<PAGE>
As filed with SEC on January 26, 1996 Registration No. 33-73882
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 1 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 4 /x/
(Check appropriate box or boxes)
----------------
THE PALLADIAN TRUST
(Exact name of registrant as specified in charter)
4225 EXECUTIVE SQUARE, SUITE 355
LA JOLLA, CALIFORNIA 92037
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (619) 677-5917
H. Michael Schwartz
4225 Executive Suite, Suite 355
La Jolla, California 92037
(Name and Address of Agent for Service of Process)
copies to:
Jeffrey C. Martin
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
--------------------
The Registrant has elected, pursuant to Rule 24f-2 under the Investment Company
Act of 1940, to register an indefinite number of shares. The Rule 24f-2
Notice for fiscal year 1995 will be filed on or before June 28, 1996.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on (January 30, 1996) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<PAGE>
CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)
Form N-1A Item No. Caption in Part A Prospectus
------------------ ----------------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Expenses
Item 3. Condensed Financial Performance Information
Item 4. General Description
of Registrant General Information; Investment
Objectives and Policies;
Description of Securities and
Investment Techniques
Item 5. Management of the Fund Management of the Trust
Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information
Item 7. Purchase of Securities Being Investment in the Trust
Offered
Item 8. Redemption of Repurchase Investment in the Trust
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ -----------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix
Item 14. Management of the Fund Management of the Trust
Item 15. Control Person and Principal Management of the Trust
Holders of Securities
Item 16. Investment Advisory and Management of the Trust
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
Item 18. Capital Stock and Other Capitalization
Securities
Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculations of Performance Performance Information
Data
Item 23. Financial Statements Financial Statements
Part C
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Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
ii
<PAGE>
PROSPECTUS
for
The Value Portfolio
The Growth Portfolio
The International Growth Portfolio
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
4225 Executive Square, Suite 355
La Jolla, California 92037
(619) 677-5917
This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Palladian Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies. Shares
of the Portfolios may be sold only to: (1) life insurance company separate
accounts (the "Separate Accounts") to serve as the underlying investment medium
for variable annuity contracts; (2) qualified retirement plans, as permitted by
Treasury Regulations; and (3) life insurance companies and advisers to the
Portfolios and their affiliates. In the future, the Trust intends to sell its
shares to Separate Accounts to serve as the underlying investment medium for
variable life insurance contracts. Shares will not be offered directly to the
public.
Palladian Advisors, Inc. ("PAI") serves as overall manager of the
Portfolios. PAI has retained Tremont Partners, Inc. ("Portfolio Adviser") to
assist it in evaluating, recommending, and monitoring an investment adviser for
each Portfolio which will provide day-to-day management (a "Portfolio Manager").
The five Portfolios and their respective Portfolio Managers are as follows:
Portfolio Portfolio Manager
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The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
Information about the investment objectives and policies of each Portfolio,
along with a detailed description of the types of securities and other assets in
which each Portfolio may invest, are set forth in this prospectus. There can be
no assurance that the investment objective for any Portfolio will be achieved.
The Global Strategic Income Portfolio may invest up to 50% of its assets in
bonds rated below investment grade (commonly referred to as "junk bonds" or
"high yield/high risk bonds"). High yield/high risk bonds involve significant
risks. See page _____.
This prospectus sets forth concisely the information a prospective
purchaser of a variable contract or a participant in a qualified retirement plan
should know before directing that contributions or amounts credited to him or
her be invested in the Portfolios. A Statement of Additional Information (the
"SAI") dated February 1, 1996 containing additional and more detailed
information about the Portfolios has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this prospectus. It is
available without charge and can be obtained by writing or calling the Trust at
the address and telephone number printed above.
--------------------------
PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES
SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
--------------------------
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.
THE DATE OF THIS PROSPECTUS IS February 1, 1996.
<PAGE>
TABLE OF CONTENTS
PAGE
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SUMMARY OF EXPENSES 4
GENERAL INFORMATION 5
The Palladian Trust 5
The Manager and Portfolio Managers 5
Investment Objectives 5
MANAGEMENT OF THE TRUST 6
Manager 6
Portfolio Advisor 6
Portfolio Managers 6
The Value Portfolio 7
The Growth Portfolio 7
The International Growth Portfolio 7
The Global Strategic Income Portfolio 7
The Global Interactive/Telecomm Portfolio 7
Management and Portfolio Management Investment Advisory Fees 7
Custodian and Transfer Agent 9
INVESTMENT OBJECTIVES AND POLICIES 9
The Value Portfolio 10
The Growth Portfolio 10
The International Growth Portfolio 11
The Global Strategic Income Portfolio 11
The Global Interactive/Telecomm Portfolio 12
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 13
U.S. Government Securities 13
Debt Securities 14
Mortgage-Backed Securities 14
Other Asset-Backed Securities 15
Variable and Floating Rate Securities 15
Banking Industry and Savings Industry Obligations 15
Commercial Paper 15
Repurchase Agreements 16
Reverse Repurchase Agreements 16
Lending Portfolio Securities 16
Illiquid Securities 16
Warrants 16
Other Investment Companies 17
Short Sales 17
Short Sales Against the Box 17
Foreign Securities 17
Investment in Gold and Other Precious Metals 19
Futures Contracts 19
Options 20
Foreign Currency Transactions 21
2
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PAGE
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Leverage 21
Indexed Securities 21
INVESTMENT IN THE TRUST 21
Principal Underwriter 21
Determination of Net Asset Value 22
Purchase of Shares 22
Redemption of Shares 23
DIVIDENDS, DISTRIBUTIONS, AND TAXES 23
OTHER INFORMATION 24
Capitalization 24
Voting Rights 24
Portfolio Brokerage 24
Performance Information 24
Performance Data for the Portfolio Managers 25
APPENDIX A 30
APPENDIX B 31
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.
3
<PAGE>
SUMMARY OF EXPENSES
The following table shows the expenses that will incurred by each
Portfolio, expressed as a percentage of average net assets during the year. If
you have been given this prospectus because you are considering the purchase of
a variable annuity contract, you should refer instead to the corresponding table
in the variable annuity contract prospectus.
Shareholder Transactions Expenses (for each Portfolio)
Sales Load on Purchases None
Sales Load on Reinvested Dividends None
Deferred Sales Load Imposed on Redemption None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Management 12b-1 Other Operating
Portfolio Fees(1) Fees Expenses(2) Expenses
<S> <C> <C> <C>
The Value Portfolio 0.80% None 0.85% 1.65%
The Growth Portfolio 0.80% None 1.10% 1.90%
The International Growth Portfolio 0.80% None 1.23% 2.03%
The Global Strategic Income Portfolio 0.80% None 1.23% 2.03%
The Global Interactive/Telecomm Portfolio 0.80% None 0.96% 1.76%
</TABLE>
The purpose of the following example is to assist investors in
understanding the various costs and expenses that an investor in the Portfolios
will bear directly or indirectly. It shows the total expenses that would be
payable if you redeemed your shares after having held them for one and three
year periods respectively. The amounts shown are based upon the estimates.
Actual expenses may be greater or less than those shown. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance.
EXAMPLE
A shareholder would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time
period:
1 year 3 years
The Value Portfolio $16.50 $51.18
The Growth Portfolio $19.00 $58.79
The International Growth Portfolio $20.30 $62.73
The Global Strategic Income Portfolio $20.30 $62.73
The Global Interactive/Telecomm Portfolio $17.60 $54.53
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(1) As explained in "Management and Portfolio Management Advisory Fees," page
___, the total advisory fee for PAI, the Portfolio Adviser, and the Portfolio
Managers for the first 12 months of operations is, for each Portfolio, 0.90% of
average daily net assets. After that time, there will be an incentive fee
arrangement. The base fee will be 2.00%, but it may vary from between 0.00% to
4.00% depending on the Portfolio's performance.
(2) Based on estimates for the current fiscal year.
4
<PAGE>
GENERAL INFORMATION
THE PALLADIAN TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of The
Palladian Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business
trust and is registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end management investment company.
THE MANAGER AND PORTFOLIO MANAGERS
Palladian Advisors, Inc. ("PAI") serves as overall manager of the
Portfolios. PAI has retained Tremont Partners, Inc. ("Portfolio Adviser") to
assist it in evaluating, recommending, and monitoring an investment adviser for
each Portfolio who will provide day-to-day management (a "Portfolio Manager").
The five Portfolios and their respective Portfolio Managers are as follows:
Portfolio Portfolio Manager
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The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
The Global Interactive/Telecomm
Portfolio GAMCO Investors, Inc.
After the first year of operations each Portfolio Manager will be paid on
an incentive fee basis, which could result in either higher than average
advisory fees or possibly no advisory fee at all, depending on how well each
Portfolio Manager performs for you.
Each Portfolio Manager has contractually agreed that it or an affiliate
(either directly or through a qualified plan) will invest at least a total of
$1 million in the Portfolio or Portfolios it manages. The Portfolio Managers
for the Growth and Global Strategic Income Portfolios have agreed to make the
investment shortly after the Portfolios commence operations. The Portfolio
Manager for the International Growth Portfolio (Bee & Associates Incorporated)
has agreed that it or its principals will make the investment (directly or
through qualified plans) when that Portfolio reaches $10 million in total
assets. Since GAMCO Investors, Inc. manages both the Value Portfolio and the
Global Interactive/Telecomm Portfolio, it has agreed to invest $500,000 in each
Portfolio. GAMCO Investors, Inc. will make those investments shortly after the
Portfolios commence operations. Although a Portfolio Manager is permitted by
law to sell its shares at any time, each Portfolio Manager currently intends to
maintain that investment as long as it manages the Portfolio. Once a Portfolio
Manager makes that investment, and for as long as it maintains the investment,
the Portfolio Manager will be managing a portion of their own money along with
your money.
There can be no assurance that any particular Portfolio investment
objective will be attained. The Board of Trustees may establish additional
Portfolios at any time and may discontinue offering a Portfolio at any time.
INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios.
Each Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can be
no assurance that any of these objectives will be met.
The investment objectives of the Portfolios are fundamental, which
means they may not be changed without shareholder approval as required by the
1940 Act.
THE VALUE PORTFOLIO seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.
THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
5
<PAGE>
THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
THE GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees. Additional information about the trustees and officers
of the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses of
printing and mailing prospectuses, proxy statements and shareholder
communications.
MANAGER
Palladian Advisors, Inc. ("PAI" or the "Manager") serves as overall Manager
of the Trust and is responsible for general investment supervisory services to
the Portfolios. PAI, located at 4225 Executive Square, Suite 355, La Jolla,
California 92037, is registered with the Securities and Exchange Commission as
an investment adviser. Prior to PAI's registration on May 21, 1993 and the
subsequent development and offering of the Trust, the Manager had no direct
previous experience in providing management services for investment companies;
however, its officers have extensive experience in the development and
distribution of investment products, specifically, variable life insurance
policies, variable annuity contracts, and management investment companies that
serve as investment mediums for such policies and contracts. PAI evaluates and
recommends to the Trust registered investment advisers to be retained by the
Trust on behalf of each of the Portfolios as Portfolio Managers and monitors and
assesses their performance and makes periodic reports to the Trust. In
performing these responsibilities, the Manager will rely on the services of
Tremont Partners, Inc., which has been retained as Portfolio Advisor. PAI, not
the Trust, pays the fee of the Portfolio Advisor.
PORTFOLIO ADVISOR
Tremont Partners, Inc. ("Tremont" or the "Portfolio Advisor"), located at
One Corporate Center at Rye, 555 Theodore Fremd Avenue, Rye, New York 10580, has
been engaged in the business of rendering portfolio manager evaluation selection
and supervisory services to consulting clients since 1984. Tremont is wholly
owned by Tremont Advisors, Inc. (formerly Lynch Asset Management Corporation),
a public corporation. As of December 31, 1994, Mario J. Gabelli (Chairman of
Lynch Corporation and Chief Investment Officer of GAMCO Investors, Inc.,
Portfolio Manager for the Value and Global Interactive/Telecomm Portfolios)
together with certain affiliated entities, controls 63.68% of the voting stock
of Tremont Advisors, Inc. (as defined by Rule l3d-3 under the Securities
Exchange Act of l934). The principals and staff of Tremont are experienced in
acting as investment consultants and in developing, implementing and managing
multiple portfolio manager programs. Tremont provides asset management
consulting services to various institutions and individual clients and provides
PAI with investment consulting services with respect to the development,
implementation and management of the Trust's multiple portfolio managers
program. Tremont is paid by PAI (not the Trust). As Portfolio Advisor, Tremont
provides research concerning registered investment advisers to be retained by
the Trust as Portfolio Managers, monitors and assists PAI with the periodic
reevaluation of existing Portfolio Managers and makes periodic reports to PAI
and the Trust.
PORTFOLIO MANAGERS
Each Portfolio Manager makes specific investments on behalf of a Portfolio
in accordance with the particular Portfolio's objective and the Portfolio
Manager's investment approach and strategies. The Portfolio Managers designated
for each Portfolio are listed and described below.
6
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Selection and retention criteria for Portfolio Managers include: (1)
their historical performance records relative to their respective markets and
peer groups; (2) consistent performance in the context of the markets and
preservation of capital in declining markets; (3) organizational stability and
reputation; (4) the quality and depth of investment personnel; (5) the ability
of the Portfolio Manager to apply its approach consistently; (6) a willingness
to work on an incentive fee basis; and (7) a willingness to invest $1 million in
their Portfolio(s). Each Portfolio Manager will not necessarily exhibit all of
the criteria to the same degree. It should be noted, however, that there can be
no certainty that any Portfolio Manager will obtain superior results at any
given time.
Tremont recommends Portfolios Managers to PAI based upon its
continuing quantitative and qualitative evaluation of the Portfolio Managers
skills in managing assets pursuant to specific investment approaches and
strategies. Short-term investment performance, by itself, is not a significant
factor in selecting or terminating a Portfolio Manager, and PAI and Tremont do
not expect to recommend frequent changes of Portfolio Managers.
The Portfolio Managers activities are subject to general oversight by
the Trustees, PAI and Tremont. Although the Trustees, PAI and Tremont do not
evaluate the investment merits of the Portfolio Managers' specific securities
selections, they do review the performance of each Portfolio Manager relative to
the selection criteria.
The Portfolio Managers for the Portfolios are as follows:
THE VALUE PORTFOLIO. GAMCO Investors, Inc. ("GAMCO"), One Corporate
Center, Rye, New York 10580-1434, acts as investment adviser for individuals,
pension trusts, profit-sharing trusts and endowments. GAMCO is a majority-owned
subsidiary of Gabelli Funds, Inc. Mario J. Gabelli may be deemed a "controlling
person" of GAMCO on the basis of his ownership of stock of Gabelli Funds, Inc.
Mario J. Gabelli is primarily responsible for the day-to-day investment
management of the Portfolio. Mr. Gabelli has been the Chief Investment Officer
of GAMCO since its organization in 1980.
THE GROWTH PORTFOLIO. Stonehill Capital Management, Inc. ("Stonehill
Capital"), 277 Park Avenue, New York, New York 10172, is owned by its founder
Robert L. Emerson. Stonehill Capital is registered with the SEC as an
investment adviser and manages assets in excess of $100 million. Mr. Emerson
is primarily responsible for the day-to-day investment management of the
Portfolio, and has been President of Stonehill Capital for the past five years.
THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated ("BAI"),
370 17th Street, Suite 5150, Denver, Colorado 80202, was formed in 1989 to
provide global equity management expertise to individuals, retirement plan
sponsors, foundations, endowments and other entities. The firm, which is
registered with the SEC as an investment adviser, currently manages assets of
approximately $170 million. Bruce B. Bee is primarily responsible for the day-
to-day investment management of the Portfolio. Since BAI's organization in
1989, Mr. Bee has been the firm's controlling person and principal portfolio
manager.
THE GLOBAL STRATEGIC INCOME PORTFOLIO. Fischer Francis Trees & Watts, Inc.
("Fisher Francis"), 200 Park Avenue, 46th Floor, New York, New York 10166, was
formed in 1972 to provide global fixed income management expertise to
individuals, central banks, government institutions, commercial banks and
private corporations. The firm, which is registered with the SEC as an
investment adviser, currently manages assets of approximately $18 billion.
Liaquat Ahamed is primarily responsible for the day-to-day investment management
of the Portfolio. Since 1988, Mr. Ahamed has served as the firm's Chief
Investment Officer for global strategy and head of the firm's London office.
Prior to 1988, he worked for nine years at the World Bank and was in charge of
the Bank's non-dollar government bond investments.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this Portfolio,
as well as the Value Portfolio. Mario J. Gabelli is primarily responsible for
the day-to-day investment management of the Global Interactive/Telecomm
Portfolio. Mr. Gabelli has been Chief Investment Officer of GAMCO since its
organization in 1980.
MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, PAI serves as the overall manager of the
Portfolios, Tremont serves as a consultant to PAI, and the Portfolio Managers
handle the day-to-day investment management of the Portfolios. For these
services, each Portfolio pays an overall management fee, computed and accrued
daily and paid monthly, based on its average daily net assets. After the first
year of operations, the overall fee will vary based on the performance of that
Portfolio (after expenses) compared to that of an appropriate benchmark. The
overall advisory fee will be split among the various advisers in the following
manner. The Portfolio Manager will receive 80% of the fee, and PAI will receive
the remaining 20%. PAI is responsible for paying the fee of Tremont, which
equals 32.5% of the fee received by PAI.
7
<PAGE>
FIXED ADVISORY FEE FOR THE FIRST YEAR. For the period beginning with the
day on which the Portfolio commences investment operations and ending with the
last day of the twelfth full calendar month thereafter, each Portfolio will pay
at the end of each month, a monthly advisory fee calculated at an annual rate of
0.80% of the Portfolio's average daily net assets.
PERFORMANCE-BASED FEE AFTER THE FIRST YEAR. Beginning with the thirteenth
month, each Portfolio will pay at the end of each month, a monthly advisory fee
equal to a Basic Fee plus or minus an Incentive Fee. (As explained below, the
fee might be reduced if absolute performance is negative.) The monthly Basic
Fee will equal one-twelfth of the annual Basic Fee rate of 2.0% multiplied by
average daily net assets over the previous 12 months. The Incentive Fee rate
ranges from -2.0% to +2.0% on an annual basis, depending on a comparison of the
Portfolio's performance (reflecting a deduction of Portfolio expenses) and the
performance of a selected benchmark index over the past 12 months. The monthly
Incentive Fee, like the monthly Basic Fee, is calculated by multiplying one-
twelfth of the Incentive Fee rate on an annual basis by the average daily net
assets over the previous 12 months. Accordingly, the Total Fee could range from
0.0% to an annual rate of 4.0%, depending on performance.
As noted above, performance of both the Portfolio and the selected
benchmark index will be calculated on a rolling 12-month period (I.E., the
previous 12 months, including the month for which the fee is being calculated).
The performance of a Portfolio will be calculated by first determining the
change in the Portfolio's net asset value per share during the period, assuming
the reinvestment of distributions during that period, and then expressing this
amount as a percentage of the net asset value per share at the beginning of the
period. Net asset value per share is calculated by dividing the value of the
securities held by the Portfolio plus any cash or other assets minus all
liabilities including accrued advisory fees and the other expenses, by the total
number of shares outstanding at the time. The performance of the selected
benchmark index is calculated as the sum of the change in the level of the index
during the period, plus the value of any dividends or distributions made by the
companies whose securities comprise the index accumulated to the end of the
period, and then expressing that amount as a percentage of the index at the
beginning of the period.
No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance -- selected benchmark index plus 2.25 percentage points.
The maximum fee will be paid if performance is 5.25 percentage points higher
than the target (i.e., 7.5 percentage points higher than the selected benchmark
index). No fee will be paid if performance is 5.25 percentage points lower than
the target (i.e., more than 3 percentage points below the selected benchmark
index). The chart below further explains the Incentive Fee at various
performance levels.
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) TOTAL
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above
schedule, if the absolute performance of a Portfolio (after payment of all
expenses, including the Basic Fee and any Incentive Fee) is negative, the
monthly advisory fee will be the lesser of the fee calculated pursuant to the
above schedule or the alternative monthly advisory fee described below, which
under certain circumstances results in the Portfolios paying either no advisory
fee or a lower monthly advisory fee than under the performance fee schedule
above. If a Portfolio's performance (after payment of all expenses including
advisory fees) is negative and does not exceed the selected benchmark by six
percentage points (on an annual basis), no monthly advisory fee will be paid.
If the Portfolio's performance (after payment of all expenses including advisory
fees) is negative and does not exceed the selected benchmark by twelve
percentage points but does exceed the selected benchmark by six percentage
points (on an annual basis), the alternate monthly advisory fee will be based on
an annual rate of 1.0% of average daily net assets over the previous 12 months.
If, on the other hand, the performance of a Portfolio (after payment of all
expenses including advisory
8
<PAGE>
fees) is negative but exceeds the selected benchmark by twelve percentage points
or more (on an annual basis), the alternative monthly advisory fee will be based
on an annual rate of 2.0% of average daily net assets over the previous 12
months.
SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate higher
than the investment advisory fees paid by most other investment companies. If a
Portfolio outperforms the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by a Portfolio may further exceed those paid by other
investment companies. On the other hand, if a Portfolio underperforms the
selected benchmark, the advisory fee paid by the Portfolio may be less than
those paid by other investment companies. If, during the applicable performance
period, a Portfolio underperforms the selected benchmark by three or more
percentage points, the Portfolio will not pay any advisory fee, although the
Manager, Portfolio Advisor and Portfolio Managers will remain obligated to
provide the Portfolio with the services contemplated herein as long as they are
in effect.
FACTORS CONSIDERED BY TRUST. In April 1972, the SEC issued Release No.
7113 under the 1940 Act to focus attention of mutual fund directors and
investment advisers on certain factors which must be considered in connection
with investment company performance fee arrangements. One of these factors is to
"avoid basing significant fee adjustments upon random or insignificant
differences" between the investment performance of a Portfolio and that of a
particular index which is being compared. The Release concludes that the
directors of a Portfolio "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." In approving the advisory fee structure, the Trust
considered that the performance fee was structured so that only the Basic Fee
would be paid in the event of small changes in performance and that any
significant incentive payments or penalties would be attributable to the
Portfolio Manager's skill or lack of skill rather than random fluctuations in
performance.
PERFORMANCE BENCHMARKS. As described above, total advisory fees paid to
each Portfolio Manager for advising the Portfolios are based on the performance
of the Portfolio they manage relative to an appropriately selected market
benchmark. In selecting the performance benchmark for each Portfolio, the
Trust, with the assistance of PAI and Tremont, attempted to select a benchmark
with characteristics and attributes most analogous to each Portfolio. The
performance benchmarks selected for the Portfolios are listed below and
described in more detail in Appendix A.
Portfolio Performance Benchmark
- -------------------------------------------------------------------------------
The Value Portfolio S&P 500
The Growth Portfolio S&P 500
The International Growth Portfolio MSCI - Europe, Australia, Far East
(EAFE) Index
The Global Strategic Income Portfolio JP Morgan Global Government Bond
Index, Unhedged
The Global Interactive/Telecomm
Portfolio S&P 500
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Portfolios has a different investment objective, described
below. Each Portfolio is managed by its own Portfolio Manager. There can be no
assurance that any of the Portfolios will achieve their investment objective.
Each Portfolio is subject to the risk of changing economic, business, and
financial conditions, as well as the risk the Portfolio Manager will not
accurately anticipate those changes. As with any security, a risk of loss is
inherent in an investment in a Portfolio's shares.
The different types of securities and investment techniques used by the
individual Portfolio Managers all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of a security may not be able
to meet its obligations on interest or principal payments at the time called for
by the instrument. In addition, the value of debt instruments generally rises
and falls inversely with interest rates.
Certain types of investments and investment techniques common to one or
more Portfolios are described in greater detail, including the risks of each,
under "Description of Securities and Investment Techniques" in this Prospectus
and in the Statement of Additional Information.
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The investment objectives of the Portfolios are fundamental, which means
that they may be changed only with shareholder approval in accordance with the
1940 Act. Unless otherwise indicated, each Portfolio's practices, policies, and
programs for achieving its objectives are not fundamental and thus may be
changed by the Board of Trustees without shareholder approval. The Statement of
Additional Information sets forth certain investment restrictions which are
fundamental, and, like the investment objectives, may be changed only with
shareholder approval.
THE VALUE PORTFOLIO
The Value Portfolio seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.
In identifying such companies, the Portfolio Manager seeks to invest in
companies that, in the public market, are selling at a significant discount to
their private market value, the value the Portfolio Manager believes informed
industrialists would be willing to pay to acquire companies with similar
characteristics. If investor attention is focused on the underlying asset values
of these companies through an emerging or anticipated development or other
catalyst, an investment opportunity to realize this private market value may
exist. Undervaluation of a company can result from a variety of factors, such as
a lack of investor recognition of (1) the underlying value of a company's fixed
assets, (2) the value of a consumer or commercial franchise, (3) changes in the
economic or financial environment particularly affecting a company, (4) new,
improved or unique products or services, (5) new or rapidly expanding markets,
(6) technological developments or advancements affecting a company or its
products, or (7) changes in government regulations, political climate or
competitive conditions. The actual developments or catalysts particularly
applicable to a given company that may, in the Portfolio Manager's judgment,
lead to significant appreciation of that company's securities include: a change
in management or management policies; the acquisition of a significant equity
position by an investor or group of investors acting in concert; a merger,
reorganization, sale of a division, or a third-party or issuer tender offer, the
spin-off to shareholders of a subsidiary, division or other substantial assets;
or a recapitalization, an internal reorganization or the retirement or death of
a senior officer or substantial shareholder. In addition to the foregoing
factors, developments and catalysts, the Portfolio Manager, in selecting
investments, also considers the market price of the issuer's securities, its
balance sheet characteristics and the perceived strength of its management.
The Portfolio seeks to achieve its objective by investing primarily in a
portfolio of common stocks, preferred stocks and other securities convertible
into, or exchangeable for, common stocks. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
___. When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its assets
in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments.
THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
In considering securities for the Portfolio, the Portfolio Manager reviews
on a weekly basis the projected annual earnings, sales growth, quarterly profit
outlook and valuations of a universe of approximately 200 companies. These
companies are, for the most part, involved in the retail, food service,
healthcare, technology and financial services industries and typically have high
returns on equity, strong brand names, rapid unit volume sales growth and, with
the exception of financial companies, balance sheets with little or no debt.
The Portfolio Manager usually seeks to select companies that enjoy market
dominance, which, in turn, confers pricing power within a growing market niche.
Such pricing control normally produces high returns on investment which allows
companies to fund superior growth without the need for dilutive financing.
The Portfolio Manger's 200 stock universe is constantly being modified and
updated with an active and ongoing effort to find more attractive stocks.
Additions to the list are made when the Portfolio Manager finds a company with
financial characteristics superior to the least attractive stocks in the current
universe. Deletions are made when a company's fundamental prospects
deteriorate.
From the Portfolio Manager's 200 stock universe, investments are made in
those stocks which meet all of the following criteria: (1) accelerating near-
term profit growth; (2) valuation in the lower half of the stock's historic
range; and (3) price momentum superior to that of the overall market. Normally,
60 to 80 stocks from the Portfolio Manager's universe meet these tests.
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Stocks will typically be sold whenever any of the following occurs: (1) a
reduction in quarterly or annual earnings estimates; (2) a company's long-term
competitive position is called into question; (3) the stock's valuation on the
next 12 months' earnings moves into the upper 10% of its historic range; or (4)
the stock price experiences a unexpected decline.
The Portfolio's policy stresses flexibility and adaptability in arranging
its Portfolio to seek the desired results. Common stocks will generally
constitute all or most of the Portfolio, but the Portfolio may invest in
preferred stocks, debt securities and cash instruments when, in the judgment of
the Portfolio Manager, a more conservative investment position seems appropriate
in light of anticipated market conditions. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
___. The Portfolio will not invest for purposes of exercising management or
control.
The Portfolio will be subject to the risks of investment in equity
securities, i.e., there is no assurance of capital appreciation and there is a
substantial risk of decline. Investment in the securities of new companies may
in some instances involve a higher degree of risk than investments in securities
of companies with longer operating histories. The Portfolio does not intend to
invest in securities of companies with no operating history. Any current income
from dividends received from such securities will be entirely incidental.
THE INTERNATIONAL GROWTH PORTFOLIO
The International Growth Portfolio seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
Foreign securities are defined as securities of issuers whose principal
activities are outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Portfolio
Manager will look at such factors as the location of its assets, personnel,
sales and earnings.
Normally, at least 65% of the Portfolio's total assets will be invested in
securities of issuers from at least three different countries outside of North
America. Although the Portfolio may invest up to 35% in securities of issuers
from Canada, Mexico and the United States, the Portfolio Manager currently does
not expect to invest in a significant part of this amount in securities of U.S.
issuers. No more than 20% of the Portfolio's net assets may be invested in the
securities of any one foreign country, except that the Portfolio may invest up
to 35% of net assets in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
Germany.
In considering securities for the Portfolio, the Portfolio Manager will
concentrate on companies with market capitalization of under $1 billion. When
allocating the Portfolio's investments among geographic regions and individual
countries, the Portfolio Manager considers various criteria, such as prospects
for relative economic growth among countries, expected levels of inflation,
government policies influencing business conditions, and the outlook for
currency relationships. The Portfolio Manager expects to invest most of the
Portfolio's assets in securities of issuers located in developed countries in
these general geographic areas: the Americas (other than the United States),
the Far East and Pacific Basin, Australia, Scandinavia and Western Europe.
The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated in foreign currencies. The Portfolio
Manager expects that opportunities for long term growth of capital will come
primarily from common stock, securities such as warrants or rights that are
convertible into common stock, preferred stock, and depository receipts for
those securities. The Portfolio may invest up to 5% of its assets in high
yield/high risk debt securities. See "Debt Securities," page ___. The
Portfolio does not place any emphasis on dividends or interest income except
when the Portfolio Manager believes this income will have a favorable influence
on the market value of the security. The Portfolio may invest in indexed
securities whose value depends on the price of foreign currencies, commodities,
securities indices, or other financial indicators. In the normal course of
managing the Portfolio, the Portfolio Manager may invest a portion of the
Portfolio's assets in U.S. and foreign government obligations and money market
securities (including repurchase agreements) when the Portfolio has monies not
yet invested, it has sold one security and is waiting to buy another one, so
that it will be prepared to meet redemption requests, or to earn a return on
available cash balances. When market conditions warrant, the Portfolio Manager
can make substantial temporary defensive investments in U.S. government
obligations or investment-grade obligations of companies incorporated in and
having principal business activities in the United States.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
The Global Strategic Income Portfolio seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
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The Global Strategic Income Portfolio allocates its assets among debt
securities of issuers in three separate areas: (1) the United States, (2)
developed foreign countries, and (3) emerging markets. The Portfolio will select
particular debt securities in each sector based on their relative investment
merits. Within each area, the Portfolio selects debt securities from those
issued by governments and their agencies and instrumentalities; central banks;
and commercial banks and other corporate entities.
