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PROSPECTUS JULY 15, 1999
GUINNESS FLIGHT
INTERNET.COM-TM-
INDEX FUND
[LOGO]
INVESTEC
GUINNESS FLIGHT
---------------
Global Asset Management
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TABLE OF CONTENTS
INTERNET.COM-TM- INDEX FUND 2
RISKS OF INVESTING 8
FUND MANAGEMENT 11
ACCOUNT SERVICES 13
FINANCES 20
INDEX TRADEMARK 23
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GUINNESS FLIGHT PROSPECTUS
July 15, 1999
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GUINNESS FLIGHT INTERNET.COM-TM- INDEX FUND
This Prospectus covers the Guinness Flight internet.com Index Fund (the
"internet.com Index Fund" or "Fund"). You will find specific information in this
Prospectus about this Fund plus general information about investing with
Guinness Flight Investment Funds (the "Guinness Flight Funds"). You may find
additional information in the Statement of Additional Information for Guinness
Flight Funds, which is incorporated by reference into this Prospectus. If you
would like the combined prospectus that covers the other Guinness Flight Funds,
please contact us.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE ABOVE
LISTED FUND. THE SECURITIES AND EXCHANGE COMMISSION ALSO HAS NOT DETERMINED
WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY PERSON WHO TELLS YOU THAT
THE SECURITIES AND EXCHANGE COMMISSION HAS MADE SUCH APPROVAL OR DETERMINATION
IS COMMITTING A CRIME.
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INTERNET.COM INDEX FUND
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RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
THE INTERNET.COM INDEX CONSISTS OF COMPANIES (INCLUDING SOME SMALL CAP
COMPANIES) THAT REPRESENT THE FOLLOWING SUB-SECTORS WITHIN THE INTERNET SECTOR:
- - ETAILERS AND E-COMMERCE
- - SOFTWARE
- - ENABLERS
- - SECURITY
- - CONTENT
- - HIGH SPEED
- - ACCESS
[GRAPHIC] The internet.com Index Fund's investment objective is long-term
capital appreciation primarily through investments in equity securities of
companies that comprise the internet.com Index.
INVESTMENT STRATEGIES
The internet.com Index Fund will invest at least 85% of its total assets in the
securities that comprise the internet.com Index. As an index fund, the
internet.com Index Fund will attempt to replicate the performance of the
internet.com Index. In managing the Fund, we will follow a principal investment
policy of "full replication," meaning that the Fund will attempt to invest in
all 50 component issues that comprise the internet.com Index in proportion to
their weighting in the Index. From time to time, we may also use a method known
as "index sampling" to efficiently handle cash inflows and outflows on a
short-term basis. "Index sampling" is an investment technique that seeks to
replicate the performance of the Index by investing in fewer than the 50
component stocks.
The internet.com Index consists of companies (including some small cap
companies) that represent the following sub-sectors within the Internet sector.
- etailers and e-commerce--Companies that engage in the buying and/or
selling of goods and services using the Internet.
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- Software--Companies involved in the creation of software applications
that enhance the Internet for consumer or business purposes.
- Enablers--Firms that create, supply or invest in technologies or services
that allow other firms to operate Web sites, services or businesses.
- Security--Denotes an Internet company involved in the creation and
implementation of security for Internet networks. These include
"firewalls," "encryption" and "verification" services or products and are
generally accepted by the Internet and public as appropriately defined as
"security" companies.
- Content--Internet companies involved in the creation or aggregation of
content whether original or third party.
- High Speed--Companies involved in the creation of broadband services,
products and content. The term "high speed" is generally accepted to mean
the transfer of data at speeds measured in bits at greater than 128
kilobits per second. Cable modems, devices that allow a PC or device to
connect to the cable industry coaxial wire with proper switches, deliver
data as much as 100 times faster than "narrowband" services commonly in
use today.
- Access--Describes companies which provide connection to the Internet.
The Index is reviewed quarterly by internet.com to insure that it includes the
most representative list of Internet stocks. If a company representing a new
AS AN INDEX FUND, THE INTERNET.COM INDEX FUND WILL ATTEMPT TO REPLICATE THE
PERFORMANCE OF THE INTERNET.COM INDEX.
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FOR THE PURPOSES OF THE INTERNET.COM INDEX, AN INTERNET STOCK IS DEFINED AS A
COMPANY THAT DERIVES A MAJORITY OF ITS REVENUE FROM THE INTERNET.
sub-sector (meaning it offers a service or product not included in the seven
sub-sectors already identified) becomes publicly traded, or if a company changes
direction into a new market sub-sector, it may be added to the Index
intra-quarterly. In managing the Fund, the manager will seek to adjust the
Fund's holdings as soon as practicable to reflect any underlying changes in the
Index.
For the purposes of the internet.com Index, an Internet stock is defined as a
company that derives a majority of its revenue from the Internet.
As an Internet index, internet.com attempts to capture the growth of the
Internet, which is a global collection of connected computers that allows
commercial and professional organizations, educational institutions, government
agencies, and consumers to communicate electronically, access and share
information, and conduct business.
The internet.com Index is adjusted for stock splits, mergers, acquisitions or
delistings similar to how the Dow Jones Industrial Average is adjusted.
PRINCIPAL RISKS
[GRAPHIC] The internet.com Index Fund is subject to the following risks common
to all mutual funds that invest in equity securities and the securities that
make up the internet.com Index. You may lose money under any of the following
circumstances:
- the internet.com Index goes down;
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- Internet stocks fall out of favor with investors (market value of an
Internet stock goes down);
- the internet.com Index is more adversely affected by a market downturn
than a larger, more broad-based index due to its concentration and focus
on Internet stocks or a specific sub-sector within the Internet sector;
- Internet companies in the internet.com Index lose money due to intense
pricing pressure or high capital investment costs;
- the Fund manager's investment strategy does not achieve the Fund's
objective or the manager does not implement the strategy properly; or
- the stock market goes down.
In addition, you should be aware that share prices of Internet companies will
fluctuate more than other stocks because Internet stocks are subject to more
rapid change in technology and products than other stocks and that small cap
stocks which comprise the internet.com Index are more difficult to sell during a
down market due to lower liquidity. The Fund may exhibit a greater degree of
volatility and fluctuation on a day-to day basis than a larger, broad-based
index.
See "Risks of Investing" on page 8 for a more detailed discussion of the risks
associated with investing in this Fund.
THE INDEX IS REVIEWED QUARTERLY BY INTERNET.COM TO INSURE THAT IT INCLUDES THE
MOST REPRESENTATIVE LIST OF INTERNET STOCKS.
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FEES AND EXPENSES
[GRAPHIC] This table describes the fees and expenses that you may pay if you buy
and hold shares of the internet.com Index Fund:
<TABLE>
<CAPTION>
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SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases:
(as % of offering price) 0%
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Maximum Deferred Sales Charge (Load): 0%
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Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions: 0%
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Redemption Fee (as % of amount redeemed, if applicable) 2%(1)(2)
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Exchange Fee 2%(1)
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Maximum Account Fee: 0%
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<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
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<S> <C>
Management Fee: 0.90%(3)
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Rule 12b-1 Fee: 0%
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Other Expenses(4): 0.35%
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Total Annual Fund Operating Expenses(4)(5): 1.25%
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</TABLE>
(1) You will be charged a 2% fee only if you redeem or exchange shares of
this Fund within 30 days of purchase.
(2) There is a $10 fee for redemption by wire.
(3) Pursuant to an Investment Advisory Agreement, the Fund will pay an
advisory fee of 0.90% on the first $100 million in assets, 0.75% on
the next $100 to $500 million, and 0.60% on assets over $500 million.
(4) These expenses are based on estimated amounts for the current fiscal
year.
(5) Investec Guinness Flight Global Asset Management Limited is
contractually obligated to cap the Fund's Total Annual Fund Operating
Expenses at 1.35% through December 31, 2000.
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EXAMPLE
This example is to help you compare the cost of investing in the internet.com
Index Fund with the cost of investing in other mutual funds.
The Example assumes that:
- you invest $10,000 in the Fund for the time periods indicated;
- your investment has a 5% return each year;
- the Fund's operating expenses remain the same; and
- you redeem all your shares.
Although your actual costs may be higher or lower, under these assumptions, your
costs would be:
1 Year 3 Years
$127 $397
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RISKS OF INVESTING
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RISKS OF INVESTING
[GRAPHIC] As with all mutual funds, investing in this Fund involves certain
risks. We cannot guarantee that this Fund will meet its investment objective.
You may lose money if you invest in this Fund.
The Fund may use various investment techniques, some of which involve greater
amounts of risk. You should consider the risks described below before you decide
to invest in our Fund.
[GRAPHIC] RISKS OF INVESTING IN MUTUAL FUNDS
The following risks are common to all mutual funds and therefore apply to the
internet.com Index Fund:
- Market Risk. The market value of a security may go up or down, sometimes
rapidly and unpredictably. These fluctuations may cause a security to be
worth less than it was at the time of purchase. Market risk applies to
individual securities, a particular sector or the entire economy.
- Manager Risk. Fund management affects Fund performance. The Fund may lose
money if the Fund manager's investment strategy does not achieve the
Fund's objective or the manager does not implement the strategy properly.
- Year 2000 Risk. The Fund, its service providers or the companies in which
the Fund invests could be disrupted by problems in its computer systems
related to the Year 2000.
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RISKS OF INVESTING IN SMALL CAP COMPANIES
The following risks are common to all mutual funds that invest in small
capitalization companies (those with a market value of less than U.S. $1
billion), and therefore apply to the internet.com Index Fund which includes
small cap stocks. As a general rule, investments in stock of small cap companies
(those with a market value of less than U.S. $1 billion) are more risky than
investments in the stock of larger companies (those with a market value of more
than U.S. $1 billion) for the following reasons, among others:
- small cap companies tend to rely on more limited product lines and
business activities, which makes them more susceptible to business
setbacks or economic downturns;
- the stock of small cap companies may be traded less frequently than that
of larger companies; and
- small cap companies have more limited financial resources.
[GRAPHIC]
RISKS OF INVESTING IN THE INTERENET.COM INDEX
The following risks apply to the internet.com Index Fund:
- Index Concentration. The internet.com Index Fund is comprised of 50
companies. Because of this concentration and focus on Internet stocks,
the internet.com Index Fund may exhibit more volatility and fluctuation
on a day-to-day basis than a larger, broad-based index.
- Internet Sector Concentration. The internet.com Index Fund is solely
invested in Internet companies or Internet-related companies. Because of
this concentration and focus, the Fund may exhibit a greater degree of
volatility and fluctuation on a day-to-day basis than a larger,
broader-based index.
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- Internet Company Risk. Internet companies, which are the primary
components of the internet.com Index, are subject to special risks.
Internet companies are subject to a more rapid rate of change in
technology and products than non-Internet companies. As a result, the
share prices of Internet companies will fluctuate to a greater degree
than other stocks. Changes in telephone and cable regulations, anti-trust
regulations and freedom of speech laws may have a material effect on the
demand for Internet services. Many of the products and services of
Internet companies are subject to high risks of obsolescence caused by
advances in science and technology.
[GRAPHIC]
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GUINNESS FLIGHT FUNDS MANAGEMENT
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INVESTMENT ADVISOR
[GRAPHIC] Investec Guinness Flight Global Asset Management Limited ("Investec")
is the investment advisor for the Guinness Flight Funds. Investec supervises all
aspects of the Fund's operations and advises the Fund, subject to oversight by
the Fund's Board of Trustees. For providing these services, the Fund pays
Investec an annualized 0.90% advisory fee.
Investec is a subsidiary of Investec Guinness Flight, which is a subsidiary of
Investec Group Limited. Investec Guinness Flight was created in November 1998
through the merger of Guinness Flight Hambro Asset Management Limited and
Investec Asset Management.
[GRAPHIC]
Investec Guinness Flight manages 105 investment funds domiciled in the United
Kingdom, South Africa, Guernsey, Dublin and the United States. Investec Group,
established in 1974, is an independent, international investment and private
banking group. It was listed on the Johannesburg Stock Exchange in 1986 and is
the largest independent investment banking group in South Africa.
The primary offices of Investec Guinness Flight are located in the U.K., South
Africa, Hong Kong and the United States. The U.S. office of Investec is located
at 225 S. Lake Ave., Ste. 777, Pasadena, CA 91101. Investec Guinness Flight's
main office is located in London, England at 2 Gresham Street, London EC2V7QP.
The Hong Kong office is located at 2108 Jardine House, One Connaught Place,
Central, Hong Kong. Investec Group's main office is located at 100 Grayston
Drive, Sandown, Sandton, Johannesburg, SA 2196, South Africa.
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PORTFOLIO MANAGEMENT
INTERNET.COM INDEX FUND
Doug Blatch. Mr. Blatch joined Investec Asset Management in April 1996 and is
the portfolio manager responsible for all domestic and international index funds
and derivatives trading. He currently manages four index funds available to
offshore investors as well as the Wired Index Fund and internet.com Index Fund.
He also manages Investec USA Equity Fund, Investec European Equity Fund,
Investec Japanese Equity Fund and Investec Index Fund. Prior to joining Investec
Asset Management, Mr. Blatch was a manager at Schitag Ernst & Young GMBH
(Berlin) from 1993 to 1995.
[GRAPHIC] Domenico Ferrini. Mr. Ferrini joined Investec Asset Management in 1992
as an administrator and one of the founding members. He then moved to equity
trading and subsequently became chief trader, coordinating bond, money market,
equity and derivative trading as well as international trading activity. Prior
to joining Investec Asset Management, Mr. Ferrini worked at Kaplan and Stewart
Stockbrokers beginning in 1988. He assists Mr. Blatch in managing the
internet.com Index Fund. Mr. Ferrini also manages the Investec Gilt Fund and is
a director of Investec Guinness Flight.
