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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1998
File Nos. 33-76566 and 811-8416
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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. 7
SELECT ADVISORS VARIABLE INSURANCE TRUST
(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.
Title of Securities Being Registered: Shares of Beneficial Interest
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SELECT ADVISORS VARIABLE INSURANCE TRUST
FORM N-1A
CROSS REFERENCE SHEET
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Part A
ITEM NO. HEADINGS IN PROSPECTUS
<S> <C>
1. Cover Page ......................................... Cover Page
2. Synopsis ........................................... Not applicable
3. Condensed Financial Information .................... Financial Highlights
4. General Description of Registrant .................. Cover Page; Investment Objectives,
Policies and Risks; Advisor and Portfolio
Advisors; Management of the Trust
5. Management of the Funds ............................ Advisor and Portfolio Advisors;
Management of the Trust
5A. Management's Discussion of Fund Performance ....... Not applicable
6. Capital Stock and Other Securities ................. Cover Page; Purchase of Shares;
Redemption of Shares; Dividends,
Distributions and Taxes; Management of
the 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
15. Control Persons and Principal Holders of
Securities ......................................... Management of the Trust; Organization
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<TABLE>
<S> <C>
of the Trust
16. Investment Advisory and Other Services ............. Management of the Trust
17. Brokerage Allocation and Other Practices ........... Investment Objectives, Policies,
Restrictions and Risks
18. Capital Stock and Other Securities ................. Organization of the Trust (See also
Prospectus -- "Dividends, Distributions
and Taxes")
19. Purchase, Redemption and Pricing of Securities
Being Offered ...................................... Valuation of Securities; Redemption in
Kind
20. Tax Status ......................................... Taxes (See also Prospectus --
"Dividends, Distributions and Taxes")
21. Underwriters ....................................... Not applicable
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.
</TABLE>
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PROSPECTUS
MAY 1, 1998
SELECT ADVISORS TOUCHSTONE
VARIABLE INSURANCE 311 PIKE STREET
TRUST CINCINNATI, OHIO 45202
================================================================================
Select Advisors Variable Insurance Trust (the "Trust") is an open-end,
investment management company providing investment vehicles (each, a
"Portfolio") for variable annuity contracts of various insurance companies. The
Trust is professionally managed by Touchstone Advisors, Inc. (the "Advisor" or
"Touchstone Advisors"). Each Portfolio benefits from discretionary advisory
services by one or more investment advisor(s) (each, a "Portfolio Advisor")
identified, retained, supervised and compensated by the Advisor.
The Trust is a series company that currently consists of the following
Portfolios:
TOUCHSTONE VALUE PLUS PORTFOLIO
TOUCHSTONE EMERGING GROWTH PORTFOLIO
TOUCHSTONE INTERNATIONAL EQUITY PORTFOLIO
TOUCHSTONE BALANCED PORTFOLIO
TOUCHSTONE INCOME OPPORTUNITY PORTFOLIO
TOUCHSTONE STANDBY INCOME PORTFOLIO
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 the Touchstone Variable Annuity Service Center at
1-800-669-2796 (PRESS 2) or writing the Trust at the address listed above. 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 important information regarding registrants that file
electronically with the SEC.
Shares of each Portfolio may only be purchased by the separate accounts
of insurance companies, for the purpose of funding variable annuity contracts.
Particular Portfolios may not be available in your state due to various
insurance regulations. Please check with the Touchstone Variable Annuity Service
Center for available Portfolios. Inclusion of a Portfolio in this Prospectus
which is not available in your state is not to be considered a solicitation.
This Prospectus should be read in conjunction with the prospectus of the
separate account of the specific insurance product which accompanies this
Prospectus.
THE SHARES OF EACH PORTFOLIO 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 AND
VARIABLE ANNUITIES 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.
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 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
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HAVING BEEN AUTHORIZED BY THE TRUST. 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.