The Portfolio Manager will actively manage both the allocation of assets
among the major markets and the currencies underlying the fixed income
securities purchased for the Portfolio. In doing so, the Portfolio Manager will
rely on its proprietary technical and fundamental global fixed income and multi-
currency systems which allow the Portfolio Manager to identify market changes.
The Portfolio Manager does not use its system to forecast market changes or for
market timing purposes.
Debt securities in which the Global Strategic Income Portfolio may invest
include bonds, notes, debentures, and other similar instruments. The Portfolio
normally invests at least 50% of its total assets in U.S. and foreign debt and
other fixed income securities that, at the time of purchase, are rated at least
investment grade, or, if unrated, are determined by the Portfolio Manager to be
of comparable quality. No more than 50% of the Portfolio's assets may be
invested in securities of below investment grade quality (also called high
yield/high risk bonds), which involve a high degree of risk and are
predominantly speculative. See "Debt Securities", page __. Consistent with the
foregoing percentage limitations, the Portfolio may invest in securities that
are in default in payment of principal and/or interest.
For purposes of the Portfolio's operations, "emerging markets" consist of
all countries determined by Portfolio Manager to have developing or emerging
economies and markets. These countries generally are expected to include every
country in the world except the United States, and the developed foreign
countries of Canada, Japan, Australia, New Zealand and most countries in Western
Europe. The Global Strategic Income Portfolio considers investment in the
following emerging markets: Algeria, Argentina, Bolivia, Botswana, Brazil,
Chile, China, Colombia, Costa Rica, Czechoslovakia, Ecuador, Egypt, Finland,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica,
Jordan, Kenya, Malaysia, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, South Korea, Sri Lanka,
Taiwan, Thailand, Turkey, Uruguay, Venezuela, Zimbabwe.
The Global Strategic Income Portfolio's investments in emerging market
securities will consist substantially of debt securities issued by emerging
market governments that are traded in the markets of developed countries or
groups of developed countries. The Portfolio Manager may invest in debt
securities of emerging market issuers that it determines to be suitable
investments for the Portfolio without regard to ratings. Currently,
substantially all emerging market debt securities are of below investment grade
quality. Because the Global Strategic Income Portfolio's investment in debt
securities rated below investment grade (i.e., high yield/high risk bonds) is
limited to 50% of its total assets, its investment in emerging market debt
securities is therefore effectively limited to 50% of its assets as well.
Emerging market securities are subject to greater risks than securities from
developed nations. See "Foreign Securities," page 18.
The Global Strategic Income Portfolio also may consider making carefully
selected investments in below investment grade debt securities of corporate
issuers in the United States and in developed foreign markets, subject to the
overall 50% limitation on high yield/high risk bonds. The Global Strategic
Income Portfolio also may invest up to 5% of its assets in loan participations
and assignments. More information is included in the Statement of Additional
Information.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Global Interactive/Telecomm Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in common and preferred stocks of (1) companies participating
in emerging technological advances in interactive services and products that are
accessible to individuals in their homes or offices through consumer electronics
devices; (2) telecommunications companies; and (3) companies outside of the
telecommunications industry which, in the opinion of the Portfolio Manager,
stand to benefit from development in the telecommunications industry. The
Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. See "Debt Securities," page ___. When the Portfolio Manager
believes that a defensive investment posture is warranted or when opportunities
for capital appreciation do not appear attractive, the Portfolio may temporarily
invest all or a portion of its assets in short-term money market instruments,
such as obligations of the U.S. Government and its agencies and
instrumentalities, high-quality commercial paper and bank certificates of
deposit and time deposits and repurchase agreements with respect to such
instruments.
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For example, the Portfolio may invest in companies involved in the
following products and services: emerging technologies combining television,
telephone and computer systems; regular telephone service; wireless
communications services and equipment, including cellular telephone data and
voice transmission; electronic components and communications equipment; video
conferencing; electronic mail; local and wide area networking; linkage of data
and word processing systems; publishing and information systems; broadcasting,
including television and radio; cable television systems and networks; wireless
cable television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of entertainment programming; computer
hardware and software and other equipment used in the creation and distribution
of entertainment programming; interactive and multimedia programming including
home shopping and multiplayer games; and advertising agencies and niche
advertising mediums such as in-store or direct mail.
In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; and effective research and product development and
marketing.
The Portfolio Manager will allocate the Portfolio's assets among securities
of countries and in currency denominations and industry sectors where
opportunities for meeting the Portfolio's investment objective are expected to
be the most attractive. The Portfolio may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Portfolio will invest in at least three different countries, including the
United States; issuers in any one country, other than the U.S., will represent
no more than 40% of the Portfolio's assets.
The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or are guaranteed by, the U.S.
Government, its agencies or instrumentalities. Treasury bills, notes, and bonds
are direct obligations of the U.S. Treasury. Securities guaranteed by the U.S.
Government include federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury (such as Government National Mortgage Association
("GNMA") certificates, described in the section on "Mortgage-Backed Securities,"
and Federal Housing Administration debentures). In guaranteed securities, the
payment of principal and interest is unconditionally guaranteed by the U.S.
Government, and thus they are of the highest credit quality. Such direct
obligations or guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity, the U.S.
Government is obligated to or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Student Loan
Mortgage Association, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and Federal Home Loan Banks.
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DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank). Each
Portfolio may only invest in (1) debt securities which meet the minimum ratings
criteria set forth for that particular Portfolio and (2) unrated debt securities
that are, in the Portfolio Manager's determination, comparable in quality to the
rated debt securities in which the Portfolio may invest.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category where
interest payments and principal security appear adequate for the present, but
economic characteristics that provide longer term protection may be lacking. Any
bond, and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.
The Global Strategic Income Portfolio may invest up to 50% of its assets in
debt securities that are below investment grade (i.e., rated BB or lower by
Standards & Poor's, rated Ba or lower by Moody's, or unrated but determined by
the Portfolio Manager to be of similar quality). These securities are commonly
referred to as "junk bonds" or "high yield/high risk debt securities." The
Value, Growth, International Growth and Global Interactive/Telecomm Portfolios
may each invest up to 5% of assets in high yield/high risk debt securities.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent an interest in a pool of mortgages, such as 30-year
and 15-year fixed mortgages and adjustable rate mortgages. For GNMA securities,
the payment of principal and interest on the underlying mortgages is guaranteed
by the full faith and credit of the U.S.; for FNMA and FHLMC securities the
payment of principal and interest is guaranteed by the issuing agency but not
the U.S. The guarantees, however, do not extend to the securities' value or
yield, which are likely to fluctuate inversely with fluctuations in interest
rates. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life of a particular issue
of mortgage-backed securities.
The Portfolios may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards discussed above for debt
securities.
The Portfolios may invest in collateralized mortgage obligations ("CMOs").
A CMO is a security issued by a corporation or a U.S. government instrumentality
that is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or
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mortgage-backed securities. CMOs are partitioned into several classes with a
ranked priority by which classes of obligations are redeemed.
OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. Each Portfolio may also
invest in obligations of foreign branches of commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. See "Foreign Securities"
on page __ and "Banking Industry and Savings Industry Obligations" in the
Statement of Additional Information regarding risks attending investment in
foreign instruments generally and foreign bank instruments in particular.
The Portfolios will not invest in obligations issued by a commercial bank
or S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding securities
rated A or better by Moody's or Standard and Poor's, or, if the institution has
no outstanding securities rated by Moody's or Standard & Poor's, it has, in the
determination of the Portfolio Manager, similar creditworthiness to institutions
having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance Fund,
as the case may be; and
(iii) in the case of a foreign bank, the security is, in the determination
of the Portfolios' Portfolio Manager, of an investment quality comparable with
other debt securities which may be purchased by the Portfolios. These
limitations do not prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing requirements.
COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note master
demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable instruments
issued by government agencies and instrumentalities. All
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commercial paper purchased by the Portfolios must be, the time of investment,
(i) rated "P-l" by Moody's or "A-l" by S&P, (ii) issued or guaranteed as to
principal and interest by issuers having an existing debt security rating of
"Aa" or better by Moody's or "AA" by S&P, or (iii) securities which, if not
rated, are in the opinion of the Portfolio Manager of an investment quality
comparable to rated commercial paper in which the Portfolio may invest. See
Appendix B for description of these ratings.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement with
the seller to repurchase the securities at an agreed-upon time and price. If
the seller should default on its obligation to repurchase the securities, the
Portfolio may experience delays or difficulties in exercising its right to
realize a gain upon the securities held as collateral and might incur a loss if
the value of the securities should decline.
REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. A Portfolio may be unable to realize a return from the use
of the proceeds equal to or greater than the interest required to be paid.
LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be continuously
secured by collateral at least equal to the value of the security loaned.
Although the risk of lending portfolio securities are believed to be slight, as
with other extensions of secured credit, such lending could result in delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed to be of good standing and will not be made
unless the consideration to be earned from such loans would justify the risk.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which would
include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to dispose
of such securities and the time when the Portfolio is able to dispose of them,
during which time the value of the securities could decline. The SEC has
adopted Rule 144A which permits resale among certain institutional investors of
certain unregistered securities. As a result, a significant institutional
trading market has developed in many unregistered securities relying on this
rule. In determining whether such securities should be considered liquid, the
Portfolios will consider the following factors, among others: (1) the frequency
of the trades and the quotes for the security; (2) the number of dealers willing
to purchase or sell the security and the number of potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).
WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.
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OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
When a Portfolio makes a short sale, the proceeds it receives are retained
by the broker until the Portfolio replaces the borrowed security. In order to
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio must also pay any dividends or interest payable on
the security until the Portfolio replaces the security.
The Portfolios' obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of cash, cash items, or U.S. Government securities
in a segregated account with its custodian in an amount such that the value of
the sum of both collateral deposits is at all times equal to at least 100% of
the current market value of the securities sold short. The deposits do not
necessarily limit the Portfolios' potential loss on a short sale, which may
exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolios replaces the borrowed security, the
Portfolio will incur a loss, and if the price declines during this period, the
Portfolio will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Portfolios may have to pay in
connection with such short sale.
A Portfolio may make a short sale only if, at the time the short sale is
made and after giving effect thereto, the market value of all securities sold
short is 25% or less of the value of its net assets and the market value of
securities sold short which are not listed on a national securities exchange
does not exceed 10% of the Portfolio's net assets. In addition, a Portfolio will
not make short sales of the securities of any one issuer to the extent of more
than 2% of the Portfolio's net assets, nor will a Portfolio make short sales of
more than 2% of the outstanding securities of one class of any issuer. The
Portfolios are not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded.
SHORT SALES AGAINST THE BOX
All Portfolios may make short sales "against the box." A short sale
"against the box" is a short sale where, at the time of the short sale, a
Portfolio owns or has the immediate and unconditional right, at no added cost,
to obtain the identical security. The Portfolios would enter into such a
transaction to defer a gain or loss for Federal income tax purposes on the
security owned by the Portfolio or to receive a portion of the interest earned
by the executing broker from the proceeds of the sale. Short sales against the
box are not subject to the percentage limitations on short sales described
above.
FOREIGN SECURITIES
All Portfolios, except the Global Strategic Income Portfolio, may invest in
equity securities of foreign issuers. Each of the Portfolios may invest in
American Depository Receipts ("ADRs"), which are described below. All
Portfolios may invest in foreign government securities that are denominated in
U.S. dollars, and none of these Portfolios except for the International Growth
and Global Interactive/Telecomm Portfolios, will purchase foreign government
securities if, as a result, more than 10% of the value of its total assets would
be invested in such securities. The Portfolios may invest in foreign branches
of commercial banks and foreign banks. See the "Banking Industry and Savings
Industry Obligations" discussion in this section for further description of
these securities.
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Each Portfolio is subject to the following guidelines for diversification
of foreign security investments. If a Portfolio has less than 20% of its assets
in foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or West
Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to invest
in foreign issuers that appear to offer growth potential, or in foreign
countries with economic policies or business cycles different from those of the
United States, or to reduce fluctuations in portfolio value by taking advantage
of foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable U.S. companies.
Transactional costs in non-U.S. securities markets are generally higher than in
U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. A
Portfolio might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts. In addition, transactions in foreign securities may
involve greater time from the trade date until settlement than domestic
securities transactions and involve the risk of possible losses through the
holding of securities by custodians and securities depositories in foreign
countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.
Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies
of developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
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INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
All Portfolios may invest up to 10% of its total assets, in gold bullion
and coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable,
and gold coins will be purchased for their intrinsic value only, i.e., coins
will not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time, there are four major
producers of gold bullion: the Republic of South Africa, the United States,
Canada, and Australia. Political and economic conditions in these countries will
have a direct effect on the mining and distribution of gold and, consequently,
on its price.
FUTURES CONTRACTS
All Portfolios may purchase and sell (i) interest rate futures contracts,
(ii) stock index futures contracts, (iii) foreign currency futures contracts,
(iv) futures contracts on gold and other precious metals, and (v) options on
these futures contracts. A futures contract provides for the future sale by one
party and purchase by the other party of a specified amount of a particular
financial instrument or commodity for a specified price at a designated date,
time, and place.
The Portfolios will use futures contracts solely for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals.
An option on a futures contract gives the purchaser or holder the right,
but not the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified price at any time during the option exercise period. The Portfolios
will utilize options on futures contracts for the same purposes that they use
the underlying futures contracts.
There are several risks associated with the use of futures and futures
options for hedging purposes. While a Portfolio's hedging transactions may
protect it against adverse movements in the general level of interest rates or
other economic conditions, such transactions could also preclude a Portfolio
from the opportunity to benefit from favorable movements in the level of
interest rates or other economic conditions. There can be no guarantee that
there will be correlation between price movements in the hedging vehicle and in
the securities or other assets being hedged. An incorrect correlation could
result in a loss on both the hedged assets and the hedging vehicle so that the
Portfolio's return might have been better if hedging had not been attempted. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected market trends.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
The daily limit
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governs only price movements during a particular trading day and therefore does
not limit potential losses because the limit may work to prevent the liquidation
of unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses. Lack of a liquid market for any
reason may prevent the Portfolios from liquidating an unfavorable position and
the Portfolios would remain obligated to meet margin requirements and continue
to incur losses until the position is closed.
A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists.
OPTIONS
The Portfolios may purchase and sell (i.e., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.
Although options will be primarily used to minimize principal fluctuations
or to generate additional premium income, they do involve certain risks. The
Portfolio Manager may not correctly anticipate movements in the relevant
markets, thus causing losses on the Portfolio's options positions.
A position in an exchange-traded option may be closed out only on an
exchange, board of trade or other trading facility which provides a secondary
market for an option of the same series. Although the Portfolios will generally
purchase or write only those exchange-traded options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or otherwise may
exist. In such event it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of
underlying securities acquired through the exercise of call options or upon the
purchase of underlying securities for the exercise of put options. If a
Portfolio as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide to 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 the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders.
The purchase and sale of over-the-counter ("OTC") options will also be
subject to certain risks. Unlike exchange-traded options, OTC options generally
do not have a continuous liquid market. Consequently, a Portfolio will
generally be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the OTC
option. There can be no assurance that a Portfolio will be unable to liquidate
an OTC option at a favorable price at any time prior to expiration. In the
event of insolvency of the other party, the Portfolio may be unable to liquidate
an OTC option.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
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to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.
A Portfolio's successful use of options on foreign currencies depends upon
the manager's ability to predict the direction of the currency exchange markets
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.
FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e., cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed by the parties. A Portfolio may
either accept or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Portfolio will engage in forward
currency transactions in anticipation of or to protect itself against
fluctuations in currency exchange rates, as further described in the Statement
of Additional Information.
LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33 1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio 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.
Reverse repurchase agreements, short sales of securities, and short sales
of securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery arrangement.
A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.
INDEXED SECURITIES
Each Portfolio may invest up to 5% of its assets in indexed securities.
Indexed securities values are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.
INVESTMENT IN THE TRUST
PRINCIPAL UNDERWRITER
Western Capital Financial Group, Inc., 4225 Executive Square, Suite 325, La
Jolla, California 92037, serves as the principal underwriter of the shares of
the Portfolios. H. Michael Schwartz, a trustee and officer of the Trust, is
also the President of the principal underwriter. For more information about the
principal underwriter of a particular variable contract, see the prospectus for
the contract.
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DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of 4:00
p.m. (New York City time), Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal holidays. Net asset
value per share is calculated by dividing the aggregate value of each
Portfolio's assets less all liabilities by the number of each Portfolio's
outstanding shares.
The Board of Trustees has established procedures to value each Portfolio's
assets to determine net asset value. In general, these valuations are based on
actual or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Portfolio will fluctuate in response to changes
in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, or, if no sales are reported, the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having a
maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued at
appropriately translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European
and Pacific Basin countries is normally completed well before 4:00 p.m., New
York City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Portfolio investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Portfolios' net
asset value is determined may not be reflected in the calculation of net asset
value of the Portfolio unless the Portfolio Manager, acting under authority
delegated by the Board of Trustees, deems that the particular event would
materially affect net asset value. In this event, the securities would be valued
at fair market value as determined in good faith by the Board of Trustees of the
Trust, although the actual calculations will be made by the Portfolio Manager
acting under the direction of the Board and subject to the Board's review.
PURCHASE OF SHARES
Shares of the Portfolios may be sold to: (1) life insurance company
separate accounts to serve as the underlying investment medium for variable
annuity contracts; (2) qualified retirement plans, as permitted by Treasury
Regulations; and (3) life insurance companies and advisers to the Portfolios and
their affiliates. In the future, the Trust intends to sell its shares to
separate accounts to serve as the underlying investment medium for variable life
contracts. The Trust currently does not foresee any disadvantages to variable
contract owners or retirement plan participants arising from offering the
Trust's shares to contract owners, participants, insurers and advisers, to
separate accounts of unaffiliated insurers, or to separate accounts funding both
life insurance policies and annuity contracts. In some circumstances, however,
it is theoretically possible that the interests of the various beneficial owners
of Trust shares might at some time be in conflict. If and when shares are sold
to variable life separate accounts, the Board of Trustees will monitor events in
order to identify the existence of any material
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irreconcilable conflicts and to determine what action, if any, should be taken
in response. The Trust and insurers and retirement plans that purchase its
shares will be responsible for remedying any material conflict in accordance
with SEC exemptive rules or orders. One potential remedy is withdrawal of a
separate account's investment in the Trust.
Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering its shares at any time.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. Redemptions
are effected at the net asset value per share next determined after receipt of
the redemption request. Redemption proceeds normally will be paid within seven
days following receipt of instructions in proper form, or sooner if required by
law.
The right of redemption may be suspended by the Trust or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by the
Securities and Exchange Commission, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the Securities
and Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolios of
the Portfolios, in lieu of cash, in conformity with applicable rules of the
Securities and Exchange Commission. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets into
cash.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Trust intends that the Portfolios will qualify and elect to be treated
as regulated investment companies under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). In any year in which the Portfolios
qualify as regulated investment companies and distribute substantially all of
their net investment income and their net capital gains, the Portfolios
generally will not be subject to federal income tax to the extent they
distributes to shareholders such income and capital gains in the manner required
under the Code.
Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.
The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only
general tax information, and participants in qualified retirement plans that
invest directly in the Portfolios should consult a qualified tax adviser before
purchasing or redeeming any Portfolio shares. In general, assuming that a plan
adheres to the applicable limitations of the Code and Treasury Regulations,
payments for the purchase of Portfolio shares (other than after-tax employee
payments) will be deductible (or not includable in income) up to certain amounts
each year. Federal income tax currently is not imposed upon the investment
income and realized gains until redemption. When Portfolio shares are redeemed
for the purpose of making payments to plan participants, all or a portion of the
payment is normally taxable as ordinary income. Some redemptions may also be
subject to penalty tax. For more information contact a qualified tax adviser.
The Portfolios intend to declare as a dividend and to distribute net
investment income quarterly. The Portfolios will distribute any net realized
capital gains at least once annually. All dividends and distributions will be
reinvested automatically at net asset value in additional shares of the
Portfolios. Dividends declared in October, November, or December to
shareholders of record in such month and paid during the following January will
be treated as having been distributed and received by shareholders on December
31.
Regulations under Section 817(h) of the Code contain certain
diversification requirements. Generally, under those regulations, the Portfolios
will be required to diversify its investments so that, on the last day of each
quarter of a calendar year, no more than 55% of the value of its assets will be
represented by any one investment, no more than 70% will be represented by any
two investments, no more than 80% will be represented by any three investments,
and no more than 90% will be represented by any four investments. For this
purpose, all securities of a given issuer are treated as a single investment,
but, each U.S. Government agency and instrumentality is treated as a separate
issuer. In addition, any security issued, guaranteed,
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<PAGE>
or insured (to the extent so guaranteed or insured) by the United States or an
instrumentality of the U.S. will be treated as a security issued by the U.S.
Government or its instrumentality, whichever is applicable.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on September 8,
1993. The Trust currently intends initially to issue shares of the five
portfolios described in this prospectus. The Agreement and Declaration of Trust
established three other portfolios, and the Board of Trustees may establish
additional portfolios in the future. The capitalization of the Trust consists
solely of an unlimited number of shares of beneficial interest with a par value
of $0.001 each. When issued in accordance with the Trust's Agreement and
Declaration of Trust, shares of the Portfolios are fully paid, redeemable,
freely transferable, and non-assessable by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and should be considered remote.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of
the Portfolios will be given one vote, unless otherwise required by law.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
As of December 20, 1995 all of the outstanding shares of the Portfolios
were held by either PAI or Security Life of Denver Insurance Company, a stock
life insurance company organized under the laws of Colorado and a wholly owned
indirect subsidiary of Internationale Nederladen Group. The shares were
purchased to provide the initial capital for the Trust. Until Variable Contract
owners have the right to instruct insurance companies how to vote the shares,
PAI and Security Life of Denver Insurance Company will control the Portfolios.
As explained in "The Managers and Portfolio Managers," page __, each
Portfolio Manager (or affiliate) has agreed to invest at least $1 million in the
Portfolio or Portfolios it manages. Each Portfolio Manager has agreed to vote
its shares in the same proportion as all Contract owners having voting rights
with respect to the Portfolio or in such other manner as may be required by the
SEC or its staff.
PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions 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.
The Portfolios may not engage in any transactions in which a Portfolio Manager
or its affiliates acts as principal, including over-the-counter purchases and
negotiated trades in which such party acts as a principal.
PERFORMANCE INFORMATION
The Trust may, from time to time, include quotations of each Portfolio's
total return in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature for Variable Contracts unless accompanied by
comparable performance information for a separate account to which the
Portfolios offer their shares. Quotations of total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolios over periods of 1, 5 and 10 years (up to the life
of the Portfolios). All
24
<PAGE>
total return figures will reflect the deduction of a proportional share of each
Portfolio's expenses on an annual basis, and will assume that all dividends and
distributions are reinvested when paid. Quotations of total return reflect only
the performance of a hypothetical investment in the Portfolios during the
particular time period on which the calculations are based. Total return for the
Portfolios will vary based on changes in market conditions and the level of each
Portfolio's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
Quotations of total return for the Portfolios will not take into account
charges or deductions against any Separate Account to which the Portfolio shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the Separate Account will take
such charges into account. A person considering the purchase of a Variable
Contract should not compare a Portfolio's total return with the total returns of
mutual funds that sell their shares directly to the public since the Portfolio's
figures do not reflect charges against the separate accounts or the Variable
Contracts.
Reports and promotional literature may also contain other information,
including the effect of tax deferred compounding on each Portfolio's investment
returns, or returns in general, which may be illustrated by graphs, charts, or
otherwise, and which may include a comparison, at various points in time, of the
return from an investment in the Portfolio (or returns in general) on a tax-
deferred basis (assuming one or more tax rates) with the return on a taxable
basis. For a more detailed description of the methods used to calculate each
Portfolio's total return, see the SAI.
PERFORMANCE DATA FOR THE PORTFOLIO MANAGERS
The following tables include historical performance data relating to each
Portfolio Manager. The data is provided to illustrate past performance in
managing accounts, portfolios, and/or investment companies with investment
objectives and techniques similar to the Portfolio of the Trust that the
Portfolio Manager will manage.
The performance figures have been adjusted to reflect a deduction of the
investment management fee for the first year of the Portfolio's operation (0.80%
of average daily net assets) and an estimate of other operating expenses of the
Portfolio for the Portfolio's first fiscal year of operations. (The advisory
fee and the estimated expenses are the same as those indicated in the "Summary
of Expenses," page ___.)
All returns quoted are dollar weighted rates of return which include the
impact of capital appreciation as well as the reinvestment of interest and
dividends.
The performance figures rely on data supplied by the Portfolio Managers or
from statistical services, reports or other sources believed by PAI to be
reliable. However, the data has not been verified and the performance figures
are unaudited. The performance figures for each Portfolio Manager do not
reflect all of the assets under its management and may not accurately reflect
the performance of all accounts it has managed.
As noted above, the performance figures are calculated using the advisory
fee that will be applicable only for the first 12 months of operations, 0.80% of
average daily net assets. After that time, there will be an incentive fee
arrangement. The base fee will be 2.00%, but it may vary from between 0.00% to
4.00% depending on the Portfolio's performance. See "Management and Portfolio
Management Advisory Fees," page ___. In some instances, performance figures
calculated using the incentive fee arrangement would show lower rates of return
(because the fee would be higher). In other instances, performance figures
calculated using the incentive fee arrangement would show higher rates of return
(because the fee would be lower or zero).
INVESTORS SHOULD NOT CONSIDER THIS PERFORMANCE DATA AS AN INDICATION OF THE
FUTURE PERFORMANCE OF ANY OF THE PORTFOLIOS.
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GAMCO INVESTORS, INC.
THE VALUE PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
Time Period Gabelli(1) S&P 500(2)
- -------------------------------------------------------------------------------
10 Years: 1985-1995................ -------- --------
5 Years: 1991-1995................ 17.15% 16.51%
3 Years: 1993-1995................ 19.42% 15.23%
1 Years: 1995..................... 22.45% 37.50%
Inception: September 29, 1989 - 1995 12.77% 12.80%
- -------------------------------------------------------------------------------
(1) GAMCO Investors, Inc. ("GAMCO") results are based on The Gabelli Value
Fund, Inc. (the "Fund"), a publicly available mutual fund whose management
experience, investment objectives and techniques are similar to that of the
Value Portfolio. The Fund is managed by GAMCO's parent company, Gabelli
Funds, Inc., and had assets of $486 million as of December 31, 1995. Mario
Gabelli is primarily responsible for day-to-day investment management of
the Value Portfolio and the Fund. As of December 31, 1995, GAMCO
Investors, Inc. had in excess of $5.1 billion under management. These
figures were calculated by: (1) taking the total return of the Fund; (2)
increasing that return by the advisory fees and operating expenses of the
Fund to create an estimate of the gross return of the Fund; and (3)
reducing that return by the investment management fee for the first 12
months of the Portfolio's operations (0.80% of average daily net assets)
and the estimated expenses for the Portfolio's first fiscal year of
operations. For more information, see the introduction to these tables.
(2) Standard & Poors 500 is a capital-weighted index representing the aggregate
market value of the common equity of 500 stock primarily traded on the
NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial and 20 transportation companies. The weight of each stock in the
index is proportional to its price time the number of shares outstanding.
The Standard & Poors 500 is an unmanaged index and includes the
reinvestment of all dividends.
THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
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<PAGE>
BEE & ASSOCIATES INCORPORATED
THE INTERNATIONAL GROWTH PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
Time Period BAI(1) MSCI -- EAFE(2)
- -------------------------------------------------------------------------------
10 Years: 1985-1995................ -------- --------
5 Years: 1991-1995................ 21.79% 9.37%
3 Years: 1993-1995................ 21.08% 16.69%
1 Years: 1995..................... 20.87% 11.20%
Inception: April 1989 - 1995 16.97% 4.24%
- -------------------------------------------------------------------------------
(1) Bee & Associates Incorporated results are based on a dollar weighted
composite of all fully discretionary managed accounts (with at least 3
months of experience) whose investment objectives and techniques are
similar to that of the International Growth Portfolio (the "Investment
Strategy"). These figures were calculated by: (1) taking the gross
performance figures for the subject managed accounts (i.e., without
deduction of advisory fees and other expenses) calculated by the Portfolio
Manager according to the formula recommended by the Association for
Investment Management and Research Standards (dated 1993); (2) deducting
the investment management fee for the first 12 months of the Portfolio's
operations (0.80% of average daily net assets); and (3) deducting the
estimated expenses for the Portfolio's first fiscal year of operations.
For more information, see the introduction to these tables. As of December
31, 1995, Bee & Associates Incorporated had approximately $170 million
under management, all of which used the Investment Strategy. The composite
results reflected above consist of 85% of the managed accounts and 85% of
the assets under management which used the Investment Strategy. The only
accounts using the Investment Strategy which are not included in the
composite either have been managed for less than 3 months or are not fully
discretionary (for example, do not permit certain types of investments in
the account).
(2) The Morgan Stanley Capital International -- Europe, Australia, Far East
Index (EAFE) is a widely recognized unmanaged index of non-U.S. companies
which assumes the reinvestment of dividends. These non-U.S. companies are
listed on one of 20 countries and is divided into 8 economic sectors and 38
industry groups.
THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
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<PAGE>
FISHER FRANCIS TREES & WATTS, INC.
THE GLOBAL STRATEGIC INCOME PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
J.P. MORGAN GLOBAL
BOND INDEX,
TIME PERIOD FFTW(1) UNHEDGED(2)
- -------------------------------------------------------------------------------
10 Years: 1985-1995................ -------- --------
5 Years: 1991-1995................ 10.62% 10.36%
3 Years: 1993-1995................ 10.48% 10.69%
1 Years: 1995..................... 17.77% 19.31%
Inception: December 1989 - 1995 11.92% 10.65%
- -------------------------------------------------------------------------------
(1) Fischer Francis Trees & Watts results are based on a dollar weighted
composite of its fully discretionary portfolios (with at least 3 months of
experience) whose investment objectives and techniques are similar to that
of the Global Strategic Income Portfolio (the "Investment Strategy").
These figures were calculated by: (1) taking the gross performance figures
for the subject portfolios (i.e., without deduction of advisory fees and
other expenses) calculated by the Portfolio Manager according to the
formula recommended by the Association for Investment Management and
Research Standards (dated 1993); (2) deducting the investment management
fee for the first 12 months of the Portfolio's operations (0.80% of average
daily net assets); and (3) deducting the estimated expenses for the
Portfolio's first fiscal year of operations. For more information, see the
introduction to these tables. As of December 31, 1995, Fischer Francis
Trees & Watts had $21 billion under management, $4.8 billion of which
were global fixed income portfolios. Of that $4.8 billion, approximately
$392 million were managed using the Investment Strategy. The composite
results reflected above consist of 100% of the managed accounts and 100% of
the assets under management which used the Investment Strategy.
(2) The JP Morgan Global Government Bond Index, Unhedged is a widely recognized
index that measures the global government bond market of 13 countries.