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SHAREHOLDER GUIDE:
YOUR ACCOUNT WITH GUINNESS FLIGHT FUNDS
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INVESTMENT MINIMUMS
THE MINIMUM INITIAL INVESTMENTS ARE:
<TABLE>
<CAPTION>
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TYPE OF ACCOUNT MINIMUM
<S> <C>
REGULAR (NEW INVESTOR) $2,500
REGULAR (GUINNESS FLIGHT SHAREHOLDERS) $1,000
RETIREMENT $1,000
GIFT $250
PRE-AUTHORIZED INVESTMENT PLAN (INITIAL AND INSTALLMENT PAYMENTS) $100
ADDITIONAL INVESTMENTS $250
</TABLE>
We may reduce or waive the minimum investment requirements in some cases.
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TYPES OF ACCOUNTS WE OFFER
REGULAR RETIREMENT
These accounts These accounts are
are taxable generally nontaxable
- Individual - Roth IRA
- Joint Tenant - Regular IRA
- UGMA/UTMA - Rollover IRA
- Trust - Roth Conversion
- Corporate - SEP IRA
- 401 (k)
- 403 (b)
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PURCHASING, EXCHANGING & SELLING
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HOW TO PURCHASE, EXCHANGE, AND SELL SHARES
[GRAPHIC] The Transfer Agent is open from 8:00 a.m. to 6:00 p.m. Eastern Time
for purchase, redemption and exchange orders. Shares will be purchased,
exchanged and redeemed at NAV per share. A Fund's NAV per share is calculated by
subtracting the Fund's liabilities from its assets and dividing by the total
number of Fund shares outstanding. The Transfer Agent must receive your request
by the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time)
to receive the NAV of that day. If your request is received after the close of
the New York Stock Exchange, it will be processed the next business day. The
phone number you should call for account transaction requests is (800) 915-6566.
[GRAPHIC]
SSGA MONEY MARKET FUND
Guinness Flight Funds does not operate a money market fund; however you may
exchange your shares of the Fund for SSgA Money Market Fund through Guinness
Flight Funds. State Street Bank & Trust Co. advises the SSgA Money Market Fund.
Their address is 225 Franklin Street, Boston MA 02110. You may request a SSgA
Money Market Fund prospectus by calling (800) 915-6566.
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PURCHASING
HOW TO PURCHASE SHARES
[GRAPHIC] You may purchase shares of the Fund by mail, wire or auto-buy. You may
exchange shares of the Fund for shares of another Guinness Flight Fund or the
SSgA Money Market Fund by mail or wire. A broker may charge you a transaction
fee for making a purchase for you.
MAIL
[GRAPHIC] To purchase by mail, you should:
- Complete and sign the account application
- To open a regular account, write a check payable to: "Guinness Flight
Investment Funds"
- To open a retirement account, write a check payable to the custodian or
trustee
- Send your account application and check or exchange request to one of
the following addresses:
[GRAPHIC]
For a business reply envelope: For a stamped envelope:
Guinness Flight Guinness Flight
Investment Funds Investment Funds
P.O. Box 9288 P.O. Box 8116
Boston, MA 02205-8559 Boston, MA 02266-8116
For an overnight package:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds
66 Brooks Drive
Braintree, MA 02184
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WIRE
[GRAPHIC] To purchase by wire, call the Transfer Agent at (800) 915-6566 between
8:00 a.m. and 6:00 p.m. Eastern Time on a business day to get an account number
and detailed instructions. You must then provide the Transfer Agent with a
signed application within 10 business days of the initial purchase. Instruct
your bank to send the wire to:
State Street Bank and Trust Company
ABA #0110 00028
Shareholder and Custody Services
DDA # 99050171
ATTN: [Your Name]
(Fund /Account Number)
[GRAPHIC]
Pre-Authorized Investment Plan: With a pre-authorized investment plan, your
personal bank account is automatically debited on a monthly or quarterly basis
to purchase shares of the Fund. You will receive the Net Asset Value (NAV) per
share as of the date the debit is made.
Auto-Buy: You may purchase additional shares of the Fund you own by ACH
(automated clearing house) after you elect the Auto-Buy option on your account.
To elect the Auto-Buy option, select it on your account application or call the
Transfer Agent and request an optional shareholder services form. ACH is similar
to the pre-authorized investment plan, except that you may choose the date on
which you want to make the purchase. We will need a voided check or deposit slip
before you may purchase by ACH.
Subsequent Investments: If you are making an additional investment in the Fund,
you should include either the stub from a previous confirmation statement or a
letter providing your name and account number to ensure that the money is
invested in your existing Guinness Flight account.
Purchase Order Cut-Off. We may cease taking purchase orders for the Fund at any
time when we believe that it is in the best interest of our current
shareholders. The purpose of
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such action is to limit increased Fund expenses incurred when certain investors
buy and sell shares of the Funds for the short-term when the markets are highly
volatile.
EXCHANGING AND REDEEMING
[GRAPHIC] How to Exchange and Redeem Shares. You may exchange or redeem shares
by mail or telephone. When you exchange shares, you sell shares of the Fund and
buy shares of another Guinness Flight Fund. You may realize either a gain or
loss on those shares and will be responsible for paying the appropriate taxes.
If you exchange or redeem through a broker, the broker may charge you a
transaction fee. If you purchased your shares by check, you may not receive your
redemption proceeds until the check has cleared, which may take up to 15
calendar days. You may receive the proceeds of redemption by wire or through a
systematic withdrawal plan as described below.
[GRAPHIC]
MAIL:
[GRAPHIC]
To exchange or redeem by mail, please:
- Provide your name and account number;
- Specify the number of shares or dollar amount and the Fund name or
number;
- To exchange shares, specify the name of the Fund (either another
Guinness Flight Fund or the SSgA Money Market Fund) you want to
purchase;
- Sign the redemption or exchange request (the signature must be the same
as the one on your account application). Make sure all parties that are
required by the account registration sign the request; and
- Send your request to the appropriate address above under purchasing by
mail.
TELEPHONE:
[GRAPHIC] You may redeem or exchange your shares of the Fund either in writing
or by telephone if you authorized telephone redemption on your account
application. To exchange or redeem by telephone, call the
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Transfer Agent at (800) 915-6566 between the hours of 8:00 a.m. and 6:00 p.m. on
a day the New York Stock Exchange is open for business. For your protection
against fraudulent telephone transactions, we will use reasonable procedures to
verify your identity. As long as we follow these procedures, we will not be
liable for any loss or cost to you if we act on instructions to redeem your
account that we reasonably believe to be authorized by you. You will be notified
if we refuse telephone redemption or exchange. Telephone exchanges or
redemptions may be difficult during periods of extreme market or economic
conditions. If this is the case, please send your exchange request by mail or
overnight courier.
[GRAPHIC]
WIRE:
[GRAPHIC] You may have the proceeds of the redemption request wired to your bank
account for redemptions of $500 or more. Please provide the name, location, ABA
or bank routing number of your bank and your bank account number. Payment will
be made within 3 business days after the Transfer Agent receives your written or
telephone redemption request. There is a $10 fee for redemption by wire.
Systematic Withdrawal Plan: You may establish a systematic withdrawal plan where
you have regular monthly or quarterly payments redeemed from your Guinness
Flight Fund account and sent to either you or a third party you designate.
Payments must be at least $100 and your Guinness Flight Fund must have an
account value of at least $1,000. You will receive the NAV on the date of the
scheduled withdrawal and will redeem enough full and fractional shares at that
NAV to equal the requested withdrawal. You may realize either a capital gain or
loss on the withdrawals that must be reported for tax purposes. You may purchase
additional shares of the Fund under this plan as long as the additional
purchases are equal to at least one year's scheduled withdrawals.
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Signature Guarantee. The redemption requests listed below require a signature
guarantee. You can get a signature guarantee from certain banks, brokers,
dealers, credit unions, securities exchanges, clearing agencies and savings
associations. A notarization and acknowledgment by a notary public is not a
signature guarantee.
- Redemptions by corporations, partnerships, trusts or other fiduciary
accounts;
- Redemption of an account with a value of at least $50,000 if you are
making the request in writing (if you have authorized telephone
redemption on your account, you may redeem by telephone without a
signature guarantee);
- Redemption of an account where proceeds are to be paid to someone other
than the record owner; or
- Redemption of an account where the proceeds are to be sent to an address
other than the record address.
[GRAPHIC]
ADDITIONAL EXCHANGE/REDEMPTION INFORMATION
Redemption Fee. You will be charged a redemption fee of 2% of the value of the
shares being redeemed if you redeem your shares of the Fund within 30 days of
purchase. There will not be a redemption fee if the shares were acquired through
reinvestment of distributions. Redemptions are on a first-in, first-out basis.
The redemption fee will be waived if the fee is equal to or less than .10% of
the total value of the redemption.
Small Accounts. To reduce our expenses, we may redeem an account if the total
value of the account falls below $500 due to redemptions. You will be given 30
days prior written notice of this redemption. During that period, you may
purchase additional shares to avoid the redemption.
Check Clearance. The proceeds from a redemption request may be delayed up to 15
calendar days from the date of the receipt of a purchase check until the check
clears. If the check does not clear, you will be responsible for the loss.
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This delay can be avoided by purchasing shares by wire or certified bank checks.
Exchange Limit. In order to limit expenses, we reserve the right to limit the
total number of exchanges you can make in any year to four.
Overdraft Protection. We may borrow cash temporarily from an overdraft provision
provided by the Transfer Agent to satisfy redemption requests.
Suspension of Redemptions. We may temporarily suspend the right of redemption or
postpone payments under certain emergency circumstances or when the SEC orders a
suspension.
[GRAPHIC]
FINANCES
Net Asset Value. The NAV per share of the Fund is determined at the close of the
New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each day the New
York Stock Exchange is open for business. The NAV is calculated by 1)
subtracting a Fund's liabilities from its assets and then 2) dividing that
number by the total number of outstanding shares. This procedure is in
accordance with Generally Accepted Accounting Principles. Securities without a
readily available price quotation may be priced at fair value. Fair value is
determined in good faith by or under the supervision of the Fund's officers
under methods authorized by the Board of Trustees.
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Dividends and Capital Gains Distributions. The internet.com Index Fund
distributes all or most of its net investment income and net capital gains to
shareholders. Dividends and capital gains for the Fund are normally declared and
paid semi-annually, in June and December. When calculating the amount of capital
gain for the Fund, the Fund can offset any capital gain with net capital loss
(which may be carried forward from a previous year).
Your dividends and/or capital gains distributions will be automatically
reinvested on the ex-dividend date when there is a distribution, unless you
elect otherwise, so that you will be buying more of both full and fractional
shares of the Fund. You will be buying those new shares at the NAV per share on
the ex-dividend date. You may choose to have dividends and capital gains
distributions paid to you in cash. You may also choose to reinvest dividends and
capital gains distributions in shares of another Guinness Flight Fund. You may
authorize either of these options by calling the Transfer Agent at (800)
915-6566 and requesting an optional shareholder services form. You must complete
the form and return it to the Transfer Agent before the record date in order for
the change to be effective for that dividend capital gains distribution.
[GRAPHIC]
Buying Before a Dividend. If you purchased the Fund on or before the record
date, you will receive a dividend or capital gains distribution. The
distribution will lower the NAV per share on that date and represents, in
substance, a return of basis (your cost); however you will be subject to Federal
income taxes on this distribution.
Tax Issues. The following tax information is based on tax laws and regulations
in effect on the date of this Prospectus. These laws and regulations are subject
to change. Shareholders should consult a tax professional for the tax
consequences of investing in our Fund as well as for information on state and
local taxes which may apply. A statement that provides the Federal income tax
status of the Fund's distributions will be sent to shareholders promptly at the
end of each year.
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- Distributions to Shareholders. Distributions to shareholders fall into
two tax categories. The first category is ordinary income distributions.
Ordinary income distributions are distributions of net investment income,
which includes dividends, foreign currency gains and short-term capital
gains. Long-term capital losses and foreign currency losses are used to
offset ordinary income. The second category of distribution is capital
gains distributions. Capital gains distributions are distributions of the
Fund's long-term capital gain it receives from selling stocks within its
portfolio. Short-term capital losses are used to offset long-term capital
gain. You have to pay taxes on both distributions even though you have
them automatically reinvested. On some occasions a distribution made in
January will have to be treated for tax purposes as having been
distributed on December 31 of the prior year.
[GRAPHIC]
- Gain or Loss on Sale of Shares of a Fund. You will recognize either a
gain or loss when you sell shares of your Fund. The gain or loss is the
difference between the proceeds of the sale (the NAV of the Fund on the
date of sale times the number of shares sold) and your adjusted basis.
Any loss realized on a taxable sale of shares within six months from the
date of their purchase will be treated as a long-term capital loss that
can be used to offset short-term capital gains on those shares. If you
sell shares of the Fund at a loss and repurchase shares of the same Fund
30 days before or after the sale, a deduction for the loss is generally
disallowed (a wash sale).
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- Foreign Source Income and Withholding Taxes. Some of the Fund's
investment income may be subject to foreign income taxes that are
withheld at the source. If the Fund meets certain legal requirements, it
may pass-through these foreign taxes to shareholders. Shareholders may
then claim a foreign tax credit or a foreign tax deduction for their
share of foreign taxes paid.
