.S. and U.S. banks located outside the United States; Eurodollar Time
Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a non-U.S.
branch of a U.S. bank or a non-U.S. bank; Canadian Time Deposits ("CTDs"), which
are essentially the same as ETDs except they are issued by Canadian offices of
major Canadian banks; Yankee Certificates of Deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
non-U.S. bank and held in the United States; and Yankee Bankers' Acceptances
("Yankee BAs"), which are U.S. dollar-denominated bankers' acceptances issued by
a U.S. branch of a non-U.S. bank and held in the United States.
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.
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<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 Fund 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.
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<PAGE>
The staff of the Commission has taken the position that fixed time deposits
maturing in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid. Until such time (if any) as this
position changes, the Trust, on behalf of each Fund, will include such
investments in determining compliance with the 15% limitation on investments in
illiquid securities. Restricted securities (including commercial paper issued
pursuant to Section 4(2) of the Securities Act of 1933) which the Board of
Trustees has determined are readily marketable will not be deemed to be illiquid
for purposes of such restriction.
"Value" for the purposes of the foregoing investment restrictions shall mean the
market value used in determining each Fund's net asset value.
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
-------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Name and Address Positions with Trust Principal Occupation During Past Five
Years
-------------------------------------------------------------------------------------------------
<S> <C> <C>
International, Inc. (since December
1994)
-------------------------------------------------------------------------------------------------
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
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 Americas (since 1999); Vice President,
Baltimore, MD 21202 BT Alex. Brown, Inc. (1998-1999);
(age 42) Senior Manager, PricewaterhouseCoopers LLP
(1993-1998).
-------------------------------------------------------------------------------------------------
Amy M. Olmert (3) Assistant Treasurer, Director, Deutsche Asset Management
One South Street Chief Financial Americas (since 1999); Vice
Baltimore, MD 21202 Officer 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
-------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Name and Address Positions with Trust Principal Occupation During Past Five
Years
-------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
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, 1999:
Pension or Retirement
Benefits Accrued as Part Aggregate Compensation
Name of Trustees of Fund Expenses from the Trust/Complex*
---------------- ------------------------ -----------------------
Paul K. Freeman $ 0 $ 22,750
Graham E. Jones $ 0 $ 24,750
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<PAGE>
William N. Searcy $ 0 $ 25,750
Hugh G. Lynch $ 0 $ 21,750
Edward T. Tokar $ 0 $ 21,750
______________
* The Trustees listed above do not serve on the Board of any other investment
company that may be considered to belong to the same complex as the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
DeAMIS of London, England acts as investment adviser to each Fund, except
European Equity Fund. Deutsche Asset Management, Inc. acts as investment adviser
to European Equity Fund. Effective October 6, 1999, Morgan Grenfell Investment
Services Limited, the adviser to each Fund, changed its name to Deutsche Asset
Management Investment Services Limited. On December 2, 1999, a majority of the
shareholders of the European Equity Fund 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 Fund,
pursuant to the terms of two Management Contracts between the Trust and DeAMIS.
DeAM, Inc. acts as investment adviser to the European Equity Fund 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:
Annual Rate
-----------
International Select Equity Fund 0.70%
European Equity Fund 0.70%
International Small Cap Equity Fund 1.00%
Emerging Markets Equity Fund 1.00%
Core Global Fixed Income Fund 0.50%
Global Fixed Income Fund 0.50%
International Fixed Income Fund 0.50%
Emerging Markets Debt Fund 1.00%
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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, 1997, International Select Equity
Fund, European Equity Fund, International Small Cap Equity Fund, Emerging
Markets Equity Fund, Global Fixed Income Fund, International Fixed Income Fund
and Emerging Markets Debt Fund paid advisory fees of $0, $137,269, $794,548,
$804,930, $444,411, $21,976 and $1,398,207, respectively. For the fiscal period
ended October 31, 1998, International Select Equity Fund, European Equity Fund,
International Small Cap Equity Fund, Emerging Markets Equity Fund, Global Fixed
Income Fund, Core Global Fixed Income Fund, International Fixed Income Fund and
Emerging Markets Debt Fund 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 Fund, European Equity
Fund, International Small Cap Equity Fund, Emerging Markets Equity Fund, Global
Fixed Income Fund, Core Global Fixed Income Fund, International Fixed Income
Fund and Emerging Markets Debt Fund paid advisory fees of $138,068, $312,589,
$229,335, $1,086,185, $279,603, $166,062, $113,859, and $2,822,307,
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 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
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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. are each an indirect wholly-
owned subsidiary of Deutsche Bank A.G., an international commercial and
investment banking group. As of October 31, 1999, DeAMIS managed approximately
$16.1 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 October 31, 2000, DeAM, Inc.
managed approximately $17.3 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.