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TABLE OF CONTENTS
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Page
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Table of Contents...................................................... 2
Financial Highlights................................................... 3
Investment Objectives, Policies and Risks.............................. 5
Risk Factors and Certain Investment Techniques......................... 9
Advisor and Portfolio Advisors......................................... 11
Additional Risks and Investment Techniques............................. 15
Purchase and Redemption of Shares...................................... 23
Net Asset Value........................................................ 24
Management of the Trust................................................ 25
Dividends, Distributions and Taxes..................................... 26
Performance of the Portfolios.......................................... 27
Additional Information................................................. 29
Appendix............................................................... A-1
</TABLE>
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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 Portfolio 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 Portfolio'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:
<TABLE>
<CAPTION>
PER SHARE OPERATING TOUCHSTONE EMERGING GROWTH TOUCHSTONE INTERNATIONAL EQUITY
PERFORMANCE: PORTFOLIO PORTFOLIO
---------------------------------------- ----------------------------------------
FOR THE YEARS ENDED 1997 1996 1995 1994(a) 1997 1996 1995 1994(a)
DECEMBER 31, ---- ---- ---- ------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $12.20 $11.27 $10.10 $10.00 $11.07 $10.00 $ 9.51 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) 0.03 0.04 0.11 0.04 0.07 0.06 0.04 --
Net realized and
unrealized gain on
investments 4.06 1.22 1.87 0.06 1.56 1.08 0.48 (0.49)
Total from investment
operations 4.09 1.26 1.98 0.10 1.63 1.14 0.52 (0.49)
LESS: DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.03) (0.04) (0.15) -- (0.05) (0.07) (0.03) --
Realized capital gains (0.86) (0.29) (0.66) -- (0.64) -- -- --
TOTAL DIVIDENDS AND
DISTRIBUTIONS (0.89) (0.33) (0.81) -- (0.69) (0.07) (0.03) --
NET ASSET VALUE, END OF
PERIOD $15.40 $12.20 $11.27 $10.10 $12.01 $11.07 $10.00 $ 9.51
TOTAL RETURN (b) 33.67% 11.16% 19.57% 1.00% 14.76% 11.47% 15.45% (4.90)%
RATIOS AND SUPPLEMENTAL
DATA (c):
Net assets at end of
period (000's) $19,417 $ 5,771 $2,615 $2,020 $19,703 $8,758 $5,215 $4,757
Ratios to average net
assets:
Expenses 1.15% 1.15% 1.15% 1.15% 1.25% 1.25% 1.25% 1.25%
Net investment income 0.27% 0.50% 1.09% 3.67% 0.71% 0.86% 0.46% 1.23%
Expenses, without
waiver and
reimbursement 2.19% 3.22% 3.73% 11.08% 3.19% 3.03% 3.69% 5.58%
Portfolio Turnover 88% 89% 101% 0% 149% 90% 86% 0%
Average commission
rate (d) $0.0572 $0.0568 -- -- $0.0359 $0.0266 -- --
<CAPTION>
PER SHARE OPERATING TOUCHSTONE BALANCED
PERFORMANCE: PORTFOLIO
---------------------------------
FOR THE YEARS ENDED 1997 1996 1995 1994(a)
DECEMBER 31, ---- ---- ---- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $12.84 $11.48 $10.17 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss) 0.31 0.30 0.32 0.05
Net realized and
unrealized gain on
investments 2.05 1.60 2.15 0.12
Total from investment
operations 2.36 1.90 2.47 0.17
LESS: DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.32) (0.30) (0.37) --
Realized capital gains (0.89) (0.24) (0.79) --
TOTAL DIVIDENDS AND
DISTRIBUTIONS (1.21) (0.54) (1.16) --
NET ASSET VALUE, END OF
PERIOD $13.99 $12.84 $11.48 $10.17
TOTAL RETURN (b) 18.61% 16.78% 24.56% 1.70%
RATIOS AND SUPPLEMENTAL
DATA (c):
Net assets at end of
period (000's) $22,287 $ 6,695 $2,895 $2,034
Ratios to average net
assets:
Expenses 0.90% 0.90% 0.90% 0.90%
Net investment income 2.61% 2.76% 2.87% 4.26%
Expenses, without
waiver and
reimbursement 2.04% 2.72% 3.46% 8.97%
Portfolio Turnover 86% 75% 124% 3%
Average commission
rate (d) $0.0345 $0.0664 -- --
</TABLE>
3
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<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE:
TOUCHSTONE INCOME OPPORTUNITY TOUCHSTONE STANDBY INCOME
PORTFOLIO PORTFOLIO
-------------------------------------- ----------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994(a) 1997 1996 1995 1994(a)
---- ---- ---- ------- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.21 $10.09 $ 9.42 $10.00 $10.01 $10.02 $10.03 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 1.20 1.17 1.22 0.12 0.54 0.52 0.56 0.05
Net realized and unrealized gain on
investments 0.11 1.45 0.79 (0.70) (0.01) (0.01) (0.01) 0.03
Total from investment operations 1.31 2.62 2.01 (0.58) 0.53 0.51 0.55 0.08
LESS: DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (1.19) (1.17) (1.34) -- (0.54) (0.52) (0.56) (0.05)
Realized capital gains (0.31) (0.33) -- -- -- -- --
TOTAL DIVIDENDS AND DISTRIBUTIONS (1.50) (1.50) (1.34) -- (0.54) (0.52) (0.56) (0.05)
NET ASSET VALUE, END OF PERIOD $11.02 $11.21 $10.09 $ 9.42 $10.00 $10.01 $10.02 $10.03
12.03% 27.37% 23.35% (5.80)% 5.41% 5.18% 5.90% 0.30%
TOTAL RETURN (b)
RATIOS AND SUPPLEMENTAL DATA (c):
NET ASSETS AT END OF PERIOD (000'S) $26,879 $8,268 $2,602 $1,883 $17,562 $9,105 $5,790 $5,013
Ratios to average net assets:
Expenses 0.85% 0.85% 0.85% 0.85% 0.50% 0.50% 0.50% 0.50%
Net investment income 10.93% 11.85% 12.81% 11.24% 5.42% 5.15% 5.59% 4.90%
Expenses, without waiver and
reimbursement 1.72% 2.85% 3.54% 11.56% 1.48% 1.54% 1.73% 3.67%
Portfolio Turnover 189% 213% 104% 45% 251% 143% 159% 56%
Average Commission Rate(d) -- -- -- -- -- --
</TABLE>
- ----------
(a) The Portfolios commenced operations on November 21, 1994.
(b) Total return would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
(c) Ratios are annualized.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary between
periods and funds depending on the volume and character of trades
executed in various markets where trading practices and commission rate
structures may differ.