Distribution Plan. The Fund has adopted a Distribution Plan (distribution fee of
0%) under Rule 12b-1 of the Investment Company Act of 1940, as amended. Under
this plan, no separate payments are authorized by the Fund. The Investment
Advisor or the Administrator must use its fee revenues or other resources to pay
the expenses of shareholder servicing and record keeping. The Investment Advisor
or the Administrator may also make payments from these sources to third parties,
including affiliates and independent contractors, for these types of services.
[GRAPHIC]
INDEX TRADEMARK
"ISDEX INDEX" and "internet.com" are service marks, internet.com is a trademark
and ISDEX is a registered trademark of internet.com Corporation, and are used by
Investec Guinness Flight Global Asset Management Limited in connection with the
Fund pursuant to a license agreement between Investec Guinness Flight Global
Asset Management Limited and internet.com. Under the license agreement,
internet.com is partially compensated for its license to Investec Guinness
Flight Global Asset Management Limited and the Fund of the service mark and
trademarks described above based on the total assets invested in the Fund.
internet.com makes no representation or warranty, express or limited, to
Investec Guinness Flight Global Asset Management Limited or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly or the ability of the ISDEX to track any aspect of market
performance. internet.com will continue to determine the composition of the
ISDEX Index without
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regard to Investec Guinness Flight Global Asset Management Limited or the Fund,
and internet.com has no obligation, express or implied, to take the needs of
Investec Guinness Flight Global Asset Management Limited or investors in the
Fund into consideration in determining or composing the ISDEX Index.
INTERNET.COM DOES NOT GUARANTEE THE QUALITY, ACCURACY, CURRENCY, AND/OR THE
COMPLETENESS OF THE ISDEX INDEX OR ANY DATA INCLUDED THEREIN. INTERNET.COM MAKES
NO EXPRESS OR IMPLIED WARRANTY AS TO THE RESULTS TO BE OBTAINED BY INVESTEC
GUINNESS FLIGHT GLOBAL ASSET MANAGEMENT LIMITED, INVESTORS IN THE FUND, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE ISDEX INDEX OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE FUND OR FOR ANY OTHER USE. INTERNET.COM MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
ISDEX INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL INTERNET.COM HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
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Statement of Additional Information. The Statement of Additional Information
provides a more complete discussion about the Fund and is incorporated by
reference into this prospectus, which means that it is considered a part of this
prospectus.
Annual and Semi-Annual Reports. Additional information about the Fund's
investment is available in the Fund's annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
To Review or Obtain this Information. To obtain a free copy of the Statement of
Additional Information and annual and semi-annual reports or to make any other
inquiries about the Fund, you may call Guinness Flight Funds at (800) 915-6566.
This information may be reviewed and copied at the Public Reference Room of the
Securities and Exchange Commission or by visiting the SEC's World Wide Website
at http://www.sec.gov. In addition, this information may be obtained for a fee
by writing the Public Reference Room of the Securities and Exchange Commission,
Washington, D.C. 20549-6009. You may call the SEC at (800) SEC-0330 for
information on the operation of the Public Reference Room. Finally, you may also
call or write a broker-dealer or financial intermediary that sells our Fund for
a copy of the Statement of Additional Information and other information.
Investment Company Act file no. 811-08360
<PAGE>
USEFUL GUINNESS FLIGHT PHONE NUMBERS
Shareholder Service Line: 1-800-915-6566
Automated OneCall Center: 1-800-915-6564
Website: http://www.gffunds.com
MC60 100-071599
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GUINNESS FLIGHT INVESTMENT FUNDS
225 South Lake Avenue, Suite 777
Pasadena, California 91101
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
GUINNESS FLIGHT MAINLAND CHINA FUND
GUINNESS FLIGHT NEW EUROPE FUND
GUINNESS FLIGHT WIRED-Registered Trademark- INDEX FUND
GUINNESS FLIGHT INTERNET.COM-TM- INDEX FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
This Statement of Additional Information (the "SAI") is not a prospectus, but
should be read in conjunction with the current prospectus dated April 30,
1999, pursuant to which the Guinness Flight China & Hong Kong Fund (the
"China & Hong Kong Fund"), Guinness Flight Asia Blue Chip Fund (the "Asia
Blue Chip Fund"), Guinness Flight Asia Small Cap Fund (the "Asia Small Cap
Fund"), Guinness Flight Mainland China Fund (the "Mainland China Fund"),
Guinness Flight New Europe Fund (the "New Europe Fund"), Guinness Flight
Wired-Registered Trademark- Index Fund (the "Wired Index Fund") and Guinness
Flight Global Government Bond Fund (the "Global Government Bond Fund") are
offered, and in conjunction with the current prospectus dated July 15, 1999,
pursuant to which Guinness Flight internet.com Index Fund (the "internet.com
Index Fund") (each fund to which this SAI relates will be referred to as,
collectively, the "Funds") is offered (each, a "Prospectus"). Please retain
this document for future reference.
For a free copy of either Prospectus, please call the Funds at 1-800-915-6565
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.............................................. 3
INVESTMENT OBJECTIVE AND POLICIES............................................ 3
INVESTMENT STRATEGIES AND RISKS.............................................. 6
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS................................ 16
INVESTMENT RESTRICTIONS AND POLICIES......................................... 20
PORTFOLIO TRANSACTIONS....................................................... 21
COMPUTATION OF NET ASSET VALUE............................................... 22
PERFORMANCE INFORMATION...................................................... 23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................... 24
<PAGE>
TAX MATTERS.................................................................. 25
MANAGEMENT OF THE FUNDS...................................................... 30
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS............................... 32
THE ADMINISTRATOR............................................................ 34
ADMINISTRATION AGREEMENT, DISTRIBUTION AGREEMENT AND DISTRIBUTION
PLAN................................................................... 34
DESCRIPTION OF THE FUNDS..................................................... 35
SHAREHOLDER REPORTS.......................................................... 35
FINANCIAL STATEMENTS......................................................... 37
GENERAL INFORMATION.......................................................... 38
APPENDIX A................................................................... 39
</TABLE>
Dated: July 15, 1999
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GENERAL INFORMATION AND HISTORY
Guinness Flight Investment Funds ("Guinness Flight Funds")
was first organized as a Maryland Corporation on January 7, 1994 and
converted to a Delaware business trust on April 28, 1997 as an open-end,
series, management investment company. Currently, Guinness Flight Funds
offers eight separate, non-diversified, series portfolios: the China & Hong
Kong Fund, the Asia Blue Chip Fund, the Asia Small Cap Fund, the Mainland
China Fund, the New Europe Fund, the Wired-Registered Trademark- (1) Index
Fund, the internet.com Index Fund and the Global Government Bond Fund, each
of which has unique investment objectives and strategies.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL INFORMATION ABOUT THE FUNDS
The China & Hong Kong Fund's investment objective is long term
capital appreciation primarily through investments in securities of China and
Hong Kong. The Asia Blue Chip Fund's investment objective is long-term capital
appreciation primarily through investments in equity securities of
well-established and sizable companies located in Asia. The Asia Small Cap
Fund's investment objective is long-term capital appreciation primarily through
investments in equity securities of smaller capitalization issuers located in
Asia. The Mainland China Fund's investment objective is long-term capital
appreciation primarily through investments in equity securities of companies
which are located in Mainland China and in companies located outside Mainland
China which have a significant part of their interests in China. The New Europe
Fund's investment objective is long-term capital appreciation primarily through
investments in the securities of companies that are either based in Europe or
that conduct their primary business activities in Europe. The Wired Index Fund's
investment objective is long-term capital appreciation primarily through
investments in the equity securities of companies that comprise the Wired Index.
The internet.com Index Fund's investment objective is long-term capital
appreciation primarily through investments in equity securities of companies
that comprise the internet.com Index. The Global Government Bond Fund's
investment objective is current income and capital appreciation through
investments in government securities issued by governments throughout the world.
The objective of each Fund is a fundamental policy and may not be changed except
by a majority vote of shareholders.
In addition to the primary investment strategies set forth in
the Prospectus, each of the China & Hong Kong Fund, Asia Blue Chip Fund, Asia
Small Cap Fund, Mainland China Fund and New Europe Fund may invest in investment
grade debt securities and may also invest up to 5% of its net assets in options
on equity securities and warrants, including those traded in the
over-the-counter markets.
The Funds do not intend to employ leveraging techniques.
Accordingly, no Fund will purchase new securities if amounts borrowed exceed 5%
of its total assets at the time the loan is made.
- --------------------------------------------
(1) "Wired Index" is a service mark, and Wired-Registered Trademark- is a
registered trademark of Advance Magazine Publishers, Inc. ("Advance"), used with
the permission of Advance. Wired Magazine and Advance make no representation or
warranty, express or implied, to Guinness Flight or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of the Wired Index to track any aspect of market
performance. Wired Magazine will continue to determine the composition of the
Index without regard to Guinness Flight or the Fund, and Wired Magazine has no
obligation to take the needs of Guinness Flight or investors in the Fund into
consideration in determining or composing the Index. ADVANCE DOES NOT GUARANTEE
THE QUALITY, ACCURACY, CURRENCY, AND/OR THE COMPLETENESS OF THE INDEX OR ANY
DATA INCLUDED THEREIN. ADVANCE MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
RESULTS TO BE OBTAINED BY GUINNESS FLIGHT, INVESTORS IN THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE WIRED INDEX OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE FUND OR FOR ANY OTHER USE. ADVANCE MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
WIRED INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL ADVANCE HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT
OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
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When the Funds determine that adverse market conditions exist,
the Funds may adopt a temporary defensive position and invest their entire
portfolio in Money Market Instruments. In addition, the Funds may invest in
Money Market Instruments in anticipation of investing cash positions. "Money
Market Instruments" are short-term (less than twelve months to maturity)
investments in (a) obligations of the United States or foreign governments,
their respective agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of United States or foreign banks denominated in any currency; (c)
floating rate securities and other instruments denominated in any currency
issued by international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of United
States and foreign corporations meeting the credit quality standards set by
Guinness Flight Funds' Board of Trustees; and (e) repurchase agreements with
banks and broker-dealers with respect to such securities. While the Funds do not
intend to limit the amount of their assets invested in Money Market Instruments,
except to the extent believed necessary to achieve their investment objective,
the Funds do not expect under normal market conditions to have a substantial
portion of their assets invested in Money Market Instruments. To the extent the
Funds are invested in Money Market Instruments for defensive purposes or in
anticipation of investing cash positions, the Funds' investment objectives may
not be achieved.
The following information concerning the Funds augments the
disclosure provided in the Prospectus.
THE CHINA & HONG KONG FUND, ASIA BLUE CHIP FUND, ASIA SMALL CAP FUND, MAINLAND
CHINA FUND, NEW EUROPE FUND, WIRED INDEX FUND AND INTERNET.COM INDEX FUND (THE
"EQUITY FUNDS")
Investec Guinness Flight Global Asset Management Limited
("Investec") does not intend to invest in any security in a country where the
currency is not freely convertible to United States dollars, unless it has
obtained the necessary governmental licensing to convert such currency or other
appropriately licensed or sanctioned contractual guarantee to protect such
investment against loss of that currency's external value, or Investec has a
reasonable expectation at the time the investment is made that such governmental
licensing or other appropriately licensed or sanctioned guarantee would be
obtained or that the currency in which the security is quoted would be freely
convertible at the time of any proposed sale of the security by an Equity Fund.
An Equity Fund may invest indirectly in issuers through
sponsored or unsponsored American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs"), Global
Depository Shares ("GDSs") and other types of Depository Receipts (which,
together with ADRs, EDRs, GDRs, and GDSs, are hereinafter referred to as
"Depository Receipts"). Depository Receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be
converted. In addition, the issuers of the stock of unsponsored Depository
Receipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and the
market value of the Depository Receipts. ADRs are Depository Receipts typically
issued by a United States bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. GDRs and other types of
Depository Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by either a foreign or a United States
corporation. Generally, Depository Receipts in registered form are designed for
use in the United States securities markets and Depository Receipts in bearer
form are designed for use in securities markets outside the United States. For
purposes of the Equity Funds' investment policies, investments in ADRs, GDRs and
other types of Depository Receipts will be deemed to be investments in the
underlying securities. Depository Receipts other than those denominated in
United States dollars will be subject to foreign currency exchange rate risk.
Certain Depository Receipts may not be listed on an exchange and therefore may
be illiquid securities.
Securities in which an Equity Fund may invest include those that
are neither listed on a stock exchange nor traded over-the-counter. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Equity Fund or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly
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traded may not be subject to the disclosure and other investor protection
requirements which would be applicable if their securities were publicly traded.
If such securities are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Equity Fund may be required
to bear the expenses of registration. To the extent that such securities are
illiquid by virtue of the absence of a readily available market, or legal or
contractual restrictions on resale, they will be subject to such Equity Fund's
investment restrictions on illiquid securities, discussed below.
An Equity Fund, together with any of its "affiliated persons,"
as defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
may only purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when an Equity Fund or such "affiliated
persons" hold shares of any of the underlying investment companies, such Fund's
ability to invest fully in shares of those investment companies is restricted,
and Investec must then, in some instances, select alternative investments that
would not have been its first preference.
There can be no assurance that appropriate investment companies
will be available for investment. The Equity Funds do not intend to invest in
such investment companies unless, in the judgment of Investec, the potential
benefits of such investment justify the payment of any applicable premium or
sales charge.
GLOBAL GOVERNMENT BOND FUND
Global Government Bond Fund assets invested in foreign
government securities will be invested in debt obligations and other fixed
income securities, in each case denominated in U.S. currencies, non-U.S.
currencies or composite currencies including:
(1) debt obligations issued or guaranteed by foreign
national, provincial, state, municipal or other
governments with taxing authority or by their
agencies or instrumentalities;
(2) debt obligations of supranational entities (described
below); and
(3) debt obligations of the United States Government issued
in nondollar securities.
