<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998
File Nos. 33-75764 and 811-8380
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 6
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
SELECT ADVISORS TRUST A
(Exact Name of Registrant as Specified in Charter)
311 PIKE STREET, CINCINNATI, OHIO
45202
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, including Area Code: (513) 361-7900
ANDREW S. JOSEF
INVESTORS BANK & TRUST COMPANY
200 CLARENDON STREET, BOSTON, MASSACHUSETTS 02116
(Name and Address of Agent for Service)
copies to:
J. Leland Brewster, Esq.
Frost & Jacobs LLP Edward G. Harness, Jr.
2500 East 5th Street Touchstone Securities, Inc.
P.O. Box 5715 311 Pike Street
Cincinnati, Ohio 45201-5715 Cincinnati, Ohio 45202
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Select Advisors Portfolios has also executed this Registration Statement.
Title of Securities Being Registered: Shares of Beneficial Interest.
================================================================================
<PAGE> 2
SELECT ADVISORS TRUST A
FORM N-1A
CROSS REFERENCE SHEET
Part A
ITEM NO. HEADINGS IN PROSPECTUS
1. Cover Page ......................... Cover Page
2. Synopsis ........................... Summary; Summary of Expenses
3. Condensed Financial Information .... Financial Highlights
4. General Description of Registrant .. Cover Page; Summary; Investment
Objectives, Policies and Risks;
Advisor and Portfolio Advisors;
Management of the Trust and the
Portfolio Trust
5. Management of the Funds ............ Advisor and Portfolio Advisors;
Management of the Trust and the
Portfolio Trust
6. Capital Stock and Other
Securities.......................... Cover Page; Purchase of Shares;
Redemption of Shares; Dividends,
Distributions and Taxes; Management
of the Trust and the Portfolio
Trust; Performance Information;
Additional Information
7. Purchase of Securities Being
Offered ............................ Purchase of Shares; Net Asset Value
8. Redemption or Repurchase ........... Redemption of Shares; Net Asset Value
9. Pending Legal Proceedings .......... Not applicable
Part B HEADINGS IN STATEMENT OF
ITEM NO. ADDITIONAL INFORMATION
10. Cover Page ......................... Cover Page
11. Table of Contents .................. Table of Contents
12. General Information and History .... Not applicable
13. Investment Objectives and
Policies ........................... Investment Objectives, Policies,
Restrictions and Risks
14. Management of the Fund ............. Management of the Trust and the
Portfolio Trust
<PAGE> 3
15. Control Persons and Principal
Holders of Securities .............. Management of the Trust and the
Portfolio Trust
16. Investment Advisory and Other
Services ........................... Management of the Trust and the
Portfolio Trust
17. Brokerage Allocation and Other
Practices .......................... Investment Objectives, Policies,
Restrictions and Risks
18. Capital Stock and Other
Securities ......................... Organization of the Trust and the
Portfolio Trust (See also
Prospectus -- "Dividends,
Distributions and Taxes")
19. Purchase, Redemption and Pricing of
Securities Being Offered ........... Valuation of Securities; Redemption
in Kind;Reduced Initial Sales Charges
20. Tax Status ......................... Taxation (See also Prospectus --
"Dividends, Distributions and Taxes")
21. Underwriters ....................... Management of the Trust and the
Portfolio Trust (See also
Prospectus -- "Management of the
Trust and the Portfolio Trust")
22. Calculations of Performance
Information ........................ Performance Information
23. Financial Statements ............... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE> 4
------------------------------
PROSPECTUS & APPLICATION
------------------------------
MAY 1, 1998
T O U C H S T O N E
F A M I L Y OF F U N D S
- Emerging Growth - A
- International Equity - A
- Income Opportunity - A
- Value Plus - A
- Growth & Income - A
- Balanced - A
- Bond - A
- Standby Income
T O U C H S T O N E
-------------------
The Mark of Excellence in Investment Management(TM)
<PAGE> 5
Table of Contents
Page
Summary.................................................................. 2
Summary of Expenses...................................................... 4
Financial Highlights..................................................... 7
Investment Objectives, Policies and Risks................................ 11
Risk Factors and Certain Investment Techniques........................... 21
Advisor and Portfolio Advisors........................................... 24
Additional Risks and Investment Techniques............................... 30
Purchase of Shares....................................................... 42
Redemption of Shares..................................................... 49
Net Asset Value.......................................................... 53
Management of the Trust and the Portfolio Trust.......................... 54
Dividends, Distributions and Taxes....................................... 56
Performance Information.................................................. 58
Additional Information................................................... 60
Appendix................................................................. A-1
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Trust's
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of shares, and if given or made, such other
information or representations must not be relied upon as having been authorized
by the Trust, the Advisor or the Distributor. This Prospectus does not
constitute an offer in any state in which, or to any person to whom, such offer
may not lawfully be made.
<PAGE> 6
PROSPECTUS
May 1, 1998
------------------------
TOUCHSTONE FAMILY OF FUNDS
311 PIKE STREET
CINCINNATI, OHIO 45202
(800) 669-2796
The Touchstone Family of Funds provide a convenient means of investing in
separate investment series (each a "Fund" and collectively, the "Funds"), each
with distinct investment objectives and policies. Each Fund (other than the
Standby Income Fund) invests in a corresponding Portfolio of Select Advisors
Portfolios (the "Portfolio Trust"), a New York trust registered as an open-end
diversified management investment company. Each Portfolio and the Standby Income
Fund are professionally managed by Touchstone Advisors, Inc. (the "Advisor" or
"Touchstone Advisors"). Each Portfolio and the Standby Income Fund benefits from
discretionary advisory services by one or more investment advisor(s) (each a
"Portfolio Advisor") identified, retained, supervised and compensated by the
Advisor. Each Fund is a separate series of Select Advisors Trust A (the
"Trust"), an open-end diversified management investment company.
This Prospectus relates to the following Funds:
TOUCHSTONE VALUE PLUS FUND A
TOUCHSTONE EMERGING GROWTH FUND A
TOUCHSTONE INTERNATIONAL EQUITY FUND A
TOUCHSTONE GROWTH & INCOME FUND A
TOUCHSTONE BALANCED FUND A
TOUCHSTONE INCOME OPPORTUNITY FUND A
TOUCHSTONE BOND FUND A
TOUCHSTONE STANDBY INCOME FUND
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIOS
OF SECURITIES, EACH FUND (WITH THE EXCEPTION OF THE STANDBY INCOME FUND) SEEKS
TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL ITS INVESTABLE ASSETS
("ASSETS") IN A CORRESPONDING OPEN-END MANAGEMENT INVESTMENT COMPANY HAVING THE
SAME INVESTMENT OBJECTIVE AS THE FUND (EACH A "PORTFOLIO" AND COLLECTIVELY, THE
"PORTFOLIOS"). THE FUNDS INVEST IN THEIR RESPECTIVE PORTFOLIOS THROUGH SIGNATURE
FINANCIAL GROUP, INC.'S HUB AND SPOKE(R) MASTER-FEEDER MUTUAL FUND INVESTMENT
SYSTEM ("HUB AND SPOKE(R) STRUCTURE"). HUB AND SPOKE(R) IS A REGISTERED SERVICE
MARK OF SIGNATURE FINANCIAL GROUP, INC. SEE "SPECIAL INFORMATION CONCERNING HUB
AND SPOKE(R) STRUCTURE".
THE INCOME OPPORTUNITY PORTFOLIO MAY INVEST UP TO 100% OF ITS TOTAL ASSETS IN
NON-INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS" ISSUED BY BOTH U.S.
AND FOREIGN ISSUERS, WHICH ENTAIL GREATER RISK OF UNTIMELY INTEREST AND
PRINCIPAL PAYMENTS, DEFAULT AND PRICE VOLATILITY THAN HIGHER RATED SECURITIES,
AND MAY PRESENT PROBLEMS OF LIQUIDITY AND VALUATION. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS PRIOR TO INVESTING. SEE "INVESTMENT OBJECTIVES, POLICIES
AND RISKS," "RISK FACTORS AND CERTAIN INVESTMENT TECHNIQUES," AND THE APPENDIX.
This Prospectus sets forth concisely certain information about the Trust,
including expenses, that prospective shareholders will find helpful in making an
investment decision. Shareholders are encouraged to read this Prospectus
carefully and retain it for future reference.
Additional information about the Trust is contained in a Statement of Additional
Information dated May 1, 1998, which is available upon request and without
charge by calling or writing the Trust at the telephone number or address listed
below. The Statement of Additional Information, which has been filed with the
Securities and Exchange Commission (the "SEC"), is incorporated by reference
into this Prospectus in its entirety. The SEC maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding registrants
that file electronically with the SEC.
THE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE NATIONAL CREDIT UNION SHARE INSURANCE FUND,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. MUTUAL FUNDS INVOLVE INVESTMENT
RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
The Trust. The Trust is a management investment company providing a
convenient means of investing in separate Funds each with distinct investment
objectives and policies. The Trust consists of the following eight diversified
Funds:
Touchstone Value Plus Fund A (the "Value Plus Fund") has an investment
objective of long-term growth of capital. The Portfolio Advisor will seek
to achieve its objective through investment primarily in common stocks
which are considered by the Portfolio Advisor to be fundamentally
undervalued in relation to earnings, cash flow and financial strength.
The Portfolio Advisor will also seek to provide an added plus to the
return of the Value Plus Fund through occasional investments in the
common stock of rapidly growing companies.
Touchstone Emerging Growth Fund A (the "Emerging Growth Fund") has a
primary investment objective of capital appreciation with income as a
secondary investment objective. The Portfolio attempts to achieve its
investment objectives through investment primarily in the common stocks
of smaller, rapidly growing companies.
Touchstone International Equity Fund A (the "International Equity Fund")
has an investment objective of long-term capital appreciation through
investment primarily in equity securities of companies based outside the
United States.
Touchstone Growth & Income Fund A (the "Growth & Income Fund") has an
investment objective of long-term capital appreciation and dividend
income through investment primarily in common stocks of high quality
companies.
Touchstone Balanced Fund A (the "Balanced Fund") has an investment
objective of growth of capital and income through investment in common
stocks and fixed-income securities.
Touchstone Income Opportunity Fund A (the "Income Opportunity Fund") has
an investment objective of high current income through investment in high
yield, non-investment grade debt securities of both U.S. and non-U.S.
issuers and in mortgage related securities. To the extent consistent with
its primary objective, the Portfolio will also seek capital appreciation.
Touchstone Bond Fund A (the "Bond Fund") has an investment objective of
providing high current income primarily through investment in investment
grade bonds.
Touchstone Standby Income Fund (the "Standby Income Fund") has an
investment objective of high current income to the extent consistent with
relative stability of principal.
Advisor and Portfolio Advisors. Each Fund (other than the Standby Income
Fund) invests in a corresponding Portfolio professionally managed by the
Advisor. The Standby Income Fund
2
<PAGE> 8
will invest directly in securities chosen to meet the investment objective of
the Fund. Touchstone Advisors acts as the investment advisor to the Portfolios
and to the Standby Income Fund. Each of the Portfolios and the Standby Income
Fund benefit from discretionary advisory services of one or more portfolio
advisors (the "Portfolio Advisors") identified, retained, supervised and
compensated by the Advisor. The Advisor monitors and evaluates the performance
of each Portfolio Advisor and, with respect to those Portfolios with two or more
Portfolio Advisors, allocates the Portfolio's assets among the Portfolio
Advisors. See "Advisor and Portfolio Advisors."
Purchase and Redemption of Shares. Shares of the Funds are offered for
purchase at their respective public offering price which includes the applicable
sales charge. The minimum initial investment is $500 and subsequent investments
must be at least $50. Shares may be redeemed on any day on which the Trust
calculates the Funds' net asset values. See "Purchase of Shares" and "Redemption
of Shares."
Dividends and Distributions. Each Fund intends to distribute annually to
its shareholders substantially all of its net income and its net realized long-
and short-term capital gains. Dividends from the net income of the Standby
Income Fund are declared daily and paid monthly. Dividends from the net income
of the Growth & Income Fund, the Income Opportunity Fund and the Bond Fund are
declared and paid monthly. Dividends from the net investment income of the Value
Plus Fund and the Balanced Fund are declared and paid quarterly. Dividends from
the net income of the remaining Funds are declared and paid annually.
Distributions of any net realized long-term and short-term capital gains earned
by a Fund will be made annually. See "Dividends, Distributions and Taxes."
Risk Factors. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically associated
with investing in obligations issued by the U.S. government and domestic
corporations. Certain of the Portfolios and the Standby Income Fund invest in
foreign securities, including "emerging market" securities, which involve
heightened risks. The International Equity Portfolio and the Income Opportunity
Portfolio may invest up to 40% and 65%, respectively, of its total assets in
securities of issuers based in emerging markets. See "Risk Factors and Certain
Investment Techniques -- Foreign Securities" and "-- Risks Associated with
Emerging Markets Securities."
The Income Opportunity Portfolio and the Bond Portfolio may each invest up
to 100% of its total assets in debt securities. The market value of debt
securities held by the Income Opportunity Portfolio and the Bond Portfolio, and
the net asset value of the Portfolios, will be affected by general changes in
interest rates. The market value of debt securities held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. See "Risk
Factors and Certain Investment Techniques -- Fixed-Income and Other Debt
Instrument Securities."
3
<PAGE> 9
The Income Opportunity Portfolio may invest up to 100% of its total assets
in non-investment grade bonds, commonly known as "junk bonds" issued by both
U.S. and foreign issuers, which entail greater risk of untimely interest and
principal payments, default and price volatility than higher rated securities,
and may present problems of liquidity and valuation. See "Risk Factors and
Certain Investment Techniques -- Medium and Lower Rated and Unrated Securities.
Investors should carefully consider these and other risks prior to
investing. See "Investment Objectives, Policies and Risks," "Risk Factors and
Certain Investment Techniques," and the Appendix.
SUMMARY OF EXPENSES
The following table provides (i) a summary of expenses related to the
purchases and sales of shares of each Fund and the aggregate operating expenses
of each Fund and its corresponding Portfolio as a percentage of average daily
net assets of that Fund and (ii) an example illustrating the dollar cost of such
expenses on a $1,000 investment in each Fund. THE TRUSTEES OF THE TRUST BELIEVE
THAT THE AGGREGATE PER SHARE EXPENSES OF EACH FUND (OTHER THAN THE STANDBY
INCOME FUND) AND THE CORRESPONDING PORTFOLIO WILL BE LESS THAN OR APPROXIMATELY
EQUAL TO THE EXPENSES WHICH THE FUND WOULD INCUR IF THE TRUST RETAINED THE
SERVICES OF AN INVESTMENT ADVISOR AND INVESTED THE FUND'S ASSETS DIRECTLY IN THE
TYPE OF SECURITIES BEING HELD BY THE CORRESPONDING PORTFOLIO.
<TABLE>
<CAPTION>
SHAREHOLDER VALUE EMERGING INTERNATIONAL GROWTH & INCOME STANDBY
TRANSACTION PLUS GROWTH EQUITY INCOME BALANCED OPPORTUNITY BOND INCOME
EXPENSES FUND A* FUND A FUND A FUND A FUND A FUND A FUND A FUND
----------- ------- -------- ------------- -------- -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales 5.75% 5.75% 5.75% 5.75% 5.75% 4.75% 4.75% None
Charge(1)..........
ANNUAL FUND
OPERATING
EXPENSES (as a
percentage of
average net assets)
Advisory Fee.......... 0.75% 0.80% 0.95% 0.80% 0.80% 0.65% 0.55% 0.25%
Rule 12b-1 Fees....... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.00%
</TABLE>
4
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Expenses(2)
(after waiver or
reimbursement)..... 0.30% 0.45% 0.40% 0.25% 0.30% 0.30% 0.10% 0.50%
---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses(2) (after
waiver or
reimbursement)..... 1.30% 1.50% 1.60% 1.30% 1.35% 1.20% 0.90% 0.75%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- -----------
* Expenses for the Value Plus Fund and the corresponding Portfolio are
expressed as a percentage of the Fund's projected average daily net
assets and are based on estimates of expenses to be incurred during the
fiscal year ending December 31, 1998, after any applicable fee waivers
and expense reimbursements.
(1) As a percentage of the offering price. Large purchases may be eligible
for a reduced sales charge. On purchases of $1 million or more, there is
no sales charge, however, a contingent deferred sales charge of 1.00%
will be assessed on shares redeemed within one year of purchase. There is
also no initial sales charge on your purchase of shares in a Roth IRA or
a Roth Conversion IRA if (1) you purchase the shares with the proceeds of
a redemption made within the previous 180 days from another mutual fund
complex and (2) you paid an initial sales charge or a contingent deferred
sales charge on your investment in the other mutual fund complex. See
"Purchase of Shares."
(2) The "Total Operating Expenses" charged to each Fund and the corresponding
Portfolio will not exceed the percentages listed above. Touchstone
Advisors, as sponsor (the "Sponsor") of the Trust has agreed to waive or
reimburse certain of the Operating Expenses of each Fund and the
corresponding Portfolio (the "Sponsor Agreement") such that, after such
waivers or reimbursements, the aggregate Operating Expenses of each Fund
and (except in the case of the Standby Income Fund) the corresponding
Portfolio will not exceed on an annual basis the "Total Operating
Expenses" listed in "Summary of Expenses" above (the "Expense Caps"). As
used herein, "Operating Expenses" includes amortization of organizational
expenses but is exclusive of interest, taxes, brokerage commissions and
other portfolio transaction expenses, capital expenditures and
extraordinary expenses.
"The Sponsor Agreement may be terminated by the Sponsor at the end of any
calendar quarter, or by the Trust on not less than 30 days' prior written
notice. The Sponsor has advised the Trust that it will waive all fees
under the Sponsor Agreement through December 31, 1998."
5
<PAGE> 11
For the fiscal year ended December 31, 1997, without the Expense Caps,
"Other Expenses" and "Total Operating Expenses" of the Fund and any
corresponding Portfolio would have been the following respective percentages of
the Fund's average daily net assets: Emerging Growth Fund, 3.52%, 4.57%;
International Equity Fund, 3.30%, 4.50%; Growth & Income Fund, 3.18%, 4.18%;
Balanced Fund, 4.86%, 5.91%; Income Opportunity Fund, 2.57%, 3.47%; Bond Fund,
5.70%, 6.50%; and Standby Income Fund, 3.26%, 3.51%. For the Value Plus Fund
and the corresponding Portfolio it is estimated that, for the year ending
December 31, 1998, without the Expense Caps, "Other Expenses" and "Total
Operating Expenses" will be 1.85% and 2.85%, respectively, of the Fund's
projected average daily net assets.
For more information about each Fund's and each Portfolio's expenses see
"Advisor and Portfolio Advisors," "Purchase of Shares," "Redemption of Shares,"
and "Management of the Trust and the Portfolio Trust."
Example. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return; (2) deduction of the maximum sales charge; (3)
the total operating expense ratio included in the "Summary of Expenses" above;
and (4) redemption at the end of each time period:
<TABLE>
<CAPTION>
VALUE EMERGING INTERNATIONAL GROWTH & INCOME STANDBY
PLUS GROWTH EQUITY INCOME BALANCED OPPORTUNITY BOND INCOME
FUND A FUND A FUND A FUND A FUND A FUND A FUND A FUND
------ ------- ------------- -------- -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year..... $70 $ 72 $ 73 $ 70 $ 70 $ 59 $ 56 $ 8
3 Years.... $96 $102 $105 $ 96 $ 98 $ 84 $ 75 $24
5 Years.... -- $135 $140 $125 $127 $110 $ 95 $42
10 Years... -- $226 $237 $205 $211 $186 $153 $93
</TABLE>
The purpose of this table is to assist a shareholder in understanding the
various costs and expenses that a shareholder in a Fund will bear directly or
indirectly. This example should not be considered to be a representation of past
or future expenses; actual expenses may be greater or less than those shown.
Moreover, although the table assumes a 5% annual return, a Fund's actual
performance will vary and may result in an actual return greater or less than
5%. Because each Fund (other than the Standby Income Fund) makes payments under
a distribution and services plan in accordance with Rule 12b-1, a shareholder
who holds shares of a Fund (other than the Standby Income Fund) for an extended
period of time may pay a combination of sales load and 12b-1 fees in excess of
the economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
6
<PAGE> 12
FINANCIAL HIGHLIGHTS
The following table shows selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data for
each Fund for the periods indicated and has been audited by Coopers & Lybrand
L.L.P., the Trust's independent accountants, whose report thereon appears in the
Trust's Annual Report which is incorporated by reference in the Trust's
Statement of Additional Information. The Annual Report, which includes further
information about each Fund's performance, is available without charge and upon
request by calling (800) 669-2796.
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31,1996 and December 31, 1995 and the period ended December 31,
1994 were as follows:
7
<PAGE> 13
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOUCHSTONE EMERGING GROWTH
FUND A
PER SHARE OPERATING PERFORMANCE: -----------------------------------------
1997 1996 1995 1994(a)
------ ------ ------ --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.55 $11.52 $10.11 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (0.03) 0.01 (0.01) 0.16
Net realized and unrealized gain (loss) on investments 3.71 1.20 2.29 0.11
------ ------ ------ ------
Total from investment operations 3.68 1.21 2.28 0.27
------ ------ ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.01) (0.03) (0.15)
Net capital gain (1.38) (1.17) (0.84) (0.01)
------ ------ ------ ------
Total dividends and distributions (1.38) (1.18) (0.87) (0.16)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $13.85 $11.55 $11.52 $10.11
====== ====== ====== ======
TOTAL RETURN (b) 32.20% 10.56% 22.56% 2.72%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000's) $4,949 $2,873 $2,520 $1,038
Ratios to average net assets (c)
Expenses 1.50% 1.50% 1.50% 1.75%(e)
Net investment income (loss) (0.30%) (0.12%) (0.05%) 6.10%(e)
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE BALANCED
FUND A
PER SHARE OPERATING PERFORMANCE: -----------------------------------------
1997 1996 1995 1994(a)
------ ------ ------ --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.48 $11.34 $ 9.97 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.27 0.30 0.31 0.08
Net realized and unrealized gain (loss) on investments 2.09 1.59 1.99 (0.05)
------ ------ ------ ------
Total from investment operations 2.36 1.89 2.30 0.03
------ ------ ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.30) (0.30) (0.33) (0.06)
Net capital gain (2.12) (0.45) (0.60) --
------ ------ ------ ------
Total dividends and distributions (2.42) (0.75) (0.93) (0.06)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.42 $12.48 $11.34 $ 9.97
====== ====== ====== ======
TOTAL RETURN (b) 19.25% 16.86% 23.24% 0.30%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000's) $3,316 $2,085 $1,502 $1,001
Ratios to average net assets (c)
Expenses 1.35% 1.35% 1.35% 1.60%(e)
Net investment income 2.07% 2.19% 2.39% 2.75%(e)
</TABLE>
- ------------------------------
(a) The Fund commenced operations on October 3, 1994.
(b) Total return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the periods shown.
(c) Includes the Fund's proportionate share of the corresponding Portfolio's
expenses. If the waiver and reimbursement had not been in place for the
periods listed and after consideration of state expense limitations, the
ratios of expenses to average net assets would have been higher. Ratios are
annualized for periods less than one year.
(d) Per share amounts have been calculated using the average share method.
(e) Ratios are annualized.
8
<PAGE> 14
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOUCHSTONE INTERNATIONAL EQUITY TOUCHSTONE GROWTH & INCOME
FUND A FUND A
---------------------------------------- ----------------------------------------
1997 1996 1995 1994(a) 1997 1996 1995(d) 1994(a)
- ------ ------ ------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$10.63 $ 9.58 $ 9.12 $10.00 $14.03 $13.14 $10.02 $10.00
- ------ ------ ------ ------ ------ ------ ------ ------
0.02 0.05 0.21 -- 0.09 0.12 0.05 0.86
1.64 1.06 0.47 (0.88) 2.78 2.12 3.46 (0.84)
- ------ ------ ------ ------ ------ ------ ------ ------
1.66 1.11 0.68 (0.88) 2.87 2.24 3.51 0.02
(0.02) (0.06) (0.22) -- (0.11) (0.12) (0.16) --
(0.86) -- -- -- (1.73) (1.23) (0.23) --
- ------ ------ ------ ------ ------ ------ ------ ------
(0.88) (0.06) (0.22) -- (1.84) 1.35 (0.39) --
- ------ ------ ------ ------ ------ ------ ------ ------
$11.41 $10.63 $ 9.58 $ 9.12 $15.06 $14.03 $13.14 $10.02
====== ====== ====== ====== ====== ====== ====== ======
15.57% 11.61% 5.29% (8.80)% 20.70% 16.95% 35.14% 0.20%
$4,761 $3,449 $2,617 $2,282 $5,980 $3,659 $1,500 $ 20
1.60% 1.60% 1.60% 1.85% (e) 1.30% 1.30% 1.30% 1.55%(e)
0.17% 0.42% 0.11% (0.36)%(e) 0.67% 0.55% 0.56% 0.56%(e)
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE INCOME OPPORTUNITY TOUCHSTONE BOND
FUND A FUND A
---------------------------------------- ----------------------------------------
1997 1996 1995 1994(a) 1997 1996 1995(d) 1994(a)
- ------ ------ ------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$10.90 $ 9.83 $ 9.08 $10.00 $10.17 $10.61 $ 9.88 $10.00
- ------ ------ ------ ------ ------ ------ ------ ------
1.24 1.12 1.19 0.22 0.61 0.71 0.56 1.15
(0.23) 1.38 0.77 (0.94) 0.11 (0.43) 1.07 (1.12)
- ------ ------ ------ ------ ------ ------ ------ ------
1.01 2.50 1.96 (0.72) 0.72 0.28 1.63 0.03
- ------ ------ ------ ------ ------ ------ ------ ------
(1.22) (1.12) (1.21) (0.20) (0.66) (0.70) (0.86) (0.15)
(0.80) (0.31) -- -- (0.01) (0.02) (0.04) --
- ------ ------ ------ ------ ------ ------ ------ ------
(2.02) (1.43) (1.21) (0.20) (0.67) (0.72) (0.90) (0.15)
- ------ ------ ------ ------ ------ ------ ------ ------
$9.89 $10.90 $ 9.83 $ 9.08 $10.22 $10.17 $10.61 $ 9.88
====== ====== ====== ====== ====== ====== ====== ======
9.49% 26.66% 23.19% (7.20)% 7.30% 2.85% 16.95% 0.28%
$7,009 $4,579 $1,369 $ 926 $1,685 $ 821 $ 523 $ 16
1.20% 1.20% 1.20% 1.45%(e) 0.90% 0.90% 0.90% 1.15%(e)
11.19% 11.29% 12.42% 8.60%(e) 6.08% 6.01% 6.21% 5.58%(e)
</TABLE>
9
<PAGE> 15
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOUCHSTONE STANDBY INCOME FUND
PER SHARE OPERATING PERFORMANCE --------------------------------------
1997 1996 1995 1994(a)
- -------------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.98 $10.01 $10.03 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.51 0.46 0.55 0.11
Net realized and unrealized gain (loss) on investments (0.00) 0.01 (0.02) 0.03
------ ------ ------ ------
Total from investment operations 0.51 0.47 0.53 0.14
------ ------ ------ ------
LESS: DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.52) (0.50) (0.55) (0.11)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $9.97 $ 9.98 $10.01 $10.03
====== ====== ====== ======
TOTAL RETURN(d) 5.21% 4.80% 5.71% 1.40%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000's) $8,603 $6,456 $5,910 $5,048
Ratios to average net assets(b):
Expenses 0.75% 0.75% 0.75% 1.00%(c)
Net investment income 5.14% 4.88% 5.32% 4.54%(c
Portfolio turnover 285% 20% 142% 0%
</TABLE>
- ------------------------------
(a) The Fund commenced operations on October 3, 1994.