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 Fund, European Equity Fund, International Small Cap Equity Fund, Emerging
Markets Equity Fund, Global Fixed Income Fund, Core Global Fixed Income Fund,
International Fixed Income Fund and Emerging Markets Debt Fund were 127%, 49%,
106%, 85%, 182%, 151%, 181% and 638%, respectively. For the fiscal period ended
October 31, 1999, the portfolio turnover rates for International Select Equity
Fund, European Equity Fund, International Small Cap Equity Fund,
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Emerging Markets Equity Fund, Global Fixed Income Fund, Core Global Fixed Income
Fund, International Fixed Income Fund and Emerging Markets Debt Fund were 239%,
80%, 86%, 70%, 161%, 155%, 140% and 397%, 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 International Fixed Income Funds; 0.30% for
the International 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, 1999, International Select Equity
Fund, European Equity Fund, International Small Cap Equity Fund, Emerging
Markets Equity Fund, Global Fixed Income Fund, Core Global Fixed Income Fund,
International Fixed Income Fund and Emerging Markets Debt Fund paid the
Administrator administration fees of $59,172, $133,967, $68,801, $325,855,
$139,802, $83,031, $56,929 and $705,369, respectively. Prior to November 1,
1998, SEI Financial Management Company was the Administrator for the funds. For
the fiscal year ended October 31, 1997, International Select Equity Fund,
European Equity Fund, International Small Cap Equity Fund, Emerging Markets
Equity Fund, Global Fixed Income Fund, International Fixed Income Fund and
Emerging Markets Debt Fund paid the Administrator administration fees of
$60,000, $38,843, $90,975, $99,601, $119,264, $60,000 and $139,420,
respectively. For the fiscal year ended October 31, 1998, International Select
Equity Fund, European Equity Fund, International Small Cap Equity Fund, Emerging
Markets Equity Fund, Global Fixed Income Fund, Core Global Fixed Income Fund,
International Fixed Income Fund and Emerging Markets Debt Fund paid the
Administrator administration fees of $60,177, $60,177, $60,177, $70,980,
$68,216, $10,606, $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.
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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
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 04101 (the "Distributor"), 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 Funds, 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" (as such term is defined in the 1940 Act) 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 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
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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 the Custodian Agreement, the Custodian (i) maintains a separate
account in the name of each Fund, (ii) holds and transfers portfolio securities
on account of each Fund, (iii) accepts receipts and makes disbursements of money
on behalf of each Fund, (iv) collects and receives all income and other payments
and distributions on account of each Fund's portfolio securities and (v) makes
periodic reports to the Trust's Board of Trustees concerning each Fund's
operations. The Custodian is authorized to select one or more foreign or
domestic banks or companies to serve as sub-custodian on behalf of the Trust.
SERVICE PLAN
(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
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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 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.