4
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INVESTMENT OBJECTIVES, POLICIES AND RISKS
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 Portfolios each with distinct
investment objectives and policies. The Trust consists of the following six
diversified Portfolios:
VALUE PLUS PORTFOLIO 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 Portfolio through occasional investments in the common stock
of rapidly growing companies.
EMERGING GROWTH PORTFOLIO 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.
INTERNATIONAL EQUITY PORTFOLIO has an investment objective of
long term capital appreciation through investment primarily in equity
securities of companies based outside the United States.
BALANCED PORTFOLIO has an investment objective of growth of
capital and income through investment in common stocks and fixed-income
securities.
INCOME OPPORTUNITY PORTFOLIO has an investment objective of high
current income through investment in high yield, non-investment grade
debt securities (commonly known as "junk bonds") 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.
STANDBY INCOME PORTFOLIO has an investment objective of high
current income to the extent consistent with relative stability of
principal which it attempts to achieve through investment in short
term, investment grade debt securities.
There can be no assurance that the investment objective of any
Portfolio will be achieved. The investment objective of each Portfolio may be
changed without approval by investors, but not without 30 days prior written
notice. If there is a change in the investment objectives of a Portfolio, such
change could result in a Portfolio having an investment objective different than
the objective that a shareholder considered appropriate at the time of
investment. If a Portfolio's investment objective is changed, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their then-current financial position and needs.
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 its
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.
5
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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.
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 objective 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 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
6
<PAGE> 11
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.
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."
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
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<PAGE> 12
securities. For this purpose, "equity 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) rated at least 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 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
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.
STANDBY INCOME PORTFOLIO
The investment objective of the Portfolio is high current income to the
extent consistent with relative stability
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<PAGE> 13
of principal. Unlike money market funds, however, the Portfolio 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 Portfolio may also invest in corporate bonds,
commercial paper, certificates of deposit ("CDs") and bankers' acceptances.
Up to 50% of the Portfolio'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 Portfolio'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 Portfolio invests only in investment grade securities (including
foreign securities) rated Baa or higher by Moody's or BBB or higher by S&P, or
non-rated securities which the Portfolio 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."
The Portfolio's dollar-weighted average maturity will normally be less
than one year. However, the Portfolio 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.
RISK FACTORS AND CERTAIN INVESTMENT TECHNIQUES
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. "Emerging markets"
securities include the securities of issuers based in some of the world's
underdeveloped markets, including Eastern Europe. These typically include
countries where per capita GNP is less than $8,355. 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) 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
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<PAGE> 14
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 markets 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 nationalization, expropriation and confiscatory
taxation. The former 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 any 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
Portfolio 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 a 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.
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.
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<PAGE> 15
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.
ADVISOR AND PORTFOLIO ADVISORS
ADVISOR
Touchstone Advisors, Inc., located at 311 Pike Street, Cincinnati, Ohio
45202, serves as the investment advisor to the Trust and, accordingly, as
investment advisor to each of the Portfolios. The Advisor 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 Trust has entered into an investment advisory agreement (the
"Advisory Agreement") 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. It is the Advisor's responsibility
to select, subject to the review and approval of 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.
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 Board of Trustees of the Trust whether the
Portfolio Advisor's contract should be renewed, modified or terminated. The
Advisor provides written reports to the Board of Trustees regarding the results
of its evaluation and monitoring functions. The Advisor is also responsible for
conducting all operations of the Portfolios except those operations
subcontracted to the Portfolio Advisors, or contracted by the Trust to the
custodian, transfer agent and administrator.
The Portfolio Advisor of each Portfolio 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.
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<PAGE> 16
Each Portfolio 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 as follows: Value Plus Portfolio -
0.75%; Emerging Growth Portfolio - 0.80%; International Equity Portfolio -
0.95%; Balanced Portfolio - 0.80%; Income Opportunity Portfolio - 0.65%; and
Standby Income Portfolio - 0.25%. The investment advisory fee paid by the Value
Plus, International Equity, Emerging Growth 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 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:
<TABLE>
<S> <C>
Value Plus Portfolio
Fort Washington Investment 0.45%
Advisors, Inc.
Emerging Growth Portfolio
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
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
Standby Income Portfolio
Fort Washington Investment 0.15%
Advisors, Inc.
</TABLE>
- ----------
* Includes assets of the Balanced Portfolio of the Select Advisors
Variable Insurance Trust and the Balanced Portfolio of the Select
Advisors Portfolio, (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 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 Board of
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<PAGE> 17
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 Board of Trustees, each Portfolio Advisor manages the securities
held by the Portfolio it serves in accordance with the Portfolio's stated
investment objective and policies, making investment decisions for the Portfolio
and placing orders to purchase and sell securities on behalf of the Portfolio.
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
are named below.
FORT WASHINGTON INVESTMENT ADVISORS, INC. ("Fort Washington") serves as
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 individuals 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 Value Plus
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.
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, 1996,
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.
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<PAGE> 18
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 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.
OPCAP ADVISORS ("OpCap") serves as Portfolio Advisor to the Balanced
Portfolio. OpCap Advisors 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 Robert J. Bluestone and
Matthew Greenwald are primarily responsible for the day-to-day investment
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 Standby Income
Portfolio. Christopher J. Mahony is primarily responsible for the day-to-day
investment management of the Standby Income Portfolio. 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.