(b) If the waiver and reimbursement had not been in place for the periods
listed, and after consideration of state expense limitations, the ratios of
expenses to average net assets would have been higher. Ratios are annualized
for periods less than one year.
(c) Ratios are annualized.
(d) Total return would have been lower had certain expenses not been reimbursed
or waived during the periods shown.
10
<PAGE> 16
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Trust seeks to achieve the investment objective of each Fund (with
the exception of the Standby Income Fund) by investing all the Assets of a Fund
in the corresponding Portfolio, each of which has the same investment objective
as that Fund. The Standby Income Fund will invest directly in securities
designed to meet the investment objective of that Fund. There can be no
assurance that the investment objective of any Fund or Portfolio will be
achieved. The investment objectives of each Fund and Portfolio may be changed
without approval by investors, but not without 30 days prior written notice. If
there is a change in the investment objective of a Fund, such changes could
result in a Fund having an investment objective different than the objective
that a shareholder considered appropriate at the time of investment. If a Fund's
investment objective is changed, shareholders should consider whether the Fund
remains an appropriate investment in light of their then-current financial
position and needs.
Since the investment characteristics of each Fund (with the exception of
the Standby Income Fund) will correspond directly to those of the corresponding
Portfolio, the following is a discussion of the various investment policies of
each Portfolio and of the Standby Income Fund. Further information about the
investment policies of each Portfolio and the Standby Income Fund, including a
list of those restrictions on its investment activities that are "fundamental"
(i.e., that cannot be changed without shareholder approval), appears in the
Statement of Additional Information of the Trust.
VALUE PLUS PORTFOLIO
The investment objective of the Portfolio is long-term growth of
capital. The Portfolio Advisor will seek to achieve its objective through
investment primarily in a diversified portfolio comprised of approximately 40
to 60 common stocks that are considered by the Portfolio Advisor to be
fundamentally undervalued ("Value Stocks"). The Portfolio Advisor will also
seek to provide an added plus to the return of the Value Plus Portfolio through
occasional investments in the common stock of rapidly growing companies. The
Portfolio Advisor believes that such investment in the common stock of rapidly
growing companies will not only enhance return but may also diversify the
portfolio so as to avoid risks that may be specific to Value Stocks. While the
Portfolio Advisor will generally seek to invest 80% of the Portfolio's total
assets in Value Stocks, it is the Portfolio's policy under normal conditions to
invest at least 65% of its total assets in all types of common stocks.
The Portfolio Advisor believes that there may be times when, in the
judgment, due to economic and market conditions, shareholders' interests are
best served by investing in preferred stocks, "investment grade" debt
securities, or securities that are convertible into common stocks. At such
times, the Portfolio may invest up to 35% of its total assets in such
securities.
11
<PAGE> 17
A stock will be considered undervalued if it is currently trading at a
price below that at which the Portfolio Advisor believes it should be trading
and is therefore a superior potential investment based on one or more of the
following relative comparisons: 1) price relative to earnings, 2) price relative
to cash flow and 3) price relative to financial strength. It is the goal of the
Portfolio to invest in businesses that have unique competitive advantages and
proven management and should, therefore, eventually regain investor favor. It is
anticipated that some of the companies in which the Portfolio may invest will
not pay dividends.
Although the Portfolio is not limited by issuer size in selecting
securities for investment, the Portfolio will generally invest approximately 70%
of its total assets in securities of "large cap" companies of domestic and
foreign issuers which have a market capitalization greater than $5 billion, and
the remaining 30% of the Portfolio's total assets will be invested in securities
of "mid cap" companies of domestic or foreign issuers which have a market
capitalization between $1 billion and $5 billion.
The Portfolio will generally consider debt securities to be "investment
grade" if such securities are rated investment grade at the time of purchase by
a nationally recognized statistical rating agency (i.e., BBB or better by
Standard & Poor's Rating Service, a division of McGraw-Hill Companies ("S&P") or
Baa or better by Moody's Investors Service, Inc. ("Moody's"), or if such
securities are not so rated but are considered by the Portfolio Advisor to be of
equivalent investment quality). Debt securities rated BBB by S&P or Baa by
Moody's or unrated securities of comparable investment quality lack outstanding
characteristics and in fact have speculative characteristics as well, and
changes in economic conditions and other circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal.
12
<PAGE> 18
Although the Portfolio intends to invest primarily in common stocks, it
may invest up to 10% of its assets in cash equivalent investments and short-term
fixed-income securities. Such securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder redemptions. In addition,
the Portfolio may hold up to 100% of its assets in cash or short-term
fixed-income securities for temporary defensive purposes if, in the opinion of
the Portfolio Advisor, market conditions warrant such a position. See
"Additional Risks and Investment Techniques -- Temporary Investments" and "--
Repurchase Agreements."
EMERGING GROWTH PORTFOLIO
The primary investment objective of the Portfolio is capital appreciation
with income as a secondary investment objective. The Portfolio attempts to
achieve its investment objectives through investment primarily in the common
stock of smaller, rapidly growing companies. With respect to the Emerging Growth
Portfolio, "emerging growth" companies are smaller companies with total market
capitalization less than the average of Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"), which is currently approximately $40 billion, that
the Portfolio Advisor believes have earnings that may be expected to grow faster
than the U.S. economy in general, because of new products, structural changes in
the economy or management changes.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in securities of emerging growth companies. In selecting
investments for the Portfolio, the Portfolio Advisor seeks emerging growth
companies that it believes are undervalued in the marketplace. These companies
typically possess a relatively high rate of return on invested capital so that
future growth can be financed from internal sources. Companies in which the
Portfolio is likely to invest may have limited product lines, markets or
financial resources and may lack management depth. The securities of these
companies may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. A portion of the Portfolio's assets may be
invested in the securities of
13
<PAGE> 19
larger companies which the Portfolio Advisor believes offer comparable
appreciation or to ensure sufficient liquidity. Since the Portfolio invests
primarily in smaller companies, the Portfolio invests only to a limited extent
in larger companies in emerging industries.
In addition to common stocks, the Portfolio may invest in preferred
stocks, convertible bonds and other fixed-income instruments not issued by
emerging growth companies which present opportunities for capital appreciation
as well as income. Such instruments include U.S. Treasury obligations, corporate
bonds, debentures, mortgage related securities issued by various governmental
agencies, such as Government National Mortgage Association ("GNMA") and
government related organizations, such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
including collateralized mortgage obligations ("CMOs"), privately issued
mortgage related securities (including CMOs), stripped U.S. Government and
mortgage related securities, non-publicly registered securities, and asset
backed securities. The Portfolio will only invest in preferred stocks,
convertible bonds and other fixed-income instruments rated at least Baa by
Moody's or BBB by S&P or, if unrated, determined by the Portfolio Advisor to be
of comparable quality. Instruments rated Baa or BBB possess some speculative
characteristics.
The Portfolio may invest up to 20% of its assets in foreign securities
principally traded outside the United States and in American Depositary Receipts
("ADRs"). The Portfolio may not invest more than 10% of its total assets in the
securities of companies based in an emerging market. See "Risk Factors and
Certain Investment Techniques -- Foreign Securities" and "-- Risks Associated
with Emerging Markets Securities."
INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the Portfolio is long term capital
appreciation by investing primarily in equity securities of companies based
outside the United States.
The Portfolio may invest in securities of companies in emerging markets
(see "Risk Factors and Certain Investment Techniques -- Risks Associated with
Emerging Markets Securities), but does not expect to invest more than 40% of
its total assets in securities of issuers in emerging markets. The Portfolio
will invest in issuers of companies from at least three countries outside the
United States.
Under normal market conditions, the Portfolio will invest a minimum of
80% of its total assets in equity securities of non-U.S. issuers. With respect
to the International Equity Portfolio, "equity securities" means common stock
and preferred stock (including convertible preferred stock), bonds, notes and
debentures convertible into common or preferred stock, stock purchase warrants
and rights, equity interests in trusts and partnerships, and depository receipts
of companies.
14
<PAGE> 20
The Portfolio may invest up to 20% of its total assets in debt securities
issued by U.S. or foreign banks, corporations or other business organizations,
or by U.S. or foreign governments or governmental entities (including
supranational organizations such as the International Bank for Reconstruction
and Development, i.e., the "World Bank"). The Portfolio may choose to take
advantage of opportunities for capital appreciation from debt securities by
reason of anticipated changes in such factors as interest rates, currency
relationships, or credit standing of individual issuers. The Portfolio will
invest less than 20% of its total assets in lower quality, high yielding
securities, commonly known as "junk bonds." See "Risk Factors and Certain
Investment Techniques -- Medium and Lower Rated and Unrated Securities." The
Portfolio will not invest in preferred stocks or debt securities rated less than
B by S&P and Moody's.
Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Investments in "emerging markets" securities include the
securities of issuers based in some of the world's underdeveloped markets,
including Eastern Europe. Investments in securities of issuers based in
underdeveloped countries entail all of the risks of investing in foreign issuers
to a heightened degree. See "Risk Factors and Certain Investment Techniques --
Foreign Securities" and "-- Risks Associated with Emerging Markets Securities."
The portfolio will not invest in any illiquid securities except for Rule
144A securities. See "Additional Risks and Investment Techniques -- Illiquid
Securities" and "-- Non-Publicly Traded ("Restricted") Securities and Rule 144A
Securities."
GROWTH & INCOME PORTFOLIO
The investment objective of the Portfolio is long term capital
appreciation and dividend income by investing primarily in a diversified
portfolio of dividend-paying common stocks, preferred stock and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Under normal conditions,
at least 80% of the Portfolio's total assets will be invested in common stocks
and at least 65% of the Portfolio's total assets will be invested in common
stocks that, at the time of investment, pay regular dividends.
The Portfolio will generally invest a majority of its assets in common
stocks of issuers with total market capitalization of $1 billion or greater at
the time of purchase, but may invest in
15
<PAGE> 21
securities of companies having various levels of market capitalization,
including smaller companies whose securities may be more volatile and less
liquid than securities issued by larger companies with higher levels of net
worth. Investments will be in companies in various industries.
The Portfolio may also invest up to 20% of its total assets in foreign
securities, including securities of foreign issuers in the form of ADRs. The
Portfolio may not invest more than 5% of its total assets in the securities of
companies based in an emerging market. See "Risk Factors and Certain Investment
Techniques -- Foreign Securities" and "-- Risks Associated with Emerging Markets
Securities."
The Portfolio may invest under normal circumstances up to 20% of its
total assets in preferred stocks, convertible preferred stock, bonds,
convertible debentures and other fixed-income instruments (the "Fixed Income
Instruments"). Within this 20% limitation, the Portfolio may invest in any
combination of Fixed Income Instruments subject to the following additional
limitations:
<TABLE>
<CAPTION>
Type and Ratings of
Fixed Income Instruments Limitation
------------------------ ----------
<S> <C>
Convertible Fixed Income Instruments
rated at least Ba by Moody's or BB by S&P ................. Up to 20% of the Portfolio's total assets
Non-convertible Fixed Income Instruments
rated at least Baa by Moody's or BBB by S&P................ Up to 20% of the Portfolio's total assets
Non-convertible Fixed Income Instruments
rated below Baa by Moody's or BBB by S&P................... Up to 5% of the Portfolio's total assets
</TABLE>
See "Risk Factors and Certain Investment Techniques -- Convertible
Securities" and "-- Medium and Lower Rated and Unrated Debt Securities."
The Portfolio may invest up to 10% of its total assets in real estate
investment trusts ("REITs"), which pool investors' funds for investment
primarily in income-producing real estate or real estate-related loans or
interests. See "Risk Factors and Certain Investment Techniques -- Real Estate
Investment Trusts."
The Portfolio may also invest up to 5% of its total assets in Standard
& Poor's Depositary Receipts ("SPDRs") in order to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or to minimize
trading costs. SPDRs represent ownership in a unit investment trust that holds a
portfolio of stocks designed to track the performance of the S&P 500 Index.
SPDRs are traded on the American Stock Exchange. See "Risk Factors and Certain
Investment Techniques -- Standard & Poor's Depositary Receipts."
BALANCED PORTFOLIO
The investment objective of the Portfolio is growth of capital and
income through investment in common stocks and fixed-income securities. Under
normal circumstances, the Advisor expects approximately 60% of the Portfolio's
total assets to be invested in equity securities and 40% of its total assets to
be invested in fixed-income securities. For this purpose, "equity
16
<PAGE> 22
securities" includes warrants, preferred stock and securities convertible into
equity securities. The Portfolio will, under normal circumstances, invest at
least 25% of the Portfolio's total assets in fixed-income senior securities. For
purposes of this requirement, only the fixed-income component of a convertible
bond will be considered.
The Portfolio may invest in the types of fixed-income securities
(including preferred stock), described below under the heading "Bond Portfolio."
The Portfolio will not invest in any bond rated lower than B by S&P or by
Moody's.
Up to one-third of the Portfolio's assets may be invested in foreign
equity or fixed-income securities. No more than 15% of the Portfolio's total
assets will be invested in the securities of issuers based in emerging markets.
See "Risk Factors and Certain Investment Techniques -- Foreign Securities" and
"-- Risks Associated with Emerging Markets Securities."
INCOME OPPORTUNITY PORTFOLIO
The investment objective of the Portfolio is high current income from
investment in a diversified portfolio of high yield, non-investment grade debt
securities of both U.S. and non-U.S. issuers and in mortgage related securities.
To the extent consistent with its primary objective, the Portfolio will also
seek capital appreciation. The Portfolio intends to invest a portion of its
assets in high risk, low quality debt securities of both corporate and
government issuers, commonly referred to as "junk bonds," and regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation as well as
debt securities of issuers located in emerging market countries.
The Portfolio may invest in debt obligations (which may be denominated in
U.S. dollars or in non-U.S. currencies) issued or guaranteed by foreign
corporations, certain supranational entities (such as the World Bank) and
foreign governments (including political subdivisions having taxing authority)
or their agencies or instrumentalities, and debt obligations issued by U.S.
corporations denominated in non-U.S. currencies. These investments may include
debt obligations such as bonds (including sinking fund and callable bonds),
debentures and notes (including variable and floating rate instruments),
together with preferred stocks and zero coupon securities. The Portfolio may
also invest in loans, other direct debt obligations and loan participations.
Up to 100% of the assets of the Portfolio may be invested in foreign
fixed-income securities, but no more than 30% of the total assets of the
Portfolio may be invested in non-U.S. dollar denominated securities. The
Portfolio may invest up to 65% of its total assets in debt securities of issuers
located in emerging market countries. See "Risk Factors and Certain Investment
Techniques -- Foreign Securities."
The market value of debt securities held by the Income Opportunity
Portfolio, and the net asset value of the Portfolio, will be affected by
general changes in interest rates. The market value of debt securities held by
a Portfolio can be expected to vary inversely to changes in prevailing interest
rates. See "Risk Factors and Certain Investment Techniques -- Fixed-Income and
Other Debt Instrument Securities."
The Portfolio will generally invest in securities rated BBB or lower by
S&P or Baa or lower by Moody's or, if unrated, of comparable quality in the
opinion of the Portfolio Advisor. Securities rated BBB by S&P or Baa by Moody's
possess some speculative characteristics. See the Appendix hereto for a
description of Moody's and S&P ratings and "Risk Factors and Certain Investment
17
<PAGE> 23
Techniques -- Medium and Lower Rated and Unrated Securities" for a description
of certain risks associated with lower rated securities.
In addition to high yield corporate bonds, the Portfolio will also invest
in mortgage related securities which represent pools of mortgage loans assembled
for sale to investors by various governmental agencies, such as GNMA, and
government related organizations, such as FNMA and FHLMC, as well as by private
issuers, such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies.
The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and trading
currency futures contracts and options thereon.
BOND PORTFOLIO
The investment objective of the Portfolio is to provide high current
income primarily through investments in investment grade bonds. Investment grade
bonds are those rated at least Baa by Moody's or BBB by S&P or unrated bonds
considered by the Portfolio Advisor to be of comparable quality. Under normal
circumstances, at least 65% of the value of the Portfolio's total assets will be
invested in the following types of securities: U.S. Treasury obligations,
corporate bonds, debentures, mortgage-related securities issued by various
governmental agencies, such as GNMA and government related organizations, such
as FNMA and FHLMC, including CMOs, privately issued mortgage-related securities
(including CMOs), stripped U.S. Government and mortgage-related securities,
non-publicly registered securities, asset backed securities, and Eurodollar
certificates of deposit and Eurodollar bonds. The Portfolio will also invest
in preferred stock.
No more than 60% of the Portfolio's total assets will be invested in
mortgage-related securities. The Portfolio will not invest in any bond rated
lower than B by S&P or by Moody's. The Portfolio will invest less than 35% of
its assets in U.S. or foreign non-investment grade (junk) bonds or preferred
stock. High risk, lower quality debt securities are regarded as predominantly
speculative with respect to the issuer's ability to pay interest and repay
principal in accordance with the terms of the obligation. Up to 20% of the
Portfolio's assets may be invested in fixed-income securities denominated in
foreign currencies. These foreign securities must meet the same rating and
quality standards as the Portfolio's U.S. dollar-denominated investments.
See "Risk Factors and Certain Investment Techniques -- Foreign Securities."
The market value of debt securities held by the Bond Portfolio, and the
net asset value of the Portfolio, will be affected by general changes in
interest rates. The market value of debt securities held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. See "Risk
Factors and Certain Investment Techniques -- Foreign Securities."
The average maturity of the Portfolio will be between five and fifteen
years. The average maturity of the Portfolio's holdings may be shortened in
order to preserve capital if the Portfolio Advisor anticipates a rise in
interest rates. Conversely, the maturity may be lengthened to maximize returns
if interest rates are expected to decline.
STANDBY INCOME FUND
18
<PAGE> 24
The investment objective of the Fund is high current income to the extent
consistent with relative stability of principal. Unlike money market funds,
however, the Fund does not attempt to maintain a constant $1.00 per share net
asset value.
Investments will be diversified among a broad range of money market
instruments including short term securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements with
respect to those securities. The Fund may also invest in corporate bonds,
commercial paper, certificates of deposit ("CDs") and bankers' acceptances.
Up to 50% of the Fund's total assets may be invested in U.S.
dollar-denominated Yankee Bonds or Eurodollar certificates of deposit issued by
U.S. banks. Yankee Bonds are instruments denominated in U.S. dollars which are
issued in the U.S. by foreign issuers. Eurodollar certificates of deposit are
dollar-denominated certificates of deposit which are issued in Europe. Up to 20%
of the Fund's total assets may be invested in fixed-income securities
denominated in foreign currencies. These securities include debt securities
issued by foreign banks, corporations, or other business organizations or by
foreign governments or governmental entities (including supra-national
organizations such as the World Bank). The value of securities denominated in
currencies other than the U.S. dollar will change in response to relative
currency values. See "Risk Factors and Certain Investment Techniques -- Foreign
Securities" and "-- Currency Exchange Rates."
The Fund invests only in investment grade securities (including foreign
securities) rated Baa or higher by Moody's or BBB or higher by S&P, or in
non-rated securities which the Advisor believes to be of comparable quality.
Bonds rated Baa by Moody's or BBB by S&P have some speculative characteristics.
See "Risk Factors and Certain Investment Techniques -- Medium and Lower Rated
and Unrated Securities."
The Fund's dollar-weighted average maturity will normally be less than
one year. However, the Fund may invest in fixed-income corporate debt with
maturities of greater than twelve months; but, no individual security will have
a weighted average maturity (or average life in the case of mortgage backed
securities) of greater than five years.
SPECIAL INFORMATION CONCERNING HUB AND SPOKE(R) STRUCTURE
For purposes of the following discussion about Hub and Spoke(R)
Structure, the term "Fund" shall not include the Standby Income Fund.
The Trust and the Portfolio Trust are utilizing certain proprietary
rights, know-how and financial services referred to as Hub and Spoke(R)
Structure from Signature Financial Group, Inc.
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, each Fund seeks to achieve its investment objective by
investing all of its Assets in the corresponding Portfolio, a series of a
separate registered investment company with the same investment objectives as
the Fund. In addition to selling a beneficial interest to a Fund, a Portfolio
may sell beneficial interests to other mutual funds or institutional investors.
Such investors will
19
<PAGE> 25
invest in a Portfolio on the same terms and conditions and will pay a
proportionate share of the Portfolio's expenses. However, the other investors
investing in the Portfolio are not required to sell their shares at the same
public offering price as the Fund due to variations in sales commissions and
other operating expenses. Therefore, shareholders in a Fund should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in a Portfolio. Such differences in returns
are also present in other mutual fund structures. Information concerning other
holders of interests in a Portfolio is available from Touchstone Securities,
Inc. ("Touchstone Securities" or the "Distributor") at (800) 669-2796 (press 3).
Except as permitted by the SEC, whenever a Fund is requested to vote on
matters pertaining to the corresponding Portfolio, the Fund may either hold a
formal meeting of shareholders of the Fund or, without holding a meeting of
shareholders, request the shareholders of the Fund to provide voting
instructions. If the Fund holds a meeting at which a quorum is present, it will
cast all of its votes in the Portfolio in the same proportion as the votes of
the Fund's shareholders cast at the meeting. If a quorum is not present at the
meeting, the Fund will not vote its shares in the Portfolio on the matter under
consideration. If the Fund does not hold a meeting, but requests the
shareholders to provide voting instructions, it will cast all of its votes in
the Portfolio in the same proportion as the voting instructions received from
the Fund's shareholders. In such case, there is no requirement that the
shareholders providing instructions constitute a quorum. Because of the expense
to the Fund(s) of holding a formal shareholder meeting and the uncertainty that
a quorum for the meeting will be obtained, the Fund(s) normally will solicit
only voting instructions rather than hold a meeting. In either case, the
percentage of a Fund's votes representing Fund shareholders not voting or not
providing voting instructions will be voted by the Trustees of the Trust in the
same proportion as the Fund's shareholders who do, in fact, vote or provide
voting instructions. Even if the Trust votes all its shares at the Portfolio
meeting, funds with greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a larger
fund withdraws from a Portfolio, the remaining funds may experience higher pro
rata operating expenses, thereby producing lower returns. Additionally, a
Portfolio may become less diverse, resulting in increased portfolio risk.
(However, this possibility exists as well for traditionally structured funds
which have large or institutional investors.)
The Trust may withdraw its investment in a Portfolio as a result of
certain changes in a Portfolio's investment objective, policies or restrictions
or if the Board of Trustees of the Trust determines that it is in the best
interests of the Trust to do so. Any such withdrawal could result in a
distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, a Fund could
incur brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of a Fund. Upon any such
withdrawal, the Board of Trustees of the Trust would consider what action might
be taken, including the investment of all the Assets of the Fund in another
pooled investment entity or the retention of an investment advisor to manage the
Fund's Assets in accordance with the investment policies described above with
respect to the corresponding Portfolio. In the event that the Trustees of the
Trust were unable to accomplish either, the Trustees will seek to determine the
best course of action.
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RISK FACTORS AND CERTAIN INVESTMENT TECHNIQUES
For the purposes of the following discussion under this caption, the term
"Portfolio" shall include the Standby Income Fund.
Foreign Securities. Investing in securities issued by foreign companies
and governments involves considerations and potential risks not typically
associated with investing in obligations issued by the U.S. government and
domestic corporations. Less information may be available about foreign companies
than about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Risks Associated with Emerging Markets Securities. Investments in
"emerging markets" securities include the securities of issuers based in some of
the world's underdeveloped markets, including Eastern Europe. Investments in
securities of issuers based in underdeveloped countries entail all of the risks
of investing in foreign issuers outlined in this section to a heightened degree.
These heightened risks include: (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the smaller size of the market for such securities and a low or nonexistent
volume of trading, resulting in a lack of liquidity and in price volatility;
(iii) certain national policies which may restrict a Portfolio's investment
opportunities including restrictions on investing in issuers in industries
deemed sensitive to relevant national interests; and (iv) in the case of Eastern
Europe, the absence of developed capital market and legal structures governing
private or foreign investment and private property and the possibility that
recent favorable economic and political developments could be slowed or reversed
by unanticipated events.
So long as the Communist Party continues to exercise a significant or, in
some cases, dominant role in Eastern European countries, investments in such
countries will involve risk of
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nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, and in many cases without adequate
compensation, and there is no assurance that such expropriation will not occur
in the future. In the event of such expropriation, a Portfolio could lose a
substantial portion of any investments it has made in the affected countries.
Finally, even though certain Eastern European currencies may be convertible into
U.S. dollars, the conversion rates may be artificial in relation to the actual
market values and may be adverse to Fund shareholders.
Currency Exchange Rates. A Portfolio's share value may change
significantly when the currencies, other than the U.S. dollar, in which the
Portfolio's investments are denominated strengthen or weaken against the U.S.
dollar. Currency exchange rates generally are determined by the forces of supply
and demand in the foreign exchange markets and the relative merits of
investments in different countries as seen from an international perspective.
Currency exchange rates can also be affected unpredictably by intervention by
U.S. or foreign governments or central banks or by currency controls or
political developments in the United States or abroad.