In making international fixed income securities investments,
Investec may consider, among other things, the relative growth and inflation
rates of different countries. Investec may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. Investec may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The obligations of foreign governmental entities, including
supranational issuers (described below), have various kinds of government
support. Obligations of foreign governmental entities include obligations issued
or guaranteed by national, provincial, state or other governments with taxing
power or by their agencies. These obligations may or may not be supported by the
full faith and credit of a foreign government.
Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the
Asian Development Bank and the InterAmerican Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.
The Global Government Bond Fund may invest in United States
Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. The term "United States
-5-
<PAGE>
Government Securities" refers to debt securities denominated in United States
dollars, issued or guaranteed by the United States Government, by various of its
agencies, or by various instrumentalities established or sponsored by the United
States Government. Certain of these obligations, including: (1) United States
Treasury bills, notes, and bonds; (2) mortgage participation certificates
guaranteed by the Government National Mortgage Association ("GNMA"); and (3)
Federal Housing Administration debentures, are supported by the full faith and
credit of the United States. Other United States Government Securities issued or
guaranteed by Federal agencies or government sponsored enterprises are not
supported by the full faith and credit of the United States. These securities
include obligations supported by the right of the issuer to borrow from the
United States Treasury, such as obligations of Federal Home Loan Banks, and
obligations supported only by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds.
When purchasing United States Government Securities, Investec
may take full advantage of the entire range of maturities of such securities and
may adjust the average maturity of the investments held in the portfolio from
time to time, depending upon its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest rates.
To the extent that the Global Government Bond Fund invests in the mortgage
market, Investec usually will evaluate, among other things, relevant economic
data, environmental and security specific variables such as housing starts,
coupon and age trends. To determine relative value among markets, Investec may
use tools such as yield/duration curves, break-even prepayment rate analysis and
holding-period-return scenario testing.
The Global Government Bond Fund may seek to increase its current
income by writing covered call options with respect to some or all of the United
States Government Securities held in its portfolio. In addition, the Global
Government Bond Fund may at times, through the purchase of options on United
States Government Securities, and the purchase and sale of futures contracts and
related options with respect to United States Government Securities, seek to
reduce fluctuations in net asset value by hedging against a decline in the value
of the United States Government Securities owned by the Global Government Bond
Fund or an increase in the price of such securities which the Global Government
Bond Fund plans to purchase, although it is not the general practice to do so.
Significant option writing opportunities generally exist only with respect to
longer term United States Government Securities. Options on United States
Government Securities and futures and related options are not considered United
States Government Securities; accordingly, they have a different set of risks
and features.
The Global Government Bond Fund will not invest more than 5% of
its net assets in initial margins or premiums for the futures and options. The
Global Government Bond Fund will not invest more than 25% of its net assets in
securities issued by a single foreign government, or in supranational entities
as a group, nor invest more than 25% of its net assets in securities denominated
in a single currency other than the U.S. Dollar, British Pound Sterling,
Canadian Dollar, Euro, and Japanese Yen.
INVESTMENT STRATEGIES AND RISKS
OPTIONS AND FUTURES STRATEGIES
Through the writing of call options and the purchase of options
and the purchase and sale of stock index futures contracts, interest rate
futures contracts, foreign currency futures contracts and related options on
such futures contracts, Investec may at times seek to hedge against a decline in
the value of securities included in a Fund's portfolio or an increase in the
price of securities which it plans to purchase for a Fund or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce a Fund's current
return.
The ability of a Fund to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Although the Funds will not enter into an option or futures
position unless a liquid secondary market for such option or futures contract is
believed by Investec to exist, there is no assurance that a Fund will be able to
effect closing transactions at any particular time or at an acceptable price.
Reasons for the absence of a liquid secondary market include the following: (i)
there may be insufficient trading
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interest in certain options; (ii) restrictions may be 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 the Options Clearing Corporation ("OCC") 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 or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market thereon would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would continue to be exercisable in
accordance with their terms.
Low initial margin deposits made upon the opening of a futures
position and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent a Fund purchases
or sells futures contracts and options on futures contracts and purchases and
writes options on securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities held by the Fund or decreases in the prices of securities the Fund
intends to acquire. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
the Funds will only engage in options and futures transactions for limited
purposes, such transactions involve certain risks. The Funds will not engage in
options and futures transactions for leveraging purposes.
Upon purchasing futures contracts of the type described above,
the Funds will maintain in a segregated account with their Custodian cash or
liquid high grade debt obligations with a value, marked-to-market daily, at
least equal to the dollar amount of the Funds' purchase obligation, reduced by
any amount maintained as margin. Similarly, upon writing a call option, the
Funds will maintain in a segregated account with their Custodian, liquid or high
grade debt instruments with a value, marked-to-market daily, at least equal to
the market value of the underlying contract (but not less than the strike price
of the call option) reduced by any amounts maintained as margin.
WRITING COVERED CALL OPTIONS ON SECURITIES
Call options may be used to anticipate a price increase of a
security on a more limited basis than would be possible if the security itself
were purchased. The Funds may write only covered call options. Since it can be
expected that a call option will be exercised if the market value of the
underlying security increases to a level greater than the exercise price, this
strategy will generally be used when Investec believes that the call premium
received by the Fund plus anticipated appreciation in the price of the
underlying security up to the exercise price of the call, will be greater than
the appreciation in the price of the security. By writing a call option, a Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
A Fund may write covered call options on optionable securities
(stocks, bonds, foreign exchange related futures, options and options on
futures) of the types in which it is permitted to invest in seeking to attain
its objective. Call options written by a Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price. As the
writer of the call option, the Fund is obligated to own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges).
A Fund will receive a premium from writing a call option, which
increases the writer's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
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A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by a Fund.
Options written by the Funds will normally have expiration dates
not more than one year from the date written. The exercise price of the options
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. A Fund may engage in buy-and-write
transactions in which the Fund simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, a Fund's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
Fund for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, a Fund's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and a Fund may or may not realize a loss.
To the extent that a secondary market is available on the
Exchanges, the covered call option writer may liquidate his position prior to
the assignment of an exercise notice by entering a closing purchase transaction
for an option of the same series as the option previously written. The cost of
such a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES
A Fund may purchase put options to protect its portfolio
holdings in an underlying security against a decline in market value. Such hedge
protection is provided during the life of the put option since the Fund, as
holder of the put option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the
Funds will reduce any profit they might otherwise have realized in the
underlying security by the premium paid for the put option and by transaction
costs.
A Fund may also purchase call options to hedge against an
increase in prices of securities that it wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Fund, as
holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, the Funds
will reduce any profit they might have realized had they bought the underlying
security at the time they purchased the call option by the premium paid for the
call option and by transaction costs.
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PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
The Equity Funds may purchase and sell options on stock indices
and stock index futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific
securities except that, rather than the right to take or make delivery of the
specific security at a specific 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 that stock index is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars multiplied by a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on specific
securities, all settlements of options on stock indices are in cash and gain or
loss depends on general movements in the stocks included in the index rather
than on price movements in particular stocks. Currently, index options traded
include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index, the AMEX
Market Value Index, the National Over-the-Counter Index and other standard
broadly based stock market indices.
A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
dollar amount multiplied by 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. For example, the China & Hong Kong Fund may invest
in Hang-Seng Index Futures. No physical delivery of securities is made.
If Investec expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Equity
Fund's index option or futures contract resulting from the increase in the
index. If, on the other hand, Investec expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in the Equity Fund's portfolio may also be expected to decline, but
that decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES
A Fund may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may purchase futures contracts in anticipation of a
decline in interest rates when it is not fully invested in a particular market
in which it intends to make investments to gain market exposure that may in part
or entirely offset an increase in the cost of securities it intends to purchase.
The Funds do not consider purchases of futures contracts to be a speculative
practice under these circumstances. In a substantial majority of these
transactions, the Funds will purchase securities upon termination of the futures
contract.
A Fund may sell U.S. dollar and non-U.S. dollar interest rate
futures contracts in anticipation of an increase in the general level of
interest rates. Generally, as interest rates rise, the market value of the fixed
income securities held by the Funds will fall, thus reducing the net asset value
of the holder. This interest rate risk can be reduced without employing futures
as a hedge by selling long-term fixed income securities and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the Funds in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate
futures contracts provides an alternative means of hedging against rising
interest rates. As rates increase, the value of a Fund's short position in the
futures contracts will also tend to increase, thus offsetting all or a portion
of the depreciation in the market value of the
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Fund's investments which are being hedged. While the Funds will incur commission
expenses in entering and closing out futures positions (which is done by taking
an opposite position from the one originally entered into, which operates to
terminate the position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES CONTRACTS
A Fund may write call options and purchase call and put options
on stock index and interest rate futures contracts. The Funds may use such
options on futures contracts in connection with their hedging strategies in lieu
of purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options on stock index or interest rate futures,
rather than purchasing such futures, to hedge against possible increases in the
price of equity securities or debt securities, respectively, which the Fund
intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS
In order to hedge its portfolio and to protect it against
possible variations in foreign exchange rates pending the settlement of
securities transactions, a Fund may buy or sell foreign currencies or may deal
in forward currency contracts. A Fund may also invest in currency futures
contracts and related options. If a fall in exchange rates for a particular
currency is anticipated, a Fund may sell a currency futures contract or a call
option thereon or purchase a put option on such futures contract as a hedge. If
it is anticipated that exchange rates will rise, a Fund may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the Fund intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the Funds
will be covered.
A currency futures contract sale creates an obligation by a
Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The Funds will write (sell) only covered call options on
currency futures. This means that the Funds will provide for their obligations
upon exercise of the option by segregating sufficient cash or short-term
obligations or by holding an offsetting position in the option or underlying
currency future, or a combination of the foregoing. The Funds will, so long as
they are obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the Funds in cash, cash
equivalents or other liquid securities in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by a Fund falls below 100% of the market value of the call written by
the Fund, the Fund will so segregate an amount of cash, cash equivalents or
other liquid securities equal in value to the difference. Alternatively, a Fund
may cover the call option through segregating with the custodian an amount of
the particular foreign currency equal to the amount of foreign currency per
futures contract option times the number of options written by the Fund.
If other methods of providing appropriate cover are developed,
the Funds reserve the right to employ them to the extent consistent with
applicable regulatory and exchange requirements.
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In connection with transactions in stock index options, stock
index futures, interest rate futures, foreign currency futures and related
options on such futures, the Funds will be required to deposit as "initial
margin" an amount of cash and short-term U.S. Government securities generally
equal to from 5% to 10% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
OPTIONS ON FOREIGN CURRENCIES
A Fund may write call options and purchase call and put options
on foreign currencies to enhance investment performance and for hedging purposes
in a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized as described above. For example, a decline
in the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminution in the value of portfolio securities, a Fund may purchase put options
on the foreign currency. If the value of the currency does decline, the Funds
will have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to a Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, a Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Also, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to sell the underlying currency at a loss that may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.
The Funds intend to write only covered call options on foreign
currencies. A call option written on a foreign currency by a Fund is "covered"
if the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian, which acts as the Fund's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
or the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated account
with its custodian or with a designated sub-custodian.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Fund may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
variations in foreign exchange rates. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date, which
is individually
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negotiated and privately traded by currency traders and their customers. A Fund
may enter into a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when a Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's securities denominated in such foreign
currency, or when a Fund believes that the U.S. dollar may suffer a substantial
decline against foreign currency, it may enter into a forward purchase contract
to buy that foreign currency for a fixed dollar amount ("position hedge"). In
this situation, the Fund may, in the alternative, enter into a forward contract
to sell a different foreign currency for a fixed U.S. dollar amount where it
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the sector are denominated
("cross-hedge"). If a Fund enters into a position hedging transaction, cash not
available for investment or U.S. Government Securities or other high quality
debt securities will be placed in a segregated account in an amount sufficient
to cover the Fund's net liability under such hedging transactions. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to its position hedging
transactions. As an alternative to maintaining all or part of the separate
account, a Fund may purchase a call option permitting it to purchase the amount
of foreign currency being hedged by a forward sale contract at a price no higher
than the forward contract price or a Fund may purchase a put option permitting
it to sell the amount of foreign currency subject to a forward purchase contract
at a price as high or higher than the forward contract price. Unanticipated
changes in currency prices would result in lower overall performance for a Fund
than if it had not entered into such contracts.
Generally, the Funds will not enter into a forward foreign
currency exchange contract with a term of greater than one year. At the maturity
of the contract, a Fund may either sell the portfolio security and make delivery
of the foreign currency, or may retain the security and terminate the obligation
to deliver the foreign currency by purchasing an "offsetting" forward contract
with the same currency trader obligating the Fund to purchase, on the same
maturity date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of the contract. Accordingly, it
may be necessary for a Fund 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 the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund 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. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the Fund enters into an offsetting contract for
the purchase of the foreign currency, the Fund will realize a gain to the extent
the price of the currency the Fund has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency the Fund has agreed
to purchase exceeds the price of the currency the Fund has agreed to sell.
The Funds' dealing in forward foreign currency exchange
contracts will be limited to the transactions described above. Of course, a Fund
is not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
Investec. It also should be realized that this method of protecting the value of
a Fund's portfolio securities against the decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange that one can achieve at some future point
in time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of such currency
increase.