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ADDITIONAL RISKS AND INVESTMENT TECHNIQUES
The following are descriptions of types of securities invested in by
the Portfolios, certain investment techniques employed by those Portfolios and
risks associated with utilizing either the securities or the investment
technique.
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 is 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 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
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.
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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. The 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 Portfolio expects 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 stripped
mortgage-related securities based on fixed rate FNMA and FHLMC mortgage
certificates that meet certain liquidity criteria established by the Board of
Trustees, the Portfolios will treat government stripped mortgage-related
securities and 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.
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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 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 a 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 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.
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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 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 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, as amended (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 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 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
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Portfolio's 15% limit on illiquid securities. The Board of Trustees of the
Trust, 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 of the Trust 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 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
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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 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-rated 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 stocks. 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 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, the 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.
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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 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 Trust'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.
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CERTAIN INVESTMENT RESTRICTIONS
The Trust, on behalf of 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 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, no Portfolio may 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). See "Risk Factors and
Certain Investment Techniques -- Illiquid Securities" and "-- Non-Publicly
Traded ("Restricted") Securities and Rule 144A Securities."
PORTFOLIO TURNOVER
No Portfolio, other than the Standby Income Portfolio 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 last two fiscal years ended
December 31, 1997 and 1996 the annual turnover rate of each of the following
Portfolio's was: Emerging Growth Portfolio - 88% and 89%; International Equity
Portfolio - 149% and 90%; Balanced Portfolio - 86% and 75% (equity investments -
72% and 42%; fixed-income investments - 6% and 10%); Income Opportunity
Portfolio - 189% and 213%; and Standby Income Portfolio - 251% and 143%,
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 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 AND REDEMPTION OF SHARES
OPENING AN ACCOUNT
Since you may not purchase a Portfolio's shares directly, you should
read the prospectus of the insurance company's separate account to obtain
instructions for purchasing a variable annuity contract.
SHARE PRICE
The term "net asset value" or NAV refers to the worth of one share. The
NAV is computed by adding the value of each Portfolio's investments, cash and
other assets, deducting liabilities and dividing the result by the number of
shares outstanding. Each Portfolio is open for business each day the New York
Stock Exchange Inc. ("NYSE") is open. The price of one share is its NAV which is
normally calculated at the close of regular trading on the NYSE (usually 4:00
p.m. New York time).
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INVESTMENTS
Investments in a Portfolio may be made only through separate accounts
established and maintained by insurance companies for the purpose of funding
variable contracts. Please refer to the prospectus of your insurance company's
separate account for information on how to invest in a variable annuity
contract, and how to direct your investments into subaccounts which invest in
the corresponding Portfolios.
Investments by separate accounts in each Portfolio are expressed in
terms of full and fractional shares of each Portfolio. All investments in the
Portfolios are credited to an insurance company's separate account immediately
upon acceptance of the investment by a Portfolio. Investments will be processed
at the NAV calculated after an order is received and accepted by a Portfolio.
The offering of shares of any Portfolio may be suspended for a period
of time and each Portfolio reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in the Advisor's opinion, they are of
a size that would disrupt the management of a Portfolio.
REDEMPTIONS
Shares of any Portfolio may be redeemed by the insurance company to
make benefit or surrender payments on any business day. Redemptions are effected
at the per share NAV next determined after receipt of the redemption request has
been accepted by a Portfolio. Redemption proceeds will normally be wired to the
insurance company on the next business day after receipt of the redemption
instructions by a Portfolio but in no event later than 7 days following receipt
of instructions. Each Portfolio may suspend redemptions or postpone payment
dates on days when the NYSE is closed (other than weekends or holidays), when
trading on the NYSE is restricted, or as permitted by the SEC.
NET ASSET VALUE
Each Portfolio'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
Portfolio's net assets by the total number of its shares outstanding. 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.
Generally, a Portfolio'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 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 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 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
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at their fair market value as determined by or under the direction of the Board
of Trustees.
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 Board of Trustees.
In carrying out the valuation policies of the Board of Trustees,
independent pricing services may be consulted. Further information regarding the
valuation policies is contained in the Statement of Additional Information.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust
rests with the Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust. See "Management of the Trust" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust.
SPONSOR
Touchstone Advisors, as sponsor to the Trust (the "Sponsor"), pursuant
to an agreement (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 Portfolio equal on an annual basis to
0.20% of the average daily net assets of that Portfolio 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 April 30, 1998.
ADMINISTRATOR, FUND ACCOUNTING AGENT, CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company ("Investors Bank"), 200 Clarendon
Street, Boston, Massachusetts 02116, serves as administrator, fund accounting
agent, custodian and transfer agent for the Trust. Investors Bank was organized
in 1969 as a Massachusetts-chartered trust company and is a wholly-owned
subsidiary of Investors 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 its Portfolios, accounting, clerical and bookkeeping
services; the daily calculation of net asset values and unit values; 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 Securities and Exchange Commission. Investors Bank also
provides personnel to serve as certain officers of the Trust.
As custodian, Investors Bank holds cash, securities and other assets of
the Trust as required by the Investment Company Act of 1940. As transfer agent,
Investors Bank is responsible for the issuance and redemption of shares and the
establishment and maintenance of shareholder accounts for the Trust and its
Portfolios.