Fixed-Income and Other Debt Instrument Securities. Fixed-income and other
debt instrument securities include all bonds, high yield or "junk" bonds,
municipal bonds, debentures, U.S. Government securities, mortgage related
securities including government stripped mortgage related securities, zero
coupon securities and custodial receipts. The market value of fixed-income
obligations of the Portfolios will be affected by general changes in interest
rates which will result in increases or decreases in the value of the
obligations held by the Portfolios. The market value of the obligations held by
a Portfolio can be expected to vary inversely to changes in prevailing interest
rates. As a result, shareholders should anticipate that the market value of the
obligations held by the Portfolio generally will increase when prevailing
interest rates are declining and generally will decrease when prevailing
interest rates are rising. Shareholders also should recognize that, in periods
of declining interest rates, a Portfolio's yield will tend to be somewhat higher
than prevailing market rates and, in periods of rising interest rates, a
Portfolio's yield will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to a Portfolio from the continuous sale of
its shares will tend to be invested in instruments producing lower yields than
the balance of its portfolio, thereby reducing the Portfolio's current yield. In
periods of rising interest rates, the opposite can be expected to occur. In
addition, securities in which a Portfolio may invest may not yield as high a
level of current income as might be achieved by investing in securities with
less liquidity, less creditworthiness or longer maturities.
Ratings made available by S&P and Moody's are relative and subjective and
are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio investments, a Portfolio Advisor also will
make its own evaluation of these securities. Among the factors that will be
considered are the long term ability of the issuers to pay principal and
interest and general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "When-Issued and Delayed-Delivery Securities" below.
Medium and Lower Rated and Unrated Securities. Securities rated in the
fourth highest category by S&P or Moody's, BBB and Baa, respectively, although
considered investment grade, may possess speculative characteristics, and
changes in economic or other conditions are more likely to impair the ability of
issuers of these securities to make interest and principal payments than is the
case with respect to issuers of higher grade bonds.
Generally, medium or lower rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower rated debt securities, the Portfolio Advisor's
research and credit analysis are an especially important part of managing
securities of this type held by a Portfolio. In light of these risks, the Board
of Trustees has instructed the Portfolio Advisor, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
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In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Portfolios to purchase and
may also have the effect of limiting the ability of a Portfolio to sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for shareholders. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline relatively
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of these securities
by the Portfolio, but the Portfolio Advisor will consider this event in its
determination of whether the Portfolio should continue to hold the securities.
Convertible Securities. Convertible securities may offer higher income
than the common stocks into which they are convertible and include fixed-income
or zero coupon debt securities, which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
both non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
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<PAGE> 29
Real Estate Investment Trusts. The Growth and Income Fund may invest in
REITs, which can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs.
Investment in REITs is subject to risks similar to those associated with
the direct ownership of real estate (in addition to securities markets risks).
REITs are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
Standard & Poor's Depositary Receipts ("SPDRs"). The Growth & Income
Portfolio may invest in SPDRs. SPDRs typically trade like a share of common
stock and provide investment results that generally correspond to the price and
yield performance of the component common stocks of the S&P 500 Index. There can
be no assurance that this can be accomplished as it may not be possible for the
portfolio to replicate and maintain exactly the composition and relative
weightings of the S&P 500 Index securities. SPDRs are subject to the risks of an
investment in a broadly based portfolio of common stocks, including the risk
that the general level of stock prices may decline, thereby adversely affecting
the value of such investment.
ADVISOR AND PORTFOLIO ADVISORS
ADVISOR
Touchstone Advisors, located at 311 Pike Street, Cincinnati, Ohio 45202,
serves as the investment advisor to the Portfolio Trust and, accordingly, as
investment advisor to each of the Portfolios and to the Standby Income Fund.
Touchstone Advisors is a wholly-owned subsidiary of IFS Financial Services,
Inc., which is a wholly-owned subsidiary of Western-Southern Life Assurance
Company. Western-Southern Life Assurance Company is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company.
The Portfolio Trust (as to each of the Portfolios) and the Trust (only
with respect to the Standby Income Fund) have entered into investment advisory
agreements (the "Advisory Agreements") with the Advisor which, in turn, has
entered into a portfolio advisory agreement ("Portfolio Agreement") with each
Portfolio Advisor selected by the Advisor for the Portfolios and for the Standby
Income Fund. It is the Advisor's responsibility to select, subject to the review
and approval of the Board of Trustees of the Portfolio Trust and (in the case of
the Standby Income Fund) the Board of Trustees of the Trust, portfolio advisors
who have distinguished themselves by able performance in their respective areas
of expertise in asset management and to review their continued performance.
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<PAGE> 30
Subject to the supervision and direction of the Board of Trustees, the
Advisor provides investment management evaluation services principally by
performing initial due diligence on prospective Portfolio Advisors and
thereafter monitoring Portfolio Advisor performance through quantitative and
qualitative analysis as well as periodic in-person, telephonic and written
consultations with Portfolio Advisors. In evaluating prospective Portfolio
Advisors, the Advisor considers, among other factors, each Portfolio Advisor's
level of expertise; relative performance and consistency of performance over a
minimum period of five years; level of adherence to investment discipline or
philosophy; personnel, facilities and financial strength; and quality of service
and client communications. The Advisor has responsibility for communicating
performance expectations and evaluations to each Portfolio Advisor and
ultimately recommending to the respective Board of Trustees whether the
Portfolio Advisor's contract should be renewed, modified or terminated. The
Advisor provides written reports to the respective Board of Trustees regarding
the results of its evaluation and monitoring functions. The Advisor is also
responsible for conducting all operations of the Portfolios and Funds except
those operations subcontracted to the Portfolio Advisors, custodian, transfer
agent and administrator.
The Portfolio Advisor of each Portfolio and of the Standby Income Fund
makes all the day-to-day decisions to buy or sell particular portfolio
securities. The Emerging Growth Portfolio is managed by two Portfolio Advisors,
each managing a portion of the Portfolio's assets. The Advisor will allocate
varying percentages of the assets of the Portfolio to each Portfolio Advisor,
which percentages will be adjusted from time to time by the Advisor based on its
evaluation of each Portfolio Advisor.
Each Portfolio and the Standby Income Fund pays the Advisor a fee for its
services that is computed daily and paid monthly at an annual rate equal to the
percentage of the value of the average daily net assets of the Portfolio or Fund
as follows: Value Plus Portfolio - 0.75%; Emerging Growth Portfolio - 0.80%;
International Equity Portfolio - 0.95%; Growth & Income Portfolio - 0.80% on the
first $150 million of average net assets and 0.75% thereafter; Balanced
Portfolio - 0.80%; Income Opportunity Portfolio - 0.65%; Bond Portfolio - 0.55%;
and Standby Income Fund - 0.25%. The investment advisory fee paid by the Value
Plus, Emerging Growth, International Equity, Growth & Income and Balanced
Portfolios is higher than that of most mutual funds.
The Advisor in turn pays each Portfolio Advisor a fee for its services
provided to the Portfolio or Fund that is computed daily and paid monthly at an
annual rate equal to the percentage specified below of the value of the average
daily net assets of the Portfolio or Fund managed by that Portfolio Advisor:
Value Plus Portfolio
Fort Washington Investment Advisors, Inc. 0.45%
Emerging Growth Portfolio
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David L. Babson & Company, Inc. 0.50%
Westfield Capital Management 0.45% on the first $10 million
Company & Inc. 0.40% on the next $40 million
0.35% thereafter
International Equity Portfolio
BEA Associates 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
Growth & Income Portfolio
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
Balanced Portfolio
OpCap Advisors 0.60% on the first $20 million*
0.50% on the next $30 million*
0.40% thereafter*
Income Opportunity Portfolio
Alliance Capital Management L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
Bond Portfolio
Fort Washington Investment Advisors, Inc. 0.30%
Standby Income Fund
Fort Washington Investment 0.15%
Advisors, Inc.
- -----------
* Includes assets of the Balanced Portfolio of the Portfolio Trust and the
Balanced Portfolio of the Select Advisors Variable Insurance Trust (a
portfolio for which OpCap Advisors also acts in an investment advisory
capacity).
Fort Washington Investment Advisors, Inc. is an affiliate of the Advisor,
and shareholders should be aware that the Advisor may be subject to a conflict
of interest when making decisions regarding the retention and compensation of
Fort Washington and may be subject to such a conflict
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concerning other particular Portfolio Advisors. However, the Advisor's
decisions, including the identity of a Portfolio Advisor and the specific amount
of the Advisor's compensation to be paid to the Portfolio Advisor, are subject
to review and approval by a majority of the respective Board of Trustees and
separately by a majority of such Trustees who are not affiliated with the
Advisor or any of its affiliates.
PORTFOLIO ADVISORS
Subject to the supervision and direction of the Advisor and, ultimately,
the respective Board of Trustees, each Portfolio Advisor manages the securities
held by the Portfolio or Fund it serves in accordance with the Portfolio's or
Fund's stated investment objective and policies, making investment decisions for
the Portfolio or Fund and placing orders to purchase and sell securities on
behalf of the Portfolio or Fund.
The following sets forth certain information about each of the Portfolio
Advisors. The individuals employed by the Portfolio Advisor who are primarily
responsible for the day-to-day investment management of the Portfolio or Fund
are named below.
FORT WASHINGTON INVESTMENT ADVISORS, INC. ("Fort Washington") serves as
the Portfolio Advisor to the Value Plus Portfolio. Fort Washington is owned by
The Western and Southern Life Insurance Company. Fort Washington has been
registered as an investment advisor under the Investment Advisers Act of 1940,
as amended, ("the Advisers Act"), since 1990. Fort Washington provides
investment advisory services to individual and institutional clients. As of
December 31, 1997, Fort Washington had assets under management of $9.0 billion.
John C. Holden is primarily responsible for the day-to-day investment management
of the Portfolio. Mr. Holden (CFA) joined Western and Southern/Fort Washington
in May 1997 and is Vice President and Senior Portfolio Manager. Mr. Holden
previously served as senior portfolio manager with Mellon Private Asset
Management in Pittsburgh, senior portfolio manager and investment analyst for
Star Bank's Stellar Performance Group in Cincinnati, and senior employee benefit
portfolio manager for First Kentucky Trust Company in Louisville. Fort
Washington's principal executive offices are located at 420 East Fourth Street,
Cincinnati, Ohio 45202.
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DAVID L. BABSON & COMPANY, INC. ("Babson") serves as one of two Portfolio
Advisors to the Emerging Growth Portfolio. Babson is an indirect subsidiary of
MassMutual Holding Company. Babson has been registered as an investment advisor
under the Advisers Act since 1940. Babson provides investment advisory services
to individual and institutional clients. As of December 31, 1997, Babson and
affiliates had assets under management of $19.7 billion. Eugene H. Gardner, Jr.,
Peter C. Schliemann and Lance F. James are primarily responsible for the
day-to-day investment management of the portion of the Portfolio's assets
allocated to Babson by the Advisor. Mr. Gardner has been with Babson since 1990;
Mr. Schliemann has been with Babson since 1979; and Mr. James has been with the
firm since 1986. Babson's principal executive offices are located at One
Memorial Drive, Cambridge, Massachusetts 02142-1300.
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC. ("Westfield") serves as the
second Portfolio Advisor to the Emerging Growth Portfolio. As of October 31,
1997, Westfield became an indirect, wholly-owned subsidiary of Boston Private
Bancorp, Inc. ("BPB"). Westfield has been registered as an investment advisor
under the Advisers Act since 1989. Westfield provides investment advisory
services to individual and institutional clients. As of December 31, 1997,
Westfield had assets under management of $1.4 billion. BPB was established in
May 1987. BPB is the parent company of Boston Private Bank & Trust Company, a
private bank serving clients in New England with banking and investment
products. Michael J. Chapman is primarily responsible for the day-to-day
investment management of the portion of the Portfolio's assets allocated to
Westfield by the Advisor. Mr. Chapman (CFA) has been with Westfield since 1990,
after 9 years with Eaton Vance Corporation in Boston, Massachusetts. Westfield's
principal executive offices are located at One Financial Center, Boston,
Massachusetts 02111.
BEA ASSOCIATES ("BEA") serves as Portfolio Advisor to International
Equity Portfolio. BEA is a New York general partnership organized in 1990 and is
a wholly-owned subsidiary of Credit Suisse Group, the second largest Swiss bank.
BEA has been registered as an investment advisor under the Advisers Act since
1968. BEA provides investment advisory services to individual and institutional
clients. As of December 31, 1997, BEA had assets under management of $34.2
billion. BEA's principal executive offices are located at One Citicorp Center,
153 East 53rd Street, New York, New York 10022.
The Portfolio is managed by the BEA International Equity Management Team.
The team consists of the following investment professionals: William Sterling,
Richard Watt, Steven D. Bleiberg, Susan Boland, Emily Alejos and Robert B.
Hrabchak. Mr. Sterling joined BEA in 1995, prior to which time he was the head
of International Economics at Merrill Lynch & Company. Mr. Watt joined BEA in
1995, prior to which time he was the head of emerging markets investments and
research at Gartmore Investment Limited in London. Mr. Bleiberg has been an
investment professional with BEA for more than five years. Ms. Boland joined BEA
in 1996, prior to which time she was a director and portfolio manager for Barran
& Partners Limited. Prior to 1995, she was a partner and European portfolio
manager for Teton Partners. Ms. Alejos joined BEA in 1997, prior to which time
she was a Vice President and an emerging markets portfolio manager with Bankers
Trust. Mr. Hrabchak joined BEA in 1997, prior to which time he was a senior
portfolio manager at Merrill Lynch Asset Management in Hong Kong. Prior to 1995,
he was an associate in investment banking at Salomon Brothers.
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SCUDDER KEMPER INVESTMENTS, INC. ("Scudder Kemper") serves as the
Portfolio Advisor to the Growth & Income Portfolio. Scudder, Stevens & Clark,
Inc. ("Scudder"), which registered as an investment advisor under the Advisers
Act in 1943, served as the Portfolio Advisor to the Portfolio until December 31,
1997. As of December 31, 1997, a strategic alliance between Scudder and the
Zurich Group ("Zurich") was completed, the operations of Scudder and Zurich
Kemper Investments, Inc., a subsidiary of Zurich, were combined, and the
combined operations were named Scudder Kemper Investments, Inc. Scudder Kemper
is owned 69.5% by Zurich and 30.5% by senior employees of Scudder Kemper.
Scudder Kemper provides investment advisory services to mutual fund investors,
retirement and pension plans, institutional and corporate clients, insurance
companies, and private family and individual accounts. As of December 31, 1997,
Scudder Kemper had assets under management of more than $200 billion. Zurich is
a leading, internationally recognized provider of insurance and financial
services in non-life and life insurance, and reinsurance as well as asset
management.
Robert T. Hoffman, Lori Ensinger, Benjamin W. Thorndike and Kathleen T.
Millard are the individuals primarily responsible for the day-to-day management
of the Portfolio. Mr. Hoffman, Lead Product Manager, joined Scudder in 1990. He
has 13 years of experience in the investment industry, including several years
of pension fund management experience. Lori Ensinger, Lead Portfolio Manager,
focuses on stock selection and investment strategy. She has worked as a
portfolio manager since 1983 and joined Scudder in 1993. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 18 years of investment
experience, joined Scudder in 1983. Kathleen T. Millard, Portfolio Manager, has
been involved in the investment industry since 1983 and has worked as a
portfolio manager since 1986. Ms. Millard, who joined Scudder in 1991, focuses
on strategy and stock selection. Scudder Kemper's principal executive offices
are located at 345 Park Avenue, New York, New York.
Scudder Kemper may use its affiliated broker to execute portfolio
transactions for the Growth and Income Portfolio provided the commissions paid
to the affiliated broker are reasonable and fair in comparison to commissions
paid to other brokers in connection with comparable transactions. The Board of
Trustees reviews transactions executed through an affiliated broker on a
quarterly basis.
OPCAP ADVISORS ("OpCap") serves as Portfolio Advisor to the Balanced
Portfolio. OpCap is a majority-owned subsidiary of Oppenheimer Capital, a
registered investment advisor whose employees perform all investment advisory
services provided to the Portfolio by OpCap. Oppenheimer Capital has operated as
an investment advisor since 1968. As of December 31, 1997, Oppenheimer Capital
and its subsidiaries had assets under management of $61.5 billion. On November
4, 1997, PIMCO Advisors L.P. ("PIMCO Advisors") and its affiliates acquired
control of Oppenheimer Capital and its subsidiary, OpCap. PIMCO Advisors is a
registered investment advisor with $130 billion in assets under management as
of December 31, 1997, through various subsidiaries.
Value Advisors LLC, a limited liability company and a wholly-owned
subsidiary of PIMCO Advisors, holds a one-third managing general partner
interest in Oppenheimer Capital and a 1.0% general partner interest in OpCap.
Oppenheimer Capital L.P., a Delaware limited partnership whose units are traded
on the New York Stock Exchange, owns the remaining two-thirds interest in
Oppenheimer Capital. PIMCO Partners G.P. ("PIMCO GP"), general partner of PIMCO
Advisors, holds the sole general partner interest in Oppenheimer Capital, L.P.
PIMCO G.P. owns approximately 42.83% and 66.37% respectively of the total
outstanding Class A and Class B units of limited partnership interests of PIMCO
Advisors. PIMCO GP is a California general partnership with two general
partners. The first of these general partners is Pacific Investment Management
Company, which is a California corporation and is wholly owned by Pacific
Financial Asset Management Company, a direct subsidiary of Pacific Life
Insurance Company ("Pacific Life"). PIMCO Partners L.L.C. ("PPLLC"), a
California limited liability company, is the second and managing general partner
of PIMCO GP. PPLLC's members are the Managing Directors (the "PIMCO Managers")
of Pacific Management Investment Company, a subsidiary of PIMCO Advisors (the
"PIMCO Subpartnership").
The PIMCO Managers are William H. Gross, Dean S. Meiling, James F. Muzzy,
William F. Podlich III, Frank B. Rabinovitch, Brent R. Harris, John L. Hague,
William S. Thompson Jr., William C. Powers, David H. Edington, Benjamin Trosky,
William R. Benz II and Lee R. Thomas III.
PIMCO Advisors is governed by an Operating Board and an Equity Board. The
PIMCO Subpartnership has the power to appoint (directly or indirectly) seven of
the twelve members of the Operating Board and therefore may be deemed to control
PIMCO Advisors. Pacific Life and the PIMCO Managers and/or the PIMCO
Subpartnership may each be deemed to control PIMCO Advisors because of direct or
indirect power to appoint 25% of the members of the Equity Board. Pacific Life,
the PIMCO Managers and the PIMCO Subpartnership disclaim such control.
Alan Gutmann is primarily responsible for the day-to-day investment
management of the equity portion of the Portfolio and
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Robert J. Bluestone and Matthew Greenwald are primarily responsible for the
day-to-day management of the fixed-income portion of the Portfolio. Mr. Gutmann
joined Oppenheimer Capital in 1991 and is Vice President. Mr. Bluestone joined
Oppenheimer Capital in 1986 and is Managing Director. Mr. Greenwald joined
Oppenheimer Capital in 1989 and is Vice President. OpCap's principal executive
offices are located at Oppenheimer Tower, One World Financial Center, New York,
NY 10281.
ALLIANCE CAPITAL MANAGEMENT L.P. ("Alliance") serves as Portfolio Advisor
to the Income Opportunity Portfolio. Alliance is owned 8% by its employees and
59% by wholly-owned subsidiaries of The Equitable Life Assurance Society of the
United States. The balance of its units are held by the public. Alliance has
been registered as an investment advisor under the Advisers Act since 1971.
Alliance provides investment advisory services to individual and institutional
clients. As of December 31, 1997, Alliance had assets under management of $217
billion. Wayne Lyski and Vicki Fuller are primarily responsible for the
day-to-day investment management of the Portfolio. Mr. Lyski has been with
Alliance since 1983. Ms. Fuller (CPA) has been with Alliance, and its
predecessors, since 1985. Alliance's principal executive offices are located at
1345 Avenue of the Americas, New York, New York 10105.
FORT WASHINGTON also serves as Portfolio Advisor to the Bond Portfolio
and the Standby Income Fund. Roger Lanham and Brendan White are primarily
responsible for the day-to-day investment management of the Bond Portfolio. Mr.
Lanham is a CFA and has been with Western and Southern/Fort Washington since
1980. Mr. White is a CFA and has been with Western and Southern/Fort Washington
since 1993. Prior to 1993, Mr. White was with Ohio Casualty Insurance Co. for
six years, managing high yield and mortgage backed assets. Christopher J.
Mahony is primarily responsible for the day-to-day investment management of the
Standby Income Fund. Mr. Mahony joined Fort Washington in 1994 after eight
years of investment experience with Neuberger & Berman.
YEAR 2000.
The investment advisory services provided to the Funds by Touchstone
Advisors, and each Portfolio Advisor and the services provided to shareholders
by Touchstone Securities, the Funds' Distributor, depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Funds' operations, including the handling of
securities trades, pricing and account services. Touchstone Advisors and
Touchstone Securities have advised the Funds that they have been reviewing all
of their computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems will be
compliant before that date. In addition, Touchstone Advisors has been advised by
the Funds' Portfolio Advisors, custodian, transfer agent, accounting service
agent and other service providers that they are also in the process of modifying
their systems with the same goal. There can, however, be no assurance that
Touchstone Advisors, Touchstone Securities or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Fund services at that time.
ADDITIONAL RISKS AND INVESTMENT TECHNIQUES
The following are descriptions of types of securities invested in by the
Portfolios, certain investment techniques employed by the Portfolios and risks
associated with utilizing either the securities or the investment technique. For
purposes of the following discussion under this caption, the term "Portfolio"
shall include the Standby Income Fund.
Derivatives. The Portfolios may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a traditional
security, asset, or market index. Some "derivatives" such as certain
mortgage-related and other asset-backed securities are in many respects like any
other investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and as a
low cost method of gaining exposure to a particular securities
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market without investing directly in those securities. However, some derivatives
are used for leverage, which tends to magnify the effects of an instrument's
price changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets, and can in some
circumstances, lead to significant losses. A Portfolio Advisor will use
derivatives only in circumstances where the Portfolio Advisor believes they
offer the most economic means of improving the risk/reward profile of the
Portfolio. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Portfolio. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Portfolios may use and some of their associated risks is found below.
ADRs, EDRs and CDRs. ADRs are U.S. dollar-denominated receipts typically
issued by domestic banks or trust companies that represent the deposit with
those entities of securities of a foreign issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States. European Depositary Receipts
("EDRs"), which are sometimes referred to as Continental Depositary Receipts
("CDRs"), may also be purchased by the Portfolios. EDRs and CDRs are generally
issued by foreign banks and evidence ownership of either foreign or domestic
securities. Certain institutions issuing ADRs or EDRs may not be sponsored by
the issuer of the underlying foreign securities. A non-sponsored depository may
not provide the same shareholder information that a sponsored depository is
required to provide under its contractual arrangements with the issuer of the
underlying foreign securities.
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U.S. Government Securities. Each Portfolio may invest in U.S. Government
securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government securities,
such as U.S. Treasury bills, Treasury notes and Treasury bonds, which differ
only in their interest rates, maturities and times of issuance, are supported by
the full faith and credit of the United States. Others are supported by: (i) the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Home Loan Banks; (ii) the discretionary authority of the U.S. government
to purchase the agency's obligations, such as securities of the FNMA; or (iii)
only the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities include: (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any of its
agencies, authorities or instrumentalities; and (ii) participation interests in
loans made to foreign governments or other entities that are so guaranteed. The
secondary market for certain of these participation interests is limited and,
therefore, may be regarded as illiquid.
Mortgage-Related Securities. Each Portfolio may invest in mortgage-
related securities. There are several risks associated with mortgage related
securities generally. One is that the monthly cash inflow from the underlying
loans may not be sufficient to meet the monthly payment requirements of the
mortgage-related security.
Prepayment of principal by mortgagors or mortgage foreclosures will
shorten the term of the underlying mortgage pool for a mortgage-related
security. Early returns of principal will affect the average life of the
mortgage-related securities remaining in a Portfolio. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. In periods of rising interest rates, the rate
of prepayment tends to decrease, thereby lengthening the average life of a pool
of mortgage-related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Portfolio. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Portfolio will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, a Portfolio's yield will correspondingly decline. Thus, mortgage-
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Portfolio
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purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage-related
securities.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the
Portfolio Advisor, the investment restriction limiting a Portfolio's investment
in illiquid instruments to not more than 15% of the value of its net assets will
apply.
Stripped Mortgage-Related Securities. These securities are either issued
and guaranteed, or privately-issued but collateralized by securities issued by,
GNMA, FNMA or FHLMC. These securities represent beneficial ownership interests
in either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage-related certificates issued by GNMA,
FNMA or FHLMC, as the case may be. The certificates underlying the stripped
mortgage-related securities represent all or part of the beneficial interest in
pools of mortgage loans. A Portfolio will invest in stripped mortgage-related
securities in order to enhance yield or to benefit from anticipated appreciation
in value of the securities at times when its Portfolio Advisor believes that
interest rates will remain stable or increase. In periods of rising interest
rates, the expected increase in the value of stripped mortgage-related
securities may offset all or a portion of any decline in value of the securities
held by the Portfolio.
Investing in stripped mortgage-related securities involves the risks
normally associated with investing in mortgage-related securities. See
"Mortgage-Related Securities" above. In addition, the yields on stripped
mortgage-related securities are extremely sensitive to the prepayment experience
on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
interest-only stripped mortgage-related securities and increasing the yield to
maturity on principal-only stripped mortgage-related securities. Sufficiently
high prepayment rates could result in a Portfolio not fully recovering its
initial investment in an interest-only stripped mortgage-related security. Under
current market conditions, the Portfolios expect that investments in stripped
mortgage-related securities will consist primarily of interest-only securities.
Stripped mortgage-related securities are currently traded in an over-the-counter
market maintained by several large investment banking firms. There can be no
assurance that the Portfolio will be able to effect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Portfolio will
acquire stripped mortgage-related securities only if a secondary market for the
securities exists at the time of acquisition. Except for government stripped
mortgage-related securities based on fixed rate FNMA and FHLMC mortgage
certificates that meet certain liquidity criteria established by the respective
Board of Trustees, the Portfolios will treat government stripped
mortgage-related securities and
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privately-issued mortgage-related securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% of net assets.
Zero Coupon Securities. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon securities do not require the periodic payment
of interest. These investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government securities
that make regular payments of interest. A Portfolio accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations, in which case the Portfolio will forego the purchase
of additional income producing assets with these funds. Zero coupon securities
include STRIPS, that is, securities underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities. They also include Coupons Under Book Entry
System ("CUBES"), which are component parts of U.S. Treasury bonds and represent
scheduled interest and principal payments on the bonds.