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ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
In addition, futures contracts in which a Fund may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent a
Fund from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency
exchange contracts ("forward contracts") are not traded on contract markets
regulated by the Commodity Futures Trading Commission ("CFTC") and are not
regulated by the SEC. Rather, forward currency contracts are traded through
financial institutions acting as market makers. Foreign currency options are
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
the forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities
exchanges are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may exist, potentially permitting a
Fund to liquidate open positions at a profit prior to exercise or expiration, or
to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency
options, however, are subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exercise and settlement of
such options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in a Fund's ability to act upon economic events occurring
in foreign markets during nonbusiness hours in the United States and the United
Kingdom, (d) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (e) lesser
trading volume.
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FORWARD COMMITMENTS
The Funds may make contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
because new issues of securities are typically offered to investors, such as the
Funds, on that basis. Forward commitments involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date. Although the
Funds will enter into such contracts with the intention of acquiring the
securities, the Funds may dispose of a commitment prior to a settlement date if
Investec deems it appropriate to do so. A Fund may realize short-term profits or
losses upon the sale of forward commitments.
REGULATORY MATTERS
In connection with its proposed futures and options
transactions, each Fund will file with the CFTC a notice of eligibility for
exemption from the definition of (and therefore from CFTC regulation as) a
"commodity pool operator" under the Commodity Exchange Act.
The Staff of the SEC has taken the position that the purchase
and sale of futures contracts and the writing of related options may involve
senior securities for the purposes of the restrictions contained in Section 18
of the 1940 Act on investment companies issuing senior securities. However, the
Staff has issued letters declaring that it will not recommend enforcement action
under Section 18 if an investment company:
(i) sells futures contracts on an index of
securities that correlate with its portfolio
securities to offset expected declines in the
value of its portfolio securities;
(ii) writes call options on futures contracts,
stock indexes or other securities, provided
that such options are covered by the
investment company's holding of a
corresponding long futures position, by its
ownership of portfolio securities which
correlate with the underlying stock index, or
otherwise;
(iii) purchases futures contracts, provided the
investment company establishes a segregated
account ("cash segregated account") consisting
of cash or cash equivalents in an amount equal
to the total market value of such futures
contracts less the initial margin deposited
therefor; and
(iv) writes put options on futures contracts, stock
indices or other securities, provided that
such options are covered by the investment
company's holding of a corresponding short
futures position, by establishing a cash
segregated account in an amount equal to the
value of its obligation under the option, or
otherwise.
In addition, the Funds are eligible for, and are claiming,
exclusion from the definition of the term Commodity Pool Operator in connection
with the operations of the Funds, in accordance with subparagraph (1) of
paragraph (a) of CFTC Rule 4.5, because each Fund represents that it will
operate in a manner such that:
(i) each Fund will use commodity futures or commodity options
contracts solely for bona fide hedging purposes within the meaning and
intent of Commission Rule 1.3(z)(1); PROVIDED, HOWEVER, that in
addition, with respect to positions in commodity futures or commodity
option contracts which do not come within the meaning and intent of
Rule 1.3(z)(1), each Fund will not enter into commodity futures and
commodity options contracts for which the aggregate initial margin and
premiums exceed five (5) percent of the fair market value of the Fund's
assets, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; and, PROVIDED
FURTHER, that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount as defined in Commission Rule
190.01(x) may be excluded in computing such five (5) percent;
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(ii) each Fund will not be, and has not been, marketing
participations to the public as or in a commodity pool or otherwise as
or in a vehicle for trading in the commodity futures or commodity
options markets;
(iii) each Fund will disclose in writing to each prospective
participant the purpose of and the limitations on the scope of the
commodity futures and commodity options trading in which the Fund
intends to engage; and
(iv) each Fund will submit to such special calls as the
Commission may make to require the Fund to demonstrate compliance with
the provisions of Commission Rule 4.5(c).
The Funds will conduct their purchases and sales of futures
contracts and writing of related options transactions in accordance with the
foregoing.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements. Under a
repurchase agreement, a Fund acquires a debt instrument for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an agreed
upon market interest rate effective for the period of time during which the
Fund's money is invested. A Fund's risk is limited to the ability of the seller
to pay the agreed upon sum upon the delivery date. When a Fund enters into a
repurchase agreement, it obtains collateral having a value at least equal to the
amount of the purchase price. Repurchase agreements can be considered loans as
defined by the 1940 Act, collateralized by the underlying securities. The return
on the collateral may be more or less than that from the repurchase agreement.
The securities underlying a repurchase agreement will be marked to market every
business day so that the value of the collateral is at least equal to the value
of the loan, including the accrued interest earned. In evaluating whether to
enter into a repurchase agreement, Investec will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss.
ILLIQUID AND RESTRICTED SECURITIES
The Funds have adopted the following investment policy, which
may be changed by the vote of the Board of Trustees. The Funds will not invest
in illiquid securities if immediately after such investment more than 15% of a
Fund's net assets (taken at market value) would be invested in such securities.
For this purpose, illiquid securities include (a) securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered for sale to the public, securities that are otherwise not
readily marketable and repurchase agreements having a maturity of longer than
seven days. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty in satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
Although securities which may be resold only to "qualified
institutional buyers" in accordance with the provisions of Rule 144A under the
Securities Act of 1933, as amended, are technically considered "restricted
securities", the Funds may purchase Rule 144A securities without regard to the
limitation on investments in illiquid securities described above, provided that
a determination is made that such securities have a readily
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available trading market. Investec will determine the liquidity of Rule 144A
securities under the supervision of the Funds' Board of Trustees. The liquidity
of Rule 144A securities will be monitored by Guinness Flight, and if as a result
of changed conditions, it is determined that a Rule 144A security is no longer
liquid, a Fund's holdings of illiquid securities will be reviewed to determine
what, if any, action is required to assure that the Fund does not exceed its
applicable percentage limitation for investments in illiquid securities.
In reaching a liquidity decision, Investec will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other 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 (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of
companies in emerging market countries involves certain special considerations
and risk factors which are not typically associated with investing in securities
of U.S. companies. The following disclosure augments the information provided in
the prospectus.
ECONOMIC AND POLITICAL RISKS
The economies of foreign countries may differ unfavorably from
the United States economy in such respects as, but not limited to, growth of
domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions. Further, economies of foreign
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by the economic
conditions of the countries in which they trade, as well as trade barriers,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by such countries.
With respect to any foreign country, there is the possibility
of nationalization, expropriation or confiscatory taxation, political changes,
government regulations, social instability or diplomatic developments (including
war) which could adversely affect the economies of such countries or the Funds'
investments in those countries. In addition, it may be more difficult to obtain
a judgment in a court outside the United States.
CHINA POLITICAL RISKS
The Chinese economy previously operated as a Socialist
economic system, relying heavily upon government planning from 1949, the year in
which the Communists seized power, to 1978, the year Deng Xiaoping instituted
his first economic reforms.
Economic reforms in China are transforming its economy into a
market system that has stimulated significant economic growth. As a result of
such reform, the living standards of the 800 million rural workers have
improved. Farm reform led to the doubling of China's farmers' incomes over the
1980's. The next stage of reform gave rise to small scale entrepreneurs and
stimulated light and medium industry. In addition, a cheap and abundant supply
of labor has attracted foreign investment in China. Special Economic Zones, five
originally and over thirty today, were set up, providing tax advantages to
foreign investors. Further, the Shenzhen and Shanghai Stock Exchanges have
recently opened. Class "A" and Class "B" shares are traded on both exchanges.
While only resident Chinese can purchase Class "A" shares, foreign investors
(such as the Funds) can purchase Class "B" shares. Over the period 1978 to 1997,
China's gross domestic product grew between 9% and 10% per annum. By 1995, China
had become one of the world's major trading nations. The World Bank forecasts
that China will have the world's largest economy by 2003.
In 1984, China and Britain signed the Joint Declaration, which
allowed for the termination of British rule in Hong Kong on June 30, 1997, but
which maintains the previously existing capitalist economic and social system of
Hong Kong for 50 years beyond that date. Obviously, there are risks arising from
Hong Kong's
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return to China under the "one country two systems" proposal. However, Hong Kong
and China are interdependent; 70% of foreign investment in China is from Hong
Kong and China has large shareholdings in Hong Kong companies. Investec believes
that China is unlikely to damage the Hong Kong economy and destroy the value of
their investments. Today, Hong Kong's stock market is one of the largest in the
world and is highly liquid and extensively regulated.
Notwithstanding the beliefs of Investec, investors should
realize that there are significant risks to investing in China and Hong Kong.
The risks include:
(1) that political instability may arise as a result of
indecisive leadership;
(2) that hard line Marxist Leninists might regain the
political initiative;
(3) that social tensions caused by widely differing
levels of economic prosperity within Chinese society
might create unrest, as they did in the tragic events
of 1989, culminating in the Tiananmen Square
incident; and
(4) that the threat of armed conflict exists over the
unresolved situation concerning Taiwan.
Investors should further realize that the central government
of China is communist and, while a liberal attitude towards foreign investment
and capitalism prevails at present, a return to hard line communism and a
reaction against capitalism and the introduction of restrictions on foreign
investment is a possibility. There can be no assurance that the Chinese
government will continue to pursue its economic reform policies or, if it does,
that those policies will be successful. The issue of "B" shares, "H" shares and
"N" shares by Chinese companies and the ability to obtain a "back-door listing"
through Red Chips is still regarded by the Chinese authorities as an experiment
in economic reform. The reformist elements which now dominate Chinese policies
remain ideologically communist and political factors may, at any time, outweigh
economic policies and the encouragement of foreign investment. The Funds will be
highly sensitive to any significant change in political, social or economic
policy in China. Such sensitivity may, for the reasons specified above,
adversely affect the capital growth and thus the performance of the Funds.
Investec, however, believes that the process of reform has now gone too far to
be easily reversed.
INVESTMENT IN CHINA AT PRESENT INVOLVES ABOVE AVERAGE RISK DUE TO A NUMBER OF
SPECIAL FACTORS DESCRIBED HEREIN. INVESTMENT IN THE FUNDS SHOULD BE REGARDED AS
LONG TERM IN NATURE. THE FUNDS ARE SUITABLE ONLY FOR THOSE INVESTORS WHO CAN
AFFORD THE RISKS INVOLVED AND SHOULD CONSTITUTE ONLY A LIMITED PART OF AN
INVESTOR'S PORTFOLIO. THE PRICE OF THE FUNDS MAY EXPERIENCE SIGNIFICANT
FLUCTUATIONS.
SECURITIES MARKET RISKS
In general, trading volume on foreign stock exchanges is
substantially less than that on the New York Stock Exchange. Further, securities
of some foreign companies are less liquid and more volatile than securities of
comparable United States companies. Securities without a readily available
market will be treated as illiquid securities for purposes of the Funds'
limitations on such purchases. Similarly, volume and liquidity in most foreign
bond markets can be substantially less than in the United States, and
consequently, volatility of price can be greater than in the United States.
Fixed commissions on foreign markets are generally higher than negotiated
commissions on United States exchanges; however, the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions and may
be able to purchase the securities in which the Funds may invest on other stock
exchanges where commissions are negotiable.
With regard to China, both the Shanghai and the Shenzhen
securities markets are in their infancy and are undergoing a period of
development and change. This may lead to trading volatility, difficulty in the
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settlement and recording of transactions and difficulty in interpreting and
applying the relevant regulations. In addition, the choice of investments
available to the Funds will be severely limited as compared with the choice
available in other markets due to the small but increasing number of "B" share,
"H" share, "N" share and Red Chip issues currently available. There is a low
level of liquidity in the Chinese securities markets, which are relatively small
in terms of both combined total market value and the number of "B" shares, "H"
shares, "N" shares and Red Chips available for investment. Shareholders are
warned that this could lead to severe price volatility.
SMALL CAPITALIZATION ISSUERS
Investors should be aware that investments in small
capitalization issuers carry more risk than investments in issuers with market
capitalizations greater than $1 billion. Generally, small companies rely on
limited product lines, financial resources, and business activities that make
them more susceptible to setbacks or downturns. In addition, the stock of such
companies may be more thinly traded. Accordingly, the performance of small
capitalization issuers may be more volatile.
INTEREST RATE FLUCTUATIONS
Generally, the value of fixed income securities will change as
interest rates fluctuate. During periods of falling interest rates, the values
of outstanding long-term debt obligations generally rise. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
GOVERNMENTAL CREDIT RISK
The obligations of foreign government entities, including
supranational issuers, have various kinds of government support. Although
obligations of foreign governmental entities include obligations issued or
guaranteed by national, provincial, state or other government with taxing power,
or by their agencies, these obligations may or may not be supported by the full
faith and credit of a foreign government.
ACCOUNTING STANDARDS AND LEGAL FRAMEWORK
Many foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards, practices and
disclosure requirements comparable to those applicable to United States
companies. Consequently, there may be less publicly available information about
such companies than about United States companies. Further, there is generally
less governmental supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States.
With regard to China, the national regulatory and legal
framework for capital markets and joint stock companies is not well developed
compared to those of Western countries. Certain matters of concern to foreign
shareholders are not adequately dealt with or are only covered in a number of
national and local laws and regulations. As the efficacy of such laws and
regulations is as yet uncertain, there can be no assurance as to the extent to
which rights of foreign shareholders will be protected.
Further, Chinese companies are not required to follow
international accounting standards. There are a number of differences between
international accounting standards and accounting practice in China, including
the valuation of property and other assets (in particular inventory and
investments and provisions against debtors), accounting for depreciation,
consolidation, deferred taxation and contingencies and the treatment of exchange
differences. There may, therefore, be significant differences in the preparation
of financial statements by accountants following Chinese accounting standards
and practices when compared with those prepared in accordance with international
accounting standards. All issuers of "B" shares, "H" shares, "N" shares and Red
Chips are, however, required to produce accounts which are prepared in
accordance with international accounting standards.