For its services as administrator and fund accounting agent, the Trust
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 Trust, 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
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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. As compensation
for its services as transfer agent, each Portfolio pays Investors Bank $5,000
annually.
ALLOCATION OF EXPENSES OF THE PORTFOLIOS
Each 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 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 legal existence and shareholder relations. Pursuant to
the Sponsor Agreement, the Sponsor has agreed to waive or reimburse certain
fees and expenses of each Portfolio such that after such waivers and
reimbursements, the aggregate Operating Expenses of each Portfolio (as used
herein, "Operating Expenses" include amortization of organizational expenses
but is exclusive of interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary expenses) do not
exceed that Portfolio's expense cap (the "Expense Cap"). Each Portfolio's
Expense Cap is as follows: Value Plus Portfolio - 1.15%; Emerging Growth
Portfolio - 1.15%; International Equity Portfolio - 1.25%; Balanced Portfolio -
.90%; Income Opportunity Portfolio - .85%; and Standby Income Portfolio - .50%.
An Expense Cap may be terminated with respect to a Portfolio 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 Portfolio. Dividends derived from net investment
income and distributions of net realized long and short term capital gains paid
by a Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (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. Dividends attributable
to the net investment income of the Standby Income Portfolio will be declared
daily and paid monthly. Shareholders of that Portfolio receive dividends from
the day following the purchase up to and including the date of redemption.
Dividends attributable to the net investment income of the Income Opportunity
Portfolio are declared and paid monthly. Dividends attributable to the net
investment income of the Value Plus Portfolio and the Balanced Portfolio are
declared and paid quarterly. Dividends attributable to the net investment income
of the Emerging Growth Portfolio and International Equity Portfolio are declared
and paid annually. Distributions of any net realized long term and short term
capital gains earned by a Portfolio will be made annually.
TAXES
Because each Portfolio 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 Portfolio (rather than on
a Trust-wide basis).
Each Portfolio 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 Internal Revenue Code of 1986, as amended (the "Code").
Each Portfolio intends to satisfy these overall
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distribution requirements and any other required conditions. In addition, each
Portfolio 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 Portfolio 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 Portfolio'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 Portfolio of net income and distributions of a
Portfolio'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 Portfolio shares and whether the dividends
or distributions are received in cash or reinvested in additional shares.
Distributions by a Portfolio 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 Portfolio shares and
whether the distributions are received in cash or reinvested in additional
shares.
A portion of the dividends paid by the Portfolios will not qualify for
the dividend received deduction for corporations. As a general rule, dividends
paid by a Portfolio, 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 Portfolio'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 a Portfolio 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 Portfolio
qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Portfolio's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Portfolio may elect, for U.S. federal income tax
purposes, to treat foreign income taxes paid by the 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 Portfolio will
qualify for and make this election in most, but not necessarily all, of its
taxable years. If a Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio 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 Portfolio 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 Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
PERFORMANCE OF THE PORTFOLIOS
PERFORMANCE
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EACH PORTFOLIO'S PERFORMANCE MAY BE QUOTED IN ADVERTISING IN TERMS OF
YIELD AND TOTAL RETURN IF ACCOMPANIED BY PERFORMANCE OF THE INSURANCE COMPANY'S
SEPARATE ACCOUNT. Performance is based on historical results and not intended to
indicate future performance.
YIELD
For the Income Opportunity Portfolio, the Balanced Portfolio and the
Standby Income Portfolio, from time to time, the Trust may advertise the 30-day
"yield." The yield of a Portfolio refers to the income generated by an
investment in the Portfolio over the 30-day period identified in the
advertisement and is computed by dividing the net investment income per share
earned by the Portfolio 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 Portfolio'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 Portfolio
from the beginning date of the measuring period to the ending date of the
measuring period. The figure reflects changes in the price of the Portfolio's
shares and assumes that any income, dividends and/or capital gains distributions
made by the Portfolio during the period are reinvested in shares of the
Portfolio. 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 Portfolio'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 Portfolio'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 Portfolio also may use aggregate total return figures for various
periods, representing the cumulative change in value of an investment in the
Portfolio for the specific period (again reflecting changes in the Portfolio'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
Portfolio 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 Portfolio'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.
YIELDS AND TOTAL RETURNS FOR THE PORTFOLIOS INCLUDE THE EFFECT OF
DEDUCTING EACH PORTFOLIO'S EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES
ATTRIBUTABLE TO ANY PARTICULAR INSURANCE PRODUCT. SINCE SHARES OF THE PORTFOLIOS
MAY ONLY BE PURCHASED THROUGH A VARIABLE ANNUITY OR VARIABLE LIFE CONTRACT, YOU
SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE CHOSEN
FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these charges from
quotations of each Portfolio's performance has the effect of increasing the
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performance quoted. You should bear in mind the effect of these charges when
comparing a Portfolio's performance to that of other mutual funds.
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 six 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 Portfolio, shareholders of that Portfolio would be entitled to
share pro rata in the net assets of the Portfolio 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.