Loans and Other Direct Debt Instruments. These are instruments in amounts
owed by a corporate, governmental or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables) or to other parties. Direct debt instruments purchased by a
Portfolio may have a maturity of any number of days or years, may be secured or
unsecured, and may be of any credit quality. Direct debt instruments involve the
risk of loss in the case of default or insolvency of the borrower. Direct debt
instruments may offer less legal protection to a Portfolio in the event of fraud
or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. Direct debt
instruments also may include standby financing commitments that obligate a
Portfolio to supply additional cash to the borrower on demand at the time when a
Portfolio would not have otherwise done so, even if the borrower's condition
makes it unlikely that the amount will ever be repaid.
These instruments will be considered illiquid securities and so will be
limited, along with a Portfolio's other illiquid securities, to not more than
15% of the Portfolio's net assets.
Swap Agreements. To help enhance the value of its portfolio or manage its
exposure to different types of investments, the Portfolios may enter into
interest rate, currency and mortgage swap agreements and may purchase and sell
interest rate "caps," "floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make
regular payments equal to a floating interest rate on a specified amount (the
"notional principal amount") in return for payments equal to a fixed interest
rate on the same amount for a specified period. If a swap
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agreement provides for payment in different currencies, the parties may also
agree to exchange the notional principal amount. Mortgage swap agreements are
similar to interest rate swap agreements, except that notional principal amount
is tied to a reference pool of mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed level; the purchaser of an interest rate floor
has the right to receive payments to the extent a specified interest rate falls
below an agreed level. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile;
depending on how they are used, they may have considerable impact on a
Portfolio's performance. Swap agreements involve risks depending upon the other
party's creditworthiness and ability to perform, as judged by the Portfolio
Advisor, as well as the Portfolio's ability to terminate its swap agreements or
reduce its exposure through offsetting transactions.
All swap agreements are considered as illiquid securities and, therefore,
will be limited, along with all of a Portfolio's other illiquid securities, to
15% of that Portfolio's net assets.
Custodial Receipts. Custodial receipts or certificates, such as
Certificates of Accrual on Treasury Securities ("CATS"), Treasury Investors
Growth Receipts ("TIGRs") and Financial Corporation certificates ("FICO
Strips"), are securities underwritten by securities dealers or banks that
evidence ownership of future interest payments, principal payments or both on
certain notes or bonds issued by the U.S. Government, its agencies, authorities
or instrumentalities. The underwriters of these certificates or receipts
purchase a U.S. Government security and deposit the security in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities, described above. Although
typically under the terms of a custodial receipt a Portfolio is authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, if the underlying issuer fails to
pay principal and/or interest when due, a Portfolio may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Portfolio had purchased a direct obligation of the issuer. In addition, if
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, the yield on the underlying security would be reduced
in respect of any taxes paid.
When-Issued and Delayed-Delivery Securities. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for
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the purpose of acquiring securities and not for the purpose of leverage.
When-issued securities purchased by the Portfolio may include securities
purchased on a "when, as and if issued" basis under which the issuance of the
securities depends on the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may
expose a Portfolio to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Repurchase Agreements. Each of the Portfolios may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Portfolio would acquire an underlying debt obligation for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding period. A Portfolio may
enter into repurchase agreements with respect to U.S. Government securities with
member banks of the Federal Reserve System and certain non-bank dealers approved
by the respective Board of Trustees. Under each repurchase agreement, the
selling institution is required to maintain the value of the securities subject
to the repurchase agreement at not less than their repurchase price. The
Portfolio Advisor, acting under the supervision of the Advisor and the
respective Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those non-bank dealers with whom the
Portfolio enters into repurchase agreements. In entering into a repurchase
agreement, a Portfolio bears a risk of loss in the event that the other party to
the transaction defaults on its obligations and the Portfolio is delayed or
prevented from exercising its rights to dispose of the underlying securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Portfolio seeks to assert its rights
to them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or a part of the income from the agreement.
Repurchase agreements are considered to be collateralized loans under the
Investment Company Act of 1940 (the "1940 Act").
Reverse Repurchase Agreements and Forward Roll Transactions. The
Portfolios may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Portfolio agrees to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price. Forward roll
transactions are equivalent to reverse repurchase agreements but involve
mortgage-backed securities and involve a repurchase of a substantially similar
security. At the time the Portfolio enters into a reverse repurchase agreement
or forward roll transaction it will place in a segregated custodial account cash
or liquid securities having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements and forward roll transactions
involve the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of the securities. Reverse repurchase
agreements and forward roll transactions are considered to be
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borrowings by a Portfolio for purposes of the limitations described in "Certain
Investment Restrictions" below and in the Trust's Statement of Additional
Information.
Lending Portfolio Securities. Each Portfolio may lend securities to
brokers, dealers and other financial organizations. These loans, if and when
made, may not exceed 30% of a Portfolio's assets taken at value. A Portfolio's
loans of securities will be collateralized by cash, letters of credit or U.S.
Government securities. The cash or instruments collateralizing a Portfolio's
loans of securities will be maintained at all times in a segregated account with
the Portfolio's custodian, or with a designated subcustodian, in an amount at
least equal to the current market value of the loaned securities. In lending
securities to brokers, dealers and other financial organizations, a Portfolio is
subject to risks, which, like those associated with other extensions of credit,
include delays in recovery and possible loss of rights in the collateral should
the borrower fail financially.
Illiquid Securities. No Portfolio may invest more than 15% of its net
assets in securities which are illiquid or otherwise not readily marketable. The
Trustees of the Portfolio Trust have adopted a policy that the International
Equity Portfolio may not invest in illiquid securities other than Rule 144A
securities. If a security becomes illiquid after purchase by the Portfolio, the
Portfolio will normally sell the security unless to do so would not be in the
best interests of shareholders.
Non-Publicly Traded ("Restricted") Securities and Rule 144A Securities.
Each Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. Provided
that a dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Portfolio's 15% limit on illiquid securities. The respective Board of Trustees,
with advice and information from the respective Portfolio Advisor, will
determine the liquidity of restricted securities or Rule 144A securities by
looking at factors such as trading activity and the availability of reliable
price information and, through reports from such Portfolio Advisor, the Board of
Trustees will monitor trading activity in restricted securities. If
institutional trading in restricted securities or Rule 144A securities were to
decline, a Portfolio's illiquidity could be increased and the Portfolio could be
adversely affected.
No Portfolio will invest more than 10% of its total assets in restricted
securities (excluding Rule 144A securities).
Temporary Investments. For temporary defensive purposes during periods
when the Portfolio Advisor of a Portfolio believes, in consultation with the
Advisor, that pursuing the Portfolio's basic investment strategy may be
inconsistent with the best interests of its shareholders, the Portfolio may
invest its assets without limit in the following money market instruments:
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (including those purchased in the form of custodial receipts),
repurchase agreements, certificates of deposit, master notes, time deposits and
bankers' acceptances issued by
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banks or savings and loan associations having assets of at least $500 million as
of the end of their most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Portfolio Advisor of the
International Equity Portfolio may invest without limit in obligations issued or
guaranteed by foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated at least AA by S&P or
Aa by Moody's or, if unrated, are determined by the Portfolio Advisor to be of
equivalent quality. Each Portfolio also may hold a portion of its assets in
money market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investments in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued basis.
Futures Contracts and Related Options. Each Portfolio may enter into
futures contracts and purchase and write (sell) options on these contracts,
including but not limited to interest rate, securities index and foreign
currency futures contracts and put and call options on these futures contracts.
These contracts will be entered into only upon the concurrence of the Portfolio
Advisor that such contracts are necessary or appropriate in the management of
the Portfolio's assets. These contracts will be entered into on exchanges
designated by the Commodity Futures Trading Commission ("CFTC") or, consistent
with CFTC regulations, on foreign exchanges. These transactions may be entered
into for bona fide hedging and other permissible risk management purposes
including protecting against anticipated changes in the value of securities a
Portfolio intends to purchase.
No Portfolio will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Portfolio will buy futures or write puts whose underlying value exceeds 25% of
its total assets, and no Portfolio will buy calls with a value exceeding 5% of
its total assets.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to a Portfolio
Advisor's ability to predict correctly movements in the direction of the
securities markets generally, which ability may require different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may realize
a loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are
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being hedged or a Portfolio may not be able to close a futures or options
position without incurring a loss in the event of adverse price movements.
Options on Foreign Currencies. Each Portfolio that may invest in foreign
securities may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. The Portfolio may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different, but related currency.
As with other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the premium
received, and the Portfolio could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Portfolio's position, it may not forfeit the entire amount of the
premium plus related transaction costs. In addition, the Portfolio may purchase
call options on currency when the Portfolio Advisor anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire. Similarly, if the Portfolio is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying currency. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. The
Portfolio's ability to terminate over-the-counter options ("OTC Options") will
be more limited than the exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Portfolio will treat purchased OTC Options and assets used to cover written OTC
Options as illiquid securities. With respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase formula.
Options on Stock. Each Portfolio which invests in equity securities may
write or purchase options on stock. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying stock
at the exercise price at any time during the option period. Similarly, a put
option gives the purchaser of the option the right to sell, and obligates the
writer to buy the underlying stock at the exercise price at any time during the
option period. A covered call option with respect to which a Portfolio owns the
underlying stock sold by the Portfolio exposes the Portfolio during the term of
the option to possible loss of opportunity to realize appreciation in the
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market price of the underlying stock or to possible continued holding of a stock
which might otherwise have been sold to protect against depreciation in the
market price of the stock. A covered put option sold by a Portfolio exposes the
Portfolio during the term of the option to a decline in price of the underlying
stock.
To close out a position when writing covered options, a Portfolio may
make a "closing purchase transaction" which involves purchasing an option on the
same stock with the same exercise price and expiration date as the option which
it has previously written on the stock. The Portfolio will realize a profit or
loss for a closing purchase transaction if the amount paid to purchase an option
is less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, a Portfolio may
make a "closing sale transaction" which involves liquidating the Portfolio's
position by selling the option previously purchased.
Options on Securities Indexes. Each Portfolio may purchase and write put
and call options on securities indexes listed on domestic and, in the case of
those Portfolios which may invest in foreign securities, on foreign exchanges. A
securities index fluctuates with changes in the market values of the securities
included in the index.
Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Portfolio may invest in options on foreign stock indexes in
lieu of direct investment in foreign securities. The Portfolio may also use
foreign stock index options for hedging purposes.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether the
Portfolio will realize a gain or loss from the purchase or writing of options on
an index depends upon movements in the level of securities prices in the market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in price of a particular security. Accordingly, successful
use by a Portfolio of options on security indexes will be subject to the
Portfolio Advisor's ability to predict correctly
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<PAGE> 46
movement in the direction of that securities market generally or of a particular
industry. This requires different skills and techniques than predicting changes
in the price of individual securities.
Forward Currency Contracts. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another, for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be negotiated
with a currency trader and fixed for the term of the contract at the time that
the Portfolio enters into the contract.
In hedging specific portfolio positions, a Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio Advisor. The
amount the Portfolio may invest in forward currency contracts is limited to the
amount of the Portfolio's aggregate investments in foreign currencies. Risks
associated with entering into forward currency contracts include the possibility
that the market for forward currency contracts may be limited with respect to
certain currencies and, upon a contract's maturity, the inability of a Portfolio
to negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not be perfect. There is no assurance that an active forward
currency contract market will always exist. These factors will restrict a
Portfolio's ability to hedge against the risk of devaluation of currencies in
which a Portfolio holds a substantial quantity of securities and are unrelated
to the qualitative rating that may be assigned to any particular security. See
the Statement of Additional Information for further information concerning
forward currency contracts.
Asset Coverage. To assure that a Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery transactions, forward
currency contracts and swap transactions, are not used to achieve investment
leverage, the Portfolio will cover such transactions, as required under
applicable SEC interpretations, either by owning the underlying securities or by
establishing a segregated account with the Portfolio's custodian containing
liquid securities in an amount at all times equal to or exceeding the
Portfolio's commitment with respect to these instruments or contracts.
CERTAIN INVESTMENT RESTRICTIONS
Each Portfolio has adopted certain investment restrictions that are
enumerated in detail in the Statement of Additional Information. The following
are summaries of these restrictions; see the Statement of Additional Information
for the full text of these restrictions. Among other restrictions, each
Portfolio may not, with respect to 75% of its total assets taken at market
value, invest more
41
<PAGE> 47
than 5% of its total assets in the securities of any one issuer or acquire more
than 10% of the outstanding voting securities of any one issuer, except U.S.
Government securities. In addition, each Portfolio may not invest more than 25%
of its total assets in securities of issuers in any one industry. Each Portfolio
may borrow money as a temporary measure from banks in an aggregate amount not
exceeding one-third of the value of the Portfolio's total assets. Reverse
repurchase agreements and forward roll transactions involving mortgage related
securities will be aggregated with bank borrowings for purposes of this
calculation. No Portfolio may purchase securities while borrowings exceed 5% of
the value of the Portfolio's total assets. No Portfolio will invest more than
15% of the value of its net assets in securities that are illiquid, including
certain government stripped mortgage related securities, repurchase agreements
maturing in more than seven days and that cannot be liquidated prior to maturity
and securities that are illiquid by virtue of the absence of a readily available
market. Securities that have legal or contractual restrictions on resale but
have a readily available market, such as certain Rule 144A securities, are
deemed not illiquid for this purpose. No Portfolio may invest more than 10% of
its assets in restricted securities (excluding Rule 144A securities).
PORTFOLIO TURNOVER
No Portfolio, other than the Standby Income Fund, will trade in
securities for short term profits but, when circumstances warrant, securities
may be sold without regard to the length of time held. An annual turnover rate
of 100% would occur when all the securities held by the Portfolio are replaced
one time during a period of one year. For the fiscal years ended December 31,
1997 and 1996, the annual turnover rate of each of the following Portfolios was:
Emerging Growth Portfolio -- 101% and 117%; International Equity Portfolio --
151% and 86%; Growth & Income Portfolio -- 170% and 92%; Balanced Portfolio --
120% and 88% (equity investments -- 92% and 68%, fixed-income investments -- 6%
and 19%); Income Opportunity Portfolio -- 270% and 222%; Bond Portfolio -- 88%
and 64% and Standby Income Fund -- 285% and 20%, respectively. It is expected
that the annual portfolio turnover rate for the Value Plus Portfolio will be
between 50% and 100%. A portfolio turnover rate of approximately 100% may be
higher than those of other mutual funds. A Portfolio with a higher portfolio
turnover rate will have higher brokerage transaction expenses and a higher
incidence of realized capital gains or losses. See "Taxation" and "Portfolio
Transactions and Brokerage Commissions" in the Statement of Additional
Information.
PURCHASE OF SHARES
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<PAGE> 48
GENERAL
Shares of a Fund may be purchased at the public offering price, which is
the net asset value next determined after receipt of an order, plus the
applicable sales charge. Shares of a Fund may be purchased at the public
offering price through a securities broker or bank or other financial
institution which has a sales agreement with the Distributor (a "Dealer").
Purchase orders for shares of a Fund received prior to the close of
regular trading on the New York Stock Exchange, Inc. (the "NYSE") on any day
that a Fund's net asset value is calculated are priced according to the net
asset value determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time the net asset value per
share is next determined. A purchase order is received when it is transmitted to
the Trust's transfer agent, State Street Bank and Trust Company (the "Transfer
Agent"), a co-transfer agent or other authorized agent and accepted on behalf of
the Distributor. Regular trading on the NYSE usually closes at 4:00 p.m., New
York time. See "Net Asset Value" below for a description of the times at which a
Fund's net asset value per share is determined. The Distributor reserves the
right to reject any purchase order.
Certificates for shares will not be issued. Each shareholder's account
will be maintained by a broker or the Transfer Agent. Shares of the Funds may be
purchased only in those states where they may be lawfully sold.
INVESTMENT MINIMUMS
The minimum initial investment is $500. However, the initial minimum is
reduced to $250 for retirement plan investments and custodial accounts under the
Uniform Gifts/Transfers to Minors Act ("UGTMA") and to $50 for purchases through
the Automatic Investment Plan and through the Direct Deposit Purchase Plan. The
minimum for any subsequent investment is $50. For further information regarding
retirement plans, see "Retirement Plans," and for additional information
concerning the Automatic Investment Plan, see "Investment Options." The Trust
reserves the right to vary the initial and subsequent minimums at any time.
RETIREMENT PLANS
The Funds' shares are designed for use with certain types of tax
qualified retirement plans including defined benefit and defined contribution
plans. You may invest in each Fund through various retirement plans including
Individual Retirement Accounts ("IRAs"), Savings Incentive Match Plan for
Employees ("SIMPLE") IRAs, Roth Individual Retirement Accounts ("Roth IRAs"),
Roth Conversion Individual Retirement Accounts ("Roth Conversion IRAs"),
Education Individual Retirement Accounts ("Education IRAs"), Simplified
Employee Pension Plan ("SEP") IRAs and Section 403(b) Tax Sheltered Accounts
that employ as custodian a bank acceptable to the Distributor. The Distributor
will establish Keogh or HR-10 Corporate Pension and Profit Sharing retirement
plans in the future to facilitate investment in the Funds. For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please contact your tax advisor.
SALES CHARGE
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<PAGE> 49
Shares are sold at the public offering price next determined after a
purchase order is received as discussed above. Each Fund, except the Standby
Income Fund, imposes a sales charge in accordance with the following schedules:
Value Plus Fund, Emerging Growth Fund, International Equity Fund,
Growth,& Income Fund and Balanced Fund
<TABLE>
<CAPTION>
AMOUNT OF INVESTMENT SALES CHARGE SALES CHARGE
-------------------- AS % OF AS % OF NET DEALER DISTRIBUTOR
OFFERING PRICE ASSET VALUE CONCESSION RETENTION
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Under $25,000............................. 5.75% 6.10% 5.00% 0.75%
$25,000 but less than $50,000............. 5.75% 6.10% 5.00% 0.75%
$50,000 but less than $100,000............ 4.50% 4.71% 3.75% 0.75%
$100,000 but less than $250,000........... 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000........... 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $750,000........... 2.00% 2.04% 1.60% 0.40%
$750,000 but less than $1 million......... 2.00% 2.04% 1.60% 0.40%
$1 million or more*....................... 0.00% 0.00% 0.00% 0.00%
<CAPTION>
Income Opportunity Fund and Bond Fund
AMOUNT OF INVESTMENT SALES CHARGE SALES CHARGE
-------------------- AS % OF AS % OF NET DEALER DISTRIBUTOR
OFFERING PRICE ASSET VALUE CONCESSION RETENTION
-------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Under $25,000.............................. 4.75% 4.99% 4.00% 0.75%
$25,000 but less than $50,000.............. 4.50% 4.71% 3.75% 0.75%
$50,000 but less than $100,000............. 4.00% 4.17% 3.25% 0.75%
$100,000 but less than $250,000............ 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000............ 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $750,000............ 2.00% 2.04% 1.60% 0.40%
$750,000 but less than $1 million.......... 2.00% 2.04% 1.60% 0.40%
$1 million or more*........................ 0.00% 0.00% 0.00% 0.00%
</TABLE>
- ----------
* There is no initial sales charge on purchases of $1 million or more,
including purchases involving a Letter of Intent, Right of Accumulation,
Aggregation or Concurrent Purchases
44
<PAGE> 50
(as described below). However, a contingent deferred sales charge
("CDSC") of 1% is imposed on such purchases if liquidated within the
first year after purchase, except for exchanges or certain qualified
retirement plans. See "Reduced Sales Charges" for information as to ways
in which initial sales charges may be reduced.
On sales at net asset value, Dealers may be paid referral fees by the
Distributor directly; such fees will not be borne by the investor.
From time to time, the Distributor may reallow to Dealers the full amount
of the sales charge.
HOW TO PURCHASE SHARES
You may purchase shares of any Fund directly from the Trust through its
Transfer Agent or through your Dealer. Account applications can be obtained from
the Transfer Agent or your Dealer.
All funds received are invested in full and fractional shares of the
respective Fund(s). The Trust maintains records of each record owner's holdings
of Fund shares. Certain dealers maintain records of their customers' accounts.
Each shareholder will receive statements of transactions, holdings and
dividends. Shares of the Trust may be purchased only in those states where they
may lawfully be sold.
An investment may be made using any of the following methods:
By Mail. Investors should contact their Dealer for further instructions.
Checks are accepted subject to collection at full value. Shares will be issued
upon receipt of payment by the Trust of the full public offering price of the
shares.
If you wish to purchase Fund shares by mail, your check should be in U.S.
dollars and made payable to the Touchstone Family of Funds, or State Street Bank
and Trust Company. Third party checks which are payable to an existing
shareholder of the Touchstone Funds who is a natural person (as opposed to a
corporation or partnership) and endorsed over to the Touchstone Family of Funds
or State Street Bank and Trust Company will be accepted. When purchases are made
by check or automatic investment plan, redemptions will not be allowed until the
investment being redeemed has been in the account for 15 business days. Send
your check with the completed account application to the address indicated on
the application.
You may make subsequent investments in any Fund by completing the
investment form at the bottom of a recent account statement, making your check
payable to the Touchstone Family of Funds, writing your account number and asset
allocation model number, if applicable, on the check and mailing it in the
envelope provided with your account statement. Subsequent investments may also
be made by mailing your check directly to your Dealer's address printed on your
account statement. Your Dealer is responsible for forwarding payment promptly to
the Transfer Agent.
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<PAGE> 51
Each Fund reserves the right to reject any purchase order or to suspend
or modify the continuous offering of its shares. The Trust reserves the right to
cancel any purchase order for which payment has not been received by the fifth
business day following the investment.
By Wire. Investments may be made directly through the use of wire
transfers of federal funds. Share purchases by wire will be effected at the
public offering price next determined after acceptance of the order by the
Transfer Agent. To purchase by wire, you should contact your bank and request it
to wire federal funds to the Transfer Agent. In most cases, a bank will either
be a member of the Federal Reserve Banking System or have a relationship with a
bank that is a member. Banks will normally charge a fee for handling wire
transfers. You should contact the Transfer Agent or your Dealer for further
instructions.
For an initial purchase of shares of a Fund by wire, you must first
telephone the Transfer Agent at (800) 669-2796 (press 1) between the hours of
8:00 a.m. and 4:00 p.m. (New York time) on a day when the NYSE is open for
regular trading to receive an account number. The following information will be
requested: your name, address, tax identification number, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to the Transfer Agent, State
Street Bank and Trust Company, P.O. Box 8518, Boston, Massachusetts 02266-8518,
ABA Number 011000028, DDA Number 9905-036-1. Attention: Mutual Funds Division,
specifying on the wire the name of the Fund, the account number assigned by the
Transfer Agent and your name. If you arrange for receipt by the Transfer Agent
of federal funds prior to the close of regular trading (usually 4:00 p.m., New
York time) of the NYSE on a day the NYSE is open for regular trading, you may
purchase shares of a Fund as of that day. Your bank may charge a fee for wiring
money on your behalf.
In making a subsequent purchase order by wire, you should wire funds to
the Transfer Agent in the manner described above and be sure that the wire
specifies the name of the Fund, your name and the account number. However, it is
not necessary to call the Transfer Agent to make subsequent purchase orders by
wire.
PURCHASES THROUGH PROCESSING ORGANIZATIONS
Shares of the Funds may also be purchased through a "Processing
Organization," which is a broker-dealer, bank or other financial institution
that purchases shares for its customers. When shares are purchased this way, the
Processing Organization, rather than its customer, may be the shareholder of
record of the shares. The minimum initial and subsequent investments in the
Funds for shareholders who invest through a Processing Organization generally
will be set by the Processing Organization. Processing Organizations may also
impose other charges and restrictions in addition to or different from those
applicable to investors who remain the shareholder of record of their shares
including transaction fees on the purchase or sale of Fund shares. Thus, an
investor contemplating investing with the Funds through a Processing
Organization should read materials provided by the Processing Organization in
conjunction with this Prospectus.
46
<PAGE> 52
Although Processing Organizations will sell and redeem shares at net
asset value, they may charge their customers a fee in connection with services
offered to customers. Shares held through a Processing Organization may be
transferred into the investor's name following procedures established by the
investor's Processing Organization and the Transfer Agent. Certain Processing
Organizations may receive compensation from the Funds, the Transfer Agent, the
Advisor or their affiliates.
One or more of the Funds have authorized one or more Processing
Organizations to accept on its behalf purchase and redemption orders. Such
Processing Organizations are authorized to designate other intermediaries to
accept purchase and sales orders on the Funds' behalf. A Fund will be deemed to
have received a purchase or redemption order when an authorized Processing
Organization, or its authorized designee, accepts the order. Orders will be
priced at the Fund's net asset value next computed after such order is accepted
by an authorized Processing Organization or its authorized designee.
REDUCED SALES CHARGES
For purposes of the following discussion about reduced sales charges,
the term "Fund" does not include the Standby Income Fund.
Aggregation. Sales charge discounts are available for certain aggregated
investments. Investments which may be aggregated include those made by you, your
spouse and your children under the age of 21, if all parties are purchasing
shares for their own accounts, which may include purchases through employee
benefit plans such as an IRA, individual-type 403(b) plan or single-participant
Keogh-type plan or by a business solely controlled by these individuals (for
example, the individuals own the entire business) or by a trust (or other
fiduciary arrangement) solely for the benefit of these individuals. Individual
purchases by trustees or other fiduciaries may also be aggregated if the
investments are: (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above; or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, other than employee benefit plans described above;
or (3) for a common trust fund or other pooled account not specifically formed
for the purpose of accumulating Fund shares. Purchases made for nominee or
street name accounts (securities held in the name of a Dealer or another nominee
such as a bank trust department instead of the customer) may not be aggregated
with those made for other accounts and may not be aggregated with other nominee
or street name accounts unless otherwise qualified as described above.
Concurrent Purchases. To qualify for a reduced sales charge, you may
combine concurrent purchases of shares of two or more Funds (other than The
Standby Income Fund). For example, if you concurrently invest $25,000 in one
Fund and $25,000 in another Fund, the sales charge would be reduced to reflect a
$50,000 purchase.