This index is weighted by market capitalization ($3,053 billion-US) and is
comprised of 424 bonds with maturities greater than one year. In the
unhedged index, foreign currencies are converted into dollars at spot
rates. This gives the index exposure to both bond and currency markets.
THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
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<PAGE>
GAMCO INVESTORS, INC.
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE (AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
Gabelli Gabelli
Time Period Interactive(1) S&P 500(2) Telecomm(1) S&P 500(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10 Years: 1985-1995................ -------- -------- -------- --------
5 Years: 1991-1995................ -------- -------- --------- --------
3 Years: 1993-1995................ -------- -------- -------- --------
1 Years: 1995......................... 18.61% 37.50 16.24% 37.50%
Inception: 11.19% 17.06 6.96% 16.51%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) GAMCO Investors, Inc. results are based upon two publicly available mutual
funds, The Gabelli Global Interactive Couch Potato-Registered Trademark-
Fund (the "Interactive Fund") and The Gabelli Global Telecommunications
Fund (the "Telecomm Fund"). The Portfolio will be managed combining the
investment objectives and techniques of these two Funds. The Funds are
managed by GAMCO's parent company, Gabelli Funds, Inc. Mario Gabelli is
primarily responsible for the day-to-day investment management of the Funds
and the Global Interactive/Telecomm Portfolio. As of December 31, 1995,
GAMCO Investors, Inc. had in excess of $5.1 billion under management. As
of that date, the Interactive Fund (which commenced operations on February
7, 1994) had assets of $31.4 million, and the Telecomm Fund (which
commenced operations on November 1, 1993) had assets of $122.8 million.
For each Fund, these figures were calculated by: (1) taking the total
return of the Fund; (2) increasing that return by the advisory fees and
operating expenses of the Fund to create an estimate of the gross return of
the Fund; and (3) reducing that return by the investment management fee for
the first 12 months of the Portfolio's operations (0.80% of average daily
net assets) and the estimated expenses for the Portfolio's first fiscal
year of operations.
(2) Standard & Poors 500 is a capital-weighted index representing the aggregate
market value of the common equity of 500 stock primarily traded on the
NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial and 20 transportation companies. The weight of each stock in the
index is proportional to its price time the number of shares outstanding.
The Standard & Poors 500 is an unmanaged index and includes the
reinvestment of all dividends.
THESE RESULTS ARE UNAUDITED. OF COURSE, PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
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<PAGE>
APPENDIX A
DESCRIPTION OF INDICES
The following information as to each index has been supplied by the
respective preparer of the index or has been obtained from other
publicly-available information.
S&P 500 COMPOSITE
STOCK PRICE INDEX
The purpose of the S&P 500 Composite Stock Price Index is to portray the
pattern of common stock price movement. Construction of the index proceeds from
industry groups to the whole. Currently there are four groups: 400 Industrials,
40 Utilities, 20 Transportation and 40 Financial. Since some industries are
characterized by companies of relatively small stock capitalization, the index
does not comprise the 500 largest companies listed on the New York Stock
Exchange.
Component stocks are chosen solely with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the New York Stock Exchange common stock population, taken as the
assumed model for the composition of the total market. Each stock added to the
index must represent a viable enterprise and must be representative of the
industry group to which it is assigned. Its market price movements must in
general be responsive to changes in industry affairs.
The formula adopted by S&P is generally defined as a "base-weighted
aggregative" expressed in relatives with the average value for the base period
(1941-1943) equal to 10. Each component stock is weighted so that it will
influence the index in proportion to its respective market importance. The most
suitable weighting factor for this purpose is the number of shares outstanding.
The price of any stock multiplied by number of shares outstanding gives the
current market value for that particular issue. This market value determines the
relative importance of the security.
Market values for individual stocks are added together to obtain their
particular group market value. These group values are expressed as a relative,
or index number, to the base period (1941-1943) market value. As the base period
market value is relatively constant, the index number reflects only fluctuations
in current market values.
MORGAN STANLEY CAPITAL INTERNATIONAL
EUROPE, AUSTRALIA, AND THE FAR EAST INDEX
The Morgan Stanley EAFE index measures the performance in Europe,
Australia, and the Far East (EAFE). EAFE contains 20 countries, excluding the
U.S. and the emerging markets of Latin America. Japan represents approximately
46% of the Index value. EAFE is divided into 8 economic sectors and 38 industry
groups. Banking, utilities, and health care are the largest groups.
JP MORGAN GLOBAL GOVERNMENT BOND INDEX, UNHEDGED
The J.P. Morgan Global Government Bond Index, Unhedged, measures the global
government bond market of 13 countries. This index is weighted by market
capitalization ($3,053 billion-US) and is comprised of 424 bonds with maturities
greater than one year. In the unhedged index, foreign currencies are converted
into dollars at spot rates. This gives the index exposure to both bond and
currency markets. As of February 1995, the index was comprised of the following
countries and country weights: Australia (1.2%), Belgium (3.2%), Canada (2.7%),
Denmark (1.7%), France (7.0%), Germany (9.3%), Italy (4.5%), Japan (13.5%), the
Netherlands (3.5%), Spain (2.6%), Sweden (1.5%), United Kingdom (6.2%) and the
United States (43.1%).
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<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
Aaa -- Bonds 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
edged."
Aa -- Bonds 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.
A -- Bonds rated A possess many favorable investment attributes and are
generally considered as upper-medium-grade obligations.
Baa -- Bonds rated Baa are considered 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 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 characterize
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
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<PAGE>
BB, B, CCC, CC -- Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-l is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-l (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-l but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-l by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
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STATEMENT OF ADDITIONAL INFORMATION
for
The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
4225 Executive Square, Suite 355
La Jolla, California 92037
(619) 677-5917
February 1, 1996
This Statement of Additional Information discusses five portfolios listed
above (the "Portfolios") of The Palladian Trust (the "Trust"), which is an
open-end management investment company.
Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity contracts; (2) qualified retirement
plans, as permitted by Treasury Regulations; and (3) life insurance companies
and advisers to the Portfolios and their affiliates. In the future, the Trust
intends to sell its shares to Separate Accounts to serve as the underlying
investment medium for variable life contracts.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated February 1, 1996, of
the above-listed Portfolios of The Palladian Trust and has been filed with the
Securities and Exchange Commission as part of the Trust's Registration
Statement. Investors should note, however, that this Statement of Additional
Information is not itself a prospectus and should be read carefully in
conjunction with the Prospectus for the Portfolios and retained for future
reference. The contents of this Statement of Additional Information are
incorporated by reference in the Prospectus in their entirety. A copy of the
Prospectus may be obtained free of charge from the Trust at the address and
telephone number listed above.
Manager:
Palladian Advisors, Inc.
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TABLE OF CONTENTS
PAGE
INTRODUCTION 3
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 3
Mortgage-Backed Securities 3
GNMA Certificates 3
FNMA and FHLMC Mortgage-Backed Obligations 4
Collateralized Mortgage Obligations (CMOs) 4
Other Mortgage-Backed Securities 5
Asset-Backed Securities 6
Banking Industry and Savings Industry Obligations 7
Commercial Paper 7
Repurchase Agreements 7
Options on Equity Securities 8
Options on Debt Securities 9
Options on Stock Indices 10
Options on Foreign Currencies 12
Futures Contracts 12
Options on Futures Contracts 13
When-Issued or Delayed Delivery Securities 13
Foreign Currency Transactions 14
INVESTMENT RESTRICTIONS 15
MANAGEMENT OF THE TRUST 17
Trustees and Officers 17
Service Providers 19
PORTFOLIO TRANSACTIONS AND BROKERAGE 19
Investment Decisions 19
Brokerage and Research Services 20
PERFORMANCE INFORMATION 21
TAXATION 22
OTHER INFORMATION 23
Capitalization 23
Organization Expenses 23
Registration Statement 23
FINANCIAL STATEMENTS 25
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Portfolios' Prospectus. The more detailed information contained herein
is intended solely for investors who have read the Prospectus and are interested
in a more detailed explanation of certain aspects of some of the Portfolios'
securities and some investment techniques. Some of the Portfolios' investment
techniques are described only in the Prospectus and are not repeated herein.
Captions and defined terms in this Statement of Additional Information generally
correspond to like captions and terms in the Portfolios' Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the periodic payments made by the individual borrowers on the residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-backed
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates, regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed payments
while errant receipts are tracked down may vary. Other mortgage-backed
securities, such as those of the Federal Home
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Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"), trade in book-entry form and should not be subject to the
risk of delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate of
return upon reinvestment of principal. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the GNMA certificates. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking in" yields during
periods of declining interest rates, although they may have comparable risks of
decline in value during periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the FNMA and the FHLMC. FNMA, a federally chartered and privately owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest, but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA also issues REMIC Certificates, which represent an
interest in a trust funded with FNMA Certificates. REMIC Certificates are
guaranteed by FNMA, and not by the full faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. FHLMC, a corporate instrumentality of the United States,
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal and maintains reserves to protect holders against losses due to
default. PCs are not backed by the full faith and credit of the U.S.
Government. As is the case with GNMA certificates, the actual maturity and
realized yield on particular FNMA and FHLMC pass-through securities will vary
based on the prepayment experience of the underlying pool of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and
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prepaid principal are paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner-than-desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to the principal; a like amount is paid as principal on the Series A, B,
or C Bond currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a mortgage-
backed security meets a Portfolio's investment quality standards. There can be
no assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements.
All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. A Portfolio will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Portfolio Manager,
are illiquid if, as a result, more than 15% of the value of a Portfolio's total
assets will be illiquid. As new types of mortgage-backed securities are
developed and offered to investors, the Portfolio Manager will,
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consistent with a Portfolio's investment objectives, policies, and quality
standards, consider making investments in such new types of mortgage-backed
securities.
ASSET-BACKED SECURITIES
All Portfolios may purchase asset-backed securities. Two such securities
are "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and Credit Card
Receivable Securities.
CARS-SM-, represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly to
certificate holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. Certificate holders
may also experience delays in payment or losses on CARS-SM- if the full amounts
due on underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage, or loss of the vehicles securing the contracts,
or other factors.
Credit Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit balances on revolving
credit card agreements ("Accounts") are generally paid down more rapidly than
are Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen the
maturity of Credit Card Receivable Securities, most such securities provide for
a fixed period during which only interest payments on the underlying Accounts
are passed through to the security holder and principal payments received on
such Accounts are used to fund the transfer to the pool of assets supporting the
related Credit Card Receivable Securities of additional credit card charges made
on an Account. The initial fixed period usually may be shortened upon the
occurrence of specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying Accounts during the initial
period and the non-occurrence of specified events. The Tax Reform Act of 1986,
pursuant to which a taxpayer's ability to deduct consumer interest in his or her
federal income tax calculation was completely phased out for taxable years
beginning in 1991, as well as competitive and general economic factors, could
adversely affect the rate at which new receivables are created in an Account and
conveyed to an issuer, shortening the expected weighted average life of the
related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event which shortens the
period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike many other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
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BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future political
and economic developments; (ii) their obligations may be less marketable than
comparable obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the accounting,
auditing, and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks.
Foreign banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
COMMERCIAL PAPER
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. The lender has the right to increase or to decrease the
amount under the note at any time up to the full amount provided by the note
agreement; and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be traded. However,
the notes are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an ongoing
basis, the earning power, cash flow, and other liquidity ratios of the borrower
and its ability to pay principal and interest on demand. The Portfolio Manager
also will consider the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; the Portfolio may invest in them only if the Portfolio Manager
believes that at the time of investment the notes are of comparable quality to
the other commercial paper in which the Portfolio may invest. Master demand
notes are considered by the Portfolio to have a maturity of one day, unless the
Portfolio Manager has reason to believe that the borrower could not make
immediate repayment upon demand. See the Appendix for a description of Moody's
and S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months (up
to one year) from the date of delivery. The resale price is in excess of the
purchase price by an amount which reflects an agreed-upon market rate of return,
effective for the period of time the Portfolio is invested in the security.
This results in a fixed rate of return protected from market fluctuations during
the
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period of the agreement. This rate is not tied to the coupon rate on the
security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages in
repurchase transactions, obtaining collateral at least equal in value to the
repurchase obligation, and marking the collateral to market on a daily basis.
A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together with
any other securities that are not readily marketable, would exceed 15% of the
net assets of the Portfolio. If the seller should become bankrupt or default on
its obligations to repurchase the securities, a Portfolio may experience delay
or difficulties in exercising its rights to the securities held as collateral
and might incur a loss if the value of the securities should decline. A
Portfolio also might incur disposition costs in connection with liquidating the
securities.
OPTIONS ON EQUITY SECURITIES
The Portfolios may purchase and write (i.e., sell) put and call options on
equity securities that are traded on U.S. securities exchanges, are listed on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract pursuant
to which the purchaser or holder, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser or holder, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security at the exercise price upon exercise by
the holder of the put.
A Portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the Portfolio owns the security underlying the option; or (2)
the Portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the Portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the Portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option; or (2) the Portfolio holds on a share-for-share
basis a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or less than the exercise price if the difference is
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maintained by the Portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian.
A Portfolio may also purchase "protective puts" (i.e., put options acquired
for the purpose of protecting a Portfolio security from a decline in market
value). The loss to the Portfolio is limited to the premium paid for, and
transaction costs in connection with, the put plus the initial excess, if any,
of the market price of the underlying security over the exercise price.
However, if the market price of the security underlying the put rises, the
profit the Portfolio realizes on the sale of the security will be reduced by the
premium paid for the put option less any amount (net of transaction costs) for
which the put may be sold.
A Portfolio may also purchase putable and callable equity securities, which
are securities coupled with a put or call option provided by the issuer.
A Portfolio may purchase call options for hedging and investment purposes.
No Portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction" by buying an
option of the same series as the option previously written. Similarly, the
holder of an option may liquidate his or her position by exercise of the option
or by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that closing
purchase or closing sale transactions can be effected.
OPTIONS ON DEBT SECURITIES
The Portfolios may purchase and write exchange-traded and OTC put and call
options on debt securities. Options on debt securities are similar to options
on stock, except that the option holder has the right to take or make delivery
of a debt security, rather than stock.
A Portfolio will write only "covered" options. Options on debt securities
are covered in the same manner as options on stocks, discussed above, except
that, in the case of call options on U.S. Treasury Bills, the Portfolio might
own U.S. Treasury Bills of a different series from those underlying the call
option, but with a principal amount and value corresponding to the option
contract amount and a maturity date no later than that of the securities
deliverable under the call option.
A Portfolio may also write straddles (i.e., a combination of a call and a
put written on the same security at the same strike price where the same issue
of the security is considered as the cover for both the put and the call). In
such cases, the Portfolio will also segregate or deposit for the benefit of the
Portfolio's broker cash or liquid high-grade debt obligations equivalent to the
amount, if any, by which the put is "in the money." It is contemplated that
each Portfolio's use of straddles will be limited to 5% of the Portfolio's net
assets (meaning that the securities used for cover or segregated as described
above will not exceed 5% of the Portfolio's net assets at the time the straddle
is written).
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A Portfolio may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES above. A
Portfolio may wish to protect certain securities against a decline in market
value at a time when put options on those particular securities are not
available for purchase. A Portfolio may therefore purchase a put option on
securities it does not hold. While changes in the value of the put should
generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions as
in transactions in which the Portfolio purchases a put option on an underlying
security it owns.
A Portfolio may also purchase call options on debt securities for hedging
or investment purposes. No Portfolio currently intends to invest more than 5%
of its net assets at any one time in the purchase of call options on debt
securities.
A Portfolio may also purchase putable and callable debt securities, which
are securities coupled with a put or call option provided by the issuer.
A Portfolio may enter into closing purchase or sale transactions in a
manner similar to that discussed above in connection with options on equity
securities.
OPTIONS ON STOCK INDICES
The Portfolios may purchase and sell put and call options on stock indices
traded on national securities exchanges, listed on NASDAQ or that result from
privately negotiated transactions with broker-dealers ("OTC options"). Options
on stock indices are similar to options on stock except that, rather than the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the stock index upon which the option
is based is greater than in the case of a call, or less than, in the case of a
put, the strike price of the option. This amount of cash is equal to such
difference between the closing price of the index and the strike price of the
option times a specified multiple (the "multiplier"). If the option is
exercised, the writer is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth in
this paragraph. When a Portfolio writes a call option on a broadly based stock
market index, it will segregate or put into escrow with its custodian or pledge
to a broker as collateral for the option, cash, Treasury bills or other liquid
high-grade short-term debt obligations, or "qualified securities" (defined
below) with a market value at the time the option is written of not less than
100% of the current index value times the multiplier times the number of
contracts. A "qualified security" is an equity security which is listed on a
national securities exchange or listed on NASDAQ against which the Portfolio has
not written a stock call option and which has not been hedged by the Portfolio
by the sale of stock index futures. When a Portfolio writes a call option on an
industry or market
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segment index, it will segregate or put into escrow with its custodian or pledge
to a broker as collateral for the option, cash, Treasury bills or other liquid
high-grade short-term debt obligations, or at least five qualified securities,
all of which are stocks of issuers in such industry or market segment, with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. Such
stocks will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the
Portfolio's holdings in that industry or market segment. No individual security
will represent more than 15% of the amount so segregated, pledged or escrowed in
the case of broadly based stock market stock options or 25% of such amount in
the case of industry or market segment index options. If at the close of
business on any day the market value of such qualified securities so segregated,
escrowed, or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the fund will so segregate, escrow, or
pledge an amount in cash, Treasury bills, or other liquid high-grade short-term
debt obligations equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the call
is written, it will segregate with its custodian or pledge to the broker as
collateral, cash or U.S. government or other liquid high-grade short-term
obligations equal in value to the amount by which the call is in-the-money times
the multiplier times the number of contracts. Any amount segregated pursuant to
the foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts.
A call option is also covered if the Portfolio holds a call on the same
index as the call written where the strike price of the call held is equal to or
less than the strike price of the call written or greater than the strike price
of the call written if the difference is maintained by the Portfolio in cash,
Treasury bills or other high-grade short-term obligations in a segregated
account with its custodian.
A put option is covered if: (1) the Portfolio holds in a segregated
account cash, Treasury bills or other high-grade short-term debt obligations of
a value equal to the strike price times the multiplier times the number of
contracts; or (2) the Portfolio holds a put on the same index as the put written
where the strike price of the put held is equal to or greater than the strike
price of the put written or less than the strike price of the put written if the
difference is maintained by the Portfolio in cash, Treasury bills or other
high-grade short-term debt obligations in a segregated account with its
custodian.
A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at any
one time in the purchase of puts and calls on stock indices. A Portfolio may
effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
The prospectus details certain risks particular to options on stock
indices. In addition, when a Portfolio has written a call, there is also a risk
that the market may decline between the time the Portfolio has a call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Portfolio is able to sell stocks in its
Portfolio. As with stock options, the Portfolio will not learn that an index
option has been
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exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock Portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Portfolio holds an index option and exercises it
before final determination of the closing index value for that day, it runs the
risk that the level of the underlying index may change before closing. If such
a change causes the exercise option to fall out of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the strike
price of the option (times the applicable multiplier) to the assigned writer.
Although a Portfolio may be able to minimize the risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES
The Portfolios may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of trade.
Options on foreign currencies are similar to options on stock, except that the
option holder has the right to take or make delivery of a specified amount of
foreign currency, rather than stock.
FUTURES CONTRACTS
The Portfolios may purchase and sell stock index futures contracts for
hedging purposes. A stock index futures contract is an agreement in which the
seller of the contract agrees to deliver to the buyer an amount of cash equal to
a specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks
in the index is made. In addition, the Portfolios may, for hedging purposes,
purchase and sell (a) futures contracts on interest-bearing securities (such as
U.S. Treasury bonds and notes) or interest rate indices (referred to
collectively as "interest rate futures contracts"); (2) futures contracts on
foreign currencies or groups of foreign currencies; and (3) futures contracts on
gold and other precious metals.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."
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OPTIONS ON FUTURES CONTRACTS
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and long
position if the option is a put). Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock indices,
and futures contracts. These risks include the risk that the Portfolio manager
may not correctly predict changes in the market, the risk of imperfect
correlation between the option and the securities being hedged, and the risk
that there might not be a liquid secondary market for the option. There is also
the risk of imperfect correlation between the option and the underlying futures
contract. If there were no liquid secondary market for a particular option on a
futures contract, the Portfolio might have to exercise an option it held in
order to realize any profit and might continue to be obligated under an option
it had written until the option expired or was exercised. If a Portfolio were
unable to close out an option it had written on a futures contract, it would
continue to be required to maintain initial margin and make variation margin
payments with respect to the option position until the option expired or was
exercised against the Portfolio.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios may purchase securities on a when-issued or delayed delivery
basis if the Portfolio holds, and maintains until the settlement date in a
segregated account, cash, U.S. Government securities, or high-grade debt
obligations in an amount sufficient to meet the purchase price, or if the
Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or delayed delivery
basis involves a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Portfolios' other assets. Although a Portfolio would
generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of acquiring securities, the Portfolio may
dispose of a when-issued or delayed delivery security prior to settlement if the
Portfolio Manager deems it appropriate to do so. The Portfolio may realize
short-term profits or losses upon such sales.
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FOREIGN CURRENCY TRANSACTIONS
The Portfolio's may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e. cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed upon by the parties. A Portfolio
may either accept or make delivery of the currency at the maturity of the
forward contract or, prior to maturity, enter into a closing transaction
involving the purchase or sale of an offsetting contract. A Portfolio will
engage in forward currency transactions in anticipation of or to protect itself
against fluctuations in currency exchange rates.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, the Portfolio may
desire to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for a fixed amount of dollars for the purchase or sale of the
amount of foreign currency involved in the underlying transactions, the
Portfolio will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and such foreign
currency during the period between the date on which the security is purchased
or sold and the date on which payment is made or received.
Second, when the Portfolio Manager 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 for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Portfolios securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. None of the Portfolios will enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolios to deliver an amount
of foreign currency in excess of the value of the Portfolios securities or other
assets denominated in that currency.
A Portfolio's custodian will place cash or liquid, high-grade equity or
debt securities into a segregated account of the Portfolio in an amount equal to
the value of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Portfolio's commitments with respect to such contracts.
At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
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It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is made
to sell the security and make delivery of the foreign currency, it may be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Portfolio is
obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the Portfolios entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Portfolio will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Forward contracts are not traded on regulated commodities exchanges. There
can be no assurance that a liquid market will exist when a Portfolio seeks to
close out a forward currency position, and in such an event, a Portfolio might
not be able to effect a closing purchase transaction at any particular time. In
addition, a Portfolio entering into a forward foreign currency contract incurs
the risk of default by the counter party to the transaction. The CFTC has
indicated that it may in the future assert jurisdiction over certain types of
forward contracts in foreign currencies and attempt to prohibit certain entities
from engaging in such foreign currency forward transactions.
Although the Portfolios value their assets daily in terms of U.S. dollars,
they do not intend physically to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. They will do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the investment
restrictions set forth below, are, fundamental and may not be changed with
respect to any Portfolio without the approval of a majority of the outstanding
voting shares of that Portfolio. The vote of a majority of the outstanding
voting securities of a Portfolio means the vote, at an annual or special
meeting, of the lesser of (a) 67% or more of the voting securities present at
such meeting, if the holders of more than 50% of the outstanding voting
securities of such Portfolio are present or represented
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by proxy; or (b) more than 50% of the outstanding voting securities of such
Portfolio. None of the Portfolios will:
(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment
companies, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of
the value of a Portfolio's assets and to not more than 10% of the
issuer's outstanding voting securities held by the Palladian Trust as
a whole. Some uncertainty exists as to whether certain of the types
of bank obligations in which a Portfolio may invest, such as
certificates of deposit and bankers' acceptances, should be classified
as "cash items" rather than "other securities" for purposes of this
restriction, which is a diversification requirement under the 1940
Act. Interpreting most bank obligations as "other securities" limits
the amount a Portfolio may invest in the obligations of any one bank
to 5% of its total assets. If there is an authoritative decision that
any of these obligations are not "securities" for purposes of this
diversification test, this limitation would not apply to the purchase
of such obligations.
(2) Invest in a security if more than 25% of its total assets
(taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry,
except (a) that this restriction does not apply to securities issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto), and
to securities or obligations issued by banks, as permitted by the SEC;
and (b) that the Global Interactive/Telecomm Portfolio may invest more
than 25% of its total assets in the public utilities industry and may
invest more than 25% of its total assets in the telecommunications
industry.
(3) Purchase or sell real estate, except that a Portfolio may
invest in securities secured by real estate or real estate interests
or issued by companies in the real estate industry or which invest in
real estate or real estate interests;
(4) Buy or sell commodities or commodity contracts, except that
the Portfolio may purchase and sell futures contracts and related
options, foreign currency, forward foreign currency exchange
contracts, and gold and other precious metals.
(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities), except a Portfolio engaged in transactions in options,
futures, and options on futures may make margin deposits in connection
with those transactions, except that effecting short sales will be
deemed not to constitute a margin purchase for purposes of this
restriction.
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(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the
purchase of such obligations may be deemed to be the making
of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with
applicable guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing money
in according with that Portfolio's borrowing policies, or in
connection with any repurchase agreement, and except, for purposes of
this investment restriction, collateral or escrow arrangements with
respect to the making of short sales, purchase or sale of futures
contracts or related options, purchase or sale of forward currency
contracts, writing of options, and collateral arrangements with
respect to margin or other deposits respecting futures contracts,
related options, and forward currency contracts are not deemed to be
an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter under the federal
securities laws; and
(9) Borrow money or pledge, mortgage, or hypothecate its assets,
except that a Portfolio may: (a) borrow from banks, but only if
immediately after each borrowing and continuing thereafter there is
asset coverage of 300%; and (b) enter into reverse repurchase
agreements and transactions in options, futures, options on futures,
and forward currency contracts.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The trustees and officers of the Trust, their business addresses, and
principal occupations during the past five years are set forth below:
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Position Principal Occupations
Name and Address with the Trust During Past 5 Years
- ---------------- -------------- ---------------------
Matthew J. Stacom* Chairman of Vice Chairman, Cushman &
51 West 52nd Street the Board; Wakefield,
New York, NY 10036 Vice President September 1946 to present;
Chairman, Palladian
Advisors, Inc.,
December 1992 to present.
Tom N. Dallape Trustee Commercial Land Broker,
18300 Von Karman Avenue The Hoffman Company,
Suite 110 September 1992 to present;
Irvine, CA 92715 Commercial Land Broker,
Voit Commercial Brokerage,
July 1990 to August 1992.
Dr. Jeffry R. Haber Trustee Chief Financial Officer,
The Astor Home for Children The Astor Home for Children,
36 Mill Street July 1986 to present;
P.O. Box 5005 Adjunct Professor of
Rhinebeck, NY 12572 Accounting, Marist College,
September 1989 to present.
Charles G. Tirelli Trustee President, Rego Crescent
23 Dunwoodie Place Corporation (Real Estate
Greenwich, CT 06830 Development), January 1980
to present.
H. Michael Schwartz* Trustee; Vice President, Chief
4225 Executive Square President; Financial Officer, Protean
Suite 355 Secretary; Financial Companies,
La Jolla, California 92037 Treasurer December 1992 to present;
President and Director,
Palladian Advisors, Inc.,
December 1992 to present;
President,
Western Capital
Financial Group, Inc.,
April 1994 to present;
Chief Financial Officer,
Western Capital
Financial Group, Inc.,
October 1988 to
April 1994.
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* Matthew J. Stacom and H. Michael Schwartz are "interested persons" of the
Trust (as that term is defined in the Investment Company Act) because of their
affiliation with the Manager or its affiliates as shown above.
None of the trustees directly owns shares of the Portfolios. In addition,
as of the date of this Statement of Additional Information, the Trustees and
Officers in the aggregate owned variable contracts that entitled them to give
voting instructions with respect to less than one percent of the outstanding
shares of the Portfolios.
Trustees other than those affiliated with the Manager receive $1,500 for
each Board meeting and are reimbursed for any expenses incurred in attending
such meetings or otherwise in carrying out their responsibilities as trustees.
SERVICE PROVIDERS
For information about the investment advisers, the custodian and transfer
agent, and the principal underwriter, see the prospectus.
Coopers & Lybrand, L.L.P., 350 South Grand Avenue, Los Angeles, California
90071, serves as independent auditors for the Trust.
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111 will provide fund accounting services. The fee for each Portfolio is
based on an annual rate of 0.05% of net assets for the first $600 million in net
assets and an annual rate of 0.03% of net assets for net assets in excess of
$600 million. In addition, each Portfolio will reimburse Investors Bank & Trust
Company for out-of-pocket expenses such as pricing services.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the Portfolio Manager
of each Portfolio. Each Portfolio Manager has investment advisory clients other
than the Portfolio. A particular security may be bought or sold by a Portfolio
Manager for certain clients even though it could have been bought or sold for
other clients at the same time. It also sometimes happens that two or more
clients simultaneously purchase or sell the same security, in which event each
day's transactions in such security are, insofar as possible, allocated between
such clients in a manner deemed fair and reasonable by the Portfolio Manager.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Portfolio Manager, and the results of
such allocations, are subject to periodic review by the Trust's Manager and
Board of Trustees. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
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BROKERAGE AND RESEARCH SERVICES
Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Fixed income securities, as well
as securities traded in the over-the-counter market, on the other hand, will not
normally involve any brokerage commissions. The securities are generally traded
on a "net" basis with the dealer acting as principal for its own account without
a stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain of these securities may be purchased directly from an issuer, in which
case neither commissions nor discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolios taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing of
the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's risk
in positioning a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services, although they have no current arrangement to do so. A
Portfolio Manager may cause a Portfolio to pay a broker-dealer who furnishes
brokerage and/or research services a commission or price for executing a
transaction that is in excess of the commission or price another broker would
have received for executing the transaction if it is determined that such
commission or price is reasonable in relation to the value of the brokerage
and/or research services which have been provided. In some cases, research
services are generated by third parties, but are provided to the Portfolio
Manager or through broker-dealers.
The Portfolio Managers may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each Portfolio
Manager's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
In allocating brokerage, a Portfolio Manager annually assesses the
contribution of the brokerage and research services provided by broker-dealers,
and allocates a portion of the brokerage business of its clients on the basis of
these assessments. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various
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brokerage and research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations, but can (and often does) exceed
the suggestions because total brokerage is allocated on the basis of all the
considerations described above. In no instance is a broker-dealer excluded
from receiving business because it has not been identified as provided research
services.