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Section 406 (b) (3) supplements these provisions by prohibiting a plan fiduciary
from receiving any consideration for his own personal account from any party
dealing with the plan in connection with a transaction involving the assets of
the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan may
properly receive service fees under a Service Plan if the fees are used for the
exclusive purpose of providing benefits to the plan's participants and their
beneficiaries or for defraying reasonable expenses of administering the plan for
which the plan would otherwise be liable. See, e.g., Department of Labor ERISA
Technical Release No. 86-1 (stating a violation of ERISA would not occur where
a broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which the plan is otherwise responsible for paying). Thus,
the fiduciary duty issues involved in a plan fiduciary's receipt of the service
fee must be assessed on a case-by-case basis by the relevant plan fiduciary.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Trustees, the Adviser makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for the Funds. In executing portfolio transactions, the
Adviser seeks to obtain the best net results for the Funds, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. Commission rates, being a component of price, are
considered together with such factors. Where transactions are effected on a
foreign securities exchange, the Funds employ brokers, generally at fixed
commission rates. Commissions on transactions on U.S. securities exchanges are
subject to negotiation. Where transactions are effected in the over-the-counter
market or third market, the Funds deal with the primary market makers unless a
more favorable result is obtainable elsewhere. Fixed income securities purchased
or sold on behalf of the Funds normally will be traded in the over-the-counter
market on a net basis (i.e. without a commission) through dealers acting for
their own account and not as brokers or otherwise through transactions directly
with the issuer of the instrument. Some fixed income securities are purchased
and sold on an exchange or in over-the-counter transactions conducted on an
agency basis involving a commission.
Pursuant to the 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
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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, 1999, the Adviser paid the following brokerage
commissions for research services: for the Emerging Markets Equity Fund $26,515,
for the European Equity Fund $6,289, for the International Select Equity Fund
$81,711 and for the International Small Cap Equity Fund $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
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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, 1997, no Fund
paid any brokerage commissions to any Affiliated Broker. 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, 1999, the Emerging Markets Equity
Fund paid brokerage commissions in the amount of $3,729 to Bankers Trust
Company, an Affiliated Broker. This represents 0% 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, 1999, the European Equity Fund paid
brokerage commissions in the amount of $3,212 to Bankers Trust Company, an
Affiliated Broker. This represents 2% of the aggregate brokerage commissions
paid by the Fund in the fiscal year and 2% of the aggregate dollar amount of
transactions effected by the Fund in the fiscal year.
For the fiscal period ended October 31, 1999, the International Select Equity
Fund paid brokerage commissions in the amount of $2,192 to Bankers Trust
Company, 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, 1999, the International Small Cap Equity
Fund paid brokerage commissions in the amount of $182 to Bankers Trust Company,
an Affiliated Broker. This represents 0% of the aggregate brokerage commissions
paid by the Fund in the fiscal year and 0% of the aggregate dollar amount of
transactions effected by the Fund in the fiscal year. For the fiscal period
ended October 31, 1999, the International Small Cap Equity Fund paid brokerage
commissions in the amount of $104 to Deutsche Morgan Grenfell London, an
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Affiliated Broker. This represents 0% of the aggregate brokerage commissions
paid by the Fund in the fiscal year and 0% 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, 1997, International Select Equity Fund,
European Equity Fund, International Small Cap Equity Fund, Emerging Markets
Equity Fund, Global Fixed Income Fund, International Fixed Income Fund and
Emerging Markets Debt Fund paid aggregate brokerage commissions of $15,439.06,
$78,071.14, $503,504.08, $868,715.91, $0, $0 and $0, respectively. For the
fiscal year ended October 31, 1998, International Select Equity Fund, European
Equity Fund, International Small Cap Equity Fund, Emerging Markets Equity Fund,
Global Fixed Income Fund, Core Global Fixed Income Fund, International Fixed
Income Fund and Emerging Markets Debt Fund paid aggregate brokerage commissions
of $23,210.14, $99,051.25, $289,584.88, $623,475.42, $0, $0, $0, $0,
respectively. For the fiscal period ended October 31, 1999, International Select
Equity Fund, European Equity Fund, International Small Cap Equity Fund, Emerging
Markets Equity Fund, Global Fixed Income Fund, Core Global Fixed Income Fund,
International Fixed Income Fund and Emerging Markets Debt Fund paid aggregate
brokerage commissions of $252,586, $176,478, $142,724, $880,921, $0, $0, $0 and
$0, respectively.
As of October 31, 1999, none of the Funds held securities of its regular broker-
dealers.
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 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. 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 and
Investment 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
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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.
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
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of the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods in
which the value of the security, as determined by amortized cost, may be higher
or lower than the price the Fund would receive if the Fund sold the security.
Other assets and assets for which market quotations are not readily available
are valued at fair value using methods determined in good faith by the Board of
Trustees.