When matters are submitted for shareholder vote or when shareholders
are asked to provide voting instructions, shareholders of each Portfolio will
have one vote for each full share held and proportionate, fractional vote for
fractional shares held. A separate vote of each Portfolio is required on any
matter affecting the Portfolio unless the interests of each Portfolio in the
matter are identical or the matter does not affect the interest of the
Portfolio. Shareholders of a Portfolio are not entitled to vote or to provide
voting instructions on matters that do not affect the Portfolio and do not
require a separate vote of the Portfolio.
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
shareholder's 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
shareholders 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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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.
A-1
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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 effect 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 higher rated issues only in a 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.
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.
A-2
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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 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-3
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A-4
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A-5
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A-6
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<PAGE> 43
IFS0020G
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
SELECT ADVISORS VARIABLE INSURANCE TRUST
- -Touchstone Value Plus Portfolio
- -Touchstone Emerging Growth Portfolio
- -Touchstone International Equity Portfolio
- -Touchstone Balanced Portfolio
- -Touchstone Income Opportunity Portfolio
- -Touchstone Standby Income Portfolio
Select Advisors Variable Insurance Trust (the "Trust") is composed of
six funds: Value Plus Portfolio, Emerging Growth Portfolio, International Equity
Portfolio, Balanced Portfolio, Income Opportunity Portfolio and Standby Income
Portfolio (each, a "Portfolio" and collectively, the "Portfolios"). The Trust is
an open-end, diversified, management investment company formed as a
Massachusetts business trust.
Touchstone Advisors, Inc. ("Touchstone" or the "Advisor") is the
investment advisor of each Portfolio. 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 and
fund accounting agent to each Portfolio.
The Prospectus dated May 1, 1998, provides the basic information
investors should know before investing, and may be obtained 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
should be read in conjunction with the Prospectus. This Statement of Additional
Information is not an offer of any Portfolio 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
311 Pike Street Cincinnati, Ohio (800) 669-2796
<PAGE> 44
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISKS.................... 3
PERFORMANCE INFORMATION.................................................... 17
VALUATION OF SECURITIES; REDEMPTION IN KIND................................ 19
MANAGEMENT OF THE TRUST.................................................... 20
ORGANIZATION OF THE TRUST.................................................. 25
TAXATION................................................................... 25
FINANCIAL STATEMENTS....................................................... 28
</TABLE>
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INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS AND RISKS
INVESTMENT OBJECTIVES
The investment objective(s) of each Portfolio is described in the
Prospectus. There can be no assurance that any Portfolio will achieve its
investment objective(s).
INVESTMENT POLICIES, PRACTICES, RESTRICTIONS AND RISKS
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 Portfolio.
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 Appendix to 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, 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> 46
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, as amended (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 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 each Portfolio's portfolio under the supervision of the Board of
Trustees. In reaching liquidity decisions, the 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 (formerly the Union of Soviet Socialist
Republics).
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<PAGE> 47
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 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
Portfolio'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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<PAGE> 48
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.
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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.
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.
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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.
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
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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.
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
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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.
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.
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.
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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.
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.
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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.
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. 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 Trust's Prospectus is set forth in the Appendix to the Prospectus.
Investment Restrictions
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of
each Portfolio and may not be changed with respect to the Portfolio without the
approval of a "majority of the outstanding voting securities" of the Portfolio.
"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 Portfolio present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the
Portfolio are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of the Portfolio.
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As a matter of fundamental policy, no Portfolio may:
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio'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 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 portfolio securities and provided that any such loans not exceed 30%
of the Portfolio'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) 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 may hold and sell, for the Portfolio's portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
(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 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 and to not more than 10% of the outstanding voting securities of
such issuer.
ADDITIONAL RESTRICTIONS. Each Portfolio (or the Trust, on behalf of
each Portfolio) will not as a matter of "operating policy" (changeable by the
Board of Trustees without a shareholder vote):
(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 may borrow for temporary or emergency
purposes up to 10% of its total assets; provided, however, that no
Portfolio 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 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;
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(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 if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio'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 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; provided
further that, except in the case of a merger or consolidation, the
Portfolio shall not purchase any securities of any open-end investment
company unless the Portfolio (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 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 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 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 Board of Trustees have determined that the
commercial paper is equivalent quality and is liquid;
(viii) invest more than 10% of the Portfolio'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 Board of Trustees);
(ix) purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio 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;
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(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 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 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 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.
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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 or the Portfolio Advisor 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 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.
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<PAGE> 59
The Portfolios paid the following brokerage commissions for the periods
indicated:
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Aggregate Portfolio Portfolio Balanced Portfolio Portfolio Portfolio
Commission
<S> <C> <C> <C> <C> <C>
For the Year
Ended 12/31/97 $31,847 $108,088 $34,791 $0 $0
For the Year
Ended 12/31/96 $8,834 $37,164 $5,732 $0 $0
For the Year Ended $2,204 $15,378 $2,043 $0 $0
12/31/95
</TABLE>
PERFORMANCE INFORMATION
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or shareholder reports, if
accompanied by performance of your insurance company's corresponding insurance
separate account. These performance figures are calculated in the following
manner:
YIELD: Yields for a Portfolio used in advertising are computed by
dividing the Portfolio'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 Portfolio'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 Portfolio'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
Portfolio may differ from the rate of distributions of the Portfolio
paid over the same period or the rate of income reported in the
Portfolio's financial statements. For the 30-day period ended December
31, 1997, the Portfolio's yields were as follows: Income Opportunity
Portfolio 11.09%, Balanced Portfolio 2.57%, Standby Income Portfolio
5.46%.