The Portfolio Managers cannot readily determine the extent to which net
prices or commission rates charged by broker- dealers reflect the value of their
research services. However, net prices and commissions are periodically
reviewed to determine whether they are reasonable in relation to the services
provided. In some instances, the Portfolio Managers receive research services
they might otherwise have had to perform for themselves. The research services
provided by broker-dealers can be useful to the Portfolio Managers, in serving
the Portfolios, as well as their other clients.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return of the
Portfolios in advertisements or sales literature.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include periods of
one, five, and ten years (or, if less, up to the life of the Portfolio),
calculated pursuant to the following formula: P(1+T)TO THE POWER OF n=ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). Quotations
of total return may also be shown for other periods. All total return figures
reflect the deduction of a proportional share of Portfolio expenses on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's 500
Stock Index ("S & P 500"), the Dow Jones Industrial Average ("DJIA"), the Lehman
Brothers Government Bond Index, the Donoghue Money Market Institutional
Averages, the Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent group of
securities, (ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the
Portfolio. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Quotations of total return for a Portfolio will not take into account
charges and deductions against any Variable Accounts to which the Portfolios
shares are sold. Performance information
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for any Portfolio reflects only the performance of a hypothetical investment in
the Portfolio during the particular time period on which the calculations are
based. Performance information should be considered in light of the Portfolio's
investment objective or objectives and investment policies and the market
conditions during the given time period. Performance information should not be
considered as a representation of what may be achieved in the future.
TAXATION
The requirements applicable to a Portfolios' qualification as a regulated
investment company may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts or forward contracts.
Income received by a Portfolio from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
To comply with regulations under Section 817(h) of the Code, each Portfolio
of the Trust will be required to diversify its investments so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented by
any two investments, no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated for purposes of Section
817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
Portfolio) underlying a separate account invests solely in securities issued by
companies in a specific industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Portfolios of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules or regulations are adopted, there can
be no assurance that the Portfolios will be able to operate as currently
described in the Prospectus, or that a Portfolio will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Portfolios' investment objective is fundamental and may
be
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changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of a Portfolio as
necessary to prevent any such prospective rules and regulations from causing the
Variable Contract Owners to be considered the owners of the assets underlying
the Variable Accounts.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust dated September 8, 1993. The Trust currently intends
initially to issue shares of five different "series" or Portfolios. Each
Portfolio is, for investment purposes, a separate investment fund, and each
issues a separate class of capital stock with a par value of $0.001 per share.
Each share of stock issued with respect to a Portfolio has a pro rata interest
in the assets of that Portfolio and has no interest in the assets of any other
Portfolio. Each Portfolio bears its own liabilities and also its proportionate
share of the general liabilities of the Trust. This Statement of Additional
Information discusses the initial five Portfolios, which issue the following
five shares: Value Portfolio shares, Growth Portfolio shares, International
Growth Portfolio shares, Global Strategic Income Portfolio shares, and Global
Interactive/Telecomm Portfolio shares.
The Agreement and Declaration of Trust established three other Portfolios,
and the Board of Trustees may establish additional Portfolios (with different
investment objectives and policies) at any time in the future. The Trust has
sold 1,000 shares of one of those Portfolios (the Balanced Opportunity
Portfolio) to provide part of the Trust's initial capitalization, but the Trust
is not now offering shares of that Portfolio to Separate Accounts or qualified
plans. Establishment and offering of additional Portfolios will not alter the
rights of the Trust's shareholders. When issued in accordance with the terms of
the Agreement and Declaration of Trust, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a Portfolio of the
Trust, each shareholder is entitled to receive his or her pro rata share of the
net assets of that Portfolio.
ORGANIZATION EXPENSES
Certain of the expenses incurred by the Portfolios in connection with its
organization, its registration with the Securities and Exchange Commission, and
the public offering of its shares were advanced on behalf of the Trust by the
Manager. These organizational expenses are deferred and amortized by the
Portfolio over a period not exceeding 60 months from the date of the Portfolio's
commencement of operations.
REGISTRATION STATEMENT
This Statement of Additional Information and the prospectus do not contain
all the information included in the Trust's registration statement filed with
the Securities and Exchange
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Commission under the Securities Act of 1933 with respect to the securities
offered by the prospectus. Certain portions of the registration statement have
been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the Securities and Exchange
Commission in Washington, D.C.
Statements contained herein and in the prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
24
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Global Global
Balanced International Strategic Interactive/
Value Growth Opportunity Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $10,000 $10,000 $10,000 $10,000 $50,000 $10,000
Deferred organization expenses (Note 2) 19,678 19,678 19,678 19,678 19,678 19,678
---------------------------------------------------------------------------
Total Assets 29,678 29,678 29,678 29,678 69,678 29,678
----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for organization expenses (Note 2) 19,678 19,678 19,678 19,678 19,678 19,678
---------------------------------------------------------------------------
NET ASSETS: 10,000 10,000 10,000 10,000 50,000 10,000
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
Offering and redemption price per share $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
---------------------------------------------------------------------------
SHARES OUTSTANDING: 1,000 1,000 1,000 1,000 5,000 1,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
25
<PAGE>
THE PALLADIAN TRUST
Notes to the Statements of Assets and Liabilities
As of December 31, 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Palladian Trust (the "Trust"), an open-end management investment company
established as a Massachusetts business trust, is registered under the
Investment Company Act of 1940. The Trust offers shares of the following no-load
portfolios: Value Portfolio ("Value"), Growth Portfolio ("Growth"), Balanced
Opportunity Portfolio ("Balanced"), International Growth Portfolio
("International"), Global Strategic Income Portfolio ("Income"), and Global
Interactive/Telecomm ("Interactive/Telecomm") Portfolios. For the period
October 1995 (inception) to December 31, 1995 the Trust and Portfolios have had
no operations other than those actions relating to organizational matters. As of
December 31, 1995, the Value, Growth, Balanced, International, and
Interactive/Telecomm Portfolios had 1,000 shares outstanding that were owned by
Palladian Advisors, Inc. The Income Portfolio had 5,000 shares outstanding that
were owned by Security Life of Denver Insurance Company.
2. ORGANIZATION EXPENSES
The Trust has incurred expenses of $118,068 in connection with the organization
of the Trust. These costs have been deferred and allocated to each Portfolio
equally and will be amortized on a straight line basis over a period of sixty
months from the date the Trust commences investment operations. In the event
that any of the initial shares of the Funds are redeemed during the amortization
period by any holder thereof, the redemption proceeds will be reduced by any
unamortized organization expenses in the same proportion as the number of said
shares being redeemed bears to the number of initial shares that are outstanding
at the time of the redemption.
3. COMMITMENTS AND RELATED AGREEMENTS
ADVISORY AGREEMENT
Palladian Advisors, Inc. ("PAI") serves as overall Manager of the Trust. PAI has
engaged Tremont Partners ("Tremont") as the Portfolio Advisor which evaluates
and recommends registered investment advisers ("Portfolio Managers") for each
Portfolio of the Trust.
Each Portfolio pays an overall management fee, computed and accrued daily and
paid monthly, based on its average daily net assets. For the first twelve months
of operations, the management fee will be 0.80% of average daily net assets.
After that time, the base fee will be 2%, but it may vary from between 0% and 4%
depending on the performance of that Portfolio (after expenses) compared to that
of an appropriate benchmark. Each Portfolio Manager will receive 80% of the fee,
and PAI will receive the remaining 20%. PAI is responsible for paying the fee of
Tremont, which equals 32.5% of the fee received by PAI.
26
<PAGE>
THE PALLADIAN TRUST
Notes to the Statements of Assets and Liabilities (continued)
As of December 31, 1995
- --------------------------------------------------------------------------------
3. COMMITMENTS AND RELATED AGREEMENTS (CONTINUED)
DISTRIBUTION AGREEMENT
Western Capital Financial Group (the "Distributor") serves as the principal
underwriter and distributor of the shares of the Trust. The Distributor has
voluntarily waived any fees associated with servicing the Trust.
TRANSFER AGENCY, FUND ACCOUNTING AND CUSTODY AGREEMENT
Investors Bank & Trust will provide transfer agency, fund accounting, and
custody services for the Trust. The transfer agency and fund accounting fees for
the year will be the greater of $40,000 or 0.05% of net assets for the first
$600 million and 0.03% of net assets in excess of $600 million. Custody fees are
separated between domestic and global portfolios. The domestic custody fee will
be 0.01% of net assets each year subject to a monthly minimum fee. The global
custody fee varies by country according to the Band groupings. The
aforementioned fees are exclusive of transaction costs and out-of-pocket
expenses.
4. RELATED PARTY TRANSACTIONS
Certain officers of the Trust are also officers of PAI and the Distributor.
An individual, together with certain affiliated entities, own a majority
interest in the parent company of Tremont. He is also an officer of a Portfolio
Manager selected by Tremont to provide investment advisory services to two
Portfolios of the Trust.
An officer of the Distributor is also an officer of PAI, and a trustee and
officer of the Trust. An officer of PAI is also a trustee and officer of the
Trust.
27
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------------
To the Board of Trustees
and Shareholders of The Palladian Trust
We have audited the accompanying statements of assets and liabilities of the
Value, Growth, Balanced Opportunity, International Growth, Global Strategic
Income, and Global Interactive/Telecomm Portfolios (hereinafter the
"Portfolios"), series of The Palladian Trust, as of December 31, 1995. These
financial statements are the responsibility of the management of the Portfolios.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of the Portfolios as of
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
January 15, 1996
28
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectus constituting Part
A of this Registration Statement:
2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Statement of Assets and Liabilities.
(b) EXHIBITS
1. Declaration of Trust.4/
2. By-Laws.4/
3. Not Applicable.
4. Not Applicable.
5. (a) Form of management agreement between the Registrant and
Palladian Advisors, Inc.4/
(b) Form of portfolio advisor agreement among the Registrant,
Palladian Advisors, Inc. and Tremont Partners, Inc.4/
(c) Form of subadvisory agreement among the Registrant,
Palladian Advisors, Inc. and a Portfolio Manager.4/
6. Form of distribution agreement between the Registrant and Western
Capital Financial Group, Inc.3/
7. Not Applicable.
8. Form of custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.3/
C-1
<PAGE>
9. (a) Form of transfer agency agreement between Registrant and
Investors Bank & Trust Company.3/
(b) Form of indemnification agreement among Palladian Advisors,
Inc., Tremont Partners, Inc., and a Portfolio Manager.3/
(c) Form of Portfolio Manager Investment Agreement.3/
(d) Form of Participation Agreement among Registrant, Security
Life of Denver Insurance Company [and First ING Life Insurance
Company of New York], Western Capital Financial Group, Inc., and
Palladian Advisors, Inc.3/
10. Opinion of counsel.4/
11. Consent of independent accountants.4/
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Not Applicable.
17. Not Applicable.
18. Powers of attorney.3/
_________________________
1/ Incorporated by reference to initial registration statement for The
Palladian Trust, Reg. No. 33-73882, filed January 7, 1994.
2/ Incorporated by reference to pre-effective amendment no. 1, Reg. No. 33-
73882, filed May 12, 1995.
3/ Incorporated by reference to pre-effective amendment no. 2, Reg. No. 33-
73882, filed October 18, 1995.
4/ Filed herewith.
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of
Title of Class Record Holders
-------------- --------------
Value 1
Growth 1
Balanced Opportunity 1
International Growth 1
Global Strategic Income 1
Global Interactive/Telecomm 1
ITEM 27. INDEMNIFICATION.
Section 5.4 of the Agreement and Declaration of Trust of The Palladian
Trust provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee,
except with respect to any matter as to which it has been determined
that such Covered Person (i) did not act in good faith in the
reasonable relief that such Covered Person's action was in or not
opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct")."
C-3
<PAGE>
The Agreement and Declaration, Exhibit 1 hereto, provides additional terms of
this indemnification.
The agreement between the Registrant and the Manager includes the following
indemnification provision:
"The Manager shall not be liable for any loss suffered by the Trust as
the result of actions by persons other than the Manager or for any
loss suffered by the Trust as the result of any negligent act or error
of judgment of the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties under
this Agreement or from reckless disregard by it of its obligations and
duties under this Agreement. The Trust shall indemnify the Manager
and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager
resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Trust resulting from (i) a
breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award
of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith
or gross negligence by the Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Manager of
its obligations and duties under this Agreement."
The agreements with the Portfolio Advisor and the Portfolio Managers
include substantially similar provisions.
By separate indemnification agreements, the Manager, the Portfolio Advisor
and each Portfolio Manager have indemnified each other from all cost damage and
expense, including reasonable expenses for legal counsel, incurred by the
indemnified party as a result of the indemnifying party's actions or omissions
in performing its duties under the advisory agreements that constitute
negligence, bad faith, breach of trust or fiduciary duty, a material violation
of one or more of the advisory agreements, fraud, reckless or intentional
misconduct, or violation of law or regulation.
The Participation Agreements with Security Life of Denver Insurance Company
and First ING Life Insurance Company of New York include certain indemnification
provisions. Subject to certain limitations, the Life Company agrees, among
other things,
C-4
<PAGE>
to indemnify the Registrant, the Manager and the principal underwriter for any
and all losses, claims, damages, or liabilities (including legal and other
expenses) arising out of certain misrepresentations or omissions, a failure by
Life Company to substantially provide the services required by the Participation
Agreement, or a material breach of the Participation Agreement. Subject to
certain limitations, the Manager and the principal underwriter agree, among
other things, to indemnify the Life Company against all losses, claims, damages,
or liabilities (including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by the Trust to meet certain
requirements, or a material breach of the Participation Agreement.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(b) PALLADIAN ADVISORS, INC. ("PAI")
See "Management of the Trust" in both Prospectuses and Statements of
Additional Information (Parts A and B) of this Registration Statement.
The business and other connections of the PAI's directors and officers are
set forth below.
C-5
<PAGE>
Position
Name and Address with PAI Principal Occupations
- ---------------- -------- ---------------------
Matthew J. Stacom Chairman Vice Chairman, Cushman
51 West 52nd Street & Wakefield, September
New York, NY 10036 1946 to present.
Lesta Stacom- Vice Vice Chairman, PAI,
Summerfield Chairman December 1992 to
5211 Fisher Island Drive present.
Fisher Island Miami, FL
33109
H. Michael Schwartz Director, Vice President and
4225 Executive Square President, Chief Financial
Suite 355 Secretary Officer, Protean
La Jolla, CA 92037 Financial Companies,
December 1992 to
present; President,
Western Capital
Financial Group, Inc.
April 1994 to present;
Chief Financial
Officer, Western
Capital Financial
Group, Inc., October
1988 to April 1994.
(b) TREMONT PARTNERS, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the six Portfolios.
Information as to Tremont Partners, Inc.'s directors, officers and partners
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-238-22), as most recently amended, the text of which is incorporated
herein by reference.
C-6
<PAGE>
(c) GAMCO INVESTORS, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Value and Global Interactive/Telecomm Portfolios.
Information as to GAMCO Investors, Inc.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-141-32), as most recently amended, the text of which is
incorporated herein by reference.
(d) STONEHILL CAPITAL MANAGEMENT, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Growth Portfolio.
Information as to Stonehill Capital Management, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-39-824), as most recently amended, the text of
which is incorporated herein by reference.
(e) BEE & ASSOCIATES INCORPORATED
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the International Growth Portfolio.
Information as to Bee & Associates Incorporated's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-345-38), as most recently amended, the text of which is
incorporated herein by reference.
(f) FISCHER FRANCIS TREES & WATTS, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Global Strategic Income Portfolio.
Information as to Fischer Francis Trees & Watts, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-105-07), as most recently amended, the text of
which is incorporated herein by reference.
C-7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter does not act as principal underwriter,
depositor or investment adviser of any other investment company.
(b) Information concerning the directors and officers of Western Capital
Financial Group, Inc. is set forth below. The address of each person is 4225
Executive Square, Suite 325, La Jolla, California 92037.
Positions and Positions and
Offices with Offices with
Name Underwriter Registrant
- ---- ------------ -------------
H. Michael Schwartz President and Trustee, President,
Director Secretary and
Treasurer
Dan Dubois Senior Vice None
President
Richard Zak Senior Vice None
President
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained at the offices of (1) the Registrant and Palladian Advisors, Inc.,
4225 Executive Square, Suite 325, La Jolla, CA 92037; (2) GAMCO Investors, Inc.,
One Corporate Center, Rye, NY 10580; (3) Stonehill Capital Management, Inc., 277
Park Avenue, New York, NY 10172; (4) Bee & Associates Incorporated, 370 17th
Street, Denver, CO 80202; (5) Fischer Francis Trees & Watts, Inc., 200 Park
Avenue, 46th Floor, New York, NY 10166; (6) Tremont Partners, Inc., One
Corporate Center at Rye, 555 Theodore Fremd Avenue, Rye, NY 10580; and (7)
Investors Bank & Trust Company, 89 South Street, Boston, MA 02111.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
C-8
<PAGE>
ITEM 32. UNDERTAKINGS
Registrant makes the following undertakings:
(a) to file a post-effective amendment, using financial statements
which may not be certified, within four to six months from the
effective date of this Registration Statement.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of La Jolla, and State of California on the 26th day of
January, 1996.
THE PALLADIAN TRUST
By: /s/ H. Michael Schwartz
-------------------------------
H. Michael Schwartz
Trustee, President,
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the 26th day of January, 1996.
SIGNATURE AND TITLE
/s/ Matthew J. Stacom By: /s/ H. Michael Schwartz
- ------------------------------ --------------------------------
Matthew J. Stacom H. Michael Schwartz
Chairman and Vice President (Attorney-in-Fact)
/s/ H. Michael Schwartz
- ------------------------------
H. Michael Schwartz
Trustee, President,
Secretary and Treasurer
/s/ Tom N. Dallape By: /s/ H. Michael Schwartz
- ------------------------------ ---------------------------------
Tom N. Dallape H. Michael Schwartz
Trustee (Attorney-in-Fact)
C-10
<PAGE>
/s/ Jeffry R. Haber By: /s/ H. Michael Schwartz
- ----------------------------- ---------------------------------
Jeffry R. Haber H. Michael Schwartz
Trustee (Attorney-in-Fact)
/s/ Charles G. Tirelli By: /s/ H. Michael Schwartz
- ----------------------------- ---------------------------------
Charles G. Tirelli H. Michael Schwartz
Trustee (Attorney-in-Fact)
C-11
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NOS.
- ----------- ----------------------- ---------
1 Declaration of Trust
2 By-Laws
5 (a) Form of management agreement between
the Registrant and Palladian Advisors,
Inc.
5 (b) Form of portfolio advisor agreement among
the Registrant, Palladian Advisors, Inc.
and Tremont Partners, Inc.
5 (c) Form of subadvisory agreement among the
Registrant, Palladian Advisors, Inc. and a
Portfolio Manager
10 Opinion of counsel
11 Consent of independent accountants
C-12
<PAGE>
THE PALLADIAN TRUST
AGREEMENT AND
DECLARATION OF TRUST
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I-- THE TRUST
Section 1.1 Name..........................................................4
Section 1.2 Definitions...................................................5
ARTICLE II -- TRUSTEES
Section 2.1 Management of the Trust.......................................6
Section 2.2 Election of Trustees..........................................6
Section 2.3 Term of Office of Trustees....................................6
Section 2.4 Termination of Service
and Appointment of Trustees...................................7
Section 2.5 Temporary Absence of Trustees.................................7
Section 2.6 Number of Trustees............................................7
Section 2.7 Effect of Death, Resignation, etc. of a Trustee...............7
Section 2.8 No Accounting.................................................7
Section 2.9 Ownership of the Trust........................................7
ARTICLE III -- POWERS OF TRUSTEES
Section 3.1 General.......................................................8
Section 3.2 Investments...................................................8
Section 3.3 Legal Title...................................................9
Section 3.4 Issuance and Repurchase of Securities.........................9
Section 3.5 Borrow Money..................................................9
Section 3.6 Officers; Delegation; Committees..............................9
Section 3.7 Collection and Payment........................................9
Section 3.8 Expenses......................................................10
Section 3.9 Manner of Acting; By-laws.....................................10
Section 3.10 Voting Trusts.................................................10
Section 3.11 Miscellaneous Powers..........................................10
Section 3.12 Further Powers................................................11
ARTICLE IV -- ADVISORY, MANAGEMENT AND DISTRIBUTION
ARRANGEMENTS
Section 4.1 Management Arrangements.......................................11
Section 4.2 Distribution Arrangements.....................................12
Section 4.3 Parties to Contract...........................................12
Section 4.4 Provisions and Amendments.....................................12
1
<PAGE>
ARTICLE V -- LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1 Trustees, Shareholders, etc. Not
Personally Liable; Notice.....................................12
Section 5.2 Trustee's Good Faith Action; Expert
Advice; No Bond or Surety.....................................13
Section 5.3 Indemnification of Shareholders...............................13
Section 5.4 Indemnification of Trustees, Officers, etc....................14
Section 5.5 Compromise Payment............................................14
Section 5.6 Indemnification Not Exclusive, etc............................15
Section 5.7 Liability of Third Persons Dealing with Trustees..............15
ARTICLE VI -- SHARES OF BENEFICIAL INTEREST
Section 6.1 Beneficial Interest...........................................15
Section 6.2 Portfolio Designation.........................................15
Section 6.3 Rights of Shareholders........................................18
Section 6.4 Trust Only....................................................18
Section 6.5 Issuance of Shares............................................18
Section 6.6 Register of Shares............................................19
Section 6.7 Transfer Agent and Registrar..................................19
Section 6.8 Transfer of Shares............................................19
Section 6.9 Notice........................................................20
ARTICLE VII -- CUSTODIANS
Section 7.1 Appointment and Duties........................................20
Section 7.2 Action Upon Termination of Custodian Agreement................21
Section 7.3 Central Certificate System....................................21
Section 7.4 Acceptance of Receipts in Lieu of Certificates................21
ARTICLE VIII -- REDEMPTION
Section 8.1 Redemptions...................................................21
Section 8.2 Redemptions of Accounts of Less Than a Minimum Dollar
Amount........................................................21
ARTICLE IX -- DETERMINATION OF NET ASSET VALUE, NET
INCOME AND DISTRIBUTIONS
Section 9.1 Net Asset Value...............................................22
Section 9.2 Distributions to Shareholders.................................22
2
<PAGE>
Section 9.3 Power to Modify Foregoing Procedures..........................22
ARTICLE X -- SHAREHOLDERS
Section 10.1 Voting Powers.................................................22
Section 10.2 Meetings......................................................23
Section 10.3 Quorum and Required Vote......................................23
Section 10.4 Record Date for Meetings......................................24
Section 10.5 Proxies.......................................................24
Section 10.6 Additional Provisions.........................................24
Section 10.7 Reports.......................................................24
Section 10.8 Shareholder Action by Written Consent.........................24
ARTICLE XI -- DURATION; TERMINATION OF TRUST; AMENDMENT;
MERGERS, ETC.
Section 11.1 Duration......................................................25
Section 11.2 Termination...................................................25
Section 11.3 Reorganization................................................25
Section 11.4 Amendment Procedure...........................................26
Section 11.5 Incorporation.................................................27
ARTICLE XII -- MISCELLANEOUS
Section 12.1 Filing........................................................27
Section 12.2 Resident Agent................................................27
Section 12.3 Governing Law.................................................28
Section 12.4 Counterparts..................................................28
Section 12.5 Reliance by Third Parties.....................................28
Section 12.6 Provisions in Conflict with Law or Regulations................28
Section 12.7 Principal Business Address....................................28
3
<PAGE>
AGREEMENT AND
DECLARATION OF TRUST
OF
THE PALLADIAN TRUST
THE AGREEMENT AND DECLARATION OF TRUST made the 27th day of August, 1993 by
the parties signatory hereto, as trustees (such persons, so long as they shall
continue in office in accordance with the terms of this Agreement and
Declaration of Trust, and all other persons who at the time in question have
been duly elected or appointed as trustees in accordance with the provisions of
this Agreement and Declaration of Trust and are then in office, being
hereinafter called the "Trustees") and by the holders of shares of beneficial
interest to be issued hereunder hereinafter provided.
W I T N E S S E T H
WHEREAS, the Trustees desire to form a trust fund under the laws of the
Commonwealth of Massachusetts for the investment and reinvestment of funds
contributed thereto; and
WHEREAS, it is proposed that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest, which may, at
the discretion of the Trustees, be divided into separate portfolios as
hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in
trust all money and property contributed to the trust fund to manage and dispose
of the same for the benefit of the holders from time to time of the shares of
beneficial interest issued hereunder and subject to the provisions hereof, to
wit:
ARTICLE I
THE TRUST
SECTION 1.1 NAME. The name of the trust created hereby (the "Trust"), which
term shall be deemed to include any portfolio of the Trust when the context
requires, shall be "The Palladian Trust", and so far as may be practicable the
Trustees shall conduct the activities of the Trust, execute all documents and
sue or be sued under that name, which name (and the word "Trust" wherever
hereinafter used) shall refer to the Trustees as Trustees, and not individually,
and shall not refer to the officers, agents, employees or shareholders of the
Trust or any Portfolio thereof.
Each Portfolio of the Trust shall be established and designated by the Trustees
pursuant to Section 6.2 and each Portfolio shall conduct its activities under
such name as the Trustees shall determine and set forth in the instrument
establishing such Portfolios. Should the Trustees determine that the use of the
name of the Trust or any Portfolio is not advisable, they may select such other
name for the Trust or such Portfolio as they deem proper and the Trust or such
Portfolio may conduct its activities under such other name. Any name change
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shall be effective upon the execution by a majority of the then Trustees of an
instrument setting forth the new name. Any such instrument shall have the
status of an amendment to this Agreement and Declaration of Trust.
SECTION 1.2 DEFINITIONS. As used in this Agreement and Declaration of
Trust, the following terms shall have the following meanings:
The "1940 ACT" refers to the Investment Company Act of 1940 as amended
from time to time and the regulations promulgated thereunder.
The terms "AFFILIATED PERSON", "ASSIGNMENT", "COMMISSION", "INTERESTED
PERSON", "MAJORITY SHAREHOLDER VOTE" (the 67% or 50% requirement of the
third sentence of Section 2(a)(42) of the 1940 Act, whichever may be
applicable) and "PRINCIPAL UNDERWRITER" shall have the meanings given them
in the 1940 Act. "COMMISSION" shall mean the U.S. Securities and Exchange
Commission.
"DECLARATION" or "DECLARATION OF TRUST" shall mean this Agreement and
Declaration of Trust as amended from time to time. References in this
Declaration to "Declaration", "hereof", "herein" and "hereunder" shall be
deemed to refer to the Declaration rather than the article or section in
which such words appear.
"FUNDAMENTAL POLICIES" shall mean the investment objective for each
Portfolio and the investment restrictions set forth in the registration
statement for the Trust on Form N-lA and designated as fundamental policies
therein.
"PERSON" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
"PROSPECTUS" shall mean the currently effective prospectus of any
Portfolio of the Trust under the Securities Act of 1933, as amended.
"PORTFOLIO" shall mean any separate Portfolio that may be established
and designated pursuant to Section 6.2.
"SHAREHOLDERS" shall mean as of any particular time all holders of
record of outstanding Shares at such time.
"SHARES" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any Portfolio of the Trust
shall be divided from time to time and includes fractions of Shares as well
as whole Shares. All references to Shares shall be deemed to be Shares of
any or all Portfolios as the context may require.
"TRUSTEES" shall mean the signatories to this Declaration, so long as
they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or
appointed and have qualified as Trustees in accordance with the provisions
hereof and are then in office, and each
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such person is herein referred to as the "Trustee", and reference in this
Declaration to a Trustee or Trustees shall refer to such person or persons
in their capacity as Trustee hereunder.
"TRUST PROPERTY" shall mean as of any particular time any and all
property, real or personal, tangible or intangible, which at such time is
owned or held by or for the account of the Trust, any Portfolio thereof or
the Trustees.
ARTICLE II
TRUSTEES
SECTION 2.1 MANAGEMENT OF THE TRUST. The business and affairs of the Trust
shall be managed by the Trustees, and they shall have all powers necessary and
desirable to carry out that responsibility. The Trustees named herein (or their
successors appointed hereunder) shall serve until the election of Trustees at
the first meeting of Shareholders of the Trust.
SECTION 2.2 ELECTION OF TRUSTEES. Except for the Trustees named herein and
those Trustees designated by such Trustees prior to the issuance of Shares, or
appointed to fill vacancies pursuant to Section 2.4 hereof, the Shareholders of
the Trust shall elect Trustees at Shareholder meetings called for that purpose.
The Trustees need not be elected annually or at regular intervals. Except as
provided in Section 10.2, the Trustees shall not be required to call a meeting
of Shareholders for the purpose of electing Trustees, provided, however, that in
the event that at any time, other than the time preceding the first meeting of
Shareholders for the purpose of electing Trustees, less than a majority of the
Trustees holding office at that time were elected by the Shareholders, a meeting
of the Shareholders for the purpose of electing Trustees shall be held promptly
and in any event within 60 days (unless the Commission shall by order extend
such period). No election of a Trustee shall become effective, however, until
the person elected shall have accepted such election and agreed in writing to be
bound by the terms of this Declaration. If re-elected, a Trustee may succeed
himself. Trustees need not own shares.
SECTION 2.3 TERM OF OFFICE OF TRUSTEES. A Trustee duly appointed or elected
hereunder shall hold office until the occurrence of any of the following: (a)
the Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) the Trustee may be removed at
any time by written instrument signed by a majority of the number of Trustees
prior to such removal, specifying the date when such removal shall become
effective; (c) the Trustee who requests in writing to be retired or who has
become mentally or physically incapacitated may be retired by written instrument
signed by a majority of the other Trustees, specifying the date of his
retirement; and (d) the Trustee may be removed at any meeting of Shareholders of
the Trust by a vote of two-thirds of the outstanding Shares or by a written
declaration executed, without a meeting, by the holders of not less than
two-thirds of the outstanding Shares. A meeting for the purpose of considering
the removal of a person serving as trustee shall be called by the trustees if
requested in writing to do so by the holders (which for purposes of this
provision and only this provision
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shall be the persons having a voting interest in the shares of the Trust) of not
less than 10% of the outstanding shares of the Trust.
SECTION 2.4 TERMINATION OF SERVICE AND APPOINTMENT OF TRUSTEES. In case of
the death, resignation, retirement, removal or mental or physical incapacity of
any of the Trustees, or in case a vacancy shall, by reason of an increase in
number, or for any other reason, exist, the remaining Trustees may (but need not
unless required by the 1940 Act, so long as there are at least two remaining
Trustees) fill such vacancy by appointing for the remaining term of the
predecessor Trustee such other person as they in their discretion shall see fit.
Such appointment shall be effective upon the signing of a written instrument by
a majority of the Trustees in office and the written acceptance of this
Declaration by the appointee. An appointment of a Trustee may be made by the
Trustees then in office in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in number of Trustees effective at a later
date, provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of Trustees
and the written acceptance of this Declaration by the appointee. As soon as any
Trustee so appointed shall have accepted this Trust, the trust estate shall vest
in the new Trustee or Trustees, together with the continuing Trustees, without
any further act of conveyance, and he shall be deemed a Trustee hereunder. Any
appointment authorized by this Section 2.4 is subject to the provisions of
Section 16(a) of the 1940 Act.
SECTION 2.5 TEMPORARY ABSENCE OF TRUSTEE. Any Trustee may, by power of
attorney, delegate his power for a period not exceeding six months at any one
time to any other Trustee or Trustees, provided that in no case shall less than
two of the Trustees personally exercise the power hereunder except as herein
otherwise expressly provided.