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ADDITIONAL FOREIGN CURRENCY CONSIDERATIONS
The Funds' assets will be invested principally in securities
of entities in foreign markets and substantially all of the income received by
the Funds will be in foreign currencies. If the value of the foreign currencies
in which a Fund receives its income falls relative to the U.S. dollar between
the earning of the income and the time at which the Fund converts the foreign
currencies to U.S. dollars, the Fund will be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. dollars to
meet distribution requirements. The liquidation of investments, if required, may
have an adverse impact on a Fund's performance.
Changes in foreign currency exchange rates also will affect
the value of securities in the Funds' portfolios and the unrealized appreciation
or depreciation of investments. Further, a Fund may incur costs in connection
with conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire immediately to resell that currency to the dealer. The Funds
will conduct their foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward, futures or options contracts to
purchase or sell foreign currencies.
A Fund may enter into forward currency exchange contracts and
currency futures contracts and options on such futures contracts, as well as
purchase put or call options on currencies, in U.S. or foreign markets to
protect the value of some portion or all of its portfolio holdings against
currency risks by engaging in hedging transactions. There can be no guarantee
that instruments suitable for hedging currency or market shifts will be
available at the time when a Fund wishes to use them. Moreover, investors should
be aware that in most emerging market countries, such as China, the markets for
certain of these hedging instruments are not highly developed and that in many
emerging market countries no such markets currently exist.
INVESTMENT FUNDS AND REPATRIATION RESTRICTIONS
Some foreign countries have laws and regulations which
currently preclude direct foreign investment in the securities of their
companies. However, indirect foreign investment in the securities listed and
traded on the stock exchanges in these countries is permitted by certain foreign
countries through investment funds which have been specially authorized. See
"Tax Matters" for an additional discussion concerning such investments. The
Funds may invest in these investment funds; however, if the acquired investment
fund is registered pursuant to the 1940 Act, then the acquiring Fund may not own
(i) more than three percent of the total outstanding voting stock of the
acquired investment fund, (ii) securities issued by the acquired investment fund
having an aggregate value of more than five percent of the total assets of the
Fund, or (iii) securities issued by the acquired investment fund and all other
registered investment funds having an aggregate value of more than 10 percent of
the total assets of the Fund. If a Fund invests in such investment funds, the
Fund's shareholders will bear not only their proportionate share of the expenses
of the Fund, but also will bear indirectly similar expenses of the underlying
investment funds. Investec has agreed to waive its management fees with respect
to the portion of a Fund's assets invested in shares of other open-end
investment companies. A Fund would continue to pay its own management fees and
other expenses with respect to its investments in shares of closed-end
investment companies.
In addition to the foregoing investment restrictions, prior
governmental approval for foreign investments may be required under certain
circumstances in some foreign countries, and the extent of foreign investment in
foreign companies may be subject to limitation. Foreign ownership limitations
also may be imposed by the charters of individual companies to prevent, among
other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of
sales by foreign investors may require governmental registration and/or approval
in some foreign countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
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<PAGE>
INVESTMENT RESTRICTIONS AND POLICIES
Investment restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority (as defined in the 1940
Act) of the outstanding shares of a Fund. As used in the Prospectus and
Statement of Additional Information, the term "majority of the outstanding
shares" of a Fund means, respectively, the vote of the lesser of (i) 67% or more
of the shares of the Fund present at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the Fund. The following are the
Funds' investment restrictions set forth in their entirety. Investment policies
are not fundamental and may be changed by the Board of Trustees without
shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund may not:
1. Issue senior securities, except that a Fund may borrow
up to 33 1/3% of the value of its total assets from a bank (i) to increase its
holdings of portfolio securities, (ii) to meet redemption requests, or (iii) for
such short-term credits as may be necessary for the clearance or settlement of
the transactions. A Fund may pledge its assets to secure such borrowings.
2. Invest 25% or more of the total value of its assets in
a particular industry, except that this restriction shall not apply to U.S.
Government Securities.
3. Buy or sell commodities or commodity contracts or real
estate or interests in real estate (including real estate limited partnerships),
except that it may purchase and sell futures contracts on stock indices,
interest rate instruments and foreign currencies, securities which are secured
by real estate or commodities, and securities of companies which invest or deal
in real estate or commodities.
4. Make loans, except through repurchase agreements to
the extent permitted under applicable law.
5. Act as an underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to be
an underwriter under applicable securities laws.
INVESTMENT POLICIES
Each Fund may not:
1. Purchase securities on margin, except such short-term
credits as may be necessary for clearance of transactions and the maintenance of
margin with respect to futures contracts.
2. Make short sales of securities or maintain a short
position (except that the Fund may maintain short positions in foreign currency
contracts, options and futures contracts).
3. Purchase or otherwise acquire the securities of any
open-end investment company (except in connection with a merger, consolidation,
acquisition of substantially all of the assets or reorganization of another
investment company) if, as a result, the Fund and all of its affiliates would
own more than 3% of the total outstanding stock of that company.
Percentage restrictions apply at the time of acquisition and
any subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a
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<PAGE>
violation of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities
are placed on behalf of the Funds by Investec subject to the supervision of the
Guinness Flight Funds and the Board of Trustees and pursuant to authority
contained in the Investment Advisory Agreement between the Funds and Investec.
In selecting brokers or dealers, Investec will consider various relevant
factors, including, but not limited to: the best net price available, the size
and type of the transaction, the nature and character of the markets for the
security to be purchased or sold, the execution efficiency, settlement
capability, financial condition of the broker-dealer firm, the broker-dealer's
execution services rendered on a continuing basis and the reasonableness of any
commissions.
In addition to meeting the primary requirements of execution
and price, brokers or dealers may be selected who provide research services, or
statistical material or other services to a Fund or to Investec for the Fund's
use, which in the opinion of the Board of Trustees, are reasonable and necessary
to the Fund's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to a Fund or to Investec. Such allocation
shall be in such amounts as Guinness Flight Funds shall determine and Investec
shall report regularly to Guinness Flight Funds who will in turn report to the
Board of Trustees on the allocation of brokerage for such services.
The receipt of research from brokers or dealers may be useful
to Investec in rendering investment management services to its other clients,
and conversely, such information provided by brokers or dealers who have
executed orders on behalf of Investec's other clients may be useful to Investec
in carrying out its obligations to the Funds. The receipt of such research may
not reduce Investec's normal independent research activities.
Investec is authorized to place portfolio transactions with
brokerage firms that have provided assistance in the distribution of shares of
the Funds and is authorized to use the Funds' Distributor on an agency basis, to
effect a substantial amount of the portfolio transactions which are executed on
the New York or American Stock Exchanges, Regional Exchanges and Foreign
Exchanges where relevant, or which are traded in the over-the-counter market.
Brokers or dealers who execute portfolio transactions on
behalf of a Fund may receive commissions which are in excess of the amount of
commissions which other brokers or dealers would have charged for effecting such
transactions provided Guinness Flight Funds determines in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing brokers or dealers viewed in terms
of a particular transaction or Investec's overall responsibilities to a Fund.
It may happen that the same security will be held by other
clients of Investec. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by Investec to be equitable to each,
taking into consideration such factors as size of account, concentration of
holdings, investment objectives, tax status, cash availability, purchase cost,
holding period and other pertinent factors relative to each account. In some
cases this system could have a detrimental effect on the price or volume of the
security as far as a Fund is concerned. In other cases, however, the ability of
a Fund to participate in volume transactions will produce better executions for
the Fund.
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Brokerage commissions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Year Ended Asia Blue Asia Small China & Hong Mainland
December 31, Chip Fund Cap Fund Kong Fund China Fund
------------- --------- -------- --------- ----------
<S> <C> <C> <C> <C>
1997 $37,794 $1,271,036 $714,450 $18,313(2)
1996 $23,303(4) $204,067(3) $736,492 --
1995 -- -- $258,319 --
</TABLE>
The increase in Asia Small Cap Fund's brokerage commissions in 1997 is primarily
due to volatile Asian equity markets in 1997.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Funds is determined at 4:00 p.m.
New York time, on each day that the New York Stock Exchange is open for business
and on such other days as there is sufficient trading in a Fund's securities to
affect materially the net asset value per share of the Fund. The Funds will be
closed on New Years Day, Presidents' Day, Martin Luther King, Jr.'s Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
The Funds will invest in foreign securities, and as a result,
the calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. Occasionally, events which affect
the values of such securities and such exchange rates may occur between the
times at which they are determined and the close of the New York Stock Exchange
and will therefore not be reflected in the computation of a Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at their fair value as
determined in good faith under procedures established by and under the
supervision of the Board of Trustees. Portfolio securities of a Fund that are
traded both on an exchange and in the over-the-counter market will be valued
according to the broadest and most representative market. All assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. Dollar values at the mean between the bid and offered quotations of
the currencies against U.S. Dollars as last quoted by any recognized dealer.
When portfolio securities are traded, the valuation will be the last reported
sale price on the day of valuation. (For securities traded on the New York Stock
Exchange, the valuation will be the last reported sales price as of the close of
the Exchange's regular trading session, currently 4:00 p.m. New York time.) If
there is no such reported sale or the valuation is based on the over-the-counter
market, the securities will be valued at the last available bid price or at the
mean between the bid and asked prices, as determined by the Board of Trustees.
As of the date of this Statement of Additional Information, such securities will
be valued by the latter method. Securities for which reliable quotations are not
readily available and all other assets will be valued at their respective fair
market value as determined in good faith by, or under procedures established by,
the Board of Trustees of the Funds.
Money market instruments with less than sixty days remaining
to maturity when acquired by the Funds will be valued on an amortized cost basis
by the Funds, excluding unrealized gains or losses thereon from the valuation.
This is accomplished by valuing the security at cost and then assuming a
constant amortization to
- ---------------------------------------
(2) For the period 11/3/97 (commencement of operations) to 12/31/97.
(3) For the period 4/29/96 (commencement of operations) to 12/31/96.
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<PAGE>
maturity of any premium or discount. If a Fund acquires a money market
instrument with more than sixty days remaining to its maturity, it will be
valued at current market value until the 60th day prior to maturity, and will
then be valued on an amortized cost basis based upon the value on such date
unless the Board of Trustees determines during such 60 day period that this
amortized cost value does not represent fair market value.
All liabilities incurred or accrued are deducted from a Fund's
total assets. The resulting net assets are divided by the number of shares of
the Fund outstanding at the time of the valuation and the result (adjusted to
the nearest cent) is the net asset value per share.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of a
Fund to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the Fund. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
n
P(1 + T) = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional portion
thereof)
In calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
A Fund may also from time to time include in such advertising
a total return figure that is not calculated according to the formula set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc. or similar independent
services or financial publications, the Fund calculates its aggregate total
return for the specified periods of time by assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial net asset value
of the investment from the ending net asset value and by dividing the remainder
by the beginning net asset value. Such alternative total return information will
be given no greater prominence in such advertising than the information
prescribed under the Commission's rules.
In addition to the total return quotations discussed above, a
Fund may advertise its yield based on a 30 day (or one month) period ended on
the date of the most recent balance sheet included in the Fund's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
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6
YIELD = 2[(ab +1) 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (1) computing the yield to maturity of
each obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the Fund's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30 day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the SEC's
rules. In addition, all advertisements containing performance data of any kind
will include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The annual compounded rate of total return for the one year
period ended December 31, 1997 and the average annual compounded rate of total
return from June 30, 1994 (inception) to December 31, 1997 for the China & Hong
Kong Fund was -20.34% and 5.07%, respectively, and for the Global Government
Bond Fund was 2.87% and 5.88%, respectively. The annual compounded rate of total
return for the one-year period ended December 31, 1997 and the average annual
compounded rate of total return from April 29, 1996 (inception) to December 31,
1997 for the Asia Blue Chip Fund was -37.68% and -22.90%, respectively, and for
the Asia Small Cap Fund was -30.77 and -13.60%, respectively. The total return
for the period from November 3, 1997 (inception) to December 31, 1997 for the
Mainland China Fund was -5.50%. For the 30 day period ended December 31, 1997,
the Global Government Bond Fund's yield was 4.90%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds have elected to be governed by Rule 18f-1 of the
1940 Act, under which a Fund is obligated to redeem the shares of any
shareholder solely in cash up to the lesser of 1% of the net asset value of the
Fund or $250,000 during any 90 day period. Should any shareholder's redemption
exceed this limitation, a Fund can, at its sole option, redeem the excess in
cash or in readily marketable portfolio securities. Such securities would be
selected solely by the Fund and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the value
used in computing net asset value for the purpose of such redemption.
Each Fund has authorized one or more brokers to accept on its
behalf purchase and redemption orders. Such brokers are authorized to designate
intermediaries to accept orders on the Fund's behalf. Each Fund
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<PAGE>
will be deemed to have received the order when an authorized broker or broker
authorized designee accepts the order. Customer orders will be priced at the
Fund's net asset value next computed after they are accepted by an authorized
broker or the broker authorized designee.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting each Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment
company for federal income tax purposes under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, a Fund is not subject to federal income tax on the portion of its net
investment income (I.E., taxable interest, dividends and other taxable ordinary
income, net of expenses) and capital gain net income (I.E., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (I.E.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and will
therefore count toward satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the
disposition of an asset will be a capital gain or loss. In addition, gain will
be recognized as a result of certain constructive sales, including short sales
"against the box." However, gain recognized on the disposition of a debt
obligation purchased by a Fund at a market discount (generally, at a price less
than its principal amount) will be treated as ordinary income to the extent of
the portion of the market discount which accrued during the period of time the
Fund held the debt obligation. In addition, under the rules of Code section 988,
gain or loss recognized on the disposition of a debt obligation denominated in a
foreign currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or loss
recognized on the disposition of a foreign currency forward contract, futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to Code
Section 1256 (unless a Fund elects otherwise), will generally be treated as
ordinary income or loss.