Trading in securities on European and Far Eastern securities exchanges and over-
the-counter markets is normally completed well before the 4:00 P.M. (Eastern
time) close of business on each Business Day. In addition, European or Far
Eastern securities trading generally or in a particular country or countries may
not take place on all Business Days. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not Business Days in New York and on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Funds' calculation of net asset
values unless the Adviser deems that the particular event would materially
affect net asset value, in which case an adjustment will be made.
PERFORMANCE INFORMATION
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
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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.
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 of Institutional
shares of Core Global Fixed Income Fund, Emerging Markets Debt Fund, Global
Fixed Income Fund and International Fixed Income Fund were 4.22%, 12.92%, 5.02%,
and 4.11% respectively. If the expense limitations for these Funds had not been
in effect during this period, the yields of Institutional shares of Core Global
Fixed Income Fund, Emerging Markets Debt Fund, Global Fixed Income Fund and
International Fixed Income Fund would have been 4.16%, 12.89%, 4.98% and 4.02%,
respectively.
For the 30-day period ended October 31, 1999, the yield of Investment shares of
Emerging Markets Debt Fund was 12.71%. If the expense limitation for the fund
had not been in effect
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<PAGE>
during this period, the yield of Investment shares of Emerging Markets Debt Fund
would have been 12.68%.
TOTAL RETURN
Average annual total return is calculated separately for Investment shares
and Institutional shares 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.
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 International Select Equity Fund, European Equity
Fund, International Small Cap
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Equity Fund, Emerging Markets Equity Fund, Global Fixed Income Fund, Core Global
Fixed Income Fund, International Fixed Income Fund and Emerging Markets Debt
Fund were 59.39%, 21.18%, 38.49%, 39.02%, -3.91%,-3.93%, -3.53% and 17.86%,
respectively. For the five year period ended October 31, 1999, the average
annual total return of Institutional shares of International Small Cap Equity
Fund, Emerging Markets Equity Fund, Global Fixed Income Fund, International
Fixed Income Fund and Emerging Markets Debt Fund were 4.65%, -6.10%, 5.92%,
5.91% and 5.94%, respectively. For their respective periods from commencement of
operations to October 31, 1999, the average annual total returns for
Institutional shares of International Select Equity Fund, European Equity Fund,
International Small Cap Equity Fund, Emerging Markets Equity Fund, Global Fixed
Income Fund, Core Global Fixed Income Fund, International Fixed Income Fund and
Emerging Markets Debt Fund were 19.64%, 20.76%, 4.59%, -3.75%, 4.79%, 3.58%,
5.12% and 6.04%, respectively.
For the fiscal year ended October 31, 1999, the average annual total returns
for investment shares of Emerging Markets Debt Fund was 17.40%. From its
commencement of operations to October 31, 1999, the average annual total returns
for Investment shares of Emerging Markets Debt Fund was -15.10%. If the expense
limitations described in the Prospectus for the above Funds had not been in
effect during the indicated periods, the total returns for Institutional shares
of these Funds for such periods would have been lower than the total return
figures shown in this paragraph.
The Funds may from time to time advertise comparative performance as measured by
various 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.
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<PAGE>
TAXES
The following is a summary of the principal U.S. federal income, and certain
state and local tax considerations regarding the purchase, ownership and
disposition of shares in the Funds. This summary does not address special tax
rules applicable to certain classes of investors, such as tax-exempt entities,
insurance companies and financial institutions. 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 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
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<PAGE>
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 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
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<PAGE>
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, 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
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<PAGE>
Fund makes this election, shareholders may then deduct such pro rata portions of
qualified foreign taxes in computing their taxable incomes, or, alternatively,
use them as foreign tax credits, subject to satisfaction of certain holding
period requirements and to other applicable limitations, against their U.S.
federal income taxes. Shareholders who do not itemize deductions for federal
income tax purposes will not, however, be able to deduct their pro rata portion
of qualified foreign taxes paid by a Fund, although such shareholders will be
required to include their shares of such taxes in gross income if the Fund makes
the election referred to above.