SECTION 2.6 NUMBER OF TRUSTEES. The number of Trustees serving hereunder
at any time shall be determined by the Trustees themselves, but once Shares have
been issued shall not be less than two (2) or more than fifteen (15).
SECTION 2.7 EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
resignation, retirement, removal, or mental or physical incapacity of the
Trustees, or any one of them, shall not operate to annul or terminate the Trust
or any Portfolio hereunder or to revoke or terminate any existing agency or
contract created pursuant to the terms of this Declaration, and until such
vacancy is filled, the Trustees in office, regardless of their number, shall
have all of the powers granted to the Trustees and shall discharge all the
duties imposed upon them by this Declaration.
SECTION 2.8 NO ACCOUNTING. Except to the extent required by the 1940 Act
or under circumstances which would justify his removal for cause, no person
ceasing to be a Trustee as a result of his death, resignation, retirement,
removal or incapacity (nor the estate of any such person) shall be either
permitted or required to make an accounting to the shareholders or remaining
Trustees upon such cessation, unless specifically requested by a majority of the
remaining Trustees.
SECTION 2.9 OWNERSHIP OF THE TRUST. The assets of the Trust shall be held
separate and apart from any assets now or hereafter held in any capacity other
than as Trustee hereunder by the Trustees or by any successor Trustees. All of
the assets of the Trust shall at all times
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be considered as vested in the Trustees. No Shareholder shall be deemed to have
a severable ownership in any individual asset of the Trust or any right of
partition or possession thereof, but each Shareholder shall have a proportionate
undivided beneficial interest in the Trust.
ARTICLE III
POWERS OF TRUSTEES
SECTION 3.1 GENERAL. The Trustees in all instances shall act as principals,
and are and shall be free from the control of the Shareholders. The Trustees
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider necessary
or appropriate in connection with the management of the Trust. The Trustees
shall not be bound or limited by present or future laws or customs with regard
to investment by trustees or fiduciaries, but shall have full authority and
absolute power and control over the Trust Property and business of the Trust to
the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, including such authority, power and control to
do all acts and things as they, in their uncontrolled discretion, shall deem
proper to accomplish the purposes of this Trust. The enumeration of any specific
power herein shall not be construed as limiting the aforesaid powers.
SECTION 3.2 INVESTMENTS. The Trustees shall have power, subject to the
Fundamental Policies, to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, lend, exchange, mortgage,
hypothecate, lease, distribute or otherwise deal in or dispose of common
stocks, preferred stocks, bonds, debentures, warrants and rights to
purchase securities, mortgage related securities such as mortgage-backed
securities and collateralized mortgage obligations, options on securities,
futures contracts and options on futures contracts, covered spread options,
certificates of beneficial interest, negotiable or non-negotiable
instruments, bank obligations, evidences of indebtedness, privately placed
debt securities, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, reverse repurchase agreements, firm commitment
agreements and "when-issued" securities and other securities, including,
without limitation, those issued, guaranteed or sponsored by any state,
territory or possession of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, or by the
United States Government or its agencies or instrumentalities, or
international instrumentalities, or by any bank, savings institution,
corporation or other business entity organized under the laws of the United
States and, to the extent provided in the Prospectus and not prohibited by
the Fundamental Policies of the Trust, foreign securities of issuers or
governments organized under foreign laws; and to exercise any and all
rights, powers and privileges of ownership or interest in respect of any
and all such investments of every kind and description, with power to
designate one or more
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persons, firms, associations or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and
the Trustees shall be deemed to have the foregoing powers with respect to
any additional securities in which any Portfolio of the Trust may invest
should the investment policies set forth in the Prospectus or the
Fundamental Policies by amended.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust or any Portfolio.
SECTION 3.3 LEGAL TITLE. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more the Trustees, or in the name of the Trust or any Portfolio thereof,
or in the name of any other Person as nominee, on such terms as the Trustees may
determine, provided that the interest of the Trust or any Portfolio thereof is
appropriately protected.
SECTION 3.4 ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall have
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including
shares in fractional denominations, and, subject to the more detailed provisions
set forth in Articles VIII and IX, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property of the
applicable Portfolio of the Trust whether capital or surplus or otherwise, to
the full extent now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.
SECTION 3.5 BORROW MONEY. Subject to the Fundamental Policies, the Trustees
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the assets of
the Trust or any Portfolio thereof, including the lending of portfolio
securities, and to endorse, guarantee or undertake the performance of any
obligation, contract or engagement of any other person, form, association or
corporation.
SECTION 3.6 OFFICERS; DELEGATION; COMMITTEES. The Trustees may, as they
consider appropriate, elect and remove officers and appoint and terminate agents
and consultants and hire and terminate employees, any one or more of the
foregoing of whom may be a Trustee and may provide for the compensation of all
of the foregoing. The Trustees shall have power, consistent with their
continuing exclusive authority over the management of the Trust and the Trust
Property, to delegate from time to time to such of their number or to officers,
employees or agents of the Trust the doing of such things and the execution of
such instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient. The Trustees may appoint from
their number and terminate any one or more committees consisting of two or more
Trustees, including without implied limitation an Executive Committee which may,
when the Trustees are not in session and subject to the 1940 Act, exercise some
or all of the powers and authority of the Trustees as the Trustees may
determine.
SECTION 3.7 COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust or any Portfolio thereof; to pay all
claims, including taxes, against
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the Trust Property; to prosecute, defend, compromise, arbitrate or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust
or any Portfolio thereof; and to enter into releases, agreements and other
instruments.
SECTION 3.8 EXPENSES. The Trustees shall have power to incur and pay any
expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of the Trust or any Portfolio, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees.
The Trustees shall fix the compensation of all officers, employees and Trustees.
The Trustees may pay themselves such compensation for special services,
including legal, underwriting, syndicating and brokerage services, as they in
good faith may deem reasonable and reimbursement for expenses reasonably
incurred by themselves on behalf of the Trust.
SECTION 3.9 MANNER OF ACTING: BY-LAWS. Except as otherwise provided herein
or in the By-laws or required by the 1940 Act, any action to be taken by the
Trustees may be taken by a majority of the Trustees present at a meeting of the
Trustees (a quorum being present), including any meeting held by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, or by written consents
of a majority of Trustees then in office (or such larger or different number as
may be required by the 1940 Act or other applicable law). The Trustees may adopt
and from time to time amend or repeal the By-laws for the conduct of the
business of the Trust.
SECTION 3.10 VOTING TRUSTS. The Trustees shall have power and authority for
and on behalf of the Trust to join with other holders of any securities or debt
instruments in acting through a committee, depository, voting trustee or
otherwise, and in that connection to deposit any security or debt instrument
with, or transfer any security or debt instrument to, any such committee,
depository or trustee, and to delegate to them such power and authority with
relation to any security or debt instrument (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to pay,
such portion of the expenses and compensation of such committee, depository or
trustee as the Trustees shall deem proper.
SECTION 3.11 MISCELLANEOUS POWERS. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust or any Portfolio thereof; (b) enter
into joint ventures, partnership and any other combinations or associations; (c)
purchase, and pay for out of Trust Property, insurance as they deem necessary or
appropriate for the conduct of the business, including without limitation,
policies insuring the Shareholders, Trustees, officers, employees, agents,
managers, investment advisers, distributors, selected dealers or independent
contractors of the Trust or any Portfolio thereof against all claims arising by
reason of holding any such position or by reason of any action taken or omitted
by any such Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person against
such liability; (d) establish pension, profit-sharing, share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (e) make donations, irrespective of benefit to the
Trust, for charitable, religious, educational, scientific, civic or similar
purposes; (f) to the extent permitted by law, indemnify any Person with whom the
Trust or any Portfolio thereof has
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dealings, including any adviser, administrator, manager, distributor and
selected dealers with respect to any Portfolio, to such extent as the Trustees
shall determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust and the method in
which its accounts shall be kept; and (i) adopt a seal for the Trust, provided
that the absence of such seal shall not impair the validity of any instrument
executed on behalf of the Trust.
SECTION 3.12 FURTHER POWERS. The Trustees shall have power to conduct the
business of the Trust or any Portfolio thereof, carry on its operations and
maintain offices both within and without the Commonwealth of Massachusetts, in
any and all states of the United States of America, in the District of Columbia,
and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust or any Portfolio thereof although such things are not
herein specifically mentioned. Any determination as to what is in the interests
of the Trust or any Portfolio thereof made by the Trustees in good faith shall
be conclusive. In construing the provisions of this Declaration, the presumption
shall be in favor of a grant of power to the Trustees. The Trustees will not be
required to obtain any court order to deal with the Trust Property. No Trustee
shall be required to give any bond or other security for the performance of any
of his duties hereunder.
ARTICLE IV
ADVISORY, MANAGEMENT AND DISTRIBUTION ARRANGEMENTS
SECTION 4.1 ADVISORY AND MANAGEMENT ARRANGEMENTS. Subject to a Majority
Shareholder Vote, if required by law, of the Trust or the applicable Portfolio,
the Trustees may in their discretion from time to time enter into advisory,
management, or administrative contracts whereby the other party to such contract
shall undertake to furnish to the Trust or one or more Portfolios thereof such
advisory, management and/or administrative services, with respect to one or more
Portfolios as the Trustees shall from time to time consider desirable and all
upon such terms and conditions as the Trustees may in their discretion
determine. Subject to a Majority Shareholder Vote if required by law, the
Trustees and/or the investment adviser or manager may engage one or more firms
to serve as portfolio manager to a Portfolio pursuant to a portfolio management
contract in which the portfolio manager makes all determinations with respect to
the purchase and sale of portfolio securities and places, in the names of one or
more Portfolios all orders for execution of the portfolio transactions upon such
terms and conditions and for such compensation as the Trustees may in their
discretion approve. A portfolio manager may, in turn, engage its own
sub-advisers in managing a particular Portfolio. Notwithstanding any provisions
of this Declaration, the Trustees may authorize any manager, adviser, portfolio
manager, or administrator (subject to such general or specific instructions as
the Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities of any Portfolio of the Trust on behalf of the
Trustees or may authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of any such
manager, adviser, portfolio manager or administrator (and all without further
action by the Trustees).
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Any such purchases, sales, loans or exchanges shall be deemed to have been
authorized by all of the Trustees.
SECTION 4.2 DISTRIBUTION ARRANGEMENTS. The Trustees may in their discretion
from time to time enter into a contract, providing for the sale of the Shares of
the Trust or any Portfolio of the Trust, whereby the Trust may either agree to
sell the Shares to the other party to the contract or appoint such other party
as its sales agent for such Shares. In either case, the contract shall be on
such terms and conditions as the Trustees may in their discretion determine to
be not inconsistent with the provisions of this Article IV or the Bylaws; and
such contract may also provide for the repurchase or sale of Shares by such
other party as principal or as agent of the Trust and may provide that such
other party may enter into selected dealer agreements with registered securities
dealers to further the purpose of the distribution or repurchase of the Shares.
The Trustees may adopt a Distribution Plan pursuant to Rule 12b-1 of the 1940
Act and may authorize the Trust to make payments from its assets pursuant to
such Plan.
SECTION 4.3 PARTIES TO CONTRACT. Any contract of the character described in
Sections 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered
into with any corporation, firm, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, Trustee,
shareholder or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article IV
or the By-laws. The same person (including a firm, corporation, trust or
association) may be the other party to contracts entered into pursuant to
Sections 4.1 and 4.2 above or Article VII, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 4.3.
SECTION 4.4 PROVISIONS AND AMENDMENTS. Any contract entered into pursuant
to Sections 4.1 and 4.2 of this Article IV shall, to the extent applicable be
consistent with and subject to the requirements of Section 15 of the 1940 Act
with respect to its continuance in effect, its termination, and the method of
authorization and approval of such contract or renewal thereof, and no amendment
to any contract entered into pursuant to Section 4.1 shall be effective unless
consented to by a Majority Shareholder Vote of the applicable Portfolio if
required by law.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 5.1 TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE. All
persons extending credit to, contracting with or having any claim against the
Trust shall look only to the assets of the Portfolio with which such person
dealt for payment under such credit, contract or claim; and neither the
Shareholders of any Portfolio nor the Trustees, nor any of
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the Trust's officers, employees or agents, whether past, present or future, nor
any other Portfolio shall be personally liable therefor. Every note, bond,
contract, instrument, certificate or undertaking and every other act or thing
whatsoever executed or done by or on behalf of the Trust, any Portfolio or the
Trustees or any of them in connection with the Trust shall be conclusively
deemed to have been executed or done only by or for the Trust (or the Portfolio)
or the Trustees and not personally. Nothing in this Declaration shall protect
any Trustee or officer against any liability to the Trust or the Shareholders to
which such Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee or of such officer.
Every note, bond, contract, instrument, certificate, share or undertaking
made or issued by the Trustees or by any officers or officer shall give notice
that this Declaration is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite to the effect that the same was executed or made
by or on behalf of the Trust or by them as Trustees or Trustee or as officers or
officer and not individually and that the obligations of such instrument are not
binding upon any of them or the Shareholders individually but are binding only
upon the assets and property of the Trust, or the particular Portfolio in
question, as the case may be, but the omission thereof shall not operate to bind
any Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually.
SECTION 5.2 TRUSTEE'S GOOD FAITH ACTION; EXPERT ADVICE; NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretion hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. Subject
to the foregoing, (a) the Trustees shall not be responsible or liable in any
event for any neglect or wrongdoing of any officer, agent, employee, consultant,
adviser, manager, administrator, distributor or principal underwriter, custodian
or transfer, dividend disbursing, Shareholder servicing or accounting agent of
the Trust, nor shall any Trustee be responsible for the act or omission of any
other Trustee; (b) the Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration and their duties as
Trustees, and shall be under no liability for any act or omission in accordance
with such advice or for failing to follow such advice; and (c) in discharging
their duties, the Trustees, when acting in good faith, shall be entitled to rely
upon the books of account of the Trust and upon written reports made to the
Trustees by any officer appointed by them, any independent public accountant,
and (with respect to the subject matter of the contract involved) any officer,
partner or responsible employee of any adviser, administrator, manager,
distributor, selected dealer, appraiser or other expert, consultant or agent.
The Trustees as such shall not be required to give any bond or surety or any
other security for the performance of their duties.
SECTION 5.3 INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder (or
former Shareholder) of any Portfolio of the Trust shall be charged or held to be
personally liable for any obligation or liability of the Trust solely by reason
of being or having been a Shareholder and not because of such Shareholder's acts
or omissions or for some other reason, said Portfolio (upon proper and timely
request by the Shareholder) shall assume the defense against such charge and
satisfy any judgment thereon, and the Shareholder or former
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Shareholder (or his heirs, executors, administrators or other legal
representatives or in the case of a corporation or other entity, its corporate
or other general successor) shall be entitled out of the assets of said
Portfolios estate to be held harmless from and indemnified against all loss and
expense arising from such liability.
SECTION 5.4 INDEMNIFICATION OF TRUSTEES. OFFICERS. ETC. The Trust shall
indemnify (from the assets of the Portfolio or Portfolio in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) [hereinafter referred to
as a "Covered Person"] against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person (i) did not act in good faith in the reasonable belief that such Covered
Person's action was in or not opposed to the best interests of the Trust or (ii)
had acted with willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being referred to
hereafter as "Disabling Conduct"). A determination that the Covered Person is
entitled to indemnification may be made by (i) a final decision on the merits by
a court or other body before whom the proceeding was brought that the person to
be indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of
a court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Trust as defined in section
2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. Expenses, including accountants' and counsel
fees so incurred by any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or penalties), may be paid
from time to time by the Portfolio in question in advance of the final
disposition of any such action, suit or proceeding, provided that the Covered
Person shall have undertaken to repay the amounts so paid to the Portfolio in
question if it is ultimately determined that indemnification of such expenses is
not authorized under this Article V and (i) the Covered Person shall have
provided security for such undertaking, (ii) the Trust shall be insured against
losses arising by reason of any lawful advances, or (iii) a majority of a quorum
of the disinterested Trustees who are not a party to the proceeding, or an
independent legal counsel in a written opinion, shall have determined, based on
a review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
SECTION 5.5 COMPROMISE PAYMENT. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 5.4,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the
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disinterested Trustees who are not parties to the proceeding or (b) by an
independent legal counsel in a written opinion. Approval by the Trustees
pursuant to clause (a) or by independent legal counsel pursuant to clause (b)
shall not prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with any of such clauses as indemnification if
such Covered Person is subsequently adjudicated by a court of competent
jurisdiction not to have acted in good faith in the reasonable belief that such
Covered Person's action was in or not opposed to the best interests of the Trust
or to have been liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
SECTION 5.6 INDEMNIFICATION NOT EXCLUSIVE, ETC. The right of
indemnification provided by this Article V shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article V, "Covered Person" shall include such person's heirs, executors
and administrators; "interested Covered Person" is one against whom the action,
suit or other proceeding in question or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or threatened, and a
"disinterested" person is a person against whom none of such actions, suits or
other proceedings or another action, suit or other proceeding on the same or
similar grounds is then or has been pending or threatened. Nothing contained in
this Article shall affect any rights to indemnification to which personnel of
the Trust, other than Trustees and officers, and other persons be entitled by
contract or otherwise under law, nor the power of the Trust to purchase and
maintain liability insurance on behalf of any such person.
SECTION 5.7 LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 6.1 BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest with
par value $.001 per share. The number of such shares of beneficial interest
authorized hereunder is unlimited. All Shares issued hereunder including,
without limitation, Shares issued in connection with a dividend in Shares or a
split of Shares, shall be fully paid and nonassessable.
SECTION 6.2 PORTFOLIO DESIGNATION. The Trustees, in their discretion from
time to time, may authorize the division of Shares into additional Portfolios,
each additional Portfolio relating to a separate portfolio of investments. The
first eight such Portfolios are hereby established and designated:
The Value Portfolio
The Growth Portfolio
The Balanced Portfolio
The Flexible Income Portfolio
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The Global Growth Portfolio
The Global Hedged Utility Portfolio
The Fund For Life Portfolio
The Fund For Life: Income & Growth Portfolio
These eight Portfolios shall be the only Portfolios until additional Portfolios
are established and designated by the Trustees. The Trustees (including any
successor Trustees) shall have the right at any time and from time to time to
reallocate assets and expenses or to change the designation of any portfolio now
or hereafter created, or to otherwise change the special and relative rights of
any such portfolio provided that such change shall not adversely affect the
rights of holders of Shares other portfolios.
Different Portfolios may be established and designated and variations in the
relative rights and preferences as between the different Portfolios shall be
fixed and determined by the Trustees; provided that all Shares shall be
identical except that there may be variations between different Portfolios as to
investment policies, securities portfolios, purchase price, determination of net
asset value, the price, terms and manner of redemption, special and relative
rights as to dividends and on liquidation, conversion rights, and conditions
under which the several Portfolios shall have separate voting rights. All
references to Shares in this Declaration shall be deemed to be shares of any or
all Portfolios as the context may require.
The following provisions shall be applicable to all
Portfolios:
(a) The number of Shares of each Portfolio that may be issued shall
be unlimited. The Trustees may classify or reclassify any unissued Shares
or any Shares previously issued and required of any Portfolio into one or
more Portfolio that may be established and designated from time to time.
The Trustees may hold as treasury Shares (of the same or some other
Portfolio), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any Portfolio reacquired by the Trust at
their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each Portfolio that has been or that may be established shall
be governed by Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular Portfolio, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Portfolio for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account of
the Trust. In the event that there are any assets, income, earnings,
profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Portfolio, the Trustees shall
allocate them among any one or more of the Portfolios established and
designated from time to time in such manner and on such basis as they, in
their sole discretion, deem fair and equitable. Each such allocation by the
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Trustees shall be conclusive and binding upon the Shareholders of all
Portfolios for all purposes.
(d) The assets belonging to each particular Portfolio shall be
charged with the liabilities of the Trust in respect of that Portfolio and
all expenses, costs, charges and reserves attributable to that Portfolio,
and any general liabilities, expenses, costs, charges or reserves of the
Trust which are not readily identifiable as belonging to any particular
Portfolio shall be allocated and charged by the Trustees to and among any
one or more of the Portfolios established and designated from time to time
in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon
the holders of all Portfolios for all purposes. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to
determine which items shall be treated as income and which items as
capital; and each such determination and allocation shall be conclusive and
binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions
with respect to any one or more Portfolios shall be governed by Section 9.2
of this Trust. Dividends and distributions on Shares of a particular
Portfolio may be paid with such frequency as the Trustees may determine,
which may be daily or otherwise, pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that Portfolio, from such of the
income and capital gains, accrued liabilities belonging to that Portfolio.
All dividends and distributions on Shares of a particular Portfolio shall
be distributed pro rata to the holders of that Portfolio in proportion to
the number of Shares of that Portfolio held by such holders at the date and
time of record established for the payment of such dividends or
distributions.
(f) The assets and liabilities of the Trust shall be allocated as set
forth in this section except as follows:
(1) Costs incurred by the Trust in connection with its organization
and initial registration and public offering of Shares shall be
amortized for each such portfolio over the lesser of the life of such
portfolio or the five year period beginning with the month that the
Trust commences operations.
(2) The liabilities, expenses, costs, charges or reserves of the
Trust (other than management fee, distribution fee or the
organizational expenses paid by the Trust) which are not readily
identifiable as belonging to any particular portfolio shall be
allocated among the portfolio on the basis of their relative average
daily net assets.
(3) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the portfolios.
(g) Each portfolio shall be authorized to hold cash and invest in
securities and instruments and use investment techniques described in the
Trust's registration
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statement under the Securities Act of 1933, as amended from time to time.
Each share of beneficial interest of each portfolio ("Share") shall be
redeemable as provided in the Declaration of Trust, shall be entitled to
one vote (or fraction thereof in respect of a fractional share) on matters
on which Shares of that portfolio shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that
portfolio. The proceeds of sales of Shares of a portfolio, together with
any income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to that portfolio unless otherwise required by law. Each
Share of a portfolio shall be entitled to receive its pro rata share of net
assets of that portfolio upon liquidation of that portfolio. Upon
redemption of a shareholder's Shares, or indemnification for liabilities
incurred by reason of a shareholder being or having been a shareholder of a
series, such shareholder shall be paid solely out of the property of such
portfolio.
The establishment and designation of any additional Portfolio of Shares
shall be effective upon the execution by a majority of the then Trustees of any
instrument setting forth the establishment and designation of such Portfolio.
Such instrument shall also set forth any rights and preferences of such
Portfolios which are in addition to the rights and preferences of Shares set
forth in this Declaration. The Trustees may by an instrument executed by a
majority of their number abolish a Portfolio and the establishment and
designation thereof. Each instrument referred to in this paragraph shall have
the status of an amendment to this Declaration.
SECTION 6.3 RIGHTS OF SHAREHOLDERS. The ownership of the Trust Property of
every description and the right to conduct any business hereinbefore described
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the beneficial interest conferred by their Shares
with respect to a particular Portfolio, and they shall have no right to call for
any partition or division of any property, profits, rights or interests of the
Trust nor can they be called upon to share or assume any losses of the Trust, or
suffer an assessment of any kind by virtue of their ownership of Shares. The
Shares shall be personal property giving only the rights in this Declaration
specifically set forth. The Shares shall not entitle the holder to preference,
preemptive, appraisal, conversion or exchange rights (except for rights to
exchange Shares of one Portfolio for Shares of another Portfolio as set forth in
the Prospectus).
SECTION 6.4 TRUST ONLY. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
SECTION 6.5 ISSUANCE OF SHARES. The Trustees, in their discretion, may from
time to time without a vote of the Shareholders issue Shares with respect to any
Portfolio that may have been established pursuant to Section 6.2, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount not less than the then current net asset
value of said Shares and type of consideration, including cash or property, at
such time or times and on such terms as the Trustee may deem best, and may in
such manner acquire other assets (including the acquisition of assets subject
to, and in
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connection with the assumption of, liabilities) and businesses. In connection
with any issuance of Shares, the Trustees may issue fractional Shares. The
Trustees may from time to time divide or combine the Shares of any Portfolio
into a greater or lesser number without thereby changing the proportionate
beneficial interests in such Portfolio of the Trust. Contributions to the Trust
may be accepted for, and Shares shall be redeemed as, whole Shares and/or
1/1,000ths of a Share or multiples thereof.
SECTION 6.6 REGISTER OF SHARES. A register shall be kept at the Trust or
the offices of any transfer agent duly appointed by the Trustees under the
direction of the Trustees which shall contain the names and addresses of the
Shareholders and the number of Shares (with respect to each Portfolio that may
have been established) held by them respectively and a record of all transfers
thereof. Separate registers shall be established and maintained for each
Portfolio of the Trust. Each such register shall be conclusive as to who are the
holders of the Shares of the applicable Portfolios and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein provided,
until he has given his address to a transfer agent or such other officer or
agent of the Trustees as shall keep the register for entry thereon. The Trust
shall not be required to issue certificates for the Shares; however, the
Trustees, in their discretion, may authorize the issuance of share certificates
and promulgate appropriate rules and regulations as to their use.
SECTION 6.7 TRANSFER AGENT AND REGISTRAR. The Trustee shall have power to
employ a transfer agent or transfer agents, and a registrar or registrars, with
respect to the Shares of the various Portfolios. The transfer agent may keep the
applicable register and record therein the original issues and transfers, if
any, of the said Shares of the applicable Portfolios. Any such transfer agent
and registrar shall perform the duties usually performed by transfer agents and
registrars of certificates of stock in a corporation, except as modified by the
Trustees.
SECTION 6.8 TRANSFER OF SHARES. Shares shall be transferable on the records
of the Trust only by the record holder thereof or by his agent thereto duly
authorized in writing, upon delivery to the Trustees or a transfer agent of the
Trust of a duly executed instrument of transfer, together with such evidence of
the genuineness of each such execution and authorization and of other matters as
may reasonably be required. Upon such delivery, the transfer shall be recorded
on the applicable register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereof and neither the Trustees nor any transfer agent or registrar nor
any officer, employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the applicable register of Shares as the holder of such
Shares upon production of the proper evidence thereof to the Trustees or a
transfer agent of the Trust, but until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor any transfer agent or registrar nor any officer or
agent of the Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
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SECTION 6.9 NOTICE. Any and all notices to which any Shareholder hereunder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of record at his
last known address as recorded on the applicable register of the Trust.
ARTICLE VII
CUSTODIANS
SECTION 7.1 APPOINTMENT AND DUTIES. The Trustees shall at all times employ,
as custodian with respect to each Portfolio of the Trust, a custodian or
custodians, each of which shall have an aggregate capital, surplus and undivided
profits (as shown on its last published report) of at least ten million dollars
and shall meet the qualifications for custodians for portfolio securities of
investment companies contained in the 1940 Act. It is contemplated that separate
custodians may be employed for the different Portfolio of the Trust. Any
custodian, acting with respect to one or more Portfolios, shall have authority
as agent of the Trust or the Portfolio with respect to which it is acting, but
subject to such restrictions, limitations and other requirements, if any, as may
be contained in the By-laws of the Trust and the 1940 Act:
(1) to hold the securities owned by the Trust or the Portfolios and
deliver the same upon written order;
(2) to receive any receipt for any monies due to the Trust or the
Portfolios and deposit the same in its own banking department (if a bank)
or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of
the Trust or the Portfolios and furnish and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income
and the value of the net assets of the Trust or the Portfolios;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian. If so directed by a Majority Shareholder Vote of the
Portfolio with respect to which the custodian is acting, the custodian shall
deliver and pay over all property of the Trust held by it as specified in such
vote.
The Trustees may also authorize each custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall meet the qualifications for custodians
contained in the 1940 Act.
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SECTION 7.2 ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of any custodian agreement with respect to any Portfolio or
inability of any custodian to continue to serve, the Trustees shall promptly
appoint a successor custodian, but in the event that no successor custodian can
be found who has the required qualifications and is willing to serve, the
Trustees shall call as promptly as possible a special Shareholders' meeting to
determine whether such Portfolios shall function without a custodian or shall be
liquidated. If so directed by vote of the holders of a majority of the Shares of
such Portfolios outstanding and entitled to vote, the custodian shall deliver
and pay over all Trust Property held by it as specified in such vote.
SECTION 7.3 CENTRAL CERTIFICATE SYSTEM. Subject to such rules, regulations
and orders as the Commission may adopt or issue, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust or the
Portfolio in a system for the central handling of securities established by a
national securities exchange or a national securities association registered
with the Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, or otherwise in accordance with
the 1940 Act, pursuant to which system all securities of any particular class or
portfolio of any issuer deposited within the system are treated as fungible and
may be transferred or pledged by bookkeeping entry without physical delivery of
such securities, provided that all such deposits shall be subject to withdrawal
only upon the order of the Trust.
SECTION 7.4 ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to such
rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
ARTICLE VIII
REDEMPTION
SECTION 8.1 REDEMPTIONS. All outstanding Shares of any Portfolio of the
Trust may be redeemed at the option of the holders thereof, upon and subject to
the terms and conditions provided in this Article VIII. The Trust shall, upon
application of any Shareholder or pursuant to authorization from any Shareholder
of a particular Portfolio, redeem or repurchase from such Shareholder
outstanding Shares of such Portfolio at the then current net asset value of such
Shares. If so authorized by the Trustees, the Trust may, at any time and from
time to time, charge fees or deferred sales charges for effecting such
redemption, at such rates as the Trustees may establish, as and to the extent
permitted under the 1940 Act, and may, at any time and from time to time,
pursuant to such Act, suspend such right of redemption. The procedures for
effecting redemption shall be as set forth in the Prospectus with respect to the
applicable Portfolios from time to time.
SECTION 8.2 REDEMPTIONS OF ACCOUNTS OF LESS THAN A MINIMUM DOLLAR AMOUNT.
The Trustees shall have the power to redeem shares at a redemption price
determined in accordance with Section 8.1 if at any time the total investment in
such account does not have
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a minimum dollar value determined from time to time by the Trustees in their
sole discretion; provided, however, that the Trustees may exercise such power
with respect to Shares of any Portfolio only to the extent the Prospectus
describes such power with respect to such Portfolio. In the event the Trustees
determine to exercise their power to redeem Shares provided in this Section 8.2,
Shareholders shall be notified that the value of their account is less than the
then effective minimum dollar amount and allowed 60 days to make an additional
investment before redemption is processed.
ARTICLE IX
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS
SECTION 9.1 NET ASSET VALUE. The net asset value of each outstanding Share
of each Portfolio of the Trust shall be determined with respect to each
Portfolio at such time or times on such days as the Trustees may determine, in
accordance with the 1940 Act. The method of determination of net asset value
shall be determined by the Trustees and shall be as set forth in the Prospectus
with respect to the applicable Portfolios. The power and duty to make the daily
calculations for any Portfolio may be delegated by the Trustees to the adviser,
manager, administrator, manager, custodian, transfer agent or such other person
as the Trustees may determine. The Trustees may suspend the daily determination
of net asset value to the extent permitted by the 1940 Act.