Letter of Intent. You may reduce sales charges on all investments by
meeting the terms of a letter of intent, a non-binding commitment to invest a
minimum of $25,000 for the Income Opportunity Fund and the Bond Fund, and
$50,000 for each other Touchstone Fund, with the exception of the Standby Income
Fund, within a 24-month period. Your existing holdings in the Trust may also
be combined with the investment commitment set forth in the letter of intent to
further reduce your sales charge. Up to 5% of the letter amount will be held in
escrow to cover additional sales charges which may be due if your total
investments over the letter period are not sufficient to qualify for a sales
charge reduction. See the account application for further details.
Right of Accumulation. Reduced sales charges on shares are also available
under a combined right of accumulation, under which you may combine the value of
your shares in a Fund
47
<PAGE> 53
with any of the other Funds described herein, along with the value of the Fund's
shares being purchased. Shares of the Funds may be combined under a Letter of
Intent and a Right of Accumulation. See the Trust's Statement of Additional
Information for more information.
Waiver of Sales Charge. Sales charges do not apply to shares of the Funds
purchased: (1) by registered representatives or other employees (and their
immediate family members) of broker/dealers, banks or other financial
institutions having agreements with the Distributor; (2) by any director,
officer or other employee (and their immediate family members) of (A) The
Western and Southern Life Insurance Company or any of its affiliates, (B) any
Portfolio Advisor; (C) RogersCasey; (D) Investors Bank & Trust Company; (E) the
Transfer Agent; and (F) those firms that provide legal, accounting, public
relations or other services to the Distributor or Advisor; (3) by clients of any
Portfolio Advisor or of RogersCasey who are referred to the Distributor by a
Portfolio Advisor or RogersCasey; (4) in accounts as to which a broker-dealer
charges an asset management fee, provided the broker-dealer has an agreement
with the Distributor; (5) as part of an employee benefit plan having more than
25 eligible employees or a minimum of $250,000 invested in the Fund; (6) as part
of certain promotional programs established by the Fund and/or Distributor; (7)
by one or more members of a group of persons engaged in a common business,
profession, civic or charitable endeavor or other activity and retirees and
immediate family members of such persons pursuant to a marketing program between
the Distributor and such group; (8) by bank trust departments; and (9) through
Processing Organizations described in this Prospectus.
There is no initial sales charge on your purchase of shares in a Roth IRA
or Roth Conversion IRA if (1) you purchase the shares with the proceeds of a
redemption made within the previous 180 days from another mutual fund complex
and (2) you paid an initial sales charge or a contingent deferred sales charge
on your investment in the other mutual fund complex.
Immediate family members are defined as the spouse, parents, siblings,
natural or adopted children, mother-in-law, father-in-law, brother-in-law and
sister-in-law of a director, officer or employee. The term "employee" is deemed
to include current and retired employees.
Exemptions must be qualified in advance by the Distributor. Your
investment professional should call the Distributor for more information.
YOU MUST ADVISE YOUR DEALER OR THE TRANSFER AGENT IF YOU QUALIFY FOR A
REDUCTION IN SALES CHARGE USING ONE OR ANY COMBINATION OF THE METHODS DESCRIBED
ABOVE.
INVESTMENT OPTIONS
Automatic Investment Plan. You may make regular monthly or quarterly
investments in each Fund through automatic withdrawals of $50 or more from your
bank account once an automatic investment plan is established. See the account
application for further details about this service or call the Transfer Agent at
(800) 669-2796 (press 1).
Automatic Reinvestment. Dividends and capital gain distributions are
reinvested in additional shares at no sales charge (and without becoming subject
to any contingent deferred sales charge), unless you indicate otherwise on the
account application. You may elect to have dividends or capital gain
distributions paid in cash.
48
<PAGE> 54
Direct Deposit Purchase Plan. You may automatically invest Social
Security checks, private payroll checks, pension payouts or any other
pre-authorized government or private recurring payments of $50 or more on a
monthly basis.
Dollar Cost Averaging. You may Dollar Cost Average a minimum of $50 per
month per Fund automatically from one Touchstone Fund to any other Fund(s) of
the Trust. The applicable sales charge, if any, will be assessed.
Cross-Reinvestment. You may cross-reinvest dividends and/or capital gain
distributions paid by one Fund into shares of another Fund, subject to
conditions outlined in the Statement of Additional Information.
Cross-reinvestment of dividends and capital gain distributions may also be made
from and to the Standby Income Fund. Generally, to use this service the value of
your account in the Fund which paid the dividend or capital gain distribution
must equal at least $5,000.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged without payment of any exchange fee for
shares of another Fund described herein with the same sales charge at their
respective net asset values. An exchange of shares is treated for federal income
tax purposes as a redemption (sale) of shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss in connection with the exchange. Shareholders exchanging shares of
a Fund for shares of another Fund should review the disclosure provided herein
relating to the exchanged-for shares carefully prior to making an exchange. The
exchange privilege is available to shareholders residing in any state in which
Trust shares being acquired may be legally sold.
No sales charge will be applied except for exchanges from the Standby
Income Fund which are subject to applicable sales charges on the Fund being
purchased unless the Standby Income Fund shares were acquired by an exchange
from a Fund having a sales charge or by reinvestment or cross-reinvestment of
dividends or capital gains distribution.
For further information regarding the exchange privilege, you should
contact the Transfer Agent or your Dealer. The Distributor reserves the right to
reject any exchange request and the exchange privilege may be modified or
terminated after 60 days' written notice to shareholders.
REDEMPTION OF SHARES
REDEMPTIONS IN GENERAL
Shares of a Fund may be redeemed at no charge (except as described below
under "CDSC" with respect to redemption made within one year from the date of
purchase) on any day that the Fund calculates its net asset value as described
below under "Net Asset Value." Redemption requests received in proper form prior
to the close of regular trading on the NYSE will be effected at the net asset
value per share determined on that day. Redemption requests received after the
close of regular trading on the NYSE will be effected at the net asset
49
<PAGE> 55
value next determined. A redemption request is received when it is
transmitted to the Trust's Transfer Agent, a co-transfer agent or other
authorized agent and accepted on behalf of the Distributor. Regular trading on
the NYSE usually closes at 4:00 p.m., New York time.
A Fund is required to transmit redemption proceeds for credit to the
shareholder or to the shareholder's account at a Dealer at no charge within
seven days after receipt of a redemption request. Such payment may be postponed
or the right of redemption suspended at times when the NYSE is closed for other
than customary weekends and holidays, when trading on the NYSE is restricted,
when an emergency exists as a result of which disposal by a Portfolio of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Portfolio fairly to determine the value of its net assets,
or during any other period when the SEC, by order, so permits. Generally, funds
remitted to a Dealer will not be invested for the shareholder's benefit without
specific instruction and the Dealer will benefit from the use of temporarily
uninvested funds.
A shareholder who pays for Fund shares by personal check will be credited
with the proceeds of a redemption of those shares when the purchase check has
been collected, which may take up to 15 days. Shareholders who anticipate the
need for more immediate access to their investment should purchase shares by
federal funds or bank wire or by a certified or cashier's check.
CHECK WRITING
Upon investing in the Standby Income Fund, you may establish check
writing privileges by completing the necessary information on the account
application and paying a $5 fee per checkbook issued. You will be provided with
checks that you may use to draw against your account. Checks may be payable to
anyone you designate in the amount of $500 or more and must be signed by the
authorized number of registered shareholders exactly as indicated on our
Checking Account Signature Card contained in the account application. You will
be charged $1 for each check presented for payment. This privilege may be
modified or terminated at any time by the Trust or Transfer Agent upon notice to
shareholders. If the amount of your check exceeds the value of the shares in
your account, your check will be returned. You may not use the check-writing
privilege to close out your account as you will not be able to ascertain the
exact account balance of your account on the date your check clears. To close
out your account completely, you should use the telephone or mail redemption
procedures described below. For further information on this service, call the
Transfer Agent.
The payee of a check may cash or deposit it in a bank; however, checks
cannot be presented in person at a branch office of the Transfer Agent for cash.
When a check is presented to the Transfer Agent for payment, it will cause the
Fund to redeem a sufficient number of shares to cover the amount of the check.
You will continue to earn monthly dividends until the check is presented to the
Transfer Agent for payment. Please note that, since the share price of the Fund
may fluctuate daily, use of the check writing privilege in the Fund can result
in the liquidation of shares at a profit or a loss from the time of your
purchase and may be considered a taxable event. Consequently, while this
privilege can provide you with easy liquidity, it is not meant to be used as a
regular checking account. See "Taxes."
CONTINGENT DEFERRED SALES CHARGE ("CDSC")
With the exception of shares of the Standby Income Fund, a CDSC of 1%
applies to redemptions, made within one year after the date of purchase, of
shares acquired in purchases involving $1 million or more.
REDEMPTION PROCEDURES
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You may redeem shares of any Fund by writing to the Transfer Agent.
Specify the name of the Fund, the number of shares or dollar amount to be sold
and your name and account number. Shares may also be redeemed by contacting your
Dealer, who may charge you for this service. Shares held in street name must be
redeemed through your Dealer or, if applicable, the Processing Organization.
If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be implemented. If the proceeds of the
redemption exceed $50,000, are to be paid to a person other than the record
owner, are to be sent to an address other than the address on the Transfer
Agent's records, or are to be paid to a corporation, partnership, trust or
fiduciary, the signature(s) on the redemption request and on the certificates,
if any, or stock powers must be guaranteed by an "eligible guarantor," which
includes a bank or savings and loan association that is federally insured or a
member firm of a national securities exchange.
REDEMPTION PAYMENTS BY WIRE
Redemption proceeds are generally paid to you by check. However, at your
request, redemption proceeds of $1,000 or more may be wired by the Transfer
Agent to your bank account provided you have completed the appropriate
information on the New Account Application Form. Requests for redemption by wire
may also be initiated by completing a Touchstone Wire Transfer Form or by
written request. Any written request should include the name, location and ABA
or bank routing number (if known) of your designated bank and your account
number.
TELEPHONE REDEMPTIONS
All shareholders of any Fund have telephone redemption and exchange
privileges unless the shareholder has specifically declined these privileges. If
you do not wish to have telephone privileges for your account, you must mark the
appropriate section of the New Account Application Form. If you have telephone
redemption privileges, you may redeem shares of a Fund by telephoning the
Transfer Agent at (800) 669-2796 (press 1) or, from outside the United States,
(617) 328-5000 ext. 6518, or by sending the Transfer Agent a facsimile at (617)
774-2354 between the hours of 8:00 a.m. and 4:00 p.m. (New York time) on a day
when the NYSE is open for regular trading. Redemption requests received by the
Transfer Agent before 4:00 p.m. (New York time) on a day when the NYSE is open
for regular trading will be processed that day. Otherwise processing will occur
on the next business day.
You should realize that by electing the telephone redemption option
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you may be giving up a measure of security that you may have had if you were to
redeem your shares in writing. Furthermore, interruptions in telephone service
may mean that you will be unable to effect a redemption by telephone when
desired. When telephone redemptions are difficult to implement, you should mail
or send by overnight delivery a written redemption request to the Transfer
Agent.
The Trust reserves the right to refuse any request made by telephone and
to modify or terminate this privilege at any time on 60 days' notice to
shareholders. A telephone redemption request may be refused for such reasons as
the Trust's belief that the person requesting the telephone redemption is
neither the record owner of the shares nor a person authorized by the
shareholder to make the request. Shareholders will be promptly notified of any
refused request for a telephone redemption.
The Trust will not be liable for following instructions received by
telephone that it reasonably believes to be genuine. The Trust has established
certain procedures, some of which are described below, to confirm that telephone
instructions are genuine. If it does not follow such procedures in a particular
case it may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures that the Trust may follow include requiring a form
of personal identification before acting upon telephone instructions, making
redemption checks requested by telephone payable only to the owner(s) of the
account shown on the Trust's records, mailing such redemption checks only to the
account address shown on the Trust's records, directing wire redemptions
requested by telephone only to the bank account shown on the Trust's records,
and providing written confirmation of any transaction requested by telephone.
The Trust will normally tape record any instructions received by telephone.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to receive or send to a third party monthly, quarterly or
annual withdrawals of $50 or more if your account value is at least $5,000.
There is no special fee for this service and no minimum value is required for
retirement plans.
REINSTATEMENT PRIVILEGE
You may reinvest proceeds from a redemption of Fund shares or a dividend
or capital gain distribution with respect to Fund shares without sales charge in
any of the Funds. You may reinvest by sending a written request and a check to
the Transfer Agent within 90 days after the date of the redemption, dividend or
distribution. Reinvestment will be at the next calculated net asset value after
receipt. The tax status of a gain realized on a redemption will not be affected
by exercise of the reinstatement privilege, but a loss may be nullified if you
reinvest in the same Fund within 30 days.
INVOLUNTARY REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem an account (excluding retirement accounts and
custodian accounts under UGTMA) having a current value of $500 or less as a
result of redemptions, (but not as a result of a fluctuation in a Fund's net
asset value), but only after the shareholder has been given at least 30 days in
which to increase the account balance to more than $500. Proceeds of an
involuntary redemption will
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be sent to the shareholder of record unless the Distributor is instructed to the
contrary by the shareholder. Shareholders should be aware that involuntary
redemptions may result in the liquidation of Fund holdings at a time when the
value of those holdings is lower than the shareholder's cost of the investment
or may result in the realization of taxable capital gains.
NET ASSET VALUE
Each Fund's net asset value per share is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. Net asset value per
share is determined as of the close of regular trading on the NYSE (usually 4:00
p.m. New York time) and is computed by dividing the value of a Fund's net assets
by the total number of its shares outstanding. Since each Fund (except the
Standby Income Fund) will invest all of its Assets in a corresponding Portfolio,
the value of each such Fund's assets will be equal to the value of its
beneficial interest in the corresponding Portfolio. The net asset value of each
Portfolio is determined as of the close of regular trading on the NYSE on each
day on which the NYSE is open for trading, by deducting the amount of the
Portfolio's liabilities from the value of its assets. At the close of each such
business day, the value of each Fund's beneficial interest in the corresponding
Portfolio will be determined by multiplying the net asset value of that
Portfolio by the percentage, effective for that day, which represents the Fund's
share of the aggregate beneficial interests in that Portfolio.
Generally, a Portfolio's (or the Standby Income Fund's) investments are
valued at market value or, in the absence of a market value, at fair value as
determined by or under the direction of the respective Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued at the preceding closing values of the securities on their respective
exchanges, except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the respective Board of Trustees. A security that is primarily
traded on a domestic stock exchange is valued at the last sale price on that
exchange or, if no sales occurred during the day, at the current quoted bid
price. All short-term dollar-denominated investments that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the investment) which the respective Board
of Trustees has determined represents fair value.
An option that is written by a Portfolio is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Portfolio is generally valued at the last sale
price or, in the absence of the last sale price, the last bid price. The value
of a futures contract is equal to the unrealized gain or loss on the contract
that is determined by marking the contract to the current settlement price for a
like contract on the valuation date of the futures contract. A settlement price
may not be used if the market rises or falls the maximum allowed amount with
respect to a particular futures contract or if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the respective Board of Trustees.
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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. If the bid and offered quotations are not available, the rate
of exchange will be determined in good faith by the respective Board of
Trustees.
In carrying out the valuation policies of the Boards of Trustees,
independent pricing services may be consulted. Further information regarding
valuation policies is contained in the Statement of Additional Information.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and
the Portfolio Trust rests with their respective Board of Trustees. The Trustees
approve all significant agreements between either the Trust or the Portfolio
Trust, as the case may be, and the persons and companies that furnish services
to the Trust or the Portfolio Trust.
SPONSOR
Touchstone Advisors, as Sponsor to the Trust, pursuant to the Sponsor
Agreement provides oversight of the various service providers to the Trust,
including the Trust's Administrator, Custodian and Transfer Agent. As Sponsor to
the Trust, Touchstone Advisors reserves the right to receive a sponsor fee from
each Fund equal on an annual basis to 0.20% of the average daily net assets of
that Fund for its then-current fiscal year. The Sponsor Agreement may be
terminated by the Sponsor at the end of any calendar quarter, or by the Trust on
not less than 30 days prior written notice. The Sponsor has advised the Trust
that it will waive all fees under the Sponsor Agreement through December 31,
1998.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("Investors Bank"), 200 Clarendon Street,
Boston, Massachusetts 02116, serves as administrator and fund accounting agent
for the Trust and the Portfolio Trust, as custodian for the Portfolio Trust and
the Standby Income Fund, and as transfer agent and dividend paying agent for the
Portfolio Trust. Investors Bank was organized in 1969 as a
Massachusetts-chartered trust company and is a wholly-owned subsidiary of
Investors
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Financial Services Corp., a publicly-held corporation and holding company
registered under the Bank Holding Company Act of 1956.
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the Trust and the Portfolio Trust, accounting, clerical and
bookkeeping services; the daily calculation of net asset values; state
securities registration services (for the Trust only); corporate secretarial
services; assistance in the preparation of management reports; preparation and
filing of tax returns, registration statements, and reports to shareholders and
to the SEC. Investors Bank also provides personnel to serve as certain officers
of the Trust or the Portfolio Trust.
As custodian, Investors Bank holds cash, securities and other assets of
the Portfolio Trust and the Standby Income Fund as required by the 1940 Act. As
transfer agent, Investors Bank is responsible for maintaining records of
shareholder interests for each Portfolio of the Portfolio Trust.
Each Portfolio and the Standby Income Fund pays fees to Investors
Bank, which are computed and paid monthly. Such fees equal, in the aggregate,
0.12% on an annual basis of the average daily net assets of all the Portfolios
and Funds for which Investors Bank acts as fund accounting agent and
administrator up to $1 billion in assets and 0.08% on an annual basis of average
daily net assets which exceed $1 billion, subject to certain annual minimum
fees. As compensation for its services as custodian to the Portfolio Trust and
the Standby Income Fund, Investors Bank receives fees, computed and paid
monthly, in the aggregate, of 0.03% on an annual basis of the average daily net
assets of all the Portfolios and Funds for which Investors Bank acts as
custodian up to $500 million and 0.02% on an annual basis of such average daily
net assets for the next $500 million and 0.01% on an annual basis of such
average daily net assets which exceed $1 billion.
State Street Bank and Trust Company serves as the Trust's Transfer Agent
and dividend paying agent and may be reached at P.O. Box 8518, Boston,
Massachusetts 02266-8518.
DISTRIBUTION AND SERVICE PLAN
The Distributor acts as principal underwriter of the shares of each Fund
pursuant to a distribution agreement with the Trust. The Board of Trustees of
the Trust has adopted a distribution and service plan (the "Distribution Plan")
with respect to each Fund (other than the Standby Income Fund) in accordance
with Rule 12b-1 under the 1940 Act. The Board of Trustees adopted the
Distribution Plan after determining that there is a reasonable likelihood that
the Distribution Plan will benefit each Fund (other than the Standby Income
Fund) and its shareholders.
Each Fund (other than the Standby Income Fund) will pay a distribution
fee to the Distributor at an annual rate of up to 0.25% of the Fund's average
daily net assets in anticipation of or as reimbursement for expenses (other than
interest or carrying charges) (i) of compensating Dealers or other persons for
providing personal shareholder services, maintaining shareholder accounts and
distribution assistance and (ii) of promoting the sale of shares of the Funds
such as by paying for the preparation, printing and distribution of prospectuses
to persons other than
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then-current shareholders and for sales literature or other promotional
activities. Distribution fees are accrued daily and are charged as expenses of
each Fund as accrued.
No Fund is obligated under the Distribution Plan to pay any distribution
or shareholder service expense in excess of the fees described above. Expenses
incurred by the Distributor in one fiscal year in excess of the fees received
from a Fund in that fiscal year do not give rise to any obligation on the part
of a Fund to the Distributor with respect to any future fiscal year. Thus, if
the Distribution Plan were terminated or not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by a Fund to the
Distributor. Under arrangements with Dealers and others, the Distributor will
pay compensation upon the sale of Fund shares. To finance such payments, the
Distributor may utilize funds obtained from the Advisor which, in turn, may
borrow funds from affiliated or unaffiliated parties. Such borrowings may be
repaid or secured by an assignment of fees payable pursuant to the Distribution
Plan.
ALLOCATION OF EXPENSES OF THE FUNDS AND THE PORTFOLIOS
Each Fund and Portfolio bears its own expenses, which generally include
all costs not specifically borne by the Advisor, the Portfolio Advisors and the
Administrator. Included among a Fund's or a Portfolio's expenses are: costs
incurred in connection with its organization; investment management and
administration fees; fees for necessary professional and brokerage services;
fees for any pricing service; the costs of regulatory compliance; and costs
associated with maintaining the Trust's or the Portfolio Trust's legal existence
and shareholder relations. Pursuant to the Sponsor Agreement, the Sponsor of the
Trust has agreed to waive or reimburse certain fees and expenses of each Fund or
each Portfolio, as the case may be, such that after such waivers and
reimbursements, the aggregate Operating Expenses of each Fund and the
corresponding Portfolio do not exceed that Fund's Expense Cap. A Fund's Expense
Cap may be terminated with respect to a Fund upon 30 days' prior written notice
by the Sponsor at the end of any calendar quarter after December 31, 1998.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income (i.e., income other than long- and short-term
capital gains) and net realized long- and short-term capital gains will be
determined separately for each Fund. Dividends derived from net investment
income and distributions of net realized long- and short-term capital gains paid
by a Fund to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Fund (which will be deposited in the
shareholder's account) unless the shareholder instructs the Trust, in writing,
to pay all dividends and distributions in cash or to invest them in another
Fund. See "Investment Options -- Cross-Reinvestment" herein. Dividends
attributable to the net investment income of the Standby Income Fund will be
declared daily and paid monthly. Shareholders of that Fund receive dividends
from the day following the purchase up
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to and including the date of redemption. Dividends attributable to the net
investment income of the Growth & Income Fund, the Income Opportunity Fund and
the Bond Fund are declared and paid monthly. Dividends attributable to the net
investment income of the Value Plus Fund and the Balanced Fund are declared and
paid quarterly. Dividends attributable to the net investment income of the
Emerging Growth Fund and International Equity Fund are declared and paid
annually. Distributions of any net realized long-term and short-term capital
gains earned by a Fund will be made annually.
TAXES
Because each Fund is treated as a separate entity for federal income tax
purposes, the amounts of net income and net realized capital gains subject to
tax will be determined separately for each Fund (rather than on a Trust-wide
basis).
Each Fund separately intends to qualify each year as a regulated
investment company for federal income tax purposes.
A regulated investment company will not be subject to federal income tax
on its net income and its capital gains that it distributes to shareholders, so
long as it meets certain overall distribution requirements and other conditions
under the Code. Each Fund intends to satisfy these overall distribution
requirements and any other required conditions. In addition, each Fund is
subject to a 4% nondeductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gains. The Trust intends to
have each Fund pay additional dividends and make additional distributions as are
necessary in order to avoid application of the excise tax, if such payments and
distributions are determined to be in the best interest of the Fund's
shareholders. Dividends both declared by a Fund and payable to shareholders of
record on a date in October, November or December of a year are considered for
tax purposes received by the shareholder and paid by the fund in the year
declared, even if the actual payment date is in January of the following year.
Dividends declared by a Fund of net income and distributions of a Fund's
net realized short-term capital gains (including short-term gains from Portfolio
investments in tax exempt obligations) will be taxable to shareholders as
ordinary income for federal income tax purposes, regardless of how long
shareholders have held their Fund shares and whether the dividends or
distributions are received in cash or reinvested in additional shares.
Distributions by a Fund of net realized long-term capital gains (including
long-term gains from Portfolio investments in tax exempt obligations) will be
taxable to shareholders as long-term capital gains for federal income tax
purposes, regardless of how long a shareholder has held his Fund shares and
whether the distributions are received in cash or reinvested in additional
shares.
A portion of the dividends paid by the Funds will not qualify for the
dividend received deduction for corporations. As a general rule, dividends paid
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by a Fund, to the extent derived from dividends attributable to certain types of
stock issued by U.S. corporations, will qualify for the dividend received
deduction for corporations.
Some states, if certain asset and diversification requirements are
satisfied, permit shareholders to treat their portions of a Fund's dividends
that are attributable to interest on U.S. Treasury securities and certain U.S.
Government securities as income that is exempt from state and local income
taxes. Dividends attributable to repurchase agreement earnings are, as a general
rule, subject to state and local taxation.
Net income or capital gains earned by any Fund investing in foreign
securities may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries that
entitle the Portfolios to a reduced rate of tax or exemption from tax on this
related income and gains. It is impossible to determine the effective rate of
foreign tax in advance since the amount of these Portfolios' assets to be
invested within various countries is not known. Furthermore, if a Fund qualifies
as a regulated investment company, if certain distribution requirements are
satisfied, and if more than 50% of the value of the corresponding Portfolio's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Fund may elect, for U.S. federal income tax purposes,
to treat foreign income taxes paid by the corresponding Portfolio that can be
treated as income taxes under U.S. income tax principles as paid by its
shareholders. The Trust anticipates that the International Equity Fund will
qualify for and make this election in most, but not necessarily all, of its
taxable years. If a Fund were to make an election, an amount equal to the
foreign income taxes paid by the Fund would be included in the income of its
shareholders and the shareholders would be entitled to credit their portions of
this amount against their U.S. tax liabilities, if any, or to deduct such
portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, a Fund will report to its shareholders, in writing,
the amount per share of foreign tax that must be included in each shareholder's
gross income and the amount which will be available for deduction or credit. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Certain limitations will be imposed on the extent to which the
credit (but not the deduction) for foreign taxes may be claimed.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Funds' taxable year
with respect to certain foreign taxes paid by the Funds and certain dividends
and distributions that were, or were deemed to be, received by shareholders from
the Funds during the Funds' prior taxable year. Shareholders should consult with
their own tax advisors with specific reference to their own tax situations.
PERFORMANCE INFORMATION
YIELD
For the Income Opportunity Fund, Bond Fund, Standby Income Fund and the
Balanced Fund, from time to time, the Trust may advertise the 30-day "yield."
The yield of a Fund refers to the income generated by an investment in the Fund
over the 30-day period identified in the
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advertisement and is computed by dividing the net investment income per share
earned by the Fund during the period by the net asset value per share on the
last day of the period. This income is "annualized" by assuming that the amount
of income is generated each month over a one-year period and is compounded
semi-annually. The annualized income is then shown as a percentage of the net
asset value.