The Standby Income Portfolio's 7-day yield for the period ended
December 31, 1997 was 6.13%.
TOTAL RETURN: A Portfolio'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 Portfolio may
also calculate non-standardized total return figures which represent
aggregate (not annualized) performance over any period or year-by-year
performance.
17
<PAGE> 60
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
AVERAGE Portfolio Portfolio Balanced Portfolio Portfolio Portfolio
ANNUAL
TOTAL RETURN
<S> <C> <C> <C> <C> <C>
For the Year Ended
12/31/97 33.67% 14.76% 18.61% 12.03% 5.41%
For the Period 11/21/94*
to 12/31/97 20.67% 8.33% 19.80% 17.68% 5.49%
AGGREGATE
TOTAL RETURN
For the Year Ended -
12/31/97 33.67% 14.76% 18.61% 12.03% 5.41%
For the Period 11/21/94*
to 12/31/97 79.45% 28.27% 75.46% 65.96% 18.09%
</TABLE>
- ------------
* Commencement of operations
Any total return quotation provided for a Portfolio should not be
considered as representative of the performance of the Portfolio in the
future since the net asset value of shares of the Portfolio will vary
based not only on the type, quality and maturities of the securities
held in the Portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Portfolio. These
factors and possible differences in the methods used to calculate total
return should be considered when comparing the total return of a
Portfolio to total returns published for other investment companies or
other investment vehicles. Total return reflects the performance of
both principal and income.
In connection with communicating its performance to current or
prospective shareholders, a Portfolio 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 Portfolios may also
be compared to averages, performance rankings, or other information prepared by
recognized mutual fund statistical services. Evaluations of a Portfolio's
performance made by independent sources may also be used in advertisements
concerning the Portfolio. Sources for a Portfolio'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 Portfolio 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.
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<PAGE> 61
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 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 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 and valued as they are for purposes of computing the Portfolio's net
asset value (a redemption in kind). If payment is made in securities a
shareholder may incur transaction expenses in converting these securities into
cash. The Trust, on behalf of each Portfolio has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which each Portfolio is
obligated to redeem shares or 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 Portfolio at the beginning of the period.
Each investor in a Portfolio, 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
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<PAGE> 62
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 of 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 of 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 of the
NYSE on the following day the NYSE is open for trading.
MANAGEMENT OF THE TRUST
The Trustees and officers of the 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. Unless otherwise indicated,
the address of each Trustee and officer is 311 Pike Street, Cincinnati, Ohio
45202. The Trustees and officers of the Trust also serve in the same positions
with the Select Advisors Portfolios, Select Advisors Trust A and Select Advisors
Trust C.
TRUSTEES OF THE 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 (1986-1993); Director Emeritus, Fifth Third Bank. His address is 1313
Kemper Road, Suite 111, Cincinnati, OH 45246.
OFFICERS OF THE 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.
20
<PAGE> 63
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, Massachusetts 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, Massachusetts 02116.
PAUL J. JASINSKI (age 51) -- Assistant Treasurer; Managing Director,
Fund Administration, Investors Bank (since July, 1985). His address is 200
Clarendon Street, Boston, Massachusetts 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 Administrator or any of their affiliates will receive any
compensation from the Trust for serving as an officer or Trustee of the Trust.
The Trust, Select Advisors Portfolios, Select Advisors Trust A and Select
Advisors Trust C (the "Fund Complex") pay, in the aggregate, each Trustee who is
not a director, officer or employee of the Advisor, the Portfolio Advisors, 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.
21
<PAGE> 64
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME OF AGGREGATE TOTAL COMPENSATION
PERSON AND COMPENSATION FROM TRUST AND FUND COMPLEX
POSITION FROM TRUST PAID TO TRUSTEES
<S> <C> <C>
Joseph S. Stern, Jr. $3,372.82 $ 6,750.00
Trustee
Phillip R. Cox $4,836.71 $10,000.00
Trustee
Robert E. Stautberg $4,836.71 $10,000.00
Trustee
David Pollak $5,188.89 $10,000.00
Trustee
</TABLE>
As of March 31, 1998, the Trustees and officers of the Trust owned
in the aggregate less than 1% of the shares of any Portfolio or the Trust (all
series taken together).
ADVISOR, PORTFOLIO ADVISORS, ADMINISTRATOR, FUND ACCOUNTING AGENT,
CUSTODIAN AND TRANSFER AGENT
ADVISOR
Touchstone Advisors provides service to each Portfolio pursuant to an
Investment Advisory Agreement with the Trust (the "Advisory Agreement"). 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. The Advisory Agreement will
continue in effect if such continuance is specifically approved at least
annually by the Trustees and by a majority of the Board of 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.
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<PAGE> 65
The Advisory Agreement is terminable, with respect to a Portfolio
without penalty on not more than 60 days' nor less than 30 days' written notice
by (1) the Trust when authorized either by (a) in the case of a Portfolio, a
majority vote of the Portfolio's shareholders or (b) a vote of a majority of the
Board of Trustees or (2) the Advisor. The Advisory Agreement will automatically
terminate in the event of its assignment. The 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 Agreement.