If a shareholder chooses to take a credit for the qualified foreign taxes deemed
paid by such shareholder as a result of any such election by a Fund, the amount
of the credit that may be claimed in any year may not exceed the same proportion
of the U.S. tax against which such credit is taken which the shareholder's
taxable income from foreign sources (but not in excess of the shareholder's
entire taxable income) bears to his entire taxable income. For this purpose,
distributions from long-term and short-term capital gains or foreign currency
gains by a Fund will generally not be treated as income from foreign sources.
This foreign tax credit limitation may also be applied separately to certain
specific categories of foreign-source income and the related foreign taxes. As
a result of these rules, which have different effects depending upon each
shareholder's particular tax situation, certain shareholders of a Fund that
makes the election described above may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Tax-exempt shareholders will ordinarily not benefit from this election. Each
year that a Fund files the election described above, its shareholders will be
notified of the amount of (i) each shareholder's pro rata share of qualified
foreign taxes paid by the Fund and (ii) the portion of Fund dividends which
represents income from each foreign country. If a Fund does not make this
election 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
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that may, under certain circumstances, limit the extent to which the Funds
engage in these transactions or acquire these instruments.
Each of the Fixed Income Funds other than the International Fixed Income Fund
may invest in debt obligations that are in the lowest rating categories or are
unrated, including debt obligations of issuers not currently paying interest as
well as issuers who are in default. Investments in debt obligations that are at
risk of or in default present special tax issues for these Funds. Tax rules are
not entirely clear about issues such as when a Fund may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by these Funds, to the extent
they invest in such securities, in order to reduce the risk of their
distributing insufficient income to preserve their status as regulated
investment companies and seek to avoid having to pay federal income or excise
tax.
For federal income tax purposes, each Fund is permitted to carry forward a net
capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent years'
capital gains are offset by such losses, they would not result in federal income
tax liability to the applicable Fund and, accordingly, would generally not be
distributed to shareholders.
At October 31, 1999 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 $18,865,462 10/31/2006
Global Fixed Income Fund 986,396 10/31/2007
Core Global Fixed Income Fund 132,397 10/31/2007
International Fixed Income Fund 54,851 10/31/2007
Emerging Markets Debt Fund 58,247,275 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
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<PAGE>
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.
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.
-59-
<PAGE>
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 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
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<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. 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 the European Equity Fund 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
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<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.
As of October 31, 2000 the following shareholders owned the following respective
percentages of the outstanding Institutional shares of the indicated Funds:
--------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the
Fund
--------------------------------------------------------------------------------
-62-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding Shares
of the Fund
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
European Equity Fund National Financial Services Corp for the 30.52%
Exclusive Benefits of our Customers, 200
Liberty St, 1 World Financial Ctr, New York,
NY 100261-1003
-------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Special Custody 21.64%
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------
National Investor Services Corp for the 15.10%
Exclusive Benefit of our Customers, 55 Water
St, Fl 32, New York, NY 10041-3288
-------------------------------------------------------------------------------------------------------
International Select Equity Charles Schwab & Co., Inc. Special Custody 37.18%
Account Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------
Bear Sterns Securities Corp. FBO 102-22352-10, 21.43%
1 Metortech Center North, Brooklyn, NY
11201-3870
-------------------------------------------------------------------------------------------------------
Deutsche Bank Securities, Inc. C/F 5.28%
360-01618-83, 1251 6/th/ Avenue, New York, NY
10020-1104
-------------------------------------------------------------------------------------------------------
International Small Cap Public School Employees Retirement System C/O 55.87%
State Street PA Svcs, 30 N 3/rd/ Street Ste 750,
Harrisburg, PA 17101-1712
-------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Ttee Black & 28.02%
Decker Defined Benefit Plan, P O Box 1992,
Boston, MA 02105-1992
-------------------------------------------------------------------------------------------------------
State Street Bank & Trust Co. Cust FBO: Pitney 8.25%
Bowes Retirement Plan, One Enterprise Drive
W7A, North Quincy, MA 02171-2126
-------------------------------------------------------------------------------------------------------
National Financial Services Corp. For 5.53%
Exclusive Benefit of our Customers, Sal Vella,
200 Liberty Street, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------------
</TABLE>
-63-
<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 56.52%
Employees Savings & Profit Sharing Trust
17-72410, P O Box 92956, Chicago, Il 60675-2956
-------------------------------------------------------------------------------------------------
Public Employees' Retirement Association Attn 32.97%
Daryl Roberts, 1300 Logan Street, Denver, Co.