In general, for purposes of determining whether capital gain
or loss recognized by a Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (as applicable,
depending on the type of the Fund) (1) the asset is used to close a "short sale"
(which includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, or (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (3) the asset is stock and the Fund grants an in-the-money qualified
covered call option with respect thereto. In addition, a Fund may be required to
defer the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or
loss recognized by a Fund from a
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<PAGE>
closing transaction with respect to, an option written by the Fund will be
treated as a short-term capital gain or loss.
Further, the Code also treats as ordinary income a portion of
the capital gain attributable to a transaction where substantially all of the
return realized is attributable to the time value of a Fund's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Fund and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (3) the transaction is one that was marketed or sold
to the Fund on the basis that it would have the economic characteristics of a
loan but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in the Treasury
Regulations. The amount of the gain that is recharacterized generally will not
exceed the amount of the interest that would have accrued on the net investment
for the relevant period at a yield equal to 120% of the federal long-term,
mid-term, or short-term rate, depending upon the type of instrument at issue,
reduced by an amount equal to: (1) prior inclusions of ordinary income items
from the conversion transaction and (2) the capital interest on acquisition
indebtedness under Code section 263(g). Built-in losses will be preserved where
the Fund has a built-in loss with respect to property that becomes a part of a
conversion transaction. No authority exists that indicates that the converted
character of the income will not be passed through to the Fund's shareholders.
Certain transactions that may be engaged in by a Fund (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts.
A Fund may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If a Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualifying electing
fund (a "QEF"), in which case it will each year have ordinary income equal to
its pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an election, the Fund will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in the
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF
and does not make a mark-to-market election, then, in general, (1) any gain
recognized by the Fund upon a sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the Fund from the
PFIC will be allocated ratably over the Fund's holding period in the PFIC stock,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest
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<PAGE>
tax rate (individual or corporate, as the case may be) in effect for such prior
year, plus (ii) interest on the amount determined under clause (i) for the
period from the due date for filing a return for such prior year until the date
for filing a return for the year in which the gain is recognized or the excess
distribution is received, at the rates and methods applicable to underpayments
of tax for such period, and (4) the distribution by the Fund to shareholders of
the portions of such gain or excess distribution so allocated to prior years
(net of the tax payable by the Fund thereon) will again be taxable to the
shareholders as an ordinary income dividend.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss
(including, to the extent provided in Treasury Regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a
Fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Fund's taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to each of
which the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of such issuer and does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year a Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon an actual disposition of
the PFIC stock subject to such election) incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
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<PAGE>
FUND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Fund currently intends to distribute
any such amounts. Net capital gain that is distributed and designated as a
capital gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by a Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if a Fund elects to retain its net capital gain,
the Fund will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If a Fund elects to retain its
net capital gain, it is expected that the Fund also will elect to have
shareholders of record on the last day of its taxable year treated as if each
such shareholder received a distribution of his pro rata share of such gain,
with the result that each shareholder will be required to report his pro rata
share of such gain on his tax return as long-term capital gain, will receive a
refundable tax credit for his pro rata share of tax paid by the Fund on the
gain, and will increase the tax basis for his shares by an amount equal to the
deemed distribution less the tax credit.
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount.
Investment income that may be received by a Fund from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which may entitle a Fund to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of each Fund's assets to be invested in various
countries is not known. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, a Fund may elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. If a Fund so elects, each shareholder
would be required to include in gross income, even though not actually received,
his pro rata share of the foreign taxes paid by the Fund, but would be treated
as having paid his pro rata share of such foreign taxes and would therefore be
allowed to either deduct such amount in computing taxable income or use such
amount (subject to various Code limitations) as a foreign tax credit against
federal income tax (but not both). For purposes of the foreign tax credit
limitation rules of the Code, each shareholder would treat as foreign source
income his pro rata share of such foreign taxes plus the portion of dividends
received from a Fund representing income derived from foreign sources. No
deduction for foreign taxes could be claimed by an individual shareholder who
does not itemize deductions. Each shareholder should consult his own tax adviser
regarding the potential application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by a Fund will be treated in the manner
described above regardless of whether they are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects realized but
undistributed income or gain, or unrealized appreciation in the value of the
assets held by the Fund, distributions of such amounts to the shareholder will
be taxable in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
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<PAGE>
Ordinarily, shareholders are required to take distributions by
a Fund into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year provided such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of distributions, and the proceeds of redemption
of shares, paid to any shareholder (1) who has failed to provide a correct
taxpayer identification number, (2) who is subject to backup withholding for
failure properly to report the receipt of interest or dividend income, or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or that it is an "exempt recipient" (such as a corporation).
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or
redemption of shares of a Fund in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of a Fund within 30 days before or after the
sale or redemption. In general, any gain or loss arising from (or treated as
arising from) the sale or redemption of shares of a Fund will be considered
capital gain or loss and will be long-term capital gain or loss if the shares
were held for longer than one year. Long-term capital gain recognized by an
individual shareholder will be taxed at the lowest rates applicable to capital
gains if the holder has held such shares for more than 18 months at the time of
the sale. However, any capital loss arising from the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of the amount of capital gain dividends received on such shares.
For this purpose, the special holding period rules of Code Section 246(c)(3) and
(4) generally will apply in determining the holding period of shares. Capital
losses in any year are deductible only to the extent of capital gains plus, in
the case of a noncorporate taxpayer, $3,000 of ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) upon the gross amount of
the dividend. Furthermore, such a foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross income resulting from a Fund's election to treat any foreign taxes paid by
it as paid by its shareholders, but may not be allowed a deduction against this
gross income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from a Fund is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income and
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
taxpayers.
In the case of foreign noncorporate shareholders, a Fund may
be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or subject to
withholding tax at a reduced treaty rate) unless such shareholders furnish the
Fund with proper notification of their foreign status.
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<PAGE>
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund, including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income and
capital gain dividends from regulated investment companies may differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in a Fund.
MANAGEMENT OF THE FUNDS
The Board of Trustees manages the business and affairs of the Funds.
The Board approves all significant agreements between the Funds and companies
and individuals that provide services to the Funds. The officers of the Funds
manage the day-to-day operations of the Funds. The day-to-day operations of the
Funds are always subject to the investment objective of each Fund. The Board of
Trustees supervises the day-to-day operations
The Board of Trustees and executive officers of the Funds and their
principal occupations for the past five years are listed below. The address of
each Trustee is 225 South Lake Avenue, Suite 777, Pasadena, California, 91101.
Timothy W.N. Guinness -- TRUSTEE. Mr. Guinness has been the Chief Executive
Officer and Joint Chairman of Investec Guinness Flight since August 1998.
Previously, Mr. Guinness was the Chief Executive Officer of Guinness Flight
Hambro Asset Management Limited, London, England.
James I. Fordwood* -- TRUSTEE. Mr. Fordwood is President of Balmacara Production
Inc., an investment holding and management services company that he founded in
1987. Currently, Balmacara generally is responsible for the general accounts and
banking functions for United States companies specializing in oil and gas
operations.
Dr. Gunter Dufey* --TRUSTEE. Dr. Dufey has been a member of the faculty of the
Graduate School of Business Administration at the University of Michigan since
1969. His academic interests center on International Money and Capital Markets
as well as on Financial Policy of Multinational Corporations. Outside of
academia, he has been a member of the Board of Directors of GMAC Auto
Receivables Corporation since 1992.
Dr. Bret A. Herscher* - TRUSTEE. Dr. Herscher is President of Pacific
Consultants, a technical and technology management consulting company serving
the Electronic industry and venture capital community, which he co-founded in
1988. Additionally, Dr. Herscher has been a Director of Strawberry Tree
Incorporated, a manufacturer of computer based Data Acquisition and Control
products for factory and laboratory use, since 1989.
J. Brooks Reece, Jr.* -- TRUSTEE. Mr. Reece has been a Vice-President of Adcole
Corporation, a manufacturer of precision measuring machines and sun angle
sensors for space satellites, since 1993. Prior to becoming a Vice-President, he
was the Manager of sales and marketing. In addition, Mr. Reece is the
Vice-President and Director of Adcole Far East, Ltd., a subsidiary that manages
Adcole sales and service throughout Asia. He has held this
- ----------------------------
* Not an "interested person", as that term is defined by the 1940 Act.
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<PAGE>
position since 1986.
James J. Atkinson, Jr. -- PRESIDENT. Mr. Atkinson has been an executive Director
of Investec Guinness Flight Global Asset Management Limited, based in Pasadena
California, since November 1993.
Robert H. Wadsworth -- ASSISTANT TREASURER. 4455 East Camelback Road, Suite
261E, Phoenix, Arizona 85018. President, Robert H. Wadsworth and Associates,
Inc. (consultants) and Investment Company Administration, L.L.C. President and
Treasurer, First Fund Distributors, Inc.
Eric M. Banhazl --TREASURER. 2020 East Financial Way, Suite 100, Glendora,
California 91741. Senior Vice President, Robert H. Wadsworth & Associates, Inc.
(consultants) and Investment Company Administration, L.L.C. since March 1990;
Formerly Vice President, Huntington Advisors, Inc. (investment advisor).
Steven J. Paggioli -- SECRETARY. 479 West 22nd Street, New York, New York 10011.
Executive Vice President, Robert H. Wadsworth & Associates, Inc. (consultant)
and Investment Company Administration, L.L.C. Vice President and Secretary,
First Fund Distributors, Inc.
Rita Dam --ASSISTANT TREASURER. 2020 East Financial Way, Suite 100, Glendora,
California 91741. Vice President, Investment Company Administration, L.L.C.
since 1994. Member of the Financial Services Audit Group at Coopers & Lybrand,
LLP from 1989-1994.
Robin Berger -- ASSISTANT SECRETARY. 479 West 22nd Street, New York, New York,
10011. Vice President, Robert H. Wadsworth and Associates, Inc. since June 1993;
Formerly Regulatory and compliance Coordinator, Equitable Capital Management,
Inc. (1991-93).
The table below illustrates the compensation paid to each Trustee for
the Guinness Flight Funds' most recently completed fiscal year:
<TABLE>
<CAPTION>
Total
Aggregate Pension or Compensation from
Compensation Retirement Benefits Estimated Annual Guiness Flight
Name of Person, from Guiness Accrued as Part of Benefits Upon Funds Paid to
Position Flight Funds Fund Expenses Retirement Trustees
- ------------- ------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Dr. Gunter Dufey $7,500 $0 $0 $7,500
James I. Fordwood $7,500 $0 $0 $7,500
Dr. Bret Herscher $7,500 $0 $0 $7,500
J. Brooks Reece, Jr. $8,500 $0 $0 $8,500
</TABLE>
Effective January 1, 1998, each Trustee who is not an "interested
person" of the Funds receives an annual fee of $10,000 (with the exception of
the Chairman, who receives $11,000) allocated equally among all the Funds, plus
expenses incurred by the Trustees in connection with attendance at meetings of
the Board of Trustees and their Committees. As of the date of this Statement of
Additional Information, to the best of the knowledge of the Guinness Flight
Funds, the Board of Trustees and officers of the Funds, as a group, owned of
record less than 1% of the Funds' outstanding shares.
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<PAGE>
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS
Investec Guinness Flight Global Asset Management Limited ("Investec")
furnishes investment advisory services to the Funds. Under the Investment
Advisory Agreement (the "Agreement"), Investec directs the investments of the
Funds in accordance with the investment objectives, policies, and limitations
provided in the Funds' Prospectus or other governing instruments, the 1940 Act,
and rules thereunder, and such other limitations as the Funds may impose by
notice in writing to Investec. Investec also furnishes all necessary office
facilities, equipment and personnel for servicing the investments of the Funds;
pays the salaries and fees of all officers of Guinness Flight Funds other than
those whose salaries and fees are paid by Guinness Flight Funds' administrator
or distributor; and pays the salaries and fees of all Trustees of Guinness
Flight Funds who are "interested persons" of Guinness Flight Funds or of
Investec and of all personnel of Guinness Flight Funds or of Investec performing
services relating to research, statistical and investment activities. Investec
is authorized, in its discretion and without prior consultation with the Funds,
to buy, sell, lend and otherwise trade, consistent with the Fund's then current
investment objective, policies and restrictions in any bonds and other
securities and investment instruments on behalf of the Funds. The investment
policies and all other actions of the Funds are at all times subject to the
control and direction of Guinness Flight Funds' Board of Trustees.
Investec performs (or arranges for the performance of) the following
management and administrative services necessary for the operation of Guinness
Flight Funds: (i) with respect to the Funds, supervising relations with, and
monitoring the performance of, custodians, depositories, transfer and pricing
agents, accountants, attorneys, underwriters, brokers and dealers, insurers and
other persons in any capacity deemed to be necessary or desirable; (ii)
investigating the development of and developing and implementing, if
appropriate, management and shareholder services designed to enhance the value
or convenience of the Funds as an investment vehicle; and (iii) providing
administrative services other than those provided by Guinness Flight Funds'
administrator.
Investec also furnishes such reports, evaluations, information or
analyses to Guinness Flight Funds as Guinness Flight Funds' Board of Trustees
may request from time to time or as Investec may deem to be desirable. Investec
makes recommendations to Guinness Flight Funds' Board of Trustees with respect
to Guinness Flight Funds' policies, and carries out such policies as are adopted
by the Trustees. Investec, subject to review by the Board of Trustees, furnishes
such other services as it determines to be necessary or useful to perform its
obligations under the Agreements.