TOTAL RETURN
From time to time, the Trust may advertise a Fund's "average annual total
return" over various periods of time. This total return figure shows the average
percentage change in value of an investment in the Fund from the beginning date
of the measuring period to the ending date of the measuring period and is
reduced by the maximum sales charge during the measuring period. The figure
reflects changes in the price of the Fund's shares and assumes that any income,
dividends and/or capital gains distributions made by the Fund during the period
are reinvested in shares of the Fund. Figures will be given for recent one-,
five- and ten-year periods (if applicable) and may be given for other periods as
well (such as from commencement of the Fund's operations or on a year-by-year
basis). When considering average total return figures for periods longer than
one year, shareholders should note that a Fund's annual total return for any one
year in the period might have been greater or less than the average for the
entire period.
A Fund also may use aggregate total return figures for various periods,
representing the cumulative change in value of an investment in the Fund for the
specific period (again reflecting changes in the Fund's share price, the effect
of the maximum sales charge during the period and assuming reinvestment of
dividends and distributions). Aggregate total returns may be shown by means of
schedules, charts or graphs, and may indicate subtotals of the various
components of total return (that is, the change in value of initial investment,
income dividends and capital gains distributions). A Fund may also quote
non-standardized total return figures, such as non-annualized figures or figures
that do not reflect the maximum sales charge (provided that these figures are
accompanied by standardized total return figures calculated as described above.)
GENERAL
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes in more detail the method used to
determine a Fund's yield and total return.
RATING INDEXES
In reports or other communications to shareholders or in advertising
material, a Fund may compare its performance with that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
independent services that monitor the performance of mutual funds or with other
appropriate indexes of investment securities, such as the S&P 500, the Dow Jones
Industrial Average or the Frank Russell indexes. The performance information
also may include evaluations of the Funds published by nationally recognized
ranking services and by financial publications that are nationally recognized.
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ADDITIONAL INFORMATION
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (par value
$0.00001 per share). The Trust currently consists of eight series of shares. The
shares of each series participate equally in the earnings, dividends and assets
of the particular series. The Trust may create and issue additional series of
shares. The Trust's Declaration of Trust permits the Trustees to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in a series. Each share
represents an equal proportionate interest in a series with each other share.
Shares have no pre-emptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth below. Shareholders are entitled to
one vote for each share held.
The Trust is not required to hold annual meetings of shareholders but the
Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have under certain circumstances the right to communicate with
other shareholders for the purpose of removing one or more Trustees. Upon
liquidation of a Fund, shareholders of that Fund would be entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
The Trust was organized on November 9, 1994 as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust was organized as a trust under the laws of the State
of New York pursuant to a Declaration of Trust dated February 7, 1994. The
Portfolio Trust's Declaration of Trust provides that the Funds and other
entities investing in a Portfolio (e.g., other investment companies, insurance
company separate accounts and common and commingled trust funds) will each be
liable for all obligations of the corresponding Portfolio. However, the risk of
a Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Trust nor its shareholders will be adversely
affected by reason of the Funds' investing in the Portfolios.
Each investor in a Portfolio, including the corresponding Fund, may add
to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then
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be effected. The investor's percentage of the aggregate beneficial interests in
the Portfolio will then be re-computed as the percentage equal to the fraction
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of the close of business on such day plus or minus, as the case may
be, the amount of any additions to or withdrawals from the investor's investment
in the Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the close of business on the following business day.
When matters are submitted for shareholder vote or when shareholders are
asked to provide voting instructions, shareholders of each Fund will have one
vote for each full share held and proportionate, fractional vote for fractional
shares held. The separate vote of a Fund is required on any matter affecting
the Fund unless the interests of each Fund in the matter are identical or the
matter does not affect any interest of the Fund. Shareholders of a Fund are not
entitled to vote or to provide voting instructions on matters that do not affect
the Fund and do not require a separate vote of the Fund. Shareholders of all
Funds will vote together to elect trustees and for certain other matters. Under
certain circumstances the shareholders of one or more Funds could control the
outcome of these votes. The Portfolios of the Portfolio Trust will vote
separately or together in the same manner as the Funds. Under certain
circumstances, the investors in one or more Portfolios of the Portfolio Trust
could control the outcome of these votes.
There normally will be no meeting of shareholders for the purpose of
electing Trustees of the Trust unless and until such time as less than a
majority of the Trust's Trustees holding office have been elected by
shareholders, at which time the Trust's Trustees then in office will call a
shareholders meeting for the election of trustees. Any Trustee of the Trust may
be removed from office upon the vote of shareholders holding at least two-thirds
of the Trust's outstanding shares at a meeting called for that purpose. The
Trustees are required to call such a meeting upon the written request of
shareholder holding at least 10% of the Trust's outstanding shares. The Trust
will also assist shareholders in communicating with one another as provided for
in the 1940 Act.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Portfolios.
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APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
Moody's Bond Ratings
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 edged." 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. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
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Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1, Ba-1 and B-1.
S&P's Bond Ratings
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A. Bonds rated A have a 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 the highest rated
categories.
A-2
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BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
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. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
S&P's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
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; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (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
A-3
<PAGE> 70
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.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
A-4
<PAGE> 71
DISTRIBUTOR
Touchstone Securities, Inc.
311 Pike Street
Cincinnati, Ohio 45202
(800) 669-2796 (press 3)
INVESTMENT ADVISOR OF EACH PORTFOLIO
Touchstone Advisors, Inc.
311 Pike Street
Cincinnati, Ohio 45202
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
ADMINISTRATOR, CUSTODIAN
AND FUND ACCOUNTING AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116-9130
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
201 East Fourth Street
Cincinnati, Ohio 45202
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Touchstone Family of Funds
FORM 7036-9805
<PAGE> 72
PROSPECTUS &
APPLICATION
May 1, 1998
<PAGE> 73
IFS0006P STATEMENT OF
FORM 7050-9805 ADDITIONAL INFORMATION
MAY 1, 1998
THE TOUCHSTONE FUNDS
- -Touchstone Value Plus Fund A
- -Touchstone Emerging Growth Fund A
- -Touchstone International Equity Fund A
- -Touchstone Growth & Income Fund A
- -Touchstone Balanced Fund A
- -Touchstone Income Opportunity Fund A
- -Touchstone Bond Fund A
- -Touchstone Standby Income Fund
The Select Advisors Trust A (the "Trust") is comprised of eight funds:
Touchstone Value Plus Fund A (the "Value Plus Fund"), Touchstone Emerging Growth
Fund A (the "Emerging Growth Fund"), Touchstone International Equity Fund A (the
"International Equity Fund"), Touchstone Growth & Income Fund A (the "Growth &
Income Fund"), Touchstone Balanced Fund A (the "Balanced Fund"), Touchstone
Income Opportunity Fund A (the "Income Opportunity Fund"), Touchstone Bond Fund
A (the "Bond Fund") and Touchstone Standby Income Fund (the "Standby Income
Fund") (each, a "Fund" and collectively, the "Funds"). The Trust is an open-end
management investment company formed as a Massachusetts business trust. As
described in the prospectus of the Trust (the "Prospectus"), the Trust seeks to
achieve the investment objectives of each Fund (other than Standby Income Fund)
by investing all the investable assets ("Assets") of a Fund in a diversified
open-end management investment company having the same investment objectives as
that Fund. These investment companies are, respectively, Value Plus Portfolio,
Emerging Growth Portfolio, International Equity Portfolio, Growth & Income
Portfolio, Balanced Portfolio, Income Opportunity Portfolio and Bond Portfolio
(each, a "Portfolio" and collectively, the "Portfolios"). For convenience,
throughout the remainder of this Statement of Additional Information, the term
"Portfolio(s)" shall include, where applicable, the Standby Income Fund. Each
Portfolio is a series of Select Advisors Portfolios (the "Portfolio Trust").
Since the investment characteristics of the Funds (other than the Standby
Income Fund) will correspond directly to those of the respective Portfolio in
which the Fund invests all of its Assets, the following is generally a
discussion of the various investments of and techniques employed by the
Portfolios.
Shares of the Funds are sold by Touchstone Securities, Inc. ("Touchstone
Securities" or the "Distributor"), the Trust's distributor. Touchstone Advisors,
Inc. ("Touchstone" or the "Advisor") is the investment advisor of each Portfolio
and the Standby Income Fund. The specific investments of each Portfolio are
managed on a day-to-day basis by their respective portfolio advisors
(collectively, the "Portfolio Advisors"). Investors Bank & Trust Company
("Investors Bank" or the "Administrator") serves as administrator, custodian and
fund accounting agent to each Fund and Portfolio.
The Prospectus, dated May 1, 1998, provides the basic information
investors should know before investing, and may be obtained upon request and
without charge by calling the Trust at the telephone number listed below. This
Statement of Additional Information, which is not a prospectus, is intended to
provide additional information regarding the activities and operations of the
Trust and the Portfolio Trust and should be read in conjunction with the
Prospectus. This Statement of Additional Information is not an offer of any Fund
for which an investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have the meanings
accorded to them in the Prospectus.
TOUCHSTONE ADVISORS, INC.
INVESTMENT ADVISOR OF EACH PORTFOLIO
TOUCHSTONE SECURITIES, INC.
DISTRIBUTOR
311 Pike Street Cincinnati, Ohio (800) 669-2796
<PAGE> 74
TABLE OF CONTENTS
PAGE
----
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISKS................... 3
PERFORMANCE INFORMATION................................................... 16
VALUATION OF SECURITIES; REDEMPTION IN KIND............................... 19
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST........................... 20
ORGANIZATION OF THE TRUST AND THE PORTFOLIO TRUST......................... 27
REDUCED INITIAL SALES CHARGES............................................. 27
TAXATION ................................................................. 28
FINANCIAL STATEMENTS...................................................... 31
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<PAGE> 75
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISKS
INVESTMENT OBJECTIVES
The investment objective(s) of each Fund is described in the
Prospectus. There can be no assurance that any Fund will achieve its investment
objective(s).
INVESTMENT POLICIES, PRACTICES, RESTRICTIONS AND RISKS
Since the investment characteristics of each Fund (other than Standby
Income Fund) will correspond directly to those of the corresponding Portfolio,
the following is a discussion of the various investments of and techniques
employed by each Portfolio.
The following provides additional information about the investment
policies employed by one or more Portfolios. Please refer to the Prospectus for
information as to which investment techniques are employed by which Portfolios.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Prospectus.
LOWER-RATED DEBT SECURITIES. While the market for high yield corporate
debt securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees of the Portfolio Trust, including the use
of outside pricing services. Judgment plays a greater role in valuing high yield
corporate debt securities than is the case for securities for which more
external sources for quotations and last sale information is available. Adverse
publicity and changing investor perception may affect the ability of outside
pricing services to value lower-rated debt securities and the ability to dispose
of these securities.
In considering investments for the Portfolio, the Portfolio Advisor
will attempt to identify those issuers of high yielding debt securities whose
financial condition is adequate to meet future obligations, has improved or is
expected to improve in the future. The Portfolio Advisor's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
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<PAGE> 76
A Portfolio may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise exercise its rights as a security holder to
seek to protect the interest of security holders if it determines this to be in
the best interest of the Portfolio.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933 (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted securities 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 an investment company might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. An investment
company 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.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act on resales of certain securities to qualified institutional buyers. The
Advisor and each Portfolio Advisor anticipates that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Each Portfolio Advisor will monitor the liquidity of Rule 144A
securities in the respective Portfolio's portfolio under the supervision of the
Portfolio Trust's Board of Trustees. In reaching liquidity decisions, each
Portfolio Advisor will consider, among other things, the following factors: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
and other potential purchasers wishing to purchase or sell the security; (3)
dealer undertakings to make a market in the security and (4) the nature of the
security and 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).
SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE. Investments in
companies domiciled in Eastern European countries may be subject to potentially
greater risks than those of other foreign issuers. These risks include: (i)
potentially less social, political and economic stability; (ii) the small
current size of the markets for such securities and the low volume of trading,
which result in less liquidity and in greater price volatility; (iii) certain
national policies which may restrict the Portfolios' investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interests; (iv) foreign taxation; (v) the absence of developed legal
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (vi) the absence, until recently in
certain Eastern European countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries, or in the
Commonwealth of Independent States.
So long as the Communist Party continues to exercise a significant or,
in some cases, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
taxation. The Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there may be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
a Portfolio could lose a substantial portion of any investments it has made in
the affected countries. Further, no accounting standards exist in Eastern
European countries. Finally, even though certain Eastern
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<PAGE> 77
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial in relation to the actual market values and may be adverse to
the interests of a Fund's shareholders.
LENDING OF PORTFOLIO SECURITIES. By lending its securities, a Portfolio
can increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid by the borrower when
U.S. Government obligations are used as collateral. There may be risks of delay
in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. Each Portfolio will adhere to the following
conditions whenever its securities are loaned: (i) the Portfolio must receive at
least 100 percent cash collateral or equivalent securities from the borrower;
(ii) the borrower must increase this collateral whenever the market value of the
securities including accrued interest rises above the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities.
OPTIONS ON SECURITIES. The respective Portfolios may write (sell), to a
limited extent, only covered call and put options ("covered options") in an
attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at the exercise price. By writing
a covered put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." Where the Portfolio cannot effect a closing purchase transaction,
it may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written.
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When a Portfolio writes a call option, it will "cover" its obligation
by segregating the underlying security on the books of the Portfolio's custodian
or by placing liquid securities in a segregated account at the Portfolio's
custodian. When a Portfolio writes a put option, it will "cover" its obligation
by placing liquid securities in a segregated account at the Portfolio's
custodian.
A Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Portfolio Advisor will
monitor the creditworthiness of dealers with whom a Portfolio enters into such
options transactions under the general supervision of the Board of Trustees.
OPTIONS ON SECURITIES INDEXES. Such options give the holder the right
to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index. Such options
will be used for the purposes described above under "Options on Securities" or,
to the extent allowed by law, as a substitute for investment in individual
securities.
Options on securities indexes entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indexes is more likely to occur, although the
Portfolio generally will only purchase or write such an option if the Portfolio
Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolio will not purchase such options unless
the Advisor and the respective Portfolio Advisor each believes the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities.
Price movements in a Portfolio's portfolio may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge. Because options on securities indexes
require settlement in cash, the Portfolio Advisor may be forced to liquidate
portfolio securities to meet settlement obligations.
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When a Portfolio writes a put or call option on a securities index it
will cover the position by placing liquid securities in a segregated asset
account with the Portfolio's custodian.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies are used
for hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, are utilized. 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
diminutions in the value of portfolio securities, the Portfolio may purchase put
options on the foreign currency. If the value of the currency does decline, a
Portfolio 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, the Portfolio 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 the Portfolio 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, the Portfolio 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.
Options on foreign currencies may be written for the same types of
hedging purposes. For example, where a Portfolio 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 options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. 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 Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the Portfolio also may be
required to forego all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
Certain Portfolios intend to write covered call options on foreign
currencies. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio 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) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio 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 of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash and liquid securities in a segregated account with its
custodian.
Certain Portfolios also intend to write call options on foreign
currencies that are not covered for cross-hedging purposes. A call option on a
foreign currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with its custodian, cash or liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked to market daily.
FORWARD CURRENCY CONTRACTS. Because, when investing in foreign
securities, a Portfolio buys and sells securities denominated in currencies
other than the U.S. dollar and receives interest, dividends and sale proceeds in
currencies other than the U.S. dollar, such Portfolios from time to time may
enter into forward currency transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. A Portfolio either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or
uses forward currency contracts to purchase or sell foreign currencies.
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A forward currency contract is an obligation by a Portfolio to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract. Forward currency contracts establish an
exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward currency contract generally has
no deposit requirement and is traded at a net price without commission. Each
Portfolio maintains with its custodian a segregated account of liquid securities
in an amount at least equal to its obligations under each forward currency
contract. Neither spot transactions nor forward currency contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
A Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Portfolio Advisor's long-term
investment decisions, a Portfolio will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the
Portfolio Advisors believe that it is important to have the flexibility to enter
into foreign currency hedging transactions when it determines that the
transactions would be in a Portfolio's best interest. Although these
transactions 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 be realized should the value of the hedged currency increase. The precise
matching of the forward currency contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward currency
contract is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward currency contracts. In
such event the Portfolio's ability to utilize forward currency contracts in the
manner set forth in the Prospectus may be restricted. Forward currency contracts
may reduce the potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in currency prices
may result in poorer overall performance for the Portfolio than if it had not
entered into such contracts. The use of forward currency contracts may not
eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on a Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject a Portfolio to
certain risks.
The matching of the increase in value of a forward currency contract
and the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Portfolio may not always be able to enter into forward
currency contracts at attractive prices and this will limit the Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates of
the foreign currencies in which the Portfolio's assets that are the subject of
such cross-hedges are denominated.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the
Portfolio Advisor's skill and experience with respect to such instruments and
usually depends on the Portfolio Advisor's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, a Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or may realize
losses and thus will be in a worse position than if such strategies had not been
used. In addition, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
FUTURES CONTRACTS. A Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities or foreign
currencies, or contracts based on financial indexes including any index of U.S.
Government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. A Portfolio may enter into futures
contracts which are based on debt securities that are backed by the full faith
and credit of the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A
Portfolio may also enter into futures contracts which are based on bonds issued
by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase,
the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would decline, but the
value of the futures contracts to the Portfolio would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market.
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When a Portfolio enters into a futures contract for any purpose, the
Portfolio will establish a segregated account with the Portfolio's custodian to
collateralize or "cover" the Portfolio's obligation consisting of cash or liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin 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
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Portfolio Advisor may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although each applicable
Portfolio Advisor believes that use of such contracts will benefit the
respective Portfolio, if the Portfolio Advisor's investment judgment about the
general direction of interest rates is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
For example, if a Portfolio has hedged against the possibility of an increase in
interest rates which would adversely affect the price of debt securities held in
its portfolio and interest rates decrease instead, the Portfolio will lose part
or all of the benefit of the increased value of its debt securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if a Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. A Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance
due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Portfolio will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits on all
the futures contracts of the Portfolio and premiums paid on outstanding options
on futures contracts owned by the Portfolio would exceed 5% of the market value
of the total assets of the Portfolio.
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ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by a Portfolio
in futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
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 Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio 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, is 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, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, 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.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
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: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
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RATING SERVICES
The ratings of nationally recognized statistical rating organizations
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, each Portfolio
Advisor also makes its own evaluation of these securities, subject to review
by the Board of Trustees of the Portfolio Trust. After purchase by a Portfolio,
an obligation may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event would require a
Portfolio to eliminate the obligation from its portfolio, but a Portfolio
Advisor will consider such an event in its determination of whether a Portfolio
should continue to hold the obligation. A description of the ratings used herein
and in the Funds' Prospectuses is set forth in the Appendix to the Prospectus.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of
each Fund and each Portfolio and may not be changed with respect to the Fund or
the Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this Statement of Additional
Information and the Prospectus, means the lesser of (i) 67% or more of the
outstanding voting securities of the Fund (Portfolio) present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the Fund
(Portfolio) are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Fund (Portfolio).
As a matter of fundamental policy, no Portfolio (Fund) may (except that
no investment restriction of a Fund shall prevent a Fund from investing all of
its Assets in an open-end investment company with substantially the same
investment objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current value of the
Portfolio's (Fund's) net assets, it may borrow money (including through reverse
repurchase agreements, forward roll transactions involving mortgage-backed
securities or other investment techniques entered into for the purpose of
leverage), and except that it may pledge, mortgage or hypothecate not more than
1/3 of such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional Restrictions" below;
(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an underwriter under
the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's (Fund's) total assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of debt securities of
types distributed publicly or privately;
(4)(a)(all Portfolios (Funds) except the Growth & Income Portfolio
(Growth & Income Fund)) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary course
of business (except that the Portfolio (Trust) may hold and sell, for the
Portfolio's (Fund's) portfolio, real estate acquired as a result of the
Portfolio's (Fund's) ownership of securities);
(4)(b)(Growth & Income Portfolio (Growth & Income Fund) only)
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(i) purchase or sell real estate (except that (a) the Portfolio may
invest in (i) securities of entities that invest or deal in real estate,
mortgages, or interests therein and (ii) securities secured by real estate or
interests therein and (b) the Portfolio may hold and sell real estate acquired
as a result of the Portfolio's ownership of securities);
(ii) purchase or sell interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and options contracts) in the
ordinary course or business.
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Portfolio's (Fund's) investment objective(s), up to 25% of its total assets
may be invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its total assets taken at market value,
invest in assets other than cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies and other
securities for purposes of this calculation limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the total assets of
the Portfolio (Fund) and to not more than 10% of the outstanding voting
securities of such issuer.
ADDITIONAL RESTRICTIONS. Each Portfolio (or Trust, on behalf of each
Fund) will not, as a matter of "operating policy" (changeable by the respective
Board of Trustees without a shareholder vote) (except that no operating policy
shall prevent a Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase agreements or
forward roll transactions involving mortgage-backed securities or
similar investment techniques entered into for leveraging purposes),
except that the Portfolio(Fund) may borrow for temporary or emergency
purposes up to 10% of its total assets; provided, however, that no
Portfolio (Fund) may purchase any security while outstanding borrowings
exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Portfolio's (Fund's) total assets (taken at market value), provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and reverse
repurchase agreements are not considered a pledge of assets for
purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time thereof
would cause: (a) more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) to be invested in the
securities of such issuers; (b) more than 5% of the Portfolio's
(Fund's) total assets (taken at the greater of cost or market value) to
be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the
Portfolio (Fund); provided further that, except in the
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case of a merger or consolidation, the Portfolio (Fund) shall not
purchase any securities of any open-end investment company unless the
Portfolio (Fund) (1) waives the investment advisory fee, with respect
to assets invested in other open-end investment companies and (2)
incurs no sales charge in connection with the investment;
(vii) invest more than 15% of the Portfolio's (Fund's) net assets (taken at
the greater of cost or market value) in securities that are illiquid or
not readily marketable (defined as a security that cannot be sold in
the ordinary course of business within seven days at approximately the
value at which the Portfolio (Fund) has valued the security) not
including (a) Rule 144A securities that have been determined to be
liquid by the Board of Trustees; and (b) commercial paper that is sold
under section 4(2) of the 1933 Act which is not traded flat or in
default as to interest or principal and either (i) is rated in one of
the two highest categories by at least two nationally recognized
statistical rating organizations and the Portfolio's (Fund's) Board of
Trustees have determined the commercial paper to be liquid; or (ii) is
rated in one of the two highest categories by one nationally recognized
statistical rating agency and the Portfolio's (Fund's) Board of
Trustees have determined that the commercial paper is equivalent
quality and is liquid;
(viii) invest more than 10% of the Portfolio's (Fund's) total assets in
securities that are restricted from being sold to the public without
registration under the 1933 Act (other than Rule 144A Securities deemed
liquid by the Portfolio's (Fund's) Board of Trustees);
(ix) purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio (Fund) to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(x) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Portfolio's (Fund's) net assets (taken at market value)
is represented by such securities, or securities convertible into or
exchangeable for such securities, at any one time (the Portfolios
(Funds) have no current intention to engage in short selling);
(xi) purchase puts, calls, straddles, spreads and any combination thereof if
by reason thereof the value of the Portfolio's aggregate investment in
such classes of securities will exceed 5% of its total assets;
(xii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio and the option is
issued by the OCC, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate value of the obligations underlying the puts determined
as of the date the options are sold shall not exceed 50% of the
Portfolio's net assets; (c) the securities subject to the exercise of
the call written by the Portfolio must be owned by the Portfolio at the
time the call is sold and must continue to be owned by the Portfolio
until the call has been exercised, has
14
<PAGE> 87
lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio establishes a
segregated account with its custodian consisting of cash or liquid
securities equal in value to the amount the Portfolio will be obligated
to pay upon exercise of the put (this account must be maintained until
the put is exercised, has expired, or the Portfolio has purchased a
closing put, which is a put of the same series as the one previously
written); and
(xiii) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net
assets; and (c) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Portfolio Advisors are responsible for decisions to buy and sell
securities, futures contracts and options on such securities and futures for
each Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage commissions,
if any. Broker-dealers may receive brokerage commissions on portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker-dealer or futures commission merchant,
including to the extent and in the manner permitted by applicable law, the
Advisor, the Portfolio Advisors or their subsidiaries or affiliates. Purchases
and sales of certain portfolio securities on behalf of a Portfolio are
frequently placed by the Portfolio Advisor with the issuer or a primary or
secondary market-maker for these securities on a net basis, without any
brokerage commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers reflect
the spread between the bid and asked prices. Purchases of underwritten issues
may be made which will include an underwriting fee paid to the underwriter.
The Portfolio Advisors seek to evaluate the overall reasonableness of
the brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. In placing orders for the
purchase and sale of securities for a Portfolio, the Portfolio Advisors take
into account such factors as price, commission (if any, negotiable in the case
of national securities exchange transactions), size of order, difficulty of
execution and skill required of the executing broker-dealer. The Portfolio
Advisors review on a routine basis commission rates, execution and settlement
services performed, making internal and external comparisons.
The Portfolio Advisors are authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Portfolio with a broker to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. A Portfolio Advisor may use this research
information in managing a Portfolio's assets, as well as the assets of other
clients.
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Board of Trustees may determine, the Portfolio Advisors may consider sales
of shares of the Trust as a factor in the selection of broker-dealers to execute
portfolio transactions. The Portfolio Advisor will make such allocations if
commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal
15
<PAGE> 88
market-makers for the security being traded unless, after exercising care, it
appears that more favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Portfolio and to the corresponding
Portfolio Advisor, it is the opinion of the management of the Portfolios that
such information is only supplementary to the Portfolio Advisor's own research
effort, since the information must still be analyzed, weighed and reviewed by
the Portfolio Advisor's staff. Such information may be useful to the Portfolio
Advisor in providing services to clients other than the Portfolios, and not all
such information is used by the Portfolio Advisor in connection with the
Portfolios. Conversely, such information provided to the Portfolio Advisor by
brokers and dealers through whom other clients of the Portfolio Advisor effect
securities transactions may be useful to the Portfolio Advisor in providing
services to the Portfolios.
In certain instances there may be securities which are suitable for a
Portfolio as well as for one or more of the respective Portfolio Advisor's other
clients. Investment decisions for a Portfolio and for the Portfolio Advisor's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Portfolio is
concerned. However, it is believed that the ability of a Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.