80203-2386
-------------------------------------------------------------------------------------------------
Global Fixed Income Museum of Fine Arts Boston, Mr. Thomas W. 65.66%
Fitzgerald, 465 Huntington Avenue, Boston, MA
02115-5597
-------------------------------------------------------------------------------------------------
Boston Latin School Association, 41 West 14.13%
Street 6/th/ Floor, Boston, MA 02111
-------------------------------------------------------------------------------------------------
National Financial Services Corp for the 13.06%
Exclusive Benefit of our Customers Attn Mutual
Funds No Loads 5/th/ Floor 200 Liberty Street, 1
World Financial, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
International Fixed Income Chase Manhattan Bank TR FBO Federal-Mogul 80.56%
Corporation Pension Masters Trust - B, 26555
Northwestern Hwy, Southfield, MI 48034-2146
-------------------------------------------------------------------------------------------------
Northern Trust & Barbara Trueman & Jack 8.31%
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 6.23%
Defined Benefit Pension Plan C/O Kirk
Vandagens, 3331 W. Big Beaver Road, Ste 200,
Troy, MI 48084-2814
-------------------------------------------------------------------------------------------------
Emerging Markets Debt Bost & Co. A/C NYXF1703602, FBO Bell Atlantic 29.75%
Institutional Class Master Trust, Mutual Fund Operations, P O Box
3198 Pittsburgh, PA 15230-3198
-------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the
Fund
--------------------------------------------------------------------------------------------------
<S> <C> <C>
State of Wisconsin, Investment Board 121 E. 15.50%
Wilson Street, P O Box 7847, Madison, WI
53707-7847
-------------------------------------------------------------------------------------------------
Los Angeles County Employees Retirement 11.33%
Association, 300 N Lake Avenue Ste 850,
Pasadena, CA 91101-4109
-------------------------------------------------------------------------------------------------
Los Angeles City Employees Retirement Systems 9.04%
360 E 2/nd/ Street, 8/th/ Floor, Los Angeles, CA
90012-4238
-------------------------------------------------------------------------------------------------
Public School Employees Retirement System C/O 5.14%
State Street PA Svcs, 30 N. 3/rd/ Street Ste 750
-------------------------------------------------------------------------------------------------
</TABLE>
As of October 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 42.74%
Account, Mutual Funds Department, 101
Montgomery Street, San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
National Financial Services Corp For the 33.27%
Exclusive Benefit of our Customers Attn Mutual
Funds No Load 5/th/ Floor, 200 Liberty Street, 1
World Financial Center, New York, NY 10281-1003
-------------------------------------------------------------------------------------------------
National Investor Services Corp for the 6.21%
Exclusive Benefit of Customers 55 Water Street
Fl 32, New York, NY 10041-3299
-------------------------------------------------------------------------------------------------
International Select Equity National Financial Services Corp for the 74.70%
Exclusive Benefit of our Customers, Attn
Mutual Funds-No Loads-5/th/ Floor, 200 Liberty
-------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Percentage of
Fund Shareholder Name and Address Outstanding
Shares of the
Fund
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Street, 1 World Financial CTR New York, NY
-------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Special Custody 21.36%
Account Mutual Funds Department, 101
Montgomery Street, San Fancisco, CA 94104-4122
-------------------------------------------------------------------------------------------------
</TABLE>
As of October 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 99.99%
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 against any liability to which he or she
would otherwise be subject by reason of willful
66
<PAGE>
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 Institutional
shares and premier shares of a Fund and dividends and distributions paid by a
Fund are reflected in confirmations issued by the Transfer Agent at the time of
the transaction and/or in monthly statements issued by the Transfer Agent. A
year-to-date statement will be provided by the Transfer Agent.
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, 1999
are included in, and incorporated by reference into, this Statement of
Additional Information in reliance upon the report of PricewaterhouseCoopers
LLP, 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, 1999 are incorporated by reference into this Statement of Additional
Information from the Trust's 1999 Annual Report to Shareholders for the year
ended October 31, 1999 (filed electronically on December 30, 1999; file no. 811-
08006, and will be attached to each copy of such Statement of Additional
Information that is distributed.