SECTION 9.2 DISTRIBUTIONS TO SHAREHOLDERS. Except at such times when the
Trustees deem proper, the Trustees will not distribute to Shareholders net
investment income and realized capital gains, but will retain and reinvest such
net profits. The Trustees may make distributions to Shareholders to the extent
the distribution and the circumstances in which it may be made are determined by
the Trustees to be in the best interests of the Portfolio. The Trustees may
retain and not reinvest from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or to meet obligations of
the Trust, or as they may deem desirable to use in the conduct of its affairs or
to retain for future requirements or extensions of the business.
SECTION 9.3 POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any of
the foregoing provisions of this Article IX, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
share net asset value of the Trust's Shares or net income, or the declaration
and payment of dividends and distributions as they may deem necessary or
desirable to enable the Trust to comply with any provision of the 1940 Act, or
any securities association registered under the Securities Exchange Act of 1934,
or any order of exemption issued by said Commission, all as in effect now or
hereafter amended or modified.
ARTICLE X
SHAREHOLDERS
SECTION 10.1 VOTING POWERS. The Shareholders shall have the power to vote
(i) for the election of Trustees as provided in Article II, Section 2.2; (ii)
for the removal of Trustees as provided in Article II, Section 2.3(d); (iii)
with respect to any investment adviser as provided
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in Article IV, Section 4.1; (iv) with respect to the merger, consolidation and
sale of assets of the Trust as provided in Article XI, Section 11.3; (v) with
respect to the amendment of this Declaration as provided in Article XI, Section
11.4; (vi) to the same extent as the Shareholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders (provided, however, that a shareholder of a particular
Portfolio shall not be entitled to a derivative or class action on behalf of any
other Portfolio (or shareholders of any other Portfolio) of the Trust); and
(vii) with respect to such additional matters relating to the Trust as may be
required by law, by this Declaration, or the By-laws of the Trust or any
regulation of the Trust, by the Commission or any State, or as the Trustees may
consider desirable. Any matter affecting a particular Portfolio, including
without limitation, matters affecting the investment advisory arrangements or
investment policies or restrictions of a Portfolio, if required by law, shall
not be deemed to have been effectively acted upon unless approved by the
required vote of the Shareholders of such Portfolio if required by law. Unless
otherwise required by law, each whole Share shall be entitled to one vote as to
any matter on which it is entitled to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. There shall be no cumulative voting
in the election of Trustees. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action to be taken by Shareholders
which is required or permitted by law, this Declaration or any By-laws of the
Trust. Shareholders of each portfolio shall vote separately as class on any
matter except, consistent with the Investment Company Act of 1940, as amended
(the"Act") and the rules and the Trust's registration statement thereunder, (i)
the election of Trustees, (ii) any amendment of the Declaration of Trust, unless
the amendment affects fewer than all classes, in which case shareholders of the
affected classes shall vote separately, and (iii) ratification of the selection
of auditors. In each case of such separate voting, the Trustees shall determine
whether, for the matter to be effectively acted upon within the meaning of Rule
18f-2 under the Act or any successor rule as to a portfolio, the applicable
percentage (as specified in the Declaration of Trust, or the Act and the rules
thereunder) of the Shares of that portfolio alone must be voted in favor of the
matter, or whether the favorable vote of such applicable percentage of the
Shares of each Portfolio entitled to vote on the matter is required.
SECTION 10.2 MEETINGS. Shareholder meetings shall be held as specified in
Article I of the By-laws and in Section 2.2 hereof at the principal office of
the Trust or at such other place as the Trustees may designate. No annual or
regular meetings of shareholders are required. Meetings of the Shareholders may
be called by the Trustees and shall be held at such times, on such day and at
such hour as the Trustees may from time to time determine, for the purposes
specified in Section 2.2 and for such other purposes as may be specified by the
Trustees.
SECTION 10.3 QUORUM AND REQUIRED VOTE. Except as otherwise provided by law,
the holders of thirty percent of the outstanding Shares of each Portfolio
present in person or by proxy shall constitute a quorum for the transaction of
any business at any meeting of Shareholders. If a quorum, as above defined,
shall not be present for the purpose of any vote that may properly come before
the meeting, the Shareholders present in person or by proxy and entitled to vote
at such meeting on such matter holding a majority of the Shares present entitled
to vote on such matter may by vote adjourn the meeting from time to time to be
held at the same place without further notice than by announcement to be given
at the meeting
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until a quorum, as above defined, entitled to vote on such matter shall be
present, whereupon any such matter may be voted upon at the meeting as though
held when originally convened. Subject to any applicable requirement of law,
this Declaration or the Bylaws, a plurality of the votes cast shall elect a
Trustee and all other matters shall be decided by a majority of the votes cast
entitled to vote thereon.
SECTION 10.4 RECORD DATE FOR MEETINGS. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 180 days prior to the
date of any meeting of Shareholders or declaration of dividends or other action
as a record date for the determination of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by Section 9.2 hereof.
SECTION 10.5 PROXIES. Any vote by a Shareholder of the Trust may be made in
person or by proxy, provided that no proxy shall be voted at any meeting unless
it shall have been placed on file with the Trustees or their designee prior to
the time the vote is taken. Pursuant to a resolution of a majority of the
Trustees, proxies may be solicited in the name of one or more Trustees or one or
more officers of the Trust. Only Shareholders of record shall be entitled to
vote. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. A proxy with respect to shares
held in the name of two or more persons shall be valid if executed by any one of
them unless at or prior to exercise of the proxy the Trust receives a specific
written notice to the contrary from any one of them.
SECTION 10.6 ADDITIONAL PROVISIONS. The By-laws may include further
provisions for Shareholders' votes, meetings and related matters.
SECTION 10.7 REPORTS. The Trustees shall cause to be prepared with respect
to each Portfolio at least annually a report of operations containing a balance
sheet and statement of income and undistributed income of the applicable of the
Trust prepared in conformity with generally accepted accounting principles and
an opinion of an independent public accountant on such financial statements. It
is contemplated that separate reports may be prepared for the various
Portfolios. Copies of such reports shall be mailed to all Shareholders of
record of the applicable Portfolios within the time required by the 1940 Act.
The Trustees shall, in addition, furnish to the Shareholders at least
semi-annually, interim reports containing an unaudited balance sheet of the
portfolio as of the end of such period and an unaudited statement of income and
surplus for the period from the beginning of the current fiscal year to the end
of such period.
SECTION 10.8 SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may be
taken by Shareholders may be taken without a meeting if a majority of
Shareholders of each Portfolio entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration) consent to the action in writing and the written consents are filed
with the records of the meetings of Shareholders. Such consent shall be treated
for all purposes as a vote taken at a meeting of Shareholders.
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ARTICLE XI
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS; ETC.
SECTION 11.1 DURATION. Subject to the provisions of Sections 11.2 and 11.3
hereof, this Trust shall continue without limitation of time.
SECTION 11.2 TERMINATION.
(a) The Trust, or any Portfolio thereof, may be terminated by the
affirmative vote of a majority of the Trustees. Upon the termination of the
Trust or any Portfolio:
(i) the Trust or such Portfolios shall carry on no business
except for the purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of
the Trust or such Portfolio and all of the powers of the Trustees under
this Declaration shall continue until the affairs of the Trust or such
Portfolio shall have been wound up, including the power to fulfill or
discharge the contracts of the Trust or such Portfolio, collect its assets,
sell, convey, assign, exchange, transfer or otherwise dispose of all or any
part of the remaining Trust Property to one or more persons at public or
private sale for consideration which may consist in whole or in part of
cash, securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all the Trust Property shall require
approval of the principal terms of the transaction and the nature and
amount of the consideration by vote or consent of the holders majority of
the Shares entitled to vote; and
(iii) after payment or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property of any Portfolio, in
cash or in kind or partly each, among the Shareholders of such Portfolios
according to their respective rights.
(b) After termination of the Trust or any Portfolio and distribution
to the Shareholders as herein provided, a majority of the Trustees shall
execute and lodge among the records of the Trust an instrument in writing
setting forth the fact of such termination. Upon termination of the Trust,
the Trustees shall thereupon be discharged from all further liabilities and
duties hereunder, and the rights and interests of all Shareholders shall
thereupon cease. Upon termination of any Portfolio, the Trustees thereunder
shall be discharged from any further liabilities and duties with respect to
such Portfolio, and the rights and interests of all Shareholders of such
Portfolio shall thereupon cease.
SECTION 11.3 REORGANIZATION. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one or more
Portfolios, to another trust,
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partnership, association or corporation organized under the laws of any state of
the United States, or to the Trust to be held as assets belonging to another
Portfolio of the Trust, in exchange for cash, shares or other securities
(including, in the case of a transfer to another Portfolio of the Trust, Shares
of such other Portfolio) with such transfer either (1) being made subject to, or
with the assumption by the transferee of, the liabilities belonging to each
Portfolio the assets of which are so transferred, or (2) not being made subject
to, or not with the assumption of, such liabilities; provided, however, that no
assets belonging to any particular Portfolio shall be so transferred unless the
terms of such transfer shall have first been approved at a meeting called for
the purpose by a Majority Shareholder Vote of that Portfolio. Following such
transfer, the Trustees shall distribute such cash, shares or other securities
(giving due effect to the assets and liabilities belonging to and any other
differences among the various Portfolios the assets belonging to which have so
been transferred) among the Shareholders of the Portfolio the assets belonging
to which have been so transferred; and if all of the assets of the Trust have
been so transferred, the Trust shall be terminated.
The Trust, or any one or more Portfolios, may, either as the successor,
survivor, or non-survivor, (1) consolidate with one or more other trusts,
partnerships, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state of the United States, to form a
new consolidated trust, partnership, association or corporation under the laws
of which any one of the constituent entities is organized, or (2) merge into one
or more other trusts, partnerships, associations or corporations organized under
the laws of the Commonwealth of Massachusetts or any other state of the United
States, or have one or more such trusts, partnerships, associations or
corporations merged into it, any such consolidation or merger to be upon such
terms and conditions as are specified in an agreement and plan of reorganization
entered into by the Trust, or one or more Portfolios as the case may be, in
connection therewith. The terms "merge" or "merger" as used herein shall also
include the purchase or acquisition of any assets of any other trust,
partnership, association or corporation which is an investment company organized
under the laws of the Commonwealth of Massachusetts or any other state of the
United States. Any such consolidation or merger shall require the approval of a
Majority Shareholder Vote of each Portfolio affected thereby.
Shareholders shall have no right to demand payment for their shares or to
any other rights of dissenting shareholders in the event the Trust or any
Portfolio participates in any transaction which would give rise to appraisal or
dissenters' rights by a shareholder of a corporation organized under Chapter
156B of the General Laws of the Commonwealth of Massachusetts.
SECTION 11.4 AMENDMENT PROCEDURE. All rights granted to the Shareholders
under this Declaration are granted subject to the reservation of the right to
amend this Declaration as herein provided, except that no amendment shall repeal
the limitations on personal liability of any Shareholder or Trustee or repeal
the prohibition of assessment upon the Shareholders without the express consent
of each Shareholder or Trustee involved. Subject to the foregoing, the
provisions of this Declaration (whether or not related to the rights of
Shareholders) may be amended at any time, so long as such amendment does not
adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is not
in contravention of applicable law, including the 1940 Act, by an instrument in
writing signed by a majority of the then Trustees
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(or by an officer of the Trust pursuant to the vote of a majority of such
Trustees). Any amendment to this Declaration that adversely affects the rights
of Shareholders may be adopted at any time by an instrument in writing signed by
a majority of the then Trustees (or by an officer of the Trust pursuant to a
vote of a majority of such Trustees) when authorized to do so by the vote of a
majority of the Shares entitled to vote. Subject to the foregoing, any such
amendment shall be effective as provided in the instrument containing the terms
of such amendment or, if there is no provision therein with respect to
effectiveness, upon the execution of such instrument and of a certificate (which
may be a part of such instrument) executed by a Trustee or officer of the Trust
to the effect that such amendment has been duly adopted.
SECTION 11.5 INCORPORATION. With the approval of the holders of a majority
of the Shares, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all of the
Trust Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, association or organization in exchange
for the shares or securities thereof or otherwise, and to lend money to,
subscribe for the Shares or securities of, and enter into any contracts with any
such corporation, trust, partnership, association or organization, or any
corporation, trust, partnership, association or organization in which the Trust
holds or is about to acquire shares or any other interest. The Trustees may also
cause a merger or consolidation between the Trust or any successor thereto and
any such corporation, trust, partnership, association or other organization if
and to the extent permitted by law, as provided under the law then in effect.
Nothing contained herein shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to such
organizations or entities.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 FILING. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of the Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and also
may be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein, and unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective upon its filing. A restated Declaration, containing the original
Declaration and all amendments theretofore made, may be executed from time to
time by a majority of the Trustees and shall, upon filing with the Secretary of
the Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.
SECTION 12.2 RESIDENT AGENT. The Trust shall maintain a resident agent in
the Commonwealth of Massachusetts, which agent shall initially be CT Corporation
System, 2
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Oliver Street, Boston, Massachusetts 02109. The Trustees may designate a
successor resident agent, provided, however, that such appointment shall not
become effective until written notice thereof is delivered to the office of the
Secretary of the Commonwealth of Massachusetts.
SECTION 12.3 GOVERNING LAW. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction of
every provision hereof shall be subject to and construed according to the laws
of said Commonwealth.
SECTION 12.4 COUNTERPARTS. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original, and
such counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
SECTION 12.5 RELIANCE BY THIRD PARTIES. Any certificate executed by an
individual who, according to the records of the Trust or of any recording office
in which this Declaration may be recorded, appears to be a Trustee hereunder,
certifying to: (a) the number or identity of Trustees or Shareholders; (b) the
name of the Trust or any Portfolio thereof; (c) the due authorization of the
execution of any instrument or writing; (d) the form of any vote passed at a
meeting of Trustees or Shareholders; (e) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration; (f) the form of any By-laws
adopted by or the identity of any officers elected by the Trustees; (g) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust or any Portfolio; or (h) the establishment of any Portfolio, shall be
conclusive evidence as to the matters so certified in favor of any person
dealing with the Trustees and their successors:
SECTION 12.6 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
SECTION 12.7 PRINCIPAL BUSINESS ADDRESS. The Trust's business address will
be at 1171 East Putnam Avenue, Riverside, Connecticut 06878.
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IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
/s/ H. Michael Schwartz
---------------------------
H. Michael Schwartz
Sole Trustee
301 Livingston Avenue
Mamaroneck, NY 10543
STATE OF CONNECTICUT
4/7/93 COUNTY OF FAIRFIELD, SS: Greenwich
There personally appeared before me, H. Michael Schwartz, who resides at
301 Livingston Avenue, Mamaroneck, New York 10543, who acknowledged the
foregoing instrument to be his free act and deed and the free act and deed of
the Trustee of The Palladian Trust.
/s/
------------------
Notary Public
My commission expires:3/31/95
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DECLARATION OF TRUST
THE PALLADIAN TRUST
FEE PAID
$200.00
SEP 8 1993
CASHIERS
SECRETARY'S OFFICE
/s/
<PAGE>
THE PALLADIAN TRUST
BY-LAWS
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I -- SHAREHOLDER MEETINGS
Section 1.1 Calling of Meetings......................................4
Section 1.2 Notices..................................................4
Section 1.3 Place of Meeting.........................................4
Section 1.4 Chairman.................................................4
Section 1.5 Proxies; Voting..........................................4
Section 1.6 Closing of Transfer Books and Fixing Record Dates........4
Section 1.7 Inspectors of Election...................................5
ARTICLE II -- TRUSTEES
Section 2.1 The Trustees.............................................5
Section 2.2 Regular and Special Meetings.............................5
Section 2.3 Notice...................................................6
Section 2.4 Records..................................................6
Section 2.5 Quorum and Vote..........................................6
Section 2.6 Telephone Meeting........................................6
Section 2.7 Special Action...........................................6
Section 2.8 Action by Consent........................................6
Section 2.9 Compensation of Trustee..................................6
ARTICLE III -- OFFICERS
Section 3.1 Officers of the Trust....................................7
Section 3.2 Election and Tenure......................................7
Section 3.3 Removal of Officers......................................7
Section 3.4 Bonds and Surety.........................................7
Section 3.5 Chairman, President and Vice-President...................7
Section 3.6 Secretary................................................8
Section 3.7 Treasurer................................................8
Section 3.8 Other Officers and Duties................................8
ARTICLE IV -- POWER AND DUTIES OF THE EXECUTIVE AND OTHER COMMITTEES
Section 4.1 Executive and Other Committees...........................9
Section 4.2 Vacancies in Executive Committee.........................9
Section 4.3 Executive Committee to Report to Trustees................9
Section 4.4 Procedure of Executive Committee.........................9
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Section 4.5 Powers of Executive Committee............................9
Section 4.6 Compensation.............................................9
Section 4.7 Informal Action by Executive Committee
or Other Committee.......................................9
ARTICLE V -- SHARES OF BENEFICIAL INTEREST
Section 5.1 Book Entry Shares........................................10
Section 5.2 Transfer Agents, Registrars and the Like.................10
Section 5.3 Transfer of Shares.......................................10
Section 5.4 Registered Shareholders..................................10
ARTICLE VI -- AMENDMENT OF BY-LAWS.........................................10
ARTICLE VlI -- INSPECTION OF BOOKS.........................................11
ARTICLE VIII -- AGREEMENTS, CHECKS, DRAFTS,
ENDORSEMENTS, etc..........................................11
Section 8.1. Agreements, etc..........................................11
Section 8.2. Checks, Drafts, etc......................................11
Section 8.3. Endorsements, Assignments and Transfer of Securities.....11
Section 8.4. Evidence of Authority....................................11
ARTICLE IX -- SEAL...........................................................12
ARTICLE X -- FISCAL YEAR...................................................12
ARTICLE XI -- WAIVERS OF NOTICE............................................12
ARTICLE XII -- BOOKS AND RECORDS...........................................12
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THE PALLADIAN TRUST
BY- LAWS
These By-laws are made and adopted pursuant to Section 3.9 of the
Agreement and Declaration of Trust establishing THE PALLADIAN TRUST ("Trust")
dated _____________, 1993 as from time to time amended (hereinafter called the
"Declaration"). All words and terms capitalized in these By-laws shall have the
meaning or meanings set forth for such words or terms in the Declaration.
ARTICLE I
SHAREHOLDER MEETINGS
Section 1.1. CALLING OF MEETINGS. Meetings of the Shareholders
shall be held as provided in Section 10.2 of the Declaration at such place
within or without the Commonwealth of Massachusetts as the Trustees shall
designate.
Section 1.2. NOTICES. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by mail to
each Shareholder at his registered address as recorded on the register of the
Trust, mailed at least 10 days and not more than sixty (60) days before the
meeting. Any adjourned meeting shall be held as adjourned without further
notice. No notice need be given to any Shareholder who shall have failed to
inform the Trust of his current address or if a written waiver of notice,
executed before or after the meeting by the Shareholder or his attorney,
thereunto authorized, is filed with the records of the meeting.
Section 1.3. PLACE OF MEETING. Meetings of the Shareholders of the
Trust shall be held at such place within or without the Commonwealth of
Massachusetts as may be fixed from time to time by resolution of the Trustees.
Section 1.4. CHAIRMAN. The Chairman, if any, shall act as Chairman
at all meetings of the Shareholders; in his absence, the President shall act as
Chairman; and in the absence of the Chairman and the President, the Vice
President; and in the absence of the Vice President, the Trustee or Trustees
present at each meeting may elect a temporary Chairman for the meeting, who may
be one of themselves.
Section 1.5. PROXIES; VOTING. Shareholders may vote either in
person or by duly executed proxy and, unless otherwise required by applicable
law, each full share represented at the meeting shall have one vote, and each
fractional share shall have a proportionate fractional vote all as provided in
Article X of the Declaration. No proxy shall be valid after eleven (11) months
from the date of its execution, unless a longer period is expressly stated in
such proxy.
Section 1.6. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATES. For
the purpose of determining the Shareholders who are entitled to notice of or to
vote or act at any meeting, including any adjournment thereof, or who are
entitled to participate in any dividends, or for any other proper purpose, the
Trustees may from time to time close the transfer books or fix a record
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date in the manner provided in Section 10.4 of the Declaration. If the Trustees
do not, prior to any meeting of Shareholders, so f x a record date or close the
transfer books, then an officer of the Trust shall determine a date which shall
be not more than 180 days prior to the date of the meeting or the date upon
which the dividend is declared, as the case may be, and such date shall be the
record date.
Section 1.7. INSPECTORS OF ELECTION. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election of
the meeting. The number of Inspectors shall be either one or three. If appointed
at the meeting on the request of one or more Shareholders or proxies, a majority
of Shares present shall determine whether one or three Inspectors are to be
appointed, but failure to allow such determination by the Shareholders shall not
affect the validity of the appointment of Inspectors of Election. In case any
person appointed as Inspector fails to appear or fails or refuses to act, the
vacancy may be filled by appointment made by the Trustees in advance of the
convening of the meeting or at the meeting by the person acting as Chairman. The
Inspectors of Election shall ascertain and monitor the number of Shares
outstanding, the Shares represented at the meeting, the existence of a quorum,
the authenticity, validity and effect of proxies, shall receive votes, ballots
or consents, shall hear and determine all challenges and questions in any way
arising in connection with the right to vote, shall count and tabulate all votes
or consents, determine the results, and do such other acts as may be proper to
conduct the election or vote with fairness to all Shareholders. If there are
three Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On request
of the Chairman, if any, of the meeting, or of any Shareholder or his proxy, the
Inspectors of Election shall make a report in writing of any challenge or
question or matter determined by them and shall execute a certificate of any
facts found by them.
ARTICLE II
TRUSTEES
Section 2.1. THE TRUSTEES. The Trustees shall be responsible for the
management of the Trust; they may retain such authority to direct the business
affairs of the Trust as they deem advisable, but, subject to the Declaration and
the provisions of applicable law, they may delegate any of the various functions
involved in the management of the Trust to its officers and/or agents as they
deem fit. The term of office of each Trustee shall continue until the Trustee
resigns, is removed, retires, or is retired pursuant to Section 2.3 of the
Declaration. Subject to the provisions of Sections 2.2 and 2.4 of the
Declaration, all persons to serve as Trustees of the Trust shall be elected at
each meeting of the Shareholders of the Trust called for that purpose.
Section 2.2. REGULAR AND SPECIAL MEETINGS. Regular meetings of the
Trustees may be held without call or notice at such place or places and times as
the Trustees may determine from time to time. Special Meetings of the Trustees
shall be held upon the call of the Chairman, if any, the President, the Vice
President, or any two Trustees, at such time, on such day, and at such place, as
shall be designated in the notice of the meeting.
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Section 2.3. NOTICE. Notice of a meeting shall be given by mail or
by telegram (which term shall include a cablegram) or delivered personally or by
courier. If notice is given by mail, it shall be mailed not later than 24 hours
preceding the meeting and if given by telegram or personally, such telegram
shall be sent or delivered not later than 24 hours preceding the meeting, unless
otherwise subject to the provisions of the 1940 Act. Notice by telephone shall
constitute personal delivery for these purposes. Notice of a meeting of Trustees
may be waived before or after any meeting by signed written waiver. Neither the
business to be transacted at, nor the purpose of, any meeting of the Trustees
need be stated in the notice or waiver of notice of such meeting, and no notice
need be given of action proposed to be taken by unanimous written consent. The
attendance of a Trustee at a meeting shall constitute a waiver of notice of such
meeting except where a Trustee attends a meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting has
not been lawfully called or convened.
Section 2.4. RECORDS. The results of all actions taken at a meeting
of the Trustees, or by unanimous written consent of the Trustees, shall be
recorded by the Secretary or Assistant Secretary.
Section 2.5. QUORUM AND VOTE. A majority of the Trustees shall
constitute a quorum for the transaction of business. The act of a majority of
the Trustees present at any meeting at which a quorum is present shall be the
act of the Trustees unless a greater proportion is required by the Declaration
or these Bylaws or applicable law. In the absence of a quorum, a majority of the
Trustees present may adjourn the meeting from time to time until a quorum shall
be present. Notice of any adjourned meeting need not be given.
Section 2.6. TELEPHONE MEETING. Subject to compliance with the
provisions of the 1940 Act, the Trustees may meet by means of a conference
telephone or similar equipment by means of which all persons participating in
the meeting can hear each other.
Section 2.7. SPECIAL ACTION. When all the Trustees shall be present
at any meeting, however called or whenever held, or shall assent to the holding
of the meeting without notice, or after the meeting shall sign a written assent
thereto on the record of such meeting, the acts of such meeting shall be valid
as if such meeting had been regularly held.
Section 2.8. ACTION BY CONSENT. Subject to compliance with the
provisions of the 1940 Act, any action by the Trustees may be taken without a
meeting if a written consent thereto is signed by a majority of the Trustees
then in office and filed with the records of the Trustees' meetings. Such
consent shall be treated as a vote of the Trustees for all purposes.
Section 2.9. COMPENSATION OF TRUSTEES. The Trustees may receive a
stated salary for their services as Trustees, and by resolution of the Trustees
a fixed fee and expense of attendance may be allowed for attendance at each
meeting. Nothing herein contained shall be construed to preclude any Trustee
from serving the Trust in any other capacity, as an officer, agent or otherwise,
and receiving compensation therefor.
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ARTICLE III
OFFICERS
Section 3.1. OFFICERS OF THE TRUST. The officers of the Trust may
consist of a Chairman, if one shall be appointed by the Trustees, and shall
consist of a President, a Vice President, a Secretary, a Treasurer and such
other officers or assistant officers, as may be elected by the Trustees. Any two
or more of the offices may be held by the same person, except that the same
person may not be both President and Vice President. The Chairman, the President
and the Vice President shall be Trustees, but no other officer of the Trust need
be a Trustee.
Section 3.2. ELECTION AND TENURE. At the initial organizational
meeting and at least once a year thereafter the Trustees shall elect the
Chairman, if any, the President, the Vice President, Secretary, Treasurer and
such other officers as the Trustees shall deem necessary or appropriate in order
to carry out the business of the Trust. Such officers shall hold the office
until their successors have been duly elected and qualified. The Trustees may
fill any vacancy in office or add any additional officers at any time.
Section 3.3. REMOVAL OF OFFICERS. Any officer may be removed at any
time, with or without cause, by action of a majority of the Trustees. This
provision shall not prevent the making of a contract of employment for a
definite term with any officer and shall have no effect upon any cause of action
which any officer may have as a result of removal in breach of a contract of
employment. Any officer may resign at any time by notice in writing signed by
such officer and delivered or mailed to the Chairman, if any, President, or Vice
President, and such resignation shall take effect immediately upon receipt by
the Chairman, if any, President, or Secretary, or at a later date according to
the terms of such notice in writing.
Section 3.4. BONDS AND SURETY. Any officer may be required by the
Trustees to be bonded for the faithful performance of his duties in such amount
and with such sureties as the Trustees may determine.
Section 3.5. CHAIRMAN, PRESIDENT AND VICE-PRESIDENT. The Chairman,
if any, shall, if present, preside at all meetings of the Shareholders and of
the Trustees and shall exercise and perform such other powers and duties as may
be from time to time assigned to him by the Trustees. Subject to such
supervisory powers, if any, as may be given by the Trustees to the Chairman, if
any, the President shall be the chief executive officer of the Trust, and,
subject to the control of the Trustees, shall have general supervision,
direction and control of the business of the Trust and of its employees and
shall exercise such general powers of management as are usually vested in the
office of President of a corporation. In the absence of the Chairman, if any,
the President, and in his absence, the Vice President shall preside at all
meetings of the Shareholders and of the Trustees. The President and the Vice
President shall be, EX OFFICIO, members of all outstanding committees (except
the Audit Committee or any other Committee that consists only of Trustees who
are not interested persons of the Trust, its Investment Adviser, Manager or any
Portfolio Manager). Subject to direction of the Trustees, the Chairman, if any,
the President and the Vice President shall each have power in the name and on
behalf of the Trust to execute any and all loan documents, contracts,
agreements, deeds, mortgages and other
7
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instruments in writing, and to employ and discharge employees and agents of the
Trust. Unless otherwise directed by the Trustees, the Chairman, if any, the
President and the Vice President shall each have full authority and power, on
behalf of all of the Trustees, to attend and to act and to vote, on behalf of
the Trust at any meetings of the business organizations in which the Trust holds
an interest, or to confer such powers upon any other persons, by executing any
proxies duly authorizing such persons. The Chairman, if any, the President and
the Vice President shall have such further authorities and duties as the
Trustees shall from time to time determine.
Section 3.6. SECRETARY. The Secretary shall keep the minutes of all
meetings of, and record all votes of, Shareholders, Trustees and the Executive
Committee, if any. He shall be custodian of the seal of the Trust, if any, and
he (and any other person so authorized by the Trustees) shall affix the seal or,
if permitted, a facsimile thereof, to any instrument executed by the Trust which
would be sealed by a Massachusetts corporation executing the same or a similar
instrument and shall attest to the seal and the signature or signatures of the
officer or officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident to such office
in a Massachusetts business corporation, and shall have such other authorities
and duties as the Trustees shall from time to time determine. Any of the duties
of the Secretary may be performed by an Assistant Secretary duly appointed by
the Trustees.
Section 3.7. TREASURER. Except as otherwise directed by the
Trustees, the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and of
the President all powers and duties normally incident to his office. He may
endorse for deposit or collection all notes, checks and other instruments
payable to the Trust or to its order. He shall deposit all funds of the Trust in
such depositories as the Trustees shall designate. He shall be responsible for
such disbursement of the funds of the Trust as may be ordered by the Trustees or
the President. He shall keep accurate account of the books of the Trust's
transactions which shall be the property of the Trust, and which together with
all other property of the Trust in his possession, shall be subject at all times
to the inspection and control of the Trustees. Unless the Trustees shall'
otherwise determine, the Treasurer shall be the principal accounting officer of
the Trust and shall also be the principal financial officer of the Trust. He
shall have such other duties and authorities as the Trustees shall from time to
time determine. Notwithstanding anything to the contrary herein contained, the
Trustees may authorize any adviser, administrator, manager, portfolio manager,
or transfer agent to maintain bank accounts and deposit and disburse funds of
any series of the Trust on behalf of such Series.
Section 3.8. OTHER OFFICERS AND DUTIES. The Trustees may elect such
other officers and assistant officers as they shall from time to time determine
to be necessary or desirable in order to conduct the business of the Trust.
Assistant officers shall act generally in the absence of the officer whom they
assist and shall assist that officer in the duties of his office. Each officer,
employee and agent of the Trust shall have such other duties and authority as
may be conferred upon him by the Trustees or delegated to him by the President
or, in his absence, the Vice President.