All other costs and expenses not expressly assumed by Investec under
the Agreements or by the Administrator under the administration agreement
between it and the Funds on behalf of the Funds shall be paid by the Funds from
the assets of the Funds, including, but not limited to fees paid to Investec and
the Administrator, interest and taxes, brokerage commissions, insurance
premiums, compensation and expenses of the Trustees other than those affiliated
with the adviser or the administrator, legal, accounting and audit expenses,
fees and expenses of any transfer agent, distributor, registrar, dividend
disbursing agent or shareholder servicing agent of the Funds, expenses,
including clerical expenses, incident to the issuance, redemption or repurchase
of shares of the Funds, including issuance on the payment of, or reinvestment
of, dividends, fees and expenses incident to the registration under Federal or
state securities laws of the Funds or their shares, expenses of preparing,
setting in type, printing and mailing prospectuses, statements of additional
information, reports and notices and proxy material to shareholders of the
Funds, all other expenses incidental to holding meetings of the Funds'
shareholders, expenses connected with the execution, recording and settlement of
portfolio securities transactions, fees and expenses of the Funds' custodian for
all services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts, expenses of calculating net asset value
of the shares of the Funds, industry membership fees allocable to the Funds, and
such extraordinary expenses as may arise, including litigation affecting the
Funds and the legal obligations which the Funds may have to indemnify the
officers and Trustees with respect thereto.
Expenses which are attributable to the Funds are charged against the
income of the Funds in determining net income for dividend purposes. Investec,
from time to time, may voluntarily waive all or a portion of
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<PAGE>
its fees payable under the Agreement.
The Agreement was approved by the Board of Trustees on June 3, 1998 and
by the shareholders of the Funds on August 25, 1998 at a shareholder meeting
called for that purpose. The Agreement will remain in effect for two years from
the date of execution and shall continue from year to year thereafter if it is
specifically approved at least annually by the Board of Trustees and the
affirmative vote of a majority of the Trustees who are not parties to the
Agreement or "interested persons" of any such party by votes cast in person at a
meeting called for such purpose. The Trustees or Investec may terminate the
Agreement on 60 days' written notice without penalty. The Agreement terminates
automatically in the event of its "assignment", as defined in the 1940 Act.
As compensation for all services rendered under the Agreement, Investec
will receive an annual fee, payable monthly, of 1.00% of the Asia Blue Chip
Fund's, Asia Small Cap Fund's, China & Hong Kong Fund's, Mainland China Fund's
and New Europe Fund's average daily net assets and .75% of the Global Government
Bond Fund's average daily net assets. Investec will receive an annual fee of
0.90% of the Wired Index Fund's average daily net assets up to $100 million,
0.75% of average daily net assets between $100 and $500 million, and 0.60% of
average daily net assets in excess of $500 million. Investec will receive an
annual fee of 0.90% of the internet.com Index Fund's average daily net assets up
to $100 million, 0.75% of average daily net assets between $100 and $500
million, and 0.60% of average daily net assets in excess of $500 million.
Advisory fees and expense reimbursements/(recoupments) were as follows:
<TABLE>
<CAPTION>
Gross Expenses
Advisory (Reimbursed)/
Fee Recouped
-----------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 1997:
<S> <C> <C>
Asia Blue Chip Fund $53,636 ($130,732)
Asia Small Cap Fund 1,692,574 71,583
China & Hong Kong Fund 2,958,500 0
Mainland China Fund(1) 15,705 (11,487)
Global Government Bond Fund 58,063 (185,733)
FISCAL YEAR ENDED DECEMBER 31, 1996:
Asia Blue Chip Fund(2) $12,860 ($92,856)
Asia Small Cap Fund(2) 62,680 (71,583)
China & Hong Kong Fund 1,772,174 315,433
Global Government Bond Fund 19,110 (176,407)
FISCAL YEAR ENDED DECEMBER 31, 1995:
China & Hong Kong Fund $197,173 ($204,298)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Global Government Bond Fund 7,425 (197,114)
</TABLE>
- --------------
(1) For the period 11/3/97 (commencement of operations) to 12/31/97.
(2) For the period 4/29/96 (commencement of operations) to 12/31/96.
THE ADMINISTRATOR
Investment Company Administration, L.L.C. (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. For its services, the
Administrator receives a monthly fee equal to, on an annual basis, 0.25% of the
Funds' average daily net assets, subject to a $40,000 annual minimum for the
China Fund and $80,000 allocated based on average daily net assets of the Asia
Blue Chip Fund, Asia Small Cap Fund, Mainland China Fund and Global Government
Bond Fund.
Administration fees paid by the Funds were as follows:
<TABLE>
<CAPTION>
Global
Year Ended Asia Blue Asia Small China & Hong Mainland Government
December 31 Chip Fund Cap Fund Kong Fund China Fund Bond Fund
----------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 $13,425 $424,336 $739,625 $3,926(1) $19,733
1996 13,424(2) 13,424(2) 443,043 -- 27,122
1995 -- -- 49,293 -- 40,000
</TABLE>
---------------
(1) For the period 11/3/97 (commencement of operations) to 12/31/97.
(2) For the period 4/29/96 (commencement of operations) to 12/31/96.
ADMINISTRATION AGREEMENT, DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN
Guinness Flight Funds has entered into separate Administration and
Distribution Agreements with respect to the Funds with Investment Company
Administration, L.L.C. ("Administrator") and First Fund Distributors, Inc.
("Distributor"), respectively. Under the Distribution Agreement, the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchases for the Funds' shares and pays the expenses of printing and
distributing any prospectuses, reports and other literature used by the
Distributor, advertising, and other promotional activities in connection with
the offering of shares of the Funds for sale to the public. It is understood
that the Administrator may reimburse the Distributor for these expenses from any
source available to it, including the administration fee paid to the
Administrator by the Funds.
The Funds will not make separate payments as a result of the
Distribution Plan to Investec, the Administrator, Distributor or any other
party, it being recognized that the Funds presently pay, and will continue to
pay, an investment advisory fee to Investec and an administration fee to the
Administrator. To the extent that any payments made by the Funds to Investec or
the Administrator, including payment of fees under the Investment Advisory
Agreement or the Administration Agreement, respectively, should be deemed to be
indirect financing of any activity primarily intended to result in the sale of
shares of the Funds within the context of rule 12b-1 under the 1940 Act, then
such payments shall be deemed to be authorized by this Plan.
The Plan and related agreements were approved by the Board of Trustees
including all of the "Qualified Trustees" (Trustees who are not "interested"
persons of the Funds, as defined in the 1940 Act, and who
-34-
<PAGE>
have no direct or indirect financial interest in the Plan or any related
agreement). In approving the Plan, in accordance with the requirements of Rule
12b-1 under the 1940 Act, the Board of Trustees (including the Qualified
Trustees) considered various factors and determined that there is a reasonable
likelihood that the Plan will benefit the Funds and their shareholders. The Plan
may not be amended to increase materially the amount to be spent by the Funds
under the Plan without shareholder approval, and all material amendments to the
provisions of the Plan must be approved by a vote of the Board of Trustees and
of the Qualified Trustees, cast in person at a meeting called for the purpose of
such vote. During the continuance of the Plan, Investec will report in writing
to the Board of Trustees quarterly the amounts and purposes of such payments for
services rendered to shareholders pursuant to the Plan. Further, during the term
of the Plan, the selection and nomination of those Trustees who are not
"interested" persons of the Funds must be committed to the discretion of the
Qualified Trustees. The Plan will continue in effect from year to year provided
that such continuance is specifically approved annually (a) by the vote of a
majority of the Funds' outstanding voting shares or by the Funds' Trustees and
(b) by the vote of a majority of the Qualified Trustees.
DESCRIPTION OF THE FUNDS
SHAREHOLDER AND TRUSTEES LIABILITY. Each Fund is a series of Guinness
Flight Funds, a Delaware business trust.
The Delaware Trust Instrument provides that the Trustees shall not be
liable for any act or omission as Trustee, but nothing protects a Trustee
against liability to Guinness Flight Funds or to its shareholders to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her office. Furthermore, a Trustee is entitled to indemnification against
liability and to all reasonable expenses, under certain conditions, to be paid
from the assets of Guinness Flight Funds; provided that no indemnification shall
be provided to any Trustee who has been adjudicated by a court to be liable to
Guinness Flight Funds or the shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office or not to have acted in good faith in the reasonable
belief that his action was in the best interest of Guinness Flight Funds.
Guinness Flight Funds may advance money for expenses, provided that the Trustee
undertakes to repay Guinness Flight Funds if his or her conduct is later
determined to preclude indemnification, and one of the following conditions are
met: (i) the Trustee provides security for the undertaking; (ii) Guinness Flight
Funds is insured against losses stemming from any such advance; or (iii) there
is a determination by a majority of the Guinness Flight Funds' independent
non-party Trustees, or by independent legal counsel, that there is reason to
believe that the Trustee ultimately will be entitled to indemnification.
VOTING RIGHTS. Shares of each Fund entitle the holders to one vote per
share. The shares have no preemptive or conversion rights. The dividend rights
and the right of redemption are described in the Prospectus. When issued, shares
are fully paid and nonassessable. The shareholders have certain rights, as set
forth in the Bylaws, to call a meeting for any purpose, including the purpose of
voting on removal of one or more Trustees.
SHAREHOLDER REPORTS
Shareholders will receive reports semiannually showing the investments
of the Funds and other information. In addition, shareholders will receive
annual financial statements audited by the Funds' independent accountants.
PRINCIPAL HOLDERS. As of June 12, 1998, principal holders owning 5% or
more of the outstanding shares of the Fund as of record date are set forth
below:
-35-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Shareholder % held as of
Fund Name & Address June 12, 1998
- ---- -------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
China & Hong Kong Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 26.98%
- --------------------------------------------------------------------------------------------------------------------
Capital Ventures International
c/o Susquehanna Advisors Group
401 City Avenue, Suite 220
Bala Cynwyd, PA 19004-1117 6.94%
- --------------------------------------------------------------------------------------------------------------------
Asia Blue Chip Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 22.14%
- --------------------------------------------------------------------------------------------------------------------
Menlo F Smith Ttee
Menlo F Smith Trust
UA DTD 04/08/1988
510 Maryville College Dr. Suite 210
St. Louis, MO 63141-5801 13.10%
- --------------------------------------------------------------------------------------------------------------------
Asia Small Cap Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 33.90%
- --------------------------------------------------------------------------------------------------------------------
Mainland China Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 20.54%
- --------------------------------------------------------------------------------------------------------------------
Global Government Bond Fund Pigeon & Co.
c/o Frost National Bank
P.O. Box 2479
San Antonio, TX 78298-2479 41.19%
- --------------------------------------------------------------------------------------------------------------------
Comerica Bank
FBO Oregon Graduate Institute
P.O. Box 75000
Detroit, MI 48275-0001 28.39%
- --------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 10.28%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the Funds for the year ended December 31, 1997 are incorporated by reference.
The opinion of Ernst & Young LLP, independent accountants, with respect to the
audited financial statements, is incorporated herein in its entirety in reliance
upon such report of Ernst & Young LLP and on the authority of such firm as
experts in auditing and accounting. Shareholders will receive a copy of the
audited and unaudited financial statements at no additional charge when
requesting a copy of the Statement of Additional Information.
GENERAL INFORMATION
INDEPENDENT CONTRACTORS: Investec Guinness Flight Global Asset Management
Limited may enter into agreements with independent contractors to provide
shareholder services for a fee. Shareholder services include account maintenance
and processing, direct shareholder communications, calculating net asset value,
dividend posting and other administrative functions.
TRANSFER AGENT. State Street Bank and Trust Company is the Transfer Agent for
the Funds. The Transfer Agent provides record keeping and shareholder services.
State Street is located at P.O. Box 1912, Boston, MA 02105.
CUSTODIAN. Investors Bank and Trust Company is the custodian for the Funds. The
custodian holds the securities, cash and other assets of the Funds. Investors
Bank and Trust is located at 200 Claredon Street, Boston, MA 02116.
LEGAL COUNSEL. Kramer Levin Naftalis & Frankel LLP serves as legal counsel for
the Guinness Flight Funds and Investec Guinness Flight Global Asset Management
Limited. Kramer Levin is located at 919 Third Avenue, New York, NY 10022.
INDEPENDENT ACCOUNTANTS. Ernst & Young LLP audits the financial statements and
financial highlights of the Funds and provides reports to the Board of Trustees.
Ernst & Young is located at 725 South Figueroa, Los Angeles, CA 90017.
-37-
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuations
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
*A: Bond which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
*Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months.
Issuers rated PRIME1 or P1 (or related supporting
institutions) have a superior capacity for repayment of short-term promissory
obligations. Prime1 or P1 repayment capacity will normally be evidenced by the
following characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structures with
moderate reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
-38-
<PAGE>
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated PRIME2 or P2 (or related supporting
institutions) have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P
to a debt obligation. capacity to pay interest and repay principal is extremely
strong.
*AA: Debt rated AA have a very strong capacity to pay
interest; and repay principal and differ from the higher rated issues only in
small degree.
*A: Debt 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: Debt rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
NR: Bonds may lack a S&P rating because no public rating has
been requested, because there is insufficient information on which to base a
rating, or because S&P does not rate a particular type of obligation as a matter
of policy.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A1: This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign designation.
A2: Capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is not as high as
for issues designated "A-1."
-39-