The Portfolios and Standby Income Fund paid the following brokerage
commissions for the periods indicated:
<TABLE>
<CAPTION>
Emerging International Equity Growth & Income Standby
Aggregate Growth Portfolio Income Balanced Opportunity Bond Income
Commission Portfolio Portfolio Portfolio Portfolio Portfolio Fund
<S> <C> <C> <C> <C> <C> <C> <C>
For the
Year Ended
12/31/97 $13,110 $57,618 $94,360 $12,476 $0 $0 $0
For the
Year Ended
12/31/96 $11,550 $27,326 $45,100 $ 4,379 $0 $0 $0
For the Year
Ended 12/31/95 $ 9,127 $21,883 $34,430 $ 4,519 $0 $0 $0
</TABLE>
PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
16
<PAGE> 89
YIELD: Yields for a Fund used in advertising are computed by dividing
the Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period, and
annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable
to all stock and bond mutual funds. Dividends from equity investments
are treated as if they were accrued on a daily basis, solely for the
purpose of yield calculations. In general, interest income is reduced
with respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding assumed in yield calculations, the yield quoted for a Fund
may differ from the rate of distributions of the Fund paid over the
same period or the rate of income reported in the Fund's financial
statements. For the 30-day period ended December 31, 1997, the Funds'
yields were as follows:
Income Standby
Balanced Opportunity Fund Bond Income
Fund A A Fund A Fund
2.14% 10.32% 6.55% 5.29%
For the 7-day period ended December 31, 1997, the Standby Income Fund's
yield was 7.16%.
TOTAL RETURN: A Fund's standardized average annual total return is
calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (with all distributions reinvested) to reach the
value of that investment at the end of the periods. A Fund may also
calculate non-standardized total return figures which represent
aggregate (not annualized) performance over any period or year-by-year
performance, such as the following.
17
<PAGE> 90
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN Emerging International Equity Growth & Income
(INCLUDING SALES Growth Fund A Income Balanced Fund Opportunity Fund Bond Standby
CHARGE) Fund A Fund A A A Fund A Income Fund**
For the Year Ended
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/97 24.7% 8.9% 13.7% 12.4% 4.3% 2.2% 5.2%
For the Period
10/3/94* to
12/31/97 18.48% 4.88% 19.88% 16.11% 13.53% 6.66% 5.21%
AVERAGE ANNUAL
TOTAL RETURN
(WITHOUT SALES
CHARGE)
For the Year Ended
12/31/97 32.2% 15.6% 20.7% 19.3% 9.5% 7.3% 5.2%
For the Period
10/3/94* to
12/31/97 20.66% 6.81% 22.09% 18.24% 15.25% 8.28% 5.21%
AGGREGATE
TOTAL RETURN
(INCLUDING SALES
CHARGE)
For the Year Ended
12/31/97 24.7% 8.9% 13.7% 12.4% 4.3% 2.2% 5.2%
For the Period
10/3/94* to
12/31/97 73.4% 16.7% 80.2% 62.4% 51.0% 23.3% 17.9%
AGGREGATE
TOTAL RETURN
(WITHOUT SALES
CHARGE)
For the Year Ended
12/31/97 32.2% 15.6% 22.09% 19.3% 9.5% 7.3% 5.2%
For the Period
10/3/94* to
12/31/97 84.01% 23.86% 91.15% 72.30% 58.55% 29.46% 17.92%
</TABLE>
- ------------
* Commencement of operations
**Standby Income Fund may be purchased and redeemed at net asset value.
Any total return quotation provided for a Fund should not be considered
as representative of the performance of the Fund in the future since
the net asset value and public offering price of shares of the Fund
will vary based not only on the type, quality and maturities of the
securities held in the corresponding Portfolio, but also on changes in
the current value of such securities and on changes in the expenses of
the Fund and the corresponding Portfolio. These factors and possible
differences in the methods used to calculate total return should be
considered when comparing the total return of a Fund to total returns
published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
18
<PAGE> 91
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services, to the
performance of various indices and investments for which reliable performance
data is available. The performance figures of unmanaged indices may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. The performance of the Funds may also be
compared to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services. Evaluations of a Fund's performance
made by independent sources may also be used in advertisements concerning the
Fund. Sources for a Fund's performance information could include Asian Wall
Street Journal, Barron's, Business Week, Changing Times, The Kiplinger Magazine,
Consumer Digest, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund
Performance Analysis, Money, The New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, The Wall Street Journal
and CDA/Weisenberger Investment Companies Services.
VALUATION OF SECURITIES; REDEMPTION IN KIND
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Portfolio Trust. Such procedures include the use of
independent pricing services, which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. All portfolio securities
with a remaining maturity of less than 60 days are valued at amortized cost,
which approximates market.
The accounting records of the Portfolios are maintained in U.S.
dollars. The market value of investment securities, other assets and liabilities
and forward contracts denominated in foreign currencies are translated into U.S.
dollars at the prevailing exchange rates at the end of the period. Purchases and
sales of securities, income receipts, and expense payments are translated at the
exchange rate prevailing on the respective dates of such transactions. Reported
net realized gains and losses on foreign currency transactions represent net
gains and losses from sales and maturities of forward currency contracts,
disposition of foreign currencies, currency gains and losses realized between
the trade and settlement dates on securities transactions and the difference
between the amount of net investment income accrued and the U.S. dollar amount
actually received.
The problems inherent in making a good faith determination of the value
of restricted securities are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting Series Release
No. 113)) which concludes that there is "no automatic formula" for calculating
the value of restricted securities. It recommends that the best method simply is
to consider all relevant factors before making any calculation. According to FRR
1 such factors would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Portfolio purchases securities which are
restricted as to resale or for which current market quotations are not
available, the Portfolio Advisor will value such securities based upon all
relevant factors as outlined in FRR 1.
Each Fund and each Portfolio reserves the right, if conditions exist
which make cash payments undesirable, to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Trust, or the Portfolio, as the case may be, and valued
as they are for purposes of computing the Fund's or the Portfolio's net asset
value, as the case may be (a redemption in kind). If payment is made in
securities, an investor, including the Fund, may
19
<PAGE> 92
incur transaction expenses in converting these securities into cash. The Trust,
on behalf of each Fund, has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which each Fund is obligated to redeem shares or
beneficial interests, as the case may be, with respect to any one investor
during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund at the beginning of the period.
Each investor in a Portfolio, including the corresponding Fund, may add
to or reduce its investment in the Portfolio on each day that the NYSE is open
for business. As of the close of regular trading on the NYSE on each such day,
the value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in a
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in the
Portfolio as of the close of regular trading on the NYSE on such day plus or
minus, as the case may be, the amount of net additions to or reductions in the
investor's investment in the Portfolio effected on such day and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on the NYSE on such day plus or minus, as the case may
be, the amount of net additions to or reductions in the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in the
Portfolio as of the close of regular trading on the NYSE on the following day
the NYSE is open for trading.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO TRUST
The Trustees and officers of the Trust and the Portfolio Trust and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Asterisks indicate those
Trustees who are "interested persons" (as defined in the 1940 Act) of the Trust
and the Portfolio Trust. Unless otherwise indicated, the address of each Trustee
and officer is 311 Pike Street, Cincinnati, Ohio 45202. The Trustees and
officers of the Trust and the Portfolio Trust also serve in the same positions
with the Select Advisors Trust C and the Select Advisors Variable Insurance
Trust.
TRUSTEES OF THE TRUST AND THE PORTFOLIO TRUST
*EDWARD G. HARNESS, JR. (age 49) - Chairman of the Board of Trustees,
President and Chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. (since February, 1994); Director, Chief
Executive Officer, Touchstone Securities, Inc. (since October, 1991); President,
Touchstone Securities, Inc. (since March, 1996); President, IFS Financial
Services, Inc. (since January, 1991); President, IFS Systems, Inc. (since
August, 1991).
*WILLIAM J. WILLIAMS (age 82) - Trustee; Chairman of the Board of
Directors, The Western and Southern Life Insurance Company (since March, 1984);
Chief Executive Officer, The Western and Southern Life Insurance Company (from
March, 1984 to March, 1994). His address is 400 Broadway, Cincinnati, OH 45202.
JOSEPH S. STERN, JR. (age 80) - Trustee; Retired Professor Emeritus,
College of Business, University of Cincinnati. His address is 3 Grandin Place,
Cincinnati, OH 45208.
PHILLIP R. COX (age 50) - Trustee; President and Chief Executive
Officer, Cox Financial Corp. (since 1972); Director, Federal Reserve Bank of
Cleveland; Director, Cincinnati Bell, Inc.; Director, PNC Bank; Director,
Cinergy Corporation. His address is 105 East Fourth Street, Cincinnati, OH
45202.
ROBERT E. STAUTBERG (age 63) - Trustee; Retired Partner and Director,
KPMG Peat Marwick; Chairman of the Board of Trustees, Good Samaritan Hospital.
His address is 4815 Drake Road, Cincinnati, OH 45243.
DAVID POLLAK (age 80) - Trustee; President, The Ultimate Distributing
Company (1986 to 1993); Director Emeritus, Fifth Third Bank. His address is 1313
Kemper Road, Suite 111, Cincinnati, OH 45246.
20
<PAGE> 93
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Portfolio.
JAMES J. VANCE (age 37) - Treasurer; Treasurer Western-Southern Life
Insurance Company (since January, 1994); Corporate Financing Manager, Eastman
Kodak Company (June, 1988 to December, 1993). His address is 400 Broadway,
Cincinnati, OH 45202.
EDWARD S. HEENAN (age 54) - Treasurer; Vice President and Controller,
Touchstone Advisors, Inc. (since December, 1993); Director, Controller,
Touchstone Securities, Inc. (since October, 1991); Vice President and
Comptroller, The Western and Southern Life Insurance Company (since 1987). His
address is 400 Broadway, Cincinnati, OH 45202.
ANDREW S. JOSEF (age 34) - Secretary; Director, Legal Administration,
Investors Bank & Trust Company ("Investors Bank") (since May, 1997); Senior
Associate, Sullivan & Worcester LLP (November, 1995 to May, 1997); Associate,
Goodwin, Proctor & Hoar (January, 1993 to November, 1995); Associate, Simpson
Thacher & Bartlett (prior to 1993). His address is 200 Clarendon Street, Boston,
MA 02116.
SUSAN C. MOSHER (age 43) - Assistant Secretary; Director, Legal
Administration, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995); Partner,
Gallagher, Callahan & Gartrell, P.A. (prior to September, 1992). Her address is
200 Clarendon Street, Boston, MA 02116.
KEVIN M. CONNERTY (age 34) - Assistant Treasurer; Director, Fund
Administration - Reporting and Compliance, Investors Bank (since October, 1992);
Assistant Manager of Financial Reporting, The Boston Company (prior to October,
1992). His address is 200 Clarendon Street, Boston, MA 02116.
PAUL J. JASINSKI (age 51) - Assistant Treasurer; Managing Director -
Fund Administration, Investors Bank (since July, 1985). His address is 200
Clarendon Street, Boston, MA 02116.
Ms. Mosher and Messrs. Josef, Connerty and Jasinski also hold similar
positions for other investment companies for which Investors Bank serves as
administrator.
No director, officer or employee of the Advisor, the Portfolio
Advisors, the Distributor, the Administrator or any of their affiliates will
receive any compensation from the Trust or the Portfolio Trust for serving as an
officer or Trustee of the Trust or the Portfolio Trust. The Trust, Portfolio
Trust, Select Advisors Trust C and Select Advisors Variable Insurance Trust (the
"Fund Complex") pay in the aggregate, each Trustee who is not a director,
officer or employee of the Advisor, the Portfolio Advisors, the Distributor, the
Administrator or any of their affiliates an annual fee of $5,000, respectively,
plus $1,000, respectively, per meeting attended and reimburses them for travel
and out-of-pocket expenses. The following table reflects Trustee fees paid for
the year ended December 31, 1997.
TRUSTEE COMPENSATION TABLE
21
<PAGE> 94
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM TRUST AND FUND COMPLEX
NAME OF PERSON AND POSITION FROM TRUST PAID TO TRUSTEES
Joseph S. Stern, Jr., $ 945.37 $ 6,750
Trustee of Trust
and Portfolio Trust
Phillip R. Cox, $1,408.14 $10,000.00
Trustee of Trust
and Portfolio Trust
Robert E. Stautberg, $1,408.14 $10,000.00
Trustee of Trust
and Portfolio Trust
David Pollak, $1,408.14 $10,000.00
Trustee of Trust
and Portfolio Trust
As of March 31, 1998, Trustees and officers of the Trust and the
Portfolio Trust owned in the aggregate less than 1% of the shares of any Fund
or the Trust (all series taken together).
As of March 31, 1998, (i) Western-Southern Life Assurance Company, 400
Broadway, Cincinnati, Ohio 45202 ("Western-Southern"), which was organized under
the laws of the State of Ohio and which is a wholly owned subsidiary of Western
and Southern Life Insurance Company ("Western and Southern"), was the record
owner of 61.76%, 44.75%, and 21.81% of the outstanding shares of the
International Equity Fund, Balanced Fund and Income Opportunity Fund,
respectively; (ii) Western-Southern, Columbus Life Insurance Company ATTN: Kathy
Bradford, 400 E. 4th Street, Cincinnati, OH 45202, and Highlands Company of
Delaware, P.O. Box 587, Harbor Springs, Michigan 49740, were the record owners
of 34.33%, 5.03% and 13.10%, respectively, of the Emerging Growth Fund; (iii)
Western and Southern, 400 Broadway, Cincinnati, Ohio 45202, which was organized
under the laws of the State of Ohio, was the record owner of 23.74% of the
outstanding shares of the Growth & Income Fund; (iv) Western and Southern; State
Street Bank and Trust Company ("State Street"), as custodian for the rollover
IRA of Eugene Ruehlmann, Cincinnati, Ohio 45238; and Western-Southern were the
record owners of 22.37%, 8.05% and 7.6%, respectively, of the outstanding shares
of the Bond Fund; and (v) Western-Southern; Western and Southern; and Leslie V.
Craig, 9904 Misty Morn Lane, Cincinnati, Ohio 45242 were the record owners of
33.27%, 33.27% and 10.01%, respectively, of the outstanding shares of the
Standby Income Fund; NFSC FEBO #RYL-801615, The Hosch Grit II, Charles R. Hosche
TTEE, P.O. Box 7569, Marietta, GA 30065 was the record owner of 9.17% of the
outstanding shares of the Balanced Fund. Each of the above-named entities owning
over 50% of the outstanding shares of any of the above-named Funds may take
actions requiring a majority vote without the approval of any other investor in
such Fund.
ADVISOR, PORTFOLIO ADVISORS, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND DISTRIBUTOR
ADVISOR
22
<PAGE> 95
Touchstone Advisors provides service to each Portfolio and the Standby
Income Fund pursuant to Investment Advisory Agreements with the Portfolio Trust
and the Trust (the "Advisory Agreements"). The services provided by the Advisor
consist of directing and supervising each Portfolio Advisor, reviewing and
evaluating the performance of each Portfolio Advisor and determining whether or
not any Portfolio Advisor should be replaced. The Advisor furnishes at its own
expense all facilities and personnel necessary in connection with providing
these services. Each respective Advisory Agreement will continue in effect if
such continuance is specifically approved at least annually by the respective
Board of Trustees and by a majority of the respective Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Advisory Agreement.
Each Advisory Agreement is terminable, with respect to a Portfolio or
Standby Income Fund, without penalty on not more than 60 days' nor less than 30
days' written notice by (1) the Portfolio Trust or the Trust, as the case may
be, when authorized either by (a) in the case of a Portfolio, a majority vote of
the corresponding Fund and of the other investors in the Portfolio (with the
vote of each being in proportion to the amount of their investment) or, in the
case of Standby Income Fund, a majority vote of the Fund's shareholders, or
(b) a vote of a majority of the respective Board of Trustees or (2) the Advisor.
Each Advisory Agreement will automatically terminate in the event of its
assignment. Each Advisory Agreement provides that neither the Advisor nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in its services to
the Portfolios, except for willful misfeasance, bad faith or gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
The Trust's Prospectus contains a description of fees payable to the
Advisor for services under the Advisory Agreements.
For the periods indicated, each Portfolio and Standby Income Fund
incurred the following investment advisory fees equal on an annual basis to the
following percentages of the average daily net assets of each Portfolio and
Standby Income Fund.
<TABLE>
<CAPTION>
Emerging International Equity Growth & Income Standby
Growth Portfolio Income Balanced Opportunity Bond Portfolio Income Fund
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C> <C>
Rate 0.80% 0.95% 0.80%+ 0.80%* 0.65% 0.55% 0.25%
For the Year
Ended
12/31/97 $48,463 $73,217 $181,803 $38,823 $66,313 $82,976 $18,755
For the Year
Ended
12/31/96 $35,755 $55,448 $138,167 $24,065 $28,495 $70,808 $15,675
For the Year
Ended
12/31/95 $26,169 $43,963 $ 94,187 $16,553 $13,479 $62,478 $13,725
</TABLE>
- ------------
+ Prior to September, 1997 the rate was 0.75%.
* Prior to May, 1997, the rate was 0.70%.
For the periods indicated, the Advisor has voluntarily agreed to
reimburse each Portfolio or Fund the following amounts:
23
<PAGE> 96
<TABLE>
<CAPTION>
Emerging International Equity Growth & Income Standby
Growth Portfolio Income Balanced Opportunity Bond Portfolio Income Fund
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year
Ended
12/31/97 $84,098 $200,506 $39,190 $82,721 $62,571 $96,974 $192,319
For the Year
Ended
12/31/96 $59,720 $ 84,640 $62,911 $64,645 $62,865 $60,817 $114,416
For the Year
Ended
12/31/95 $65,261 $102,137 $37,425 $67,859 $69,419 $42,920 $101,543
</TABLE>
PORTFOLIO ADVISORS
The Advisor has, in turn, entered into a portfolio advisory agreement
(each a "Portfolio Agreement") with each Portfolio Advisor selected by the
Advisor for a Portfolio or Standby Income Fund. Under the direction of the
Advisor and, ultimately, of the Board of Trustees of the Portfolio Trust, each
Portfolio Advisor is responsible for making all of the day-to-day investment
decisions for the respective Portfolio (or portion of a Portfolio) or Fund.
Each Portfolio Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Portfolio
Agreement contains provisions similar to those described above with respect to
the Advisory Agreements.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Pursuant to Administration and Fund Accounting Agreements, Investors
Bank supervises the overall administration of the Trust, including but not
limited to, accounting, clerical and bookkeeping services; daily calculation of
net asset values; preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations. Investors Bank
also provides persons to serve as officers of the Trust. As custodian, Investors
Bank holds cash, securities and other assets of the Trust.
The Trust's Prospectus contains a description of fees payable to
Investors Bank for its services as administrator, fund accounting agent and
custodian.
Prior to December 1, 1996, Signature Financial Services, Inc.
("Signature") served as administrator and fund accounting agent to the Trust.
The Portfolios incurred the following administrative and fund
accounting fees for the periods indicated:
24
<PAGE> 97
<TABLE>
<CAPTION>
Emerging International Equity Growth & Income Standby
Growth Portfolio Income Balanced Opportunity Bond Portfolio Income Fund
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year $100,241* $222,430* $111,938* $97,151* $95,319* $104,717* $86,792
Ended
12/31/97
For the Year $61,789 $64,008 $61,966 $64,985 $61,674 $61,716 $24,289
Ended
12/31/96**
For the Year
Ended
12/31/95 $47,425 $56,773 $46,643 $47,446 $45,723 $47,775 $28,885
</TABLE>
- -----------
* For the year-ended December 31, 1997, fee includes custody fees.
** Includes administrative and fund accounting fees paid to Signature Financial
Services, Inc. and Investors Bank and Trust Company.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for willful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the
non-assigning party, and may be terminated after its Initial Term, with respect
to a Portfolio, without penalty by majority vote of the shareholders of the
Portfolio or by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("State Street") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
DISTRIBUTOR
The Trustees of the Trust have adopted a Distribution and Services Plan
(the "Distribution Plan") with respect to each Fund (except the Standby Income
Fund) after having concluded that there was a reasonable likelihood that the
Distribution Plan would benefit each such Fund and its shareholders. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. In addition, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. Of course,
there is no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan provides that the Trust may pay the Distributor a
fee not to exceed 0.25% per annum of each Fund's average daily net assets in
anticipation of, or as reimbursement for, expenses incurred in connection with
the sale of shares of the Trust, such as payments to broker-dealers who advise
shareholders regarding the purchase, sale or retention of shares of the Trust,
payments to employees of the Distributor, advertising expenses and the expenses
of printing and distributing prospectuses and reports used for sales purposes,
expenses of preparing and printing sales literature and other
distribution-related expenses.
25
<PAGE> 98
The Distribution Plan will continue in effect indefinitely if such
continuance is specifically approved at least annually by a vote of both a
majority of the Trust's Trustees and a majority of the Trust's Trustees who are
not "interested persons of the Trust" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any agreement
related to such Plan ("Qualified Trustees"). The Distributor will provide to the
Trustees of the Trust a quarterly written report of amounts expended by it under
the Distribution Plan and the purposes for which such expenditures were made.
The Distribution Plan further provides that the selection and nomination of the
Trust's disinterested Trustees shall be committed to the discretion of the
disinterested Trustees of the Trust. The Distribution Plan may be terminated at
any time by a vote of a majority of the Trust's Qualified Trustees or by a vote
of the shareholders of the Trust. The Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trust's Trustees and the Trust's Qualified
Trustees. No disinterested Trustee has any financial interest in the
Distribution Plan or in any related agreement. The Distributor will preserve
copies of any plan, agreement or report made pursuant to the Distribution Plan
for a period of not less than six years from the date of the Distribution
Plan, and for the first two years the Distributor will preserve such copies
in an easily accessible place.
The Trust paid the following fees pursuant to the Distribution Plan for
the periods indicated:
<TABLE>
<CAPTION>
Distribution Emerging Growth & Income
Fee Growth Fund International Equity Income Fund Balanced Opportunity Fund Bond Fund
A Fund A A Fund A A A
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended
12/31/97 $9,801 $10,363 $11,516 $6,637 $17,453 $4,764
For the Year Ended
12/31/96 $7,651 $7,551 $6,288 $4,477 $5,849 $3,038
For the Year Ended
12/31/95 $5,430 $5,986 $1,201 $3,082 $2,733 $ 569
</TABLE>
The Trust has entered into a Distribution Agreement with the
Distributor. Under the Distribution Agreement, the Distributor acts as the agent
of the Trust in connection with the offering of shares of the Trust.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East 5th Street, Cincinnati,
Ohio 45201-5715, serves as counsel to the Trust and each Portfolio. Coopers &
Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, acts as
independent accountants of the Trust and each Portfolio, providing audit
services, tax return preparation and assistance and consultation in connection
with the review of filings with the SEC.
26
<PAGE> 99
ORGANIZATION OF THE TRUST AND THE PORTFOLIO TRUST
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by the Trust, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
REDUCED INITIAL SALES CHARGES
RIGHT OF ACCUMULATION
Reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase shares of a Fund at the
offering price applicable to the total of (a) the dollar amount then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings. For any such right of accumulation to be made
available, the Transfer Agent must be provided at the time of purchase, by the
purchaser or the purchaser's securities dealer, with sufficient information to
permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
LETTER OF INTENT
Reduced sales charges are applicable to purchases aggregating a
minimum of $25,000 for the Income Opportunity Fund, the Bond Fund and the
Standby Income Fund and $50,000 for each other Touchstone Fund of the shares of
the Fund made within a 24 month period starting with the first purchase pursuant
to a Letter of Intent. The Letter of Intent is not a binding obligation to
purchase any amount of shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of shares of the Fund presently held on the date of the
first purchase under the Letter of Intent, may be included as a credit toward
the completion of such Letter, but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If the
total amount of shares does not equal the amount stated in the Letter of Intent,
the investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the sales charge on the shares purchased at
the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Shares equal to 5% of the intended amount will be
held in escrow during the 24 month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intent must be 5% of the dollar amount of such Letter. If, during the term of
such Letter, a purchase brings the total amount invested to an amount equal to
or in excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the shares then being purchased under such Letter, but there
will not be a retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intent will be
deducted from the total purchases made under such Letter.
27
<PAGE> 100
TAXATION
TAXATION OF THE FUNDS
The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among
other things: (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of: (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year; (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year; and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December with a record date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Each Fund shareholder will receive, if appropriate, various written
notices after the close of the Fund's prior taxable year as to the federal
income status of his dividends and distributions which were received from the
Fund during the Fund's prior taxable year. Shareholders should consult their tax
advisors as to any state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded from federal income
taxation and the dollar amount subject to such income taxation, if any, will
vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. To the extent that the Fund earns taxable
net investment income, the Fund intends to designate as taxable dividends the
same percentage of each dividend as its taxable net investment income bears to
its total net investment income earned. Therefore, the percentage of each
dividend designated as taxable, if any, may vary.
FOREIGN TAXES. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. It is impossible to determine the
effective rate of foreign tax in advance since the amount of each applicable
Portfolio's assets to be invested in various countries will vary.
28
<PAGE> 101
If the Portfolio is liable for foreign taxes, and if more than 50% of
the value of the Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, it may make an
election pursuant to which certain foreign taxes paid by it would be treated as
having been paid directly by shareholders of the entities, such as the
corresponding Fund, which have invested in the Portfolio. Pursuant to such
election, the amount of foreign taxes paid will be included in the income of the
corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such Fund shareholder will be notified after the
close of the Portfolio's taxable year whether the foreign taxes paid will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid to each such country and (b) the
portion which represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit
in any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Portfolio
on the sale of foreign securities will be treated as U.S.-source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will
be taxable to a U.S. shareholder as ordinary income. Distributions of net
capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held the
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have a cost basis in each such share equal to the net
asset value of a share of the Fund on the reinvestment date. Shareholders will
be notified annually as to the U.S. federal tax status of distributions.
TAXATION OF THE PORTFOLIOS
The Portfolios are not subject to federal income taxation. Instead, the
Fund and other investors investing in a Portfolio must take into account, in
computing their federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
Distributions received by a Fund from the corresponding Portfolio
generally will not result in the Fund recognizing any gain or loss for federal
income tax purposes, except that: (1) gain will be recognized to the extent that
any cash distributed exceeds the Fund's basis in its interest in the Portfolio
prior to the distribution; (2) income or gain may be realized if the
distribution is made in liquidation of the Fund's entire interest in the
Portfolio and includes a disproportionate share of any unrealized receivables
held by the Portfolio; and (3) loss may be recognized if the distribution is
made in liquidation of the Fund's entire interest in the Portfolio and consists
solely of cash and/or unrealized receivables. A Fund's basis in its interest in
the corresponding Portfolio generally will equal the amount of cash and the
basis of any property which the Fund invests in the Portfolio, increased by the
Fund's share of income from the Portfolio, and decreased by the Fund's share of
loss from the Portfolio, the amount of any cash distributions and the basis of
any property distributed from the Portfolio.