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ARTICLE IV
POWER AND DUTIES OF THE
EXECUTIVE AND OTHER COMMITTEES
Section 4.1. EXECUTIVE AND OTHER COMMITTEES. The Trustees may, but
shall not be required to, elect from their own number an Executive Committee to
consist of not less than two members, which number shall include the President
and Vice President, who shall, EX OFFICIO, be members thereof. The Executive
Committee shall be elected by a resolution passed by a vote of at least a
majority of the Trustees then in office. The Trustees may also elect from their
own number other committees from time to time, the number composing such
committees and the powers conferred upon the same to be determined by vote of
the Trustees.
Section 4.2. VACANCIES IN EXECUTIVE COMMITTEE. Vacancies occurring
in the Executive Committee from any cause shall be filled by the Trustees by a
resolution passed by the vote of at least a majority of the Trustees then in
office.
Section 4.3. EXECUTIVE COMMITTEE TO REPORT TO TRUSTEES. All action
by the Executive Committee shall be reported to the Trustees at their meeting
next succeeding such action.
Section 4.4. PROCEDURE OF EXECUTIVE COMMITTEE. The Executive
Committee shall fix its own rules of procedures not inconsistent with these By-
laws or with any directions of the Trustees. It shall meet at such times and
places and upon such notice as shall be provided by such rules or by resolution
of the Trustees. The presence of a majority shall constitute a quorum for the
transaction of business, and in every case an affirmative vote of a majority of
all the members of the Committee present shall be necessary for the taking of
any action.
Section 4.5. POWERS OF EXECUTIVE COMMITTEE. During the intervals
between the meetings of the Trustees, the Executive Committee, except as limited
by the By-laws of the Trust or by specific directions of the Trustees, shall
possess and may exercise all the powers of the Trustees in the management and
direction of the business and conduct of the affairs of the Trust in such manner
as the Executive Committee shall deem for the best interest of the Trust, and
shall have power to authorize the seal of the Trust to be affixed to all
instruments and documents requiring same. Notwithstanding the foregoing, the
Executive Committee shall not have the power to elect Trustees, increase or
decrease the number of Trustees, elect or remove any officer, declare dividends,
issue shares or recommend to Shareholders any action requiring Shareholder
approval.
Section 4.6. COMPENSATION. The members of any duly appointed
committee shall receive such compensation and/or fees as from time to time may
be fixed by the Trustees.
Section 4.7. INFORMAL ACTION BY EXECUTIVE COMMITTEE OR OTHER
COMMITTEE. Any action required or permitted to be taken at any meeting of the
Executive Committee or any other duly appointed Committee may be taken without a
meeting if a consent in writing setting forth such action is signed by all
members of such committee and such consent is filed with the records of the
Trust.
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ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 5.1. BOOK ENTRY SHARES. No certificates will be issued to
represent shares in the Trust unless the Trustees, in their discretion, may so
authorize. The Trust may issue certificates in any fixed denomination of shares,
or alternatively, may issue to all investors certificates evidencing ownership
of shares of beneficial interest in the Trust which will not evidence ownership
of a fixed number of shares but will indicate on its face that it represents all
Trust shares of beneficial interest for which the investor is the record owner
as shown on the books of record of the Transfer Agent of the Trust. The Trust
shall maintain adequate records to determine the holdings of each Shareholder of
record, and such records shall be deemed the equivalent of a certificate
representing the shares for all purposes.
Section 5.2. TRANSFER AGENTS. REGISTRARS AND THE LIKE. As provided
in Section 6.7 of the Declaration, the Trustees shall have authority to employ
and compensate such transfer agents and registrars with respect to the Shares of
the various Series of the Trust as the Trustees shall deem necessary or
desirable. In addition, the Trustees shall have power to employ and compensate
such dividend disbursing agents, warrant agents and agents for the reinvestment
of dividends as they shall deem necessary or desirable. Any of such agents shall
have such power and authority as is delegated to any of them by the Trustees.
Section 5.3. TRANSFER OF SHARES. The shares of the Trust shall be
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper documentation as provided in Section 6.8
of the Declaration. The Trust, or its transfer agents, shall be authorized to
refuse any transfer unless and until there is presented such evidence as may be
reasonably required to show that the requested transfer is proper.
Section 5.4. REGISTERED SHAREHOLDERS. The Trust may deem and treat
the holder of record of any Share as the absolute owner thereof for all purposes
and shall not be required to take any notice of any right or claim of right of
any other person, unless otherwise required by applicable law.
ARTICLE VI
AMENDMENT OF BY-LAWS
In accordance with Section 3.9 of the Declaration, the Trustees shall
have the power to alter, amend or repeal the By-laws or adopt new By-laws at any
time. Action by the Trustees with respect to the By-laws shall be taken by an
affirmative vote of a majority of the Trustees. The Trustees shall in no event
adopt By-laws which are in conflict with the Declaration, and any apparent
inconsistency shall be construed in favor of the related provisions in the
Declaration.
The Agreement and Declaration of Trust establishing THE PALLADIAN
TRUST, dated ________, 1993, a copy of which, together with all amendments
thereto, (the "Declaration"), is
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on file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name THE PALLADIAN TRUST refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, Shareholder, officer, employee or agent of THE PALLADIAN TRUST shall
be held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said THE PALLADIAN TRUST but the Trust estate
only shall be liable.
ARTICLE VII
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and regulations
the accounts and books of the Trust or any of them shall be open to the
inspection of-the Shareholders; and no Shareholder shall have any right to
inspect an account or book or document of the Trust except as conferred by law
or authorized by the Trustees or by resolution of the Shareholders.
ARTICLE VIII
AGREEMENTS, CHECKS, DRAFT, ENDORSEMENTS, ETC.
Section 8.1. AGREEMENTS. ETC. The Trustees or the Executive
Committee may authorize any officer or officers, or agent or agents of the Trust
to enter into any agreement or execute and deliver any instrument in the name of
and on behalf of the Trust, and such authority may be general or confined to
specific instances; and, unless so authorized by the Trustees or by the
Executive Committee or by these By-laws, no officer, agent or employee shall
have any power or authority to bind the Trust by any agreement or engagement or
to pledge its credit or to render it liable for any purpose or in any amount.
Section 8.2. CHECKS, DRAFTS ETC. All checks, drafts, or orders for
the payment of money, notes and other evidences of indebtedness shall be signed
by such officer or officers, employee or employees, or agent or agents, as shall
from time to time be designated by the Trustees or the Executive Committee, if
any, or as may be specified in or pursuant to the agreement between the Trust
and any bank or trust company appointed as custodian depository pursuant to the
provisions of the Declaration.
Section 8.3. ENDORSEMENTS, ASSIGNMENTS AND TRANSFER OF SECURITIES.
All endorsements, assignments, stock powers or other instruments of transfer of
securities standing in the name of the Trust or its nominees or directions for
the transfer of securities belonging to the Trust shall be made by such officer
or officers, employee or employees, or agent or agents as may be authorized by
the Trustees or the Executive Committee, if any.
Section 8.4. EVIDENCE OF AUTHORITY. Anyone dealing with the Trust
shall be fully justified in relying on a copy of a resolution of the Trustees or
of any committee thereof
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empowered to act in the premises which is certified as true by the Secretary or
an Assistant Secretary under the seal of the Trust.
ARTICLE IX
SEAL
The seal of the Trust shall be circular in form, bearing the
inscription:
THE PALLADIAN TRUST - 1993 - Massachusetts
ARTICLE X
FISCAL YEAR
The fiscal year of the Trust shall be the period of twelve months
ending on December 31 of each calendar year.
ARTICLE XI
WAIVERS OF NOTICE
Whenever any notice whatsoever is required to be given under the
provisions of any statute of the Commonwealth of Massachusetts, or under the
provisions of the Declaration or these By-laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice whether before or after
the time stated therein, shall be deemed equivalent thereto. A notice shall be
deemed to have been given if telegraphed, cabled or sent by wireless when it has
been delivered to a representative of any telegraph, cable or wireless company
with instructions that it be telegraphed, cabled or sent by wireless. Any
notice, if mailed, shall be deemed to be given at the time when the same shall
be deposited in the mail.
ARTICLE XII
BOOKS AND RECORDS
The books and records of the Trust, including the stock ledger or
ledgers, may be kept in or outside the Commonwealth of Massachusetts at such
office or agency of the Trust as may be from time to time determined by the
Trustees.
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INVESTMENT MANAGEMENT AGREEMENT
Agreement, made this 12th day of October, 1995, between The Palladian
Trust (the "Trust"), a Massachusetts business trust, and Palladian Advisors,
Inc. (the "Manager"), a Delaware corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940 and is engaged in the business of rendering
consulting and other services with respect to financial services and products;
and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing interests
in a separate portfolio of securities and other assets; and
WHEREAS, the Trust currently intends initially to issue shares of six
portfolios designated as The Value Portfolio, The Growth Portfolio, The Balanced
Opportunity Portfolio, The International Growth Portfolio, The Global Strategic
Income Portfolio, and The Global Interactive/Telecomm Portfolio (collectively,
the "Fulcrum Portfolios"); and
WHEREAS, the Trust may establish additional portfolios with respect to
which the Trust desires to retain the Manager to render management services
hereunder and with respect to which the Manager is willing to do so (those
portfolios plus the Fulcrum Portfolios are collectively referred to as the
"Portfolios"); and
WHEREAS, the Trust desires to avail itself of the services of the
Manager for the provision of advice with respect to the selection and monitoring
of portfolio managers for the Portfolios and for the provision of other services
for the Trust; and
WHEREAS, the Manager is willing to render such services to the Trust.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Manager to provide
management services with respect to the Fulcrum Portfolios for the period and on
the terms set forth in this Agreement, subject to the direction of the Board of
Trustees of the Trust (the "Board of Trustees"). The Manager accepts such
appointment and agrees to render the services described
<PAGE>
herein for the compensation provided in paragraph 9. In the event the Trust
establishes one or more portfolios other than the Fulcrum Portfolios with
respect to which it desires to retain the Manager to render management services
pursuant to this Agreement, it shall so notify the Manager in writing. If the
Manager is willing to render such services it shall so notify the Trust in
writing, whereupon such portfolio shall become a Portfolio as that term is used
in this Agreement.
2. SERVICES OF THE MANAGER. Subject to the supervision of the Board of
Trustees, the Manager shall provide the following management services with
respect to the Portfolios:
(a) The Manager shall analyze and recommend for consideration by the
Board of Trustees a Portfolio Advisor to help select investment advisory firms
to be retained by the Trust to provide day-to-day investment management of the
Portfolios (the "Portfolio Managers").
(b) The Manager shall work with the Portfolio Advisor to analyze and
recommend Portfolio Managers for consideration by the Board of Trustees.
(c) The Manager shall work with the Portfolio Advisor to monitor and
evaluate the performance of the Portfolio Managers and make recommendations to
the Board of Trustees concerning the renewal or termination of agreements with
Portfolio Managers (the "Portfolio Management Agreements"), although the Manager
is not authorized, except as provided in paragraph 3 of the Agreement, to make
determinations with respect to the investment of a Portfolio's assets or the
purchase or sale of securities or other investments for a Portfolio.
(d) The Manager shall monitor the Portfolio Managers for compliance
with the investment policies and restrictions of each Portfolio, the 1940 Act,
the Internal Revenue Code, and all other applicable federal and state laws and
regulations.
(e) The Manager shall coordinate all matters relating to the
functions of the Trust's Manager, Portfolio Managers, Portfolio Advisor,
custodian, transfer agent, accountants, attorneys, and other parties performing
services or operational functions for the Trust.
(f) The Manager shall provide the Trust and the Portfolios with the
services of a sufficient number of persons competent to perform such
administrative and clerical functions as are necessary to provide effective
supervision and administration of the Trust.
Investment Management Agreement Page 2
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(g) The Manager shall provide the Trust with adequate office space,
communications facilities, and other facilities necessary for its operations as
contemplated in this Agreement.
(h) The Manager shall provide the Board of Trustees such periodic and
special reports as the Board may reasonably request.
(i) The Manager shall make its officers and employees available to
the Board of Trustees and officers of the Trust for consultation and discussions
regarding the administration and management of the Trust.
(j) The Manager shall provide such assistance as the Board of
Trustees shall reasonably request in connection with the conduct of meetings of
the Board or otherwise.
3. INVESTMENT MANAGEMENT AUTHORITY. In the event that a Portfolio
Management Agreement pertaining to a Portfolio is terminated or if, at any time,
no Portfolio Manager is engaged to manage the assets of a Portfolio, then the
Manager, subject to the supervision of the Board of Trustees, will provide
day-to-day investment management of any such Portfolio. The Manager will
provide investment research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest. The Manager is
hereby authorized to execute and perform such services on behalf of the
Portfolio. To the extent permitted by the investment policies of the Portfolio,
the Manager shall make decisions for the Portfolio as to foreign currency
matters and make determinations as to, and execute and perform, foreign currency
exchange contracts on behalf of the Portfolio. The Manager will provide the
services under this Agreement in accordance with the Portfolio's investment
objective or objectives, policies, and restrictions as stated in the Trust's
registration statement under the Securities Act of 1933 and the 1940 Act as
filed with the Securities and Exchange Commission ("SEC") and amended from time
to time (the "Registration Statement"). Furthermore, under these circumstances:
(a) The Manager will use reasonable efforts to manage the Portfolio
so that it will (1) qualify as a regulated investment company under Subchapter M
of the
Investment Management Agreement Page 3
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Internal Revenue Code, (2) comply with the diversification requirements of
Section 817(h) of the Internal Revenue Code and regulations issued thereunder,
and (3) comply with any other rules and regulations pertaining to investment
vehicles underlying variable annuity or variable life insurance policies. In
managing the Portfolio in accordance with these requirements, the Manager shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
the Manager.
(b) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as any other
investment advisory clients, the Manager may, to the extent permitted by
applicable laws and regulations, including, but not limited to Section 17(d) of
the 1940 Act, but shall not be obligated to, aggregate the securities to be so
sold or purchased with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration Statement. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in a manner
that is fair and equitable in the judgment of the Manager in the exercise of its
fiduciary obligations to the Trust and to such other clients.
(c) In connection with the purchase and sale of securities for the
Portfolio, the Manager will arrange for the transmission to the custodian for
the Trust on a daily basis, such confirmation, trade tickets, and other
documents and information as may be reasonably necessary to enable the custodian
to perform its administrative and recordkeeping responsibilities with respect to
the Portfolio. With respect to portfolio securities to be purchased or sold
through the Depository Trust Company, the Manager will arrange for the automatic
transmission of the confirmation of such trades to the Trust's custodian.
(d) The Manager will assist the custodian or recordkeeping agent for
the Trust in determining, consistent with the procedures and policies stated in
the Registration Statement, the value of any portfolio securities or other
assets of the Portfolio for which the custodian or recordkeeping agent seeks
assistance or review from the Manager. The Manager will monitor on a daily
basis the determination by the custodian or recordkeeping agent for the Trust
the value of portfolio securities and other assets of the Portfolio and the
determination of net asset value of the Portfolio.
(e) The Manager will regularly report to the Board of Trustees on the
investment program for the Portfolio, and
Investment Management Agreement Page 4
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will furnish the Board of Trustees such periodic and special reports as the
Board may reasonably request.
(f) In rendering the services required under this paragraph, the
Manager may, from time to time, employ or associate with itself such person or
persons as it believes necessary to assist it in carrying out its obligations
under this Agreement. The Manager shall be responsible for making reasonable
inquiries and for reasonably ensuring that any employee of the Manager, any
person or firm that the Manager has employed or with which it has associated, or
any employee thereof involved in any material connection with the handling of
Trust assets, has not, to the best of the Manager's knowledge:
(i) been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States Code;
or
(ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have acknowledged
violation of any provisions of federal or state securities laws involving
fraud, deceit, or knowing misrepresentation.
(g) In connection with its responsibilities under this paragraph 3,
the Manager is responsible for decisions to buy and sell securities and other
investments for the Portfolio, broker-dealer selection, and negotiation of
brokerage commission rates. The Manager's primary consideration in effecting a
security transaction will be to obtain the best execution for the Portfolio,
taking into account the factors specified in the Registration Statement.
Subject to the Registration Statement and such policies as the Board of Trustees
may determine and consistent with Section 28(e) of the Securities Exchange Act
of 1934, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Portfolio to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Investment Management Agreement Page 5
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Manager or its affiliate determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Portfolio and to its other clients as to which it exercises investment
discretion.
4. CONFORMITY WITH APPLICABLE LAW. The Manager, in the performance of
its duties and obligations under this Agreement, shall act in conformity with
the Registration Statement and with the instructions and directions of the Board
of Trustees and will conform to, and comply with, the requirements of the 1940
Act and all other applicable federal and state laws and regulations.
5. EXCLUSIVITY. The services of the Manager under this Agreement are not
to be deemed exclusive, and the Manager, or any affiliate thereof, shall be free
to render similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those of
any of the Portfolios) and to engage in other activities, so long as its
services hereunder are not impaired thereby.
6. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Manager and will deliver to it all future amendments and
supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to time.
7. RECORDS. The Manager agrees to maintain and to preserve records
relating to the Trust as required by the 1940 Act. The Manager further agrees
that all records which it maintains for the Trust are the property of the Trust
and it will promptly surrender any of such records upon request.
8. EXPENSES. During the term of this Agreement, the Manager will pay all
expenses incurred by it in connection with its activities under this Agreement,
including all rent and other expense involved in providing office space and
equipment required by the Manager and the salaries and expenses of all personnel
of the Manager. The Manager further agrees to pay all salaries, fees and
expenses of any officer
Investment Management Agreement Page 6
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or trustee of the Trust who is an officer, director or employee of the Manager
or any of its affiliates. The Manager further agrees to pay all rent and other
expense in providing office space for the Trust. Nothing in this Agreement
shall require the Manager to bear the following expenses:
(a) Fees of the Portfolio Managers;
(b) Charges for audits by the Trust's independent public accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Manager, or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
Investment Management Agreement Page 7
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(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Manager or any of its affiliates;
(o) The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Manager is responsible for such expenses under
paragraph 10 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
9. COMPENSATION.
(a) For the services provided and the expenses borne by the Manager
pursuant to this Agreement, each Portfolio will pay the Manager a fee calculated
in accordance with this paragraph 9.
(b) A Portfolio will pay the Manager 20% of the Initial Monthly
Advisory Fee or the Monthly Advisory Fee, as those terms are defined in this
paragraph, whichever is applicable; provided, however, that for any period
during which the Manager is providing the services described in paragraph 3, a
Portfolio will pay the Manager 100% of the Initial Monthly Advisory Fee or the
Monthly Advisory Fee, as those terms are defined in this paragraph, whichever is
applicable.
(c) For the period beginning with the day on which a Portfolio
commences investment operations and ending with the last day of the twelfth full
calendar month thereafter, the Portfolio will pay at the end of each month, an
advisory fee calculated at an annual rate of 0.80% of the Portfolio's average
daily net assets (the "Initial Monthly Advisory Fee").
(d) For the period beginning with the first day of the thirteenth
full calendar month after which a Portfolio commences operations and continuing
through the remainder of
Investment Management Agreement Page 8
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the term of this Agreement, the Portfolio will pay at the end of each month, an
advisory fee (the "Monthly Advisory Fee"). The Monthly Advisory Fee equals the
Basic Fee (as defined in paragraph 9(e) below) plus the Incentive Fee (as
defined in paragraph 9(f) below) and adjusted, if so required, by paragraph 9(i)
below.
(e) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
(f) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between the
Performance of the Portfolio and the Performance of the Benchmark, as those
terms are defined in paragraphs 9(g) and 9(h) below; (ii) multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
Percentage Point Difference Between Performance of Annual
the Portfolio and Performance of the Benchmark Incentive
Fee (%)
+7.5 or greater 2.0%
+6.0 or greater, but less than +7.5 1.5
+4.5 or greater, but less than +6.0 1.0
+3.0 or greater, but less than +4.5 0.5
+1.5 or greater, but less than +3.0 0.0
0.0 or greater, but less than +1.5 -0.5
- -1.5 or greater, but less than 0.0 -1.0
- -3.0 or greater, but less than -1.5 -1.5
Less than -3.0 -2.0
(g) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at the
beginning of the period. Net asset value per share is calculated by dividing
the value of
Investment Management Agreement Page 9
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the securities held by the Portfolio plus any cash or other assets minus all
liabilities including accrued advisory fees and the other expenses, by the total
number of shares outstanding at the time. The Performance of the Portfolios
shall be calculated in accordance with SEC rules.
(h) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash dividends or distributions made by the companies whose securities
comprise the Benchmark accumulated to the end of the period, and then expressing
this amount as a percentage of the Benchmark at the beginning of the period.
The Performance of the Benchmark shall be calculated in accordance with SEC
rules. The Benchmark for each Portfolio is the Benchmark established by the
agreement between the Trust and the Portfolio Manager for that Portfolio. If
any Benchmark ceases to be published, changes in any material respect or
otherwise becomes impracticable to use for purposes of the Incentive Fee, the
Monthly Advisory Fee for that Portfolio will equal the Basic Fee (with no
incentive adjustment) until such time as the Board of Trustees approves a
substitute Benchmark.
(i) Notwithstanding paragraphs 9(a)-9(h) above, if the Performance of
a Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative and does not exceed the Performance of the Benchmark
by six percentage points, then the Monthly Advisory Fee will equal zero.
Notwithstanding paragraphs 9(a)-9(h) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative, exceeds the Performance of the Benchmark by six percentage points,
but does not exceed the Performance of the Benchmark by twelve percentage
points, then the Monthly Advisory Fee will not be greater than one-twelfth of 1%
of the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated). Notwithstanding
paragraphs 9(a)-9(h) above, if the Performance of a Portfolio (minus payment of
all expenses, including the Basic Fee and any Incentive Fee) is negative and
exceeds the Performance of the Benchmark by twelve percentage points, then the
Monthly Advisory Fee will not be greater than one-twelfth of 2% of the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
10. LIABILITY AND INDEMNIFICATION. The Manager and the Trust each may
rely on information reasonably believed by it to be accurate and reliable. The
Manager shall not be liable
Investment Management Agreement Page 10
<PAGE>
for any loss suffered by the Trust as the result of actions by persons other
than the Manager or for any loss suffered by the Trust as the result of any
negligent act or error of judgment of the Manager in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b)(3) of the 1940 Act) or loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties under this Agreement or from reckless disregard by it
of its obligations and duties under this Agreement. The Trust shall indemnify
the Manager and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager resulting from
actions for which it is relieved of responsibility by this paragraph. The
Manager shall indemnify the Trust and hold it harmless from all cost, damage and
expense, including reasonable expenses for legal counsel, incurred by the Trust
resulting from (i) a breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act); (ii) willful misfeasance, bad faith or gross negligence by the
Manager in the performance of its duties under this Agreement; or (iii) reckless
disregard by the Manager of its obligations and duties under this Agreement.
11. CONTINUATION AND TERMINATION. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for two years from such date and shall continue from year to
year thereafter with respect to each Portfolio so long as such continuance is
specifically approved at least annually (i) by the vote of a majority of the
Board of Trustees; or (ii) by vote of a majority of the outstanding voting
shares of the Portfolio; provided, further, in either event that continuance is
also approved by the vote of a majority of the Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of the Trust or the Manager, cast in person at a meeting called for the purpose
of voting on such approval. Any approval of this Agreement by the holders of a
majority of the outstanding shares (as defined in the 1940 Act) of a Portfolio
shall be effective to continue this Agreement with respect to such Portfolio
notwithstanding (i) that this Agreement has not been approved by the holders of
a majority of the outstanding shares of any other Portfolio or (ii) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Trust, unless such approval shall be required by
Investment Management Agreement Page 11
<PAGE>
any other applicable law or otherwise. This Agreement may be terminated by the
Trust at any time, without the payment of any penalty, by vote of a majority of
the entire Board of Trustees or by a vote of a majority of the outstanding
voting shares of the Trust, or with respect to a Portfolio, by vote of a
majority of the outstanding voting shares of such Portfolio, on sixty (60) days'
written notice to the Manager, or by the Manager at any time, without the
payment of any penalty, on ninety (90) days' written notice to the Trust. This
Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
12. INDEPENDENT CONTRACTOR. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees from time to time, have
no authority to act for or represent the Trust in any way or otherwise be deemed
its agent.
13. USE OF NAME. It is understood that the words "Palladian" and "Fulcrum
Fund," any derivative thereof and any design associated with those words
(collectively, the "Words and Designs") are the valuable property of the
Manager, and that the Trust and/or the Portfolios have the right to use the
Words and Designs only so long as this Agreement shall continue with respect to
such Trust and/or Portfolio. Upon termination of this Agreement as to a
Portfolio or several Portfolios, that Portfolio or those Portfolios shall
promptly discontinue all use of the Words and Designs. Upon termination of this
Agreement as to all Portfolios, the Trust shall promptly amend its Agreement and
Declaration of Trust to change its name to one that does not include the word
"Palladian" or any derivative thereof, and the Trust and all Portfolios shall
promptly discontinue all use of the Words and Designs.
14. NOTICE. Notices of any kind to be given to the Manager by the Trust
shall be in writing and shall be duly given if sent by first class mail or
delivered to the Manager at 4225 Executive Square, Suite 355, La Jolla, CA
92037, or at such other address or to such individual as shall be specified by
the Manager to the Trust. Notices of any kind to be given to the Trust by the
Manager shall be in writing and shall be duly given if sent by first class mail
or delivered to 4225 Executive Square, Suite 355, La Jolla, CA 92037 or at such
other address or to such individual as shall be specified by the Trust to the
Manager.
15. OBLIGATION. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that
Investment Management Agreement Page 12
<PAGE>
this Agreement has been executed on behalf of the Trust by a trustee of the
Trust in his or her capacity as trustee and not individually. The obligations
of this Agreement shall only be binding upon the assets and property of the
Trust and shall not be binding upon any trustee, officer, or shareholder of the
Trust individually.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
17. APPLICABLE LAW. This Agreement shall be governed by the laws of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
18. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
19. CAPTIONS. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Investment Management Agreement Page 13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
The Palladian Trust
__________________________ By:______________________
Witness H. Michael Schwartz
President
Palladian Advisors, Inc.
______________________ By:______________________
Witness H. Michael Schwartz
President
<PAGE>
PORTFOLIO ADVISOR AGREEMENT
Agreement, made this 12th day of October, 1995, among The Palladian
Trust (the "Trust"), a Massachusetts business trust; and Palladian Advisors,
Inc. (the "Manager"), a Delaware corporation; and Tremont Partners, Inc. (the
"Portfolio Advisor"), a Connecticut corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940 and is engaged in the business of rendering
consulting and other services with respect to financial services and products;
and
WHEREAS, the Portfolio Advisor is registered as an investment adviser
under the Investment Advisers Act of 1940 and is engaged in the business of
rendering consulting and other services with respect to financial services and
products; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing interests
in a separate portfolio of securities and other assets; and
WHEREAS, the Trust currently intends initially to issue shares of six
portfolios designated as The Value Portfolio, The Growth Portfolio, The Balanced
Opportunity Portfolio, The International Growth Portfolio, The Global Strategic
Income Portfolio, and The Global Interactive/Telecomm Portfolio (collectively,
the "Fulcrum Portfolios"); and
WHEREAS, the Trust may establish additional portfolios with respect to
which the Manager desires to retain the Portfolio Advisor to render management
services hereunder and with respect to which the Portfolio Advisor is willing to
do so (those portfolios plus the Fulcrum Portfolios are collectively referred to
as the "Portfolios"); and
WHEREAS, the Trust desires to avail itself of the services of the
Manager for the provision of advice with respect to the selection and monitoring
of portfolio managers for the Portfolios and for the provision of other services
for the Trust; and
WHEREAS, the Manager desires to avail itself of the services of the
Portfolio Advisor to assist it in providing services to the Trust; and
<PAGE>
WHEREAS, the Portfolio Advisor is willing to render such assistance to
the Manager.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Manager hereby appoints the Portfolio Advisor to
provide consulting services with respect to the Fulcrum Portfolios for the
period and on the terms set forth in this Agreement. The Portfolio Advisor
accepts such appointment and agrees to render the services described herein for
the compensation provided in paragraph 11. In the event the Trust establishes
one or more portfolios other than the Fulcrum Portfolios with respect to which
the Manager desires to retain the Portfolio Advisor to render consulting
services pursuant to this Agreement, the Manager shall so notify the Portfolio
Advisor in writing. If the Portfolio Advisor is willing to render such services
it shall so notify the Manager in writing, whereupon such portfolio shall become
a Portfolio as that term is used in this Agreement.
2. SERVICES OF THE PORTFOLIO ADVISOR. Subject to the supervision of the
Manager, the Portfolio Advisor shall provide the following consulting services
with respect to the Portfolios:
(a) The Portfolio Advisor shall analyze and recommend for
consideration investment advisory firms to be retained by the Trust to provide
day-to-day investment management of the Portfolios (the "Portfolio Managers").
(b) The Portfolio Advisor shall continually monitor and evaluate the
performance of the Portfolio Managers and assist the Manager in fulfilling its
obligation to make recommendations to the Board of Trustees concerning the
renewal or termination of agreements with Portfolio Managers, although the
Portfolio Advisor is not authorized to make determinations with respect to the
investment of a Portfolio's assets or the purchase or sale of securities or
other investments for a Portfolio.
(c) The Portfolio Advisor shall provide the Manager and Board of
Trustees of the Trust (the "Board") such periodic and special reports as the
Manager or Board may reasonably request.
(d) The Portfolio Advisor shall make its officers and employees
available to the Board, the officers of the Trust, and the officers and
directors of the Manager for consultation and discussions regarding the
management of the Trust.
3. EMPLOYEES. In rendering the services required under this Agreement,
the Portfolio Advisor may, from time to time, employ such person or persons as
it believes necessary to assist it in carrying out its obligations under this
Agreement. The
Portfolio Advisor Agreement Page 2
<PAGE>
Portfolio Advisor shall be responsible for making reasonable inquiries and for
reasonably ensuring that no employee of the Portfolio Advisor:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving violations
of Sections 1341, 1342, or 1343 of Title 18, United States Code; or
(b) has been found by any state regulatory authority, within the last
ten (10) years, to have violated or to have acknowledged violation of any
provision of any state insurance law involving fraud, deceit, or knowing
misrepresentation; or
(c) has been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have acknowledged
violation of any provisions of federal or state securities laws involving fraud,
deceit, or knowing misrepresentation; or
(d) is ineligible by reason of Section 9 of the 1940 Act to serve as
an employee of an investment adviser to an investment company.
4. CONFORMITY WITH APPLICABLE LAW. The Portfolio Advisor, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Trust's registration statement under the Securities Act of
1933 and the 1940 Act as filed with the Securities and Exchange Commission
("SEC") and amended from time to time (the "Registration Statement") and with
the instructions and directions of the Board or the Manager and will conform to,
and comply with, the requirements of the 1940 Act and all other applicable
federal and state laws and regulations.