67
<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.
68
<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.
69
<PAGE>
APPENDIX B
QUALITY DISTRIBUTION FOR EMERGING MARKETS DEBT FUND
As of the fiscal year ended October 31, 1999, the percentages of Emerging
Market Debt Fund's assets invested in unrated debt securities and securities
rated in particular rating categories by Standard & Poor's were, on a weighted
average basis, as follows*:
<TABLE>
<CAPTION>
Percentage of Total
Standard & Poor's (Moody's) Ratings Investments
--------------------------------------------------------------------- ---------------------
<S> <C>
Not Rated............................................................ 19.8%
Rated by Standard & Poor's (Moody's):
BBB-................................................................. 0%
BB+, BB, BB-......................................................... 37.2%
B+................................................................... 33.6%
CCC 9.4%
Cash................................................................. 0%
</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, 1999; nor does it imply that the overall quality of portfolio
holdings is fixed.
70
<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 Inco me, 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/
(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/
Page 2 of 16
<PAGE>
(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. /9/
(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/
(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/
Page 3 of 16
<PAGE>
(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 the Expense Limitation Agreement dated October 31,
2000, between Deutsche Asset Management, Inc. and Registrant, on
behalf of European Equity Premier Class - filed herewith.
(i). Not Applicable.
(j). Consent of Independent Accountants - filed herewith.
(k). Not Applicable.
(l). Share Purchase Agreement dated as of December 29, 1993 between
Registrant and SEI Financial Management Corporation. /6/
(m). Not Applicable.
(n). Amended Rule 18f-3 Plan dated August 17, 2000. /8/
(o). Not applicable.
(p). Fund and Advisers' Codes of Ethics. /8/;
(q). Powers of Attorney - filed herewith.
____________________
/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.
/2/ Filed as an exhibit to Post-Effective Amendment no. 12 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 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 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 Registrant's
Registration Statement on June 11, 1996 (accession number0000950146-96-000954)
and incorporated by reference herein.
Page 4 of 16
<PAGE>
/6/ Filed as an exhibit to Post-Effective Amendment no. 16 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 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 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 Registrant's
Registration Statement on October 27, 2000 (accession number
0000950109-00-004256) 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
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
Page 5 of 16
<PAGE>
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
-----------------------------------------------------------------------
(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.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKING
Not Applicable.
Page 6 of 16
<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 certifies that it
meets all of the requirements for effectiveness of the Post-Effective Amendment
No. 29 to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and 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 November 30,
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
---------- ----- ----
President and Chief November 30, 2000
Richard T. Hale Executive Officer
---------------
Richard T. Hale
Chief Financial Officer November 30, 2000
/s/ Amy M. Olmert
-----------------
Amy M. Olmert
/s/ Paul K. Freeman Trustee November 30, 2000
-------------------
Paul K. Freeman
/s/ Graham E. Jones* Trustee November 30, 2000
-----------------------
Graham E. Jones
/s/ Hugh G. Lynch* Trustee November 30, 2000
---------------------
Hugh G. Lynch
/s/ William N. Searcy* Trustee November 30, 2000
-------------------------
William N. Searcy
/s/ Edward T. Tokar* Trustee November 30, 2000
-----------------------
Edward T. Tokar
*By: Dated: November 30, 2000
/s/ Daniel O. Hirsch
------------------------
Daniel O. Hirsch
Power-of-Attorney
Page 8 of 16
<PAGE>
RESOLVED, That the President, any Vice President, the Treasurer or any
Assistant Treasurer and the Secretary or any Assistant Secretary of
the Trust be and they hereby are, and each acting singly hereby is,
authorized to prepare, execute personally or as attorney-in-fact and
file with the Commission on behalf of European Equity - Premier Class,
a registration statement on Form N-1A under the 1940 Act relating to
the Fund, and any and all exhibits and other documents relating
thereto, and any and all amendments to said registration statement,
and to pay all prescribed filing fees therefor, all in such form as
the officer or officers executing the same with the advice of counsel
may deem necessary or appropriate.
Page of 10 of 16