SALE OF SHARES
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of the Fund, or upon receipt of a distribution in complete
liquidation of a Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of Fund
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
29
<PAGE> 102
FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a
Fund may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisors with respect to the particular tax
consequences to them of an investment in a Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
The Portfolio Trust is organized as a common law trust under the laws
of the State of New York but is treated as a partnership for tax purposes. The
Portfolio Trust is not subject to any income or franchise tax in the
Commonwealth of Massachusetts.
Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a Fund.
30
<PAGE> 103
FINANCIAL STATEMENTS
The following financial statements for the Trust, Standby Income Fund
and the Portfolio Trust at and for the fiscal periods indicated are incorporated
herein by reference from their current reports to shareholders filed with the
SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy
of each such report will be provided, without charge, to each person receiving
this Statement of Additional Information.
SELECT ADVISORS TRUST A (other than Touchstone Value Plus Fund A and Touchstone
Standby Income Fund)
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31,
1997 and December 31, 1996
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
TOUCHSTONE STANDBY INCOME FUND
Schedule of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31,
1997 and December 31, 1996
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
SELECT ADVISORS PORTFOLIOS (other than Touchstone Value Plus Portfolio)
Schedule of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31,
1997 and December 31, 1996
Notes to Financial Statements
Supplementary Data
Report of Independent Accountants
31
<PAGE> 104
32
<PAGE> 105
IFS0006P
DISTRIBUTOR
Touchstone Securities, Inc. --THE TOUCHSTONE FUNDS
311 Pike Street --TOUCHSTONE VALUE PLUS FUND A
Cincinnati, Ohio 45202 --TOUCHSTONE EMERGING GROWTH FUND A
--TOUCHSTONE GROWTH & INCOME FUND A
INVESTMENT ADVISOR OF EACH PORTFOLIO --TOUCHSTONE INCOME OPPORTUNITY FUND A
Touchstone Advisors, Inc. --TOUCHSTONE BOND FUND A
311 Pike Street --TOUCHSTONE STANDBY INCOME FUND
Cincinnati, Ohio 45202
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
ADMINISTRATOR, CUSTODIAN AND
FUND ACCOUNTING AGENT
Investors Bank & Trust Company STATEMENT OF ADDITIONAL INFORMATION
200 Clarendon Street
Boston, Massachusetts 02116 MAY 1, 1998
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
33
<PAGE> 106
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A
FOR THE REGISTRANT (except Touchstone Value Plus Fund A):
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B
FOR THE REGISTRANT (except Touchstone Standby Income Fund and Touchstone
Value Plus Fund A):
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997
and December 31, 1996
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
FOR TOUCHSTONE STANDBY INCOME FUND
Schedule of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997
and December 31, 1996
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
FOR SELECT ADVISORS PORTFOLIOS (except Touchstone Value Plus Portfolio):
Schedule of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
<PAGE> 107
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997
and December 31, 1996
Notes to Financial Statements
Supplementary Data
Report of Independent Accountants
(b) EXHIBITS:
(1A) Amended Declaration of Trust of the Trust.(6)
(1B) Amendment to the Amended Declaration of Trust of the Trust.(8)
(2) Amended By-Laws of the Trust.(6)
(3) Inapplicable.
(4) Inapplicable.
(5A) Investment Advisory Agreement with respect to Touchstone Standby
Income Fund.(6)
(5B) Portfolio Advisory Agreement with respect to Touchstone Standby
Income Fund.(6)
(6) Distribution Agreement.(3)
(7) Inapplicable.
(8) Custody Agreement.(3)
(9A) Administration Agreement.(7)
(9B) Transfer Agency Agreement.(3)
(9C) Sponsor Agreement.(4)
(9D) Amendment No. 1 to the Sponsor Agreement.(5)
(9E) Fund Accounting Agreement.(7)
(10) Opinion of counsel.(4)
<PAGE> 108
(11) Consent of independent accountants.(9)
(12) Inapplicable.
(13) Investment letter of initial shareholders.(4)
(14) Inapplicable.
(15) Distribution and Service Plan pursuant to Rule 12b-l under the
Investment Company Act of 1940, as amended (the "1940 Act").(3)
(16) Methods of computation of performance information.(3)
(17) Powers of Attorney.(8)
(27) Financial Data Schedules.(9)
(1) Incorporated herein by reference from this registration statement of the
Registrant on Form N-1A (the "Registration Statement") as originally filed
with the Securities and Exchange Commission ("SEC") on February 28, 1994.
(2) Incorporated herein by reference from pre-effective amendment No. 1 to the
Registration Statement as filed with the SEC on June 16, 1994.
(3) Incorporated herein by reference from pre-effective amendment No. 2 to the
Registration Statement as filed with the SEC on August 24, 1994.
(4) Incorporated herein by reference from pre-effective amendment No. 3 to the
Registration Statement as filed with the SEC on September 23, 1994.
(5) Incorporated herein by reference from post-effective amendment No. 1 to
the Registration Statement as filed with the SEC on March 30, 1995.
(6) Incorporated herein by reference from post-effective amendment No. 2 to
the Registration Statement as filed with the SEC on April 29, 1996.
(7) Incorporated herein by reference from post-effective amendment No. 3 to
the Registration Statement as filed with the SEC on February 28, 1997.
(8) Incorporated herein by reference from post-effective amendment No. 5 to
the Registration Statement as filed with the SEC on February 13, 1998.
(9) Filed herein.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
(as of March 31, 1998)
Emerging Growth Fund A 1,053
<PAGE> 109
International Equity Fund A 984
Growth & Income Fund A 1,345
Balanced Fund A 906
Income Opportunity Fund A 1,242
Bond Fund A 608
Standby Income Fund 256
ITEM 27. INDEMNIFICATION.
Under Article V, Section 5.3 of the Trust's Declaration of Trust, (a)
subject to the exceptions and limitations contained in paragraph (b)
below: (i) every person who is or has been a Trustee or officer of the
Trust shall be indemnified by the Trust, to the fullest extent permitted
by law (including the 1940 Act) as currently in effect or as hereinafter
amended, against all liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue
of his being or having been a Trustee or officer and against amounts paid
or incurred by him in the settlement thereof; (ii) the words "claim",
"action", "suit", or "proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal, administrative or other, including
appeals), actual or threatened; and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities. (b) No
indemnification shall be provided hereunder to a Trustee or officer: (i)
against any liability to the Trust or the Shareholders by reason of a
final adjudication by the court or other body before which the proceeding
was brought that he engaged in wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office; (ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or (iii) in
the event of a settlement involving a payment by a Trustee or officer or
other disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) above resulting in a payment by a Trustee or
officer, unless there has been either a determination that such Trustee or
officer did not engage in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office
by the court or other body approving the settlement or other disposition
or by a reasonable determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that he did not engage in
such conduct: (A) by a vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter); or (B) by written opinion of
independent legal counsel. (c) Subject to the provisions of the 1940 Act,
the Trust may maintain insurance for the protection of the Trust Property,
its present or former Shareholders, Trustees, officers, employees,
independent contractors and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability (whether or not the Trust
would have the power to indemnify such Persons against such liability),
and such other insurance as the Trustees in their sole judgment shall deem
advisable. (d) The rights of indemnification herein provided shall be
severable, shall not affect any other rights to which any Trustee or
officer may now or hereafter be entitled, shall continue as to a Person
who has ceased to be such a Trustee or officer and shall inure to the
benefit of the heirs, executors and administrators of such Person. Nothing
contained herein shall affect any rights to indemnification to which
personnel other than Trustees and officers may be entitled by contract or
otherwise under law. (e) Expenses of preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 5.3 shall be advanced by the
Trust prior to final disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if it is ultimately
determined that he is not entitled to indemnification under this Section
5.3, provided that either: (i) such undertaking is secured by a surety
bond or some other appropriate security or the Trust shall be insured
against losses arising out of any such advances; or (ii) a majority of the
Disinterested Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the matter) or an
independent legal counsel in a written opinion, shall determine, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification. As used in this Section 5.3 a
"Disinterested Trustee" is one (i) who is not an "Interested Person" of
the Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the Commission),
and (ii) against whom none of such actions, suits or other proceedings or
another action, suit or other proceeding on the same or similar grounds is
then or had been pending. As used in this Section 5.3, the term
"independent legal counsel" means an attorney who is independent in all
respects from the Trust and from the person or persons who seek
indemnification hereunder and in any event means an attorney who has not
been retained by or performed services for the Trust or any person to be
so indemnified within the five years prior to the Initial request for
indemnification pursuant hereto.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees,
officers and controlling persons of the Trust pursuant to the foregoing
provisions, or otherwise, the Trust has been advised that in the opinion
of the Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Trust of expenses incurred or paid by a Trustee, officer or
controlling person of the Trust in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling
person in connection with the securities being registered, the Trust will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
<PAGE> 110
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Touchstone Advisors, Inc. ("Touchstone Advisors") serves as investment
advisor to the Standby Income Fund, a series of the Trust.
Set forth below are the names, principal business addresses and positions of
each director and officer of Touchstone Advisors. Unless otherwise noted, the
principal business address of these individuals is Touchstone Advisors, Inc.,
311 Pike Street, Cincinnati, Ohio 45202. Unless otherwise specified, none of the
officers and directors of Touchstone Advisors serve as officers and Trustees of
the Trust.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
WITH TOUCHSTONE POSITION AND OFFICES
NAME ADVISORS WITH THE REGISTRANT
<S> <C> <C>
James N. Clark* Director none
Edward G. Harness, Jr. Director, President Chairman of the Board,
and Chief Executive President and Chief
Officer Financial Officer
William F. Ledwin* Director none
Donald J. Wuebbling* Director, Secretary none
and Chief Legal
Officer
James J. Vance* Treasurer Treasurer
Edward S. Heenan* Vice President and Controller
Controller
Richard K. Taulbee* Vice President none
Patricia Wilson Chief Compliance Officer none
Robert F. Morand* Assistant Secretary none
Robert A. Dressman* Assistant Treasurer none
Timothy D. Speed* Assistant Treasurer none
</TABLE>
*Principal business address is 400 Broadway, Cincinnati, Ohio 45202
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Touchstone Securities, Inc. ("Touchstone"), the distributor of the
Shares of the Trust, also serves as principal underwriter for other
<PAGE> 111
investment companies.
(b) Set forth below are the names, principal business addresses and positions
of each director and officer of Touchstone. Unless otherwise noted, the
principal business address of these individuals is Touchstone Securities,
Inc., 311 Pike Street, Cincinnati, Ohio 45202. Unless otherwise
specified, none of the officers and directors of Touchstone serve as
officers and Trustees of the Trust.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITION AND OFFICES
NAME WITH TOUCHSTONE SECURITIES WITH THE REGISTRANT
<S> <C> <C>
James N. Clark* Director none
Edward G. Harness, Jr. Director and Chief Chairman of the Board,
Executive Officer President and Chief
Executive Officer
Edward S. Heenan* Controller Controller
William F. Ledwin* Director none
Donald J. Wuebbling* Director none
Richard K. Taulbee* Vice President none
Carl A. Ramsey** Vice President none
E. Duane Clay** Vice President none
Patricia Wilson Chief Compliance Officer none
J. Thomas Lancaster* Treasurer none
Robert F. Morand* Secretary none
</TABLE>
* Principal business address is 400 Broadway, Cincinnati, Ohio 45202.
** Principal Business address is 8901 Indian Hills Drive, Omaha, Nebraska
68114.
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Select Advisors Trust A
<PAGE> 112
311 Pike Street
Cincinnati, OH 45202
Touchstone Advisors, Inc.
311 Pike Street
Cincinnati, OH 45202
(investment advisor)
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
(administrator, custodian and fund accounting agent)
Touchstone Securities, Inc.
311 Pike Street
Cincinnati, OH 45202
(distributor)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) If the information called for by Item 5A of Form N-1A is contained in the
latest annual report to shareholders, the Registrant shall furnish each
person to whom a prospectus is delivered with a copy of the Registrant's
latest annual report to shareholders upon request and without charge.
(d) The Registrant undertakes to comply with Section 16(c) of the 1940 Act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this amendment
to its Registration Statement on Form N-1A (the "Registration Statement")
pursuant to Rule 485(b) under the Securities Act of 1933, as amended, and
has duly caused this amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
Boston and the Commonwealth of Massachusetts on the 28th day of April,
1998.
SELECT ADVISORS TRUST A
By: /s/ Andrew S. Josef
Andrew S. Josef, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities indicated on April 28, 1998.
<PAGE> 113
SIGNATURE TITLE
EDWARD G. HARNESS, JR.* Trustee, President, Chief
Edward G. Harness, Jr. Executive Officer and
Chairman of the Board
WILLIAM J. WILLIAMS* Trustee
William J. Williams
JOSEPH S. STERN, JR.* Trustee
Joseph S. Stern, Jr.
PHILLIP R. COX* Trustee
Phillip R. Cox
ROBERT E. STAUTBERG* Trustee
Robert E. Stautberg
DAVID POLLAK* Trustee
David Pollak
JAMES J. VANCE* Treasurer (Principal Financial
James J. Vance Officer and Principal Accounting
Officer)
*By /s/ ANDREW S. JOSEF
Andrew S. Josef, as Attorney-in-fact
(pursuant to powers of attorney filed herewith)
SIGNATURES
Select Advisors Portfolios has duly caused this Registration Statement on
Form N-1A (the "Registration Statement") of Select Advisors Trust A (the
"Trust") to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston and the Commonwealth of Massachusetts on
the 28th day of April, 1998.
SELECT ADVISORS PORTFOLIOS
By: /S/ANDREW S. JOSEF
Andrew S. Josef, Secretary
<PAGE> 114
This Registration Statement of Select Advisors Trust A has been signed
below by the following persons in the capacities indicated on April 28,
1998.
SIGNATURE TITLE
EDWARD G. HARNESS, JR.* Trustee, President, Chief
Executive Officer and
Chairman of the Board of Select
Advisors Portfolios
WILLIAM J. WILLIAMS* Trustee of Select Advisors
William J. Williams Portfolios
JOSEPH S. STERN, JR.* Trustee of Select Advisors
Joseph S. Stern, Jr. Portfolios
PHILLIP R. COX* Trustee of Select Advisors
Phillip R. Cox Portfolios
ROBERT E. STAUTBERG* Trustee of Select Advisors
Robert E. Stautberg Portfolios
DAVID POLLAK* Trustee of Select Advisors
David Pollak Portfolios
JAMES J. VANCE* Treasurer (Principal Financial
James J. Vance Officer and Principal Accounting
Officer) of Select Advisors
Portfolios
*By: /s/ ANDREW S. JOSEF
Andrew S. Josef, as Attorney-in-Fact
(pursuant to powers of attorney filed herewith)
<PAGE> 115
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(11) Consent of Independent Accountants
(27) Financial Data Schedules
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 6
to the Registration Statement under the Securities Act of 1933 and Amendment No.
10 to the Registration Statement under the Investment Company Act of 1940 of
Touchstone Select Advisors Trust A on Form N-1A of our report dated February 13,
1998, on our audit of the financial statements and financial highlights of
Touchstone Emerging Growth Fund A, Touchstone International Equity Fund A,
Touchstone Growth & Income Fund A, Touchstone Balanced Fund A, Touchstone Income
Opportunity Fund A and Touchstone Bond Fund A, which report is included in the
Annual Report for Select Advisors Trust A for the year ended December 31, 1997,
which is incorporated by reference in the Registration Statement; our report
dated February 13, 1998, on our audit of the financial statements and financial
highlights of Touchstone Standby Income Fund, which report is included in the
Annual Report for Touchstone Standby Income Fund for the year ended December 31,
1997, which is incorporated by reference in the Registration Statement; and our
report dated February 13, 1998, on our audit of the financial statements and
supplemental data of the Emerging Growth Portfolio, International Equity
Portfolio, Growth & Income Portfolio, Balanced Portfolio, Income Opportunity
Portfolio, and Bond Portfolio, constituting the six series of the Select
Advisors Portfolios, which report is included in the Annual Report for Select
Advisors Portfolios for the year ended December 31, 1997, which is incorporated
by reference in the Registration Statement. We also consent to the reference to
our Firm under the captions "Financial Highlights" and "Counsel and Independent
Accountants."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> TOUCHSTONE EMERGING GROWTH FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,820,692
<INVESTMENTS-AT-VALUE> 4,848,798
<RECEIVABLES> 125,453
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,991,415
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,742
<TOTAL-LIABILITIES> 42,742
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,896,709
<SHARES-COMMON-STOCK> 357,329
<SHARES-COMMON-PRIOR> 248,734
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 44,431
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,007,533
<NET-ASSETS> 4,948,673
<DIVIDEND-INCOME> 35,541
<INTEREST-INCOME> 11,528
<OTHER-INCOME> 0
<EXPENSES-NET> 58,786
<NET-INVESTMENT-INCOME> (11,717)
<REALIZED-GAINS-CURRENT> 590,394
<APPREC-INCREASE-CURRENT> 538,558
<NET-CHANGE-FROM-OPS> 1,117,235
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 204
<DISTRIBUTIONS-OF-GAINS> 453,141
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105,014
<NUMBER-OF-SHARES-REDEEMED> 24,818
<SHARES-REINVESTED> 28,399
<NET-CHANGE-IN-ASSETS> 2,075,416
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 87,905
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 179,153
<AVERAGE-NET-ASSETS> 3,918,911
<PER-SHARE-NAV-BEGIN> 11.55
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 3.71
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.38
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.85
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> TOUCHSTONE INTERNATIONAL EQUITY FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,231,928
<INVESTMENTS-AT-VALUE> 4,653,410
<RECEIVABLES> 128,752
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,799,326
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,559
<TOTAL-LIABILITIES> 38,559
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,283,036
<SHARES-COMMON-STOCK> 417,090
<SHARES-COMMON-PRIOR> 324,402
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (14,430)
<ACCUMULATED-NET-GAINS> 58,978
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 433,183
<NET-ASSETS> 4,760,767
<DIVIDEND-INCOME> 64,641
<INTEREST-INCOME> 8,789
<OTHER-INCOME> 0
<EXPENSES-NET> 66,300
<NET-INVESTMENT-INCOME> 7,130
<REALIZED-GAINS-CURRENT> 524,042
<APPREC-INCREASE-CURRENT> 47,371
<NET-CHANGE-FROM-OPS> 578,543
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,903
<DISTRIBUTIONS-OF-GAINS> 331,108
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 76,304
<NUMBER-OF-SHARES-REDEEMED> 13,074
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,312,130
<ACCUMULATED-NII-PRIOR> (1,546)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (142,837)
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 186,546
<AVERAGE-NET-ASSETS> 4,143,796
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 1.64
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0.86
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.41
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> TOUCHSTINE GROWTH & INCOME FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,774,710
<INVESTMENTS-AT-VALUE> 5,882,451
<RECEIVABLES> 154,190
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,053,805
<PAYABLE-FOR-SECURITIES> 26,461
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47,118
<TOTAL-LIABILITIES> 73,579
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,506,335
<SHARES-COMMON-STOCK> 397,027
<SHARES-COMMON-PRIOR> 260,854
<ACCUMULATED-NII-CURRENT> 2,166
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 83,816
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 387,909
<NET-ASSETS> 5,980,226
<DIVIDEND-INCOME> 82,517
<INTEREST-INCOME> 8,204
<OTHER-INCOME> 0
<EXPENSES-NET> 59,864
<NET-INVESTMENT-INCOME> 30,857
<REALIZED-GAINS-CURRENT> 652,500
<APPREC-INCREASE-CURRENT> 212,301
<NET-CHANGE-FROM-OPS> 895,658
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 36,450
<DISTRIBUTIONS-OF-GAINS> 602,875
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 194,618
<NUMBER-OF-SHARES-REDEEMED> 100,955
<SHARES-REINVESTED> 42,510
<NET-CHANGE-IN-ASSETS> 2,320,860
<ACCUMULATED-NII-PRIOR> 777
<ACCUMULATED-GAINS-PRIOR> 27,793
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 192,576
<AVERAGE-NET-ASSETS> 4,604,943
<PER-SHARE-NAV-BEGIN> 14.03
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 2.78
<PER-SHARE-DIVIDEND> 0.11
<PER-SHARE-DISTRIBUTIONS> 1.73
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.06
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> TOUCHSTONE BALANCED FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,966,941
<INVESTMENTS-AT-VALUE> 3,198,163
<RECEIVABLES> 147,205
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,362,532
<PAYABLE-FOR-SECURITIES> 40
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,727
<TOTAL-LIABILITIES> 46,767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,061,544
<SHARES-COMMON-STOCK> 267,075
<SHARES-COMMON-PRIOR> 167,149
<ACCUMULATED-NII-CURRENT> 2,506
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 30,260
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 221,455
<NET-ASSETS> 3,315,765
<DIVIDEND-INCOME> 18,418
<INTEREST-INCOME> 72,420
<OTHER-INCOME> 0
<EXPENSES-NET> 35,829
<NET-INVESTMENT-INCOME> 55,009
<REALIZED-GAINS-CURRENT> 499,632
<APPREC-INCREASE-CURRENT> (91,281)
<NET-CHANGE-FROM-OPS> 463,360
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 55,865
<DISTRIBUTIONS-OF-GAINS> 473,049
<DISTRIBUTIONS-OTHER> 8,806
<NUMBER-OF-SHARES-SOLD> 68,410
<NUMBER-OF-SHARES-REDEEMED> 11,763
<SHARES-REINVESTED> 43,278
<NET-CHANGE-IN-ASSETS> 1,230,334
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 8,479
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 156,915
<AVERAGE-NET-ASSETS> 2,653,923
<PER-SHARE-NAV-BEGIN> 12.48
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 2.09
<PER-SHARE-DIVIDEND> 0.30
<PER-SHARE-DISTRIBUTIONS> 2.12
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.42
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> TOUCHSTONE INCOME OPPORTUNITY FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7,240,584
<INVESTMENTS-AT-VALUE> 6,892,170
<RECEIVABLES> 155,785
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,065,119
<PAYABLE-FOR-SECURITIES> 800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,453
<TOTAL-LIABILITIES> 56,253
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,537,857
<SHARES-COMMON-STOCK> 709,018
<SHARES-COMMON-PRIOR> 419,997
<ACCUMULATED-NII-CURRENT> 5,651
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (235,330)
<ACCUM-APPREC-OR-DEPREC> (299,312)
<NET-ASSETS> 7,008,866
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 865,310
<OTHER-INCOME> 0
<EXPENSES-NET> 84,096
<NET-INVESTMENT-INCOME> 781,214
<REALIZED-GAINS-CURRENT> 241,119
<APPREC-INCREASE-CURRENT> (458,957)
<NET-CHANGE-FROM-OPS> 563,376
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 773,302
<DISTRIBUTIONS-OF-GAINS> 271,405
<DISTRIBUTIONS-OTHER> 242,802
<NUMBER-OF-SHARES-SOLD> 677,881
<NUMBER-OF-SHARES-REDEEMED> 488,860
<SHARES-REINVESTED> 100,000
<NET-CHANGE-IN-ASSETS> 2,429,786
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 21,521
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 242,067
<AVERAGE-NET-ASSETS> 6,974,711
<PER-SHARE-NAV-BEGIN> 10.90
<PER-SHARE-NII> 1.24
<PER-SHARE-GAIN-APPREC> (0.23)
<PER-SHARE-DIVIDEND> 1.22
<PER-SHARE-DISTRIBUTIONS> 0.80
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BT REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> TOUCHSTONE BOND FUND A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,551,304
<INVESTMENTS-AT-VALUE> 1,572,246
<RECEIVABLES> 135,722
<ASSETS-OTHER> 17,164
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,725,132
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,510
<TOTAL-LIABILITIES> 40,510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,654,030
<SHARES-COMMON-STOCK> 164,839
<SHARES-COMMON-PRIOR> 80,730
<ACCUMULATED-NII-CURRENT> 1,097
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (2,317)
<ACCUM-APPREC-OR-DEPREC> 31,812
<NET-ASSETS> 1,684,622
<DIVIDEND-INCOME> 5,587
<INTEREST-INCOME> 127,545
<OTHER-INCOME> 0
<EXPENSES-NET> 17,137
<NET-INVESTMENT-INCOME> 115,995
<REALIZED-GAINS-CURRENT> 2,874
<APPREC-INCREASE-CURRENT> 28,320
<NET-CHANGE-FROM-OPS> 147,189
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 117,358
<DISTRIBUTIONS-OF-GAINS> 203
<DISTRIBUTIONS-OTHER> 6,489
<NUMBER-OF-SHARES-SOLD> 189,458
<NUMBER-OF-SHARES-REDEEMED> 113,852
<SHARES-REINVESTED> 8,503
<NET-CHANGE-IN-ASSETS> 863,769
<ACCUMULATED-NII-PRIOR> 1,362
<ACCUMULATED-GAINS-PRIOR> (4,299)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 123,828
<AVERAGE-NET-ASSETS> 1,904,113
<PER-SHARE-NAV-BEGIN> 10.17
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.66
<PER-SHARE-DISTRIBUTIONS> 0.01
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOUCHSTONE
SELECT ADVISERS TRUST A FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> TOUCHSTONE STANDBY INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,431,304
<INVESTMENTS-AT-VALUE> 8,431,173
<RECEIVABLES> 210,438
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 30,295
<TOTAL-ASSETS> 8,671,906
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68,975
<TOTAL-LIABILITIES> 68,975
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,602,555
<SHARES-COMMON-STOCK> 862,865
<SHARES-COMMON-PRIOR> 646,782
<ACCUMULATED-NII-CURRENT> 4,343
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (3,836)
<ACCUM-APPREC-OR-DEPREC> (131)
<NET-ASSETS> 8,602,931
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 441,825
<OTHER-INCOME> 0
<EXPENSES-NET> 56,260
<NET-INVESTMENT-INCOME> 385,565
<REALIZED-GAINS-CURRENT> (1,729)
<APPREC-INCREASE-CURRENT> (499)
<NET-CHANGE-FROM-OPS> 383,337
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 392,547
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 437,066
<NUMBER-OF-SHARES-REDEEMED> 259,339
<SHARES-REINVESTED> 38,406
<NET-CHANGE-IN-ASSETS> 2,147,276
<ACCUMULATED-NII-PRIOR> 2,838
<ACCUMULATED-GAINS-PRIOR> (603)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 368
<GROSS-ADVISORY-FEES> 18,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 263,582
<AVERAGE-NET-ASSETS> 4,247,941
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.52
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.97
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