5. EXCLUSIVITY. For purposes of this paragraph, a "Fund" means a
registered investment company or a portfolio of a registered series investment
company. The services of the Portfolio Advisor under this Agreement are deemed
exclusive with respect to advising a Fund (or an adviser to a Fund) (1) which
serves as the underlying investment vehicle for variable life insurance policies
and/or variable annuity contracts and (2) which pays its adviser(s) fees based
on investment performance ("performance-based fees"). As long as this Agreement
is in effect, neither the Portfolio Advisor nor its affiliates may serve as an
adviser or consultant to a Fund (or an adviser to a Fund) (1) which serves as
the underlying investment vehicle for variable life insurance policies and/or
variable annuity contracts and (2) which pays performance-based fees to some or
all of its advisers. The services of the Portfolio Advisor under this Agreement
are also deemed exclusive with respect to advising
Portfolio Advisor Agreement Page 3
<PAGE>
a Fund (or an adviser to a Fund) (1) which serves as the underlying investment
vehicle for variable life insurance policies and/or variable annuity contracts
and (2) shares of which are purchased by one or more of its advisers. As long
as this Agreement is in effect, neither the Portfolio Advisor nor its affiliates
may serve as an adviser or consultant to a Fund (or an adviser to a Fund) (1)
which serves as the underlying investment vehicle for variable life insurance
policies and/or variable annuity contracts and (2) shares of which are purchased
by one or more of its advisers. Notwithstanding the foregoing exclusivity,
nothing in this Agreement shall prevent the Portfolio Advisor (or its
affiliates) from engaging in the following activities, provided that the
Portfolio Advisor's services to the Portfolio are not impaired thereby: (1)
serving as adviser or consultant to a Fund (or an adviser to a Fund) which does
not serve as the underlying investment vehicle for variable life insurance
policies and/or variable annuity contracts; or (2) serving as adviser or
consultant to a Fund (or an adviser to a Fund) which does not pay any of its
advisers a performance-based fee and shares of which are not purchased by one or
more of its advisers, whether or not it serves as the underlying investment
vehicle for variable life insurance policies and/or variable annuity contracts;
or (3) serving as an adviser or consultant with respect to a portfolio which is
not registered as an investment company under the 1940 Act (and is not a
portfolio of a registered series investment company), whether or not that
portfolio serves as the underlying investment vehicle for privately-placed
variable life insurance policies and/or variable annuity contracts.
6. DOCUMENTS. The Manager has delivered copies of each of the following
documents to the Portfolio Advisor and will deliver to it all future amendments
and supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to time.
7. RECORDS. The Portfolio Advisor agrees to maintain and to preserve
records relating to the Trust as required by the 1940 Act. The Portfolio
Advisor further agrees that all records which it maintains for the Manager are
the property of the Manager and it will promptly surrender any such records upon
request by the Manager or the Trust.
8. DISCLOSURE BY PORTFOLIO ADVISOR. The Portfolio Advisor will not
disclose or use any records or information obtained pursuant to this Agreement
(excluding investment research and
Portfolio Advisor Agreement Page 4
<PAGE>
investment advice) in any manner whatsoever except as required to carry out its
duties under this Agreement, and will keep confidential any information obtained
pursuant to this Agreement, and disclose such information only if the Manager
has authorized such disclosure, or if such disclosure is expressly required by
applicable federal or state law or regulations or regulatory authorities having
the requisite authority.
9. DISCLOSURE ABOUT PORTFOLIO ADVISOR. The Portfolio Advisor has
reviewed pre-effective amendment number 1 to the Trust's registration statement
and represents and warrants that, with respect to the disclosure relating to the
Portfolio Advisor, such pre-effective amendment contains, as of the date hereof,
no untrue statement of any material fact and does not omit any statement of a
material fact which was required to be stated therein or necessary to make the
statements contained therein not misleading. The Portfolio Advisor further
represents and warrants that it is a duly registered investment adviser under
the Investment Advisers Act of 1940 and a duly registered investment adviser in
all states in which the Portfolio Advisor is required to be registered.
10. EXPENSES. During the term of this Agreement, the Portfolio Advisor
will pay all expenses incurred by it in connection with its activities under
this Agreement, including all rent and other expense involved in providing
office space and equipment required by the Portfolio Advisor and the salaries
and expenses of all personnel of the Portfolio Advisor. The Portfolio Advisor
further agrees to pay all salaries, fees and expenses of any officer or trustee
of the Trust who is an officer, director or employee of the Portfolio Advisor or
any of its affiliates. Nothing in this Agreement shall require the Portfolio
Advisor to bear the following expenses:
(a) Fees of the Manager and the Portfolio Managers;
(b) Charges for all audits by the Trust's independent public
accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not
Portfolio Advisor Agreement Page 5
<PAGE>
officers, directors, or employees of the Portfolio Advisor or any of its
affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Advisor or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Portfolio Advisor is responsible for such expenses
under paragraph 9 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
11. COMPENSATION. For the services provided and the expenses borne by the
Portfolio Advisor pursuant to this Agreement, the Manager (not the Trust or a
Portfolio) will pay
Portfolio Advisor Agreement Page 6
<PAGE>
the Portfolio Advisor a monthly fee equal to 32.5% of the advisory fee received
by the Manager from the Trust for that month; provided, however, that the
Portfolio Advisor's fee will be capped at 0.32% of the Portfolios' average daily
net assets for the previous 12 months (including the month for which the fee is
being calculated). The Manager shall pay this monthly fee to the Portfolio
Advisor as soon as practicable after the Trust pays the Manager.
12. LIABILITY AND INDEMNIFICATION. The Portfolio Advisor, the Manager and
the Trust each may rely on information reasonably believed by it to be accurate
and reliable. The Portfolio Advisor shall not be liable to the Trust or its
shareholders for any loss suffered by the Trust as the result of any negligent
act or error of judgment of the Portfolio Advisor in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Portfolio Advisor of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. The Trust shall indemnify the
Portfolio Advisor and hold it harmless from all cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Portfolio
Advisor resulting from actions for which it is relieved of responsibility by
this paragraph. The Portfolio Advisor shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable expenses for
legal counsel, incurred by the Trust resulting from (i) a breach by the
Portfolio Advisor of its fiduciary duty with respect to compensation for
services paid by the Trust (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act);
(ii) willful misfeasance, bad faith or gross negligence by the Portfolio Advisor
in the performance of its duties under this Agreement; or (iii) reckless
disregard by the Portfolio Advisor of its obligations and duties under this
Agreement.
13. CONTINUATION AND TERMINATION. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for two years from such date and shall continue from year to
year thereafter with respect to each Portfolio so long as such continuance is
specifically approved at least annually (i) by the vote of a majority of the
Board of Trustees; or (ii) by vote of a majority of the outstanding voting
shares of the Portfolio; provided, further, in either event that continuance is
also approved by the vote of a majority of the Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of the Trust, Manager, or Portfolio Advisor, cast in person
Portfolio Advisor Agreement Page 7
<PAGE>
at a meeting called for the purpose of voting on such approval. Any approval of
this Agreement by the holders of a majority of the outstanding shares (as
defined in the 1940 Act) of a Portfolio shall be effective to continue this
Agreement with respect to such Portfolio notwithstanding (i) that this Agreement
has not been approved by the holders of a majority of the outstanding shares of
any other Portfolio or (ii) that this Agreement has not been approved by the
vote of a majority of the outstanding shares of the Trust, unless such approval
shall be required by any other applicable law or otherwise. This Agreement may
be terminated (i) by the Trust at any time, without the payment of any penalty,
by vote of a majority of the entire Board of Trustees or by a vote of a majority
of the outstanding voting shares of the Trust, or with respect to a Portfolio,
by vote of a majority of the outstanding voting shares of such Portfolio, on
sixty (60) days' written notice to the Manager and the Portfolio Advisor,
(ii) by the Manager at any time, without the payment of any penalty, on ninety
(90) days' written notice to the Trust and the Portfolio Advisor, or (iii) by
the Portfolio Advisor at any time, without the payment of any penalty, on ninety
(90) days' written notice to the Trust and the Manager. This Agreement will
automatically and immediately terminate in the event of its "assignment" (as
defined in the 1940 Act).
14. INDEPENDENT CONTRACTOR. The Portfolio Advisor shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Manager from time to time, have
no authority to act for or represent the Manager in any way or otherwise be
deemed its agent. Furthermore, unless otherwise expressly provided herein or
authorized by the Board, the Portfolio Manager shall have no authority to act
for or represent the Trust in any way or otherwise be deemed its agent.
15. USE OF NAME. It is understood that the words "Palladian" and "Fulcrum
Fund," any derivative thereof and any design associated with those words
(collectively, the "Words and Designs") are the valuable property of the
Manager, and that the Portfolio Advisor shall have the right to use the Words
and Designs only with the approval of the Manager. Upon termination of this
Agreement, the Portfolio Advisor shall promptly discontinue all use of the Words
and Designs.
16. SALES LITERATURE. The Manager agrees to furnish to the Portfolio
Advisor all sales literature which refers to the Portfolio Advisor prior to use
thereof and not to use such sales literature if the Portfolio Advisor reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Portfolio Advisor by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
Portfolio Advisor Agreement Page 8
<PAGE>
17. NOTICE. Notices of any kind to be given to the Trust shall be in
writing and shall be duly given if sent by first class mail or delivered to the
Trust at 4225 Executive Square, Suite 355, La Jolla, CA 92037, or at such other
address or to such individual as shall be specified by the Trust (with proper
notice to the Manager and the Portfolio Advisor). Notices of any kind to be
given to the Manager shall be in writing and shall be duly given if sent by
first class mail or delivered to 4225 Executive Square, Suite 355, La Jolla, CA
92037 or at such other address or to such individual as shall be specified by
the Manager (with proper notice to the Trust and the Portfolio Advisor).
Notices of any kind to be given to the Portfolio Advisor shall be in writing and
shall be duly given if sent by first class mail or delivered to One Corporate
Center at Rye, 555 Theodore Fremd Avenue, Rye, NY 10580 or at such other address
or to such individual as shall be specified by the Portfolio Advisor (with
proper notice to the Trust and the Manager).
18. OBLIGATION. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that this Agreement has been executed on behalf of the Trust by a
trustee of the Trust in his or her capacity as trustee and not individually.
The obligations of this Agreement shall only be binding upon the assets and
property of the Trust and shall not be binding upon any trustee, officer, or
shareholder of the Trust individually.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
20. APPLICABLE LAW. This Agreement shall be governed by the laws of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
21. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
22. CAPTIONS. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Portfolio Advisor Agreement Page 9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
The Palladian Trust
__________________________ By:______________________
Witness H. Michael Schwartz
President
Palladian Advisors, Inc.
______________________ By:______________________
Witness H. Michael Schwartz
President
Tremont Partners, Inc.
______________________ By:______________________
Witness Name:
Title:
<PAGE>
PORTFOLIO MANAGER AGREEMENT
Agreement, made this __ day of _________, 1995, among The Palladian
Trust (the "Trust"), a Massachusetts business trust; Palladian Advisors, Inc.
(the "Manager"), a Delaware corporation; and ________________ (the "Portfolio
Manager"), a ___________ corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager and the Portfolio Manager are both registered as
investment advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing interests
in a separate portfolio of securities and other assets; and
WHEREAS, the Manager has entered into a management agreement with the
Trust, pursuant to which the Manager will provide, among other services, advice
with respect to the selection and monitoring of portfolio managers to handle the
day-to-day investment management of certain portfolios; and
WHEREAS, the Trust and the Manager desire to retain the Portfolio
Manager to provide investment advisory services to the ______________ Portfolio
of the Trust (the "Portfolio"), and the Portfolio Manager is willing to render
such services.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Portfolio Manager to
provide investment advisory services with respect to the Portfolio for the
period and on the terms set forth in this Agreement, subject to the direction of
the Board of Trustees of the Trust (the "Board of Trustees"). The Portfolio
Manager accepts such appointment and agrees to render the services described
herein for the compensation provided in paragraph 13.
2. SERVICES OF THE PORTFOLIO MANAGER.
(a) Subject to the supervision of the Board of Trustees, the
Portfolio Manager will provide day-to-day investment management of the
Portfolio. The Portfolio Manager will provide investment research and conduct a
continuous program of evaluation, investment, sales, and reinvestment of the
Portfolio's assets by determining the securities and other investments that
shall be purchased, entered into, sold, closed, or exchanged for the Portfolio,
when these transactions should be executed, and what portion of the assets of
the Portfolio should
<PAGE>
be held in the various securities and other investments in which it may invest.
The Portfolio Manager is hereby authorized to execute and perform such services
on behalf of the Portfolio. To the extent permitted by the investment policies
of the Portfolio, the Portfolio Manager shall make decisions for the Portfolio
as to foreign currency matters and make determinations as to, and execute and
perform, foreign currency exchange contracts on behalf of the Portfolio. The
Portfolio Manager will provide the services under this Agreement in accordance
with the Portfolio's investment objective or objectives, policies, and
restrictions as stated in the Trust's registration statement under the
Securities Act of 1933 and the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement").
(b) The Portfolio Manager will use reasonable efforts to manage the
Portfolio so that it will (1) qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, (2) comply with the diversification
requirements of Section 817(h) of the Internal Revenue Code and regulations
issued thereunder, and (3) comply with any other rules and regulations
pertaining to investment vehicles underlying variable annuity or variable life
insurance policies. In managing the Portfolio in accordance with these
requirements, the Portfolio Manager shall be entitled to receive and act upon
advice of counsel to the Trust or counsel to the Manager.
(c) On occasions when the Portfolio Manager deems the purchase or
sale of a security to be in the best interest of the Portfolio as well as any
other investment advisory clients, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, including, but not limited to
Section 17(d) of the 1940 Act, but shall not be obligated to, aggregate the
securities to be so sold or purchased with those of its other clients where such
aggregation is not inconsistent with the policies set forth in the Registration
Statement. In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Portfolio
Manager in a manner that is fair and equitable in the judgment of the Portfolio
Manager in the exercise of its fiduciary obligations to the Trust and to such
other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Portfolio Manager will arrange for the transmission to the
custodian for the Trust on a daily basis, such confirmation, trade tickets, and
other documents and information as may be reasonably necessary to enable the
custodian to perform its administrative and recordkeeping responsibilities with
respect to the Portfolio. With respect to portfolio securities to be purchased
or sold through the Depository Trust Company, the Portfolio Manager will arrange
for the automatic transmission of the confirmation of such trades to
Portfolio Manager Agreement Page 2
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the Trust's custodian. The Portfolio Manager will provide to the Manager copies
of the documents and information sent to the custodian and the Depository Trust
Company as requested by the Manager.
(e) The Portfolio Manager will assist the custodian or recordkeeping
agent for the Trust in determining, consistent with the procedures and policies
stated in the Registration Statement, the value of any portfolio securities or
other assets of the Portfolio for which the custodian or recordkeeping agent
seeks assistance or review from the Portfolio Manager. The Portfolio Manager
will monitor on a daily basis the determination by the custodian or
recordkeeping agent for the Trust the value of portfolio securities and other
assets of the Portfolio and the determination of net asset value of the
Portfolio.
(f) The Portfolio Manager shall regularly report to the Board of
Trustees on the investment program for the Portfolio, and will furnish the Board
of Trustees such periodic and special reports as the Board may reasonably
request.
(g) The Portfolio Manager shall make its officers and employees
available to the Board of Trustees, officers of the Trust, and officers of the
Manager for consultation and discussions regarding the investment program for
the Portfolio.
3. BROKER-DEALER SELECTION. The Portfolio Manager is responsible for
decisions to buy and sell securities and other investments for the Portfolio,
broker-dealer selection, and negotiation of brokerage commission rates. The
Portfolio Manager's primary consideration in effecting a security transaction
will be to obtain the best execution for the Portfolio, taking into account the
factors specified in the Registration Statement. Subject to the Registration
Statement and such policies as the Board of Trustees may determine and
consistent with Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Portfolio to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Portfolio Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Portfolio Manager's overall responsibilities with respect to
the Portfolio and to its other clients as to which it exercises investment
discretion.
4. EMPLOYEES. In rendering the services required under this Agreement,
the Portfolio Manager may, from time to time,
Portfolio Manager Agreement Page 3
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employ such person or persons as it believes necessary to assist it in carrying
out its obligations under this Agreement. The Portfolio Manager shall be
responsible for making reasonable inquiries and for reasonably ensuring that no
employee of the Portfolio Manager:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(b) has been found by any state regulatory authority, within the last
ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(c) has been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state
securities laws involving fraud, deceit, or knowing misrepresentation;
or
(d) is ineligible by reason of Section 9 of the 1940 Act to serve as
an employee of an investment adviser to an investment company.
5. CONFORMITY WITH APPLICABLE LAW. The Portfolio Manager, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement and with the instructions and
directions of the Board of Trustees and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws and
regulations.
6. EXCLUSIVITY. The services of the Portfolio Manager under this
Agreement are deemed exclusive with respect to managing a registered investment
company (or portfolio thereof) (1) which serves as the underlying investment
vehicle for variable life insurance policies and/or variable annuity contracts
and (2) which pays its adviser(s) fees based on investment performance
("performance-based fees"). As long as this Agreement is in effect, neither the
Portfolio Manager nor its affiliates may serve as an investment adviser to or
investment manager of a registered investment company (or portfolio thereof) (1)
which serves as the underlying investment vehicle for variable life insurance
policies and/or variable annuity contracts and (2) which pays performance-based
fees to some or all of its advisers. The services of the Portfolio
Portfolio Manager Agreement Page 4
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Manager under this Agreement are also deemed exclusive with respect to managing
a registered investment company (or portfolio thereof) (1) which serves as the
underlying investment vehicle for variable life insurance policies and/or
variable annuity contracts and (2) shares of which are purchased by one or more
of its advisers. As long as this Agreement is in effect, neither the Portfolio
Manager nor its affiliates may serve as an investment adviser to or investment
manager of a registered investment company (or portfolio thereof) (1) which
serves as the underlying investment vehicle for variable life insurance policies
and/or variable annuity contracts and (2) shares of which are purchased by one
or more of its advisers. Notwithstanding the foregoing exclusivity, nothing in
this Agreement shall prevent the Portfolio Manager (or its affiliates) from
engaging in the following activities, provided that the Portfolio Manager's
services to the Portfolio are not impaired thereby: (1) serving as investment
adviser to or investment manager of a registered investment company (or
portfolio thereof) which does not serve as the underlying investment vehicle for
variable life insurance policies and/or variable annuity contracts; or (2)
serving as investment adviser to or investment manager of a registered
investment company (or portfolio thereof) which does not pay any of its advisers
a performance-based fee and shares of which are not purchased by one or more of
its advisers, whether or not it serves as the underlying investment vehicle for
variable life insurance policies and/or variable annuity contracts.
7. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Portfolio Manager and will deliver to it all future amendments
and supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to time.
8. RECORDS. The Portfolio Manager agrees to maintain and to preserve
records relating to the Trust as required by the 1940 Act. The Portfolio
Manager further agrees that all records which it maintains for the Trust are the
property of the Trust and it will promptly surrender any of such records upon
request.
9. DISCLOSURE BY PORTFOLIO MANAGER. The Portfolio Manager will not
disclose or use any records or information obtained pursuant to this Agreement
(excluding investment research and investment advice) in any manner whatsoever
except as required to
Portfolio Manager Agreement Page 5
<PAGE>
carry out its duties as investment adviser or in the ordinary course of business
in connection with placing orders for the purchase and sale of securities, and
will keep confidential any information obtained pursuant to this Agreement, and
disclose such information only if the Board of Trustees has authorized such
disclosure, or if such disclosure is expressly required by applicable federal or
state law or regulations or regulatory authorities having the requisite
authority.
10. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has
reviewed pre-effective amendment number 1 to the Trust's registration statement
and represents and warrants that, with respect to the disclosure relating to the
Portfolio Manager, such pre-effective amendment contains, as of the date hereof,
no untrue statement of any material fact and does not omit any statement of a
material fact which was required to be stated therein or necessary to make the
statements contained therein not misleading. The Portfolio Manager further
represents and warrants that it is a duly registered investment adviser under
the Investment Advisers Act of 1940 and a duly registered investment adviser in
all states in which the Portfolio Manager is required to be registered.
11. COMPLIANCE. The Portfolio Manager agrees that it shall immediately
notify the Manager and the Trust in the event that:
(a) the SEC has censured the Portfolio Manager; placed limitations
upon its activities, functions or operations; suspended or revoked its
registration as an investment adviser; or commenced proceedings or an
investigation that may result in any of these actions; or
(b) the Portfolio Manager has a reasonable basis for believing that
the Portfolio has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code; or
(c) the Portfolio Manager has a reasonable basis for believing that
the Portfolio has ceased to comply or might not comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the regulations
thereunder; or
(d) the Portfolio Manager has become aware of a material fact that is
not contained in the Registration Statement or prospectus for the Trust, or any
amendment or supplement thereto, or that any statement contained therein that
has become untrue or misleading in any material respect.
12. EXPENSES. During the term of this Agreement, the Portfolio Manager
will pay all expenses incurred by it in
Portfolio Manager Agreement Page 6
<PAGE>
connection with its activities under this Agreement, including all rent and
other expenses involved in providing office space and equipment required by the
Portfolio Manager and the salaries and expenses of all personnel of the
Portfolio Manager. The Portfolio Manager further agrees to pay all salaries,
fees and expenses of any officer or trustee of the Trust who is an officer,
director or employee of the Portfolio Manager or any of its affiliates. Nothing
in this Agreement shall require the Portfolio Manager to bear the following
expenses:
(a) Fees of the Manager and the Portfolio Advisor;
(b) Charges for audits by the Trust's independent public accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Portfolio Manager or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
Portfolio Manager Agreement Page 7
<PAGE>
(m) Costs of printing stock certificates representing shares of the
Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Manager or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Portfolio Manager is responsible for such expenses
under paragraph 14 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
13. COMPENSATION.
(a) For the services provided and the expenses borne by the Portfolio
Manager pursuant to this Agreement, the Trust will pay the Portfolio Manager 80%
of the Initial Monthly Advisory Fee or the Monthly Advisory Fee, as those terms
are defined in this paragraph, whichever is applicable.
(b) For the period beginning with the day on which the Portfolio
commences investment operations and ending with the last day of the twelfth full
calendar month thereafter, the Portfolio will pay at the end of each month, an
advisory fee calculated at an annual rate of 0.80% of the Portfolio's average
daily net assets (the "Initial Monthly Advisory Fee").
(c) For the period beginning with the first day of the thirteenth
full calendar month after which the Portfolio commences operations and
continuing through the remainder of the term of this Agreement, the Portfolio
will pay at the end of each month, an advisory fee (the "Monthly Advisory Fee").
The Monthly Advisory Fee equals the Basic Fee (as defined in paragraph 13(d)
below) plus the Incentive Fee (as defined in paragraph 13(e) below) and
adjusted, if so required, by paragraph 13(h) below.
Portfolio Manager Agreement Page 8
<PAGE>
(d) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
(e) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between the
Performance of the Portfolio and the Performance of the Benchmark, as those
terms are defined in paragraphs 13(f) and 13(g) below; (ii) multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
Percentage Point Difference Between Performance of the Annual
Portfolio and Performance of the Benchmark Incentive
Fee (%)
+7.5 or greater 2.0%
+6.0 or greater, but less than +7.5 1.5
+4.5 or greater, but less than +6.0 1.0
+3.0 or greater, but less than +4.5 0.5
+1.5 or greater, but less than +3.0 0.0
0.0 or greater, but less than +1.5 -0.5
- -1.5 or greater, but less than 0.0 -1.0
- -3.0 or greater, but less than -1.5 -1.5
Less than -3.0 -2.0
(f) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at the
beginning of the period. Net asset value per share is calculated by dividing
the value of the securities held by the Portfolio plus any cash or other assets
minus all liabilities including accrued advisory fees and the other expenses, by
the total number of shares outstanding at the time. The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
Portfolio Manager Agreement Page 9
<PAGE>
(g) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash dividends or distributions made by the companies whose securities
comprise the Benchmark accumulated to the end of the period, and then expressing
this amount as a percentage of the Benchmark at the beginning of the period.
The Performance of the Benchmark shall be calculated in accordance with SEC
rules. The Benchmark is ___________________________________________. If the
Benchmark ceases to be published, changes in any material respect or otherwise
becomes impracticable to use for purposes of the Incentive Fee, the Monthly
Advisory Fee will equal the Basic Fee (with no incentive adjustment) until such
time as the Board of Trustees approves a substitute Benchmark.
(h) Notwithstanding paragraphs 13(a)-13(g) above, if the Performance
of a Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative and does not exceed the Performance of the Benchmark
by six percentage points, then the Monthly Advisory Fee will equal zero.
Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative, exceeds the Performance of the Benchmark by six percentage points,
but does not exceed the Performance of the Benchmark by twelve percentage
points, then the Monthly Advisory Fee will not be greater than one-twelfth of 1%
of the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated). Notwithstanding
paragraphs 13(a)-13(g) above, if the Performance of a Portfolio (minus payment
of all expenses, including the Basic Fee and any Incentive Fee) is negative and
exceeds the Performance of the Benchmark by twelve percentage points, then the
Monthly Advisory Fee will not be greater than one-twelfth of 2% of the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
14. LIABILITY AND INDEMNIFICATION. The Portfolio Manager, the Manager and
the Trust each may rely on information reasonably believed by it to be accurate
and reliable. The Portfolio Manager shall not be liable to the Trust or its
shareholders for any loss suffered by the Trust as the result of any negligent
act or error of judgment of the Portfolio Manager in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Portfolio Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross
Portfolio Manager Agreement Page 10
<PAGE>
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. The Trust
shall indemnify the Portfolio Manager and hold it harmless from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by the
Portfolio Manager resulting from actions for which it is relieved of
responsibility by this paragraph. The Portfolio Manager shall indemnify the
Trust and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Trust resulting from (i)
a breach by the Portfolio Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act); (ii) willful misfeasance, bad faith or gross negligence by the
Portfolio Manager in the performance of its duties under this Agreement; or
(iii) reckless disregard by the Portfolio Manager of its obligations and duties
under this Agreement.
15. CONTINUATION AND TERMINATION. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for two years from such date and shall continue from year to
year thereafter so long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Board of Trustees; or (ii) by vote
of a majority of the outstanding voting shares of the Portfolio; provided,
further, in either event that continuance is also approved by the vote of a
majority of the Board of Trustees who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of the Trust, the Manager or
the Portfolio Manager cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be terminated (i) by the Trust at
any time, without the payment of any penalty, by vote of a majority of the
entire Board of Trustees or by a vote of a majority of the outstanding voting
shares of the Portfolio, on sixty (60) days' written notice to the Manager and
the Portfolio Manager, (ii) by the Manager at any time, without the payment of
any penalty, on ninety (90) days' written notice to the Trust and the Portfolio
Manager, or (iii) by the Portfolio Manager at any time, without the payment of
any penalty, on ninety (90) days' written notice to the Trust and the Manager.
This Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
16. INDEPENDENT CONTRACTOR. The Portfolio Manager shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees from time to
time, have no
Portfolio Manager Agreement Page 11
<PAGE>
authority to act for or represent the Trust in any way or otherwise be deemed
its agent.
17. USE OF NAME. It is understood that the words "Palladian" and "Fulcrum
Fund," any derivative thereof and any design associated with those words
(collectively, the "Words and Designs") are the valuable property of the
Manager, and that the Portfolio Manager shall have the right to use the Words
and Designs only with the approval of the Manager. Upon termination of this
Agreement, the Portfolio Manager shall promptly discontinue all use of the Words
and Designs.
18. SALES LITERATURE. The Manager agrees to furnish to the Portfolio
Manager all sales literature which refers to the Portfolio Manager prior to use
thereof and not to use such sales literature if the Portfolio Manager reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Portfolio Manager by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
19. NOTICE. Notices of any kind to be given to the Trust shall be in
writing and shall be duly given if sent by first class mail or delivered to the
Trust at 4225 Executive Square, Suite 355, La Jolla, CA 92037, or at such other
address or to such individual as shall be specified by the Trust (with proper
notice to the Manager and the Portfolio Manager). Notices of any kind to be
given to the Manager shall be in writing and shall be duly given if sent by
first class mail or delivered to 4225 Executive Square, Suite 355, La Jolla, CA
92037 or at such other address or to such individual as shall be specified by
the Manager (with proper notice to the Trust and the Portfolio Manager).
Notices of any kind to be given to the Portfolio Manager shall be in writing and
shall be duly given if sent by first class mail or delivered to
_______________________ or at such other address or to such individual as shall
be specified by the Portfolio Manager (with proper notice to the Trust and the
Manager).
20. OBLIGATION. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that this Agreement has been executed on behalf of the Trust by a
trustee of the Trust in his or her capacity as trustee and not individually.
The obligations of this Agreement shall only be binding upon the assets and
property of the Trust and shall not be binding upon any trustee, officer, or
shareholder of the Trust individually.
Portfolio Manager Agreement Page 12
<PAGE>
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
22. APPLICABLE LAW. This Agreement shall be governed by the laws of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
23. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
24. CAPTIONS. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Portfolio Manager Agreement Page 13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
The Palladian Trust
__________________________ By:__________________
Witness Title:
Palladian Advisors, Inc.
______________________ By:______________________
Witness Title:[Portfolio Manager]
______________________ By:______________________
Witness Title:
<PAGE>
[SHEA & GARDNER LETTERHEAD]
January 26, 1996
Mr. H. Michael Schwartz
President
The Palladian Trust
4225 Executive Square
Suite 355
La Jolla, CA 92037
Dear Mr. Schwartz:
The Palladian Trust (the "Trust") is a Massachusetts business trust created
under a written Agreement and Declaration of Trust (the "Declaration") dated
August 27, 1993, and filed with the Secretary of the Commonwealth of
Massachusetts on September 8, 1993, pursuant to Chapter 182 of the General Laws
of the Commonwealth of Massachusetts.
Based on our examination of the relevant documents contained in the Trust's
registration statement, and in reliance upon certain exhibits to that
registration statement including the Declaration, and assuming that the shares
of beneficial interest in the Trust (the "Shares") will be issued in accordance
with the registration statement and the Declaration, and that any appropriate
action will be taken to qualify the sale of the Shares under applicable state
laws, we are of the opinion that the Shares will be legally issued, fully paid,
and nonassessable by the Trust, except as described in the Trust prospectus
under the heading "Capitalization."
<PAGE>
Mr. H. Michael Schwartz
January 26, 1996
Page 2
We consent to the filing of this opinion as an exhibit to post-
effective amendment no. 1 to the Trust registration statement.
Yours truly,
SHEA & GARDNER
By:/s/ Christopher E. Palmer
----------------------------
Christopher E. Palmer
CEP/dd
<PAGE>
[Coopers & Lybrand Letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees
and Shareholders of The Palladian Trust
We consent to the inclusion in the Post-Effective Amendment No. 1 to the
Registration Statement of The Palladian Trust (File No. 33-73882) of our report
dated January 15, 1996 on our audits of the statements of assets and
liabilities of the Value, Growth, Balanced Opportunity, International Growth,
Global Strategic Income, and Global Interactive/Telecomm Portfolios, six series
of The Palladian Trust as of December 31, 1995. We also consent to the
reference of our Firm under the caption "Service Providers" in the statement of
additional information.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
January 26, 1996