For the periods indicated, each Portfolio incurred the following
investment advisory fees equal on an annual basis to the following percentages
of the average daily net assets of each Portfolio.
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Portfolio Portfolio Balanced Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Rate 0.80% 0.95% 0.80%* 0.65% 0.25%
For the Year Ended
December 31, 1997 $98,956 $135,300 $103,999 $108,452 $34,222
For the Year Ended $28,916 $ 62,256 $ 29,360 $ 27,962 $17,132
December 31, 1996
For the Year Ended $18,059 $ 45,830 $ 16,874 $ 13,754 $13,198
December 31, 1995
</TABLE>
- ------------
* Prior to May, 1997 the rate was 0.70%.
For the periods indicated, the Advisor has voluntarily agreed to
reimburse each Portfolio the following amounts:
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Portfolio Portfolio Balanced Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1997 $102,973 $247,246 $125,649 $110,959 $107,078
For the Year Ended $ 70,043 $103,586 $ 68,161 $ 77,994 $ 57,820
December 31, 1996
For the Year Ended $ 53,734 $107,717 $ 56,860 $ 52,598 $ 54,343
December 31, 1995
</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. Under the direction of the Advisor and, ultimately, of
the Board of Trustees, each Portfolio Advisor is responsible for making all of
the day-to-day investment decisions for the respective Portfolio (or portion of
a Portfolio).
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<PAGE> 66
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 Agreement.
ADMINISTRATOR, FUND ACCOUNTING AGENT, 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 and unit 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
and as transfer agent, Investors Bank maintains the shareholder account records
for each Portfolio, handles certain communications between shareholders and the
Trust and causes to be distributed any dividends and distributions payable by
the Trust.
The Trust's Prospectus contains a description of fees payable to
Investors Bank for its services as administrator, fund accounting agent,
custodian and transfer agent.
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 administration and fund
accounting fees for the periods indicated:
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Portfolio Portfolio Balanced Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
For the Year Ended $64,999 $80,001 $64,999 $64,999 $64,999
12/31/97
For the Year Ended $27,620 $28,589 $29,793 $27,265 $27,061
12/31/96*
For the Year Ended $28,035 $33,909 $30,059 $27,169 $28,485
12/31/95
</TABLE>
- -----------
* Includes administrative and fund accounting fees paid to Signature Financial
Services, Inc. and to Investors Bank and Trust Company.
Each of the Administration, Fund Accounting, Custodian and Transfer
Agency 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.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Frost & Jacobs LLP, 2500 PNC Center, 201 East Fifth Street, Cincinnati,
Ohio 45202-5715, 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.
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<PAGE> 67
ORGANIZATION OF THE 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 Portfolio,
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.
TAXATION
The Trust intends to qualify annually and to elect each Portfolio to be
treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Portfolio 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 Portfolio'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 Portfolio'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 Portfolio 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 Portfolio
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 Portfolio 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
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<PAGE> 68
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 Portfolio in October, November or
December with a record date in such a month and paid by the Portfolio 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 Portfolio intends to make its
distributions in accordance with the calendar year distribution requirement.
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.
If a 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, which have invested in the
Portfolio. Pursuant to such election, the amount of foreign taxes paid will be
included in the income of the investing entities' shareholders and such
investing entities' shareholders (except tax-exempt shareholders) may, subject
to certain limitations, claim either a credit or deduction for the taxes. Each
such investor 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 an investor 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 Portfolio'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
Portfolio'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 Portfolio on the reinvestment date. Shareholders
will be notified annually as to the U.S. federal tax status of distributions.
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 Portfolio 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 Portfolio 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.
26
<PAGE> 69
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Portfolio is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Portfolio
continues to qualify as a regulated investment company under Subchapter M of the
Code.
TAXATION OF VARIABLE CONTRACTS
For a discussion of tax consequences of variable contracts, please
refer to your insurance company's separate account prospectus.
Variable contracts purchased through insurance company separate
accounts provide for the accumulation of all earnings from interest, dividends
and capital appreciation without current federal income tax liability to the
owner. Depending on the variable contract, distributions from the contract may
be subject to ordinary income tax and a 10% penalty tax on distributions before
age 59 1/2. Only the portion of a distribution attributable to income is subject
to federal income tax. Investors should consult with competent tax advisors for
a more complete discussion of possible tax consequences in a particular
situation.
Section 817(h) of the Code provides that the investments of a separate
account underlying a variable insurance contract (or the investments of a mutual
fund, the shares of which are owned by the variable separate account) must be
"adequately diversified" in order for the contract to be treated as an annuity
or life insurance for tax purposes. The Department of the Treasury has issued
regulations prescribing these diversification requirements. Each Portfolio
intends to comply with these requirements.
27
<PAGE> 70
FINANCIAL STATEMENTS
The following financial statements for the 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 VARIABLE INSURANCE TRUST (other than the 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
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
28
<PAGE> 71
SELECT ADVISORS VARIABLE INSURANCE TRUST
- TOUCHSTONE VALUE PLUS PORTFOLIO
- TOUCHSTONE EMERGING GROWTH PORTFOLIO
- TOUCHSTONE INTERNATIONAL EQUITY PORTFOLIO
- TOUCHSTONE BALANCED PORTFOLIO
INVESTMENT ADVISOR - TOUCHSTONE INCOME OPPORTUNITY PORTFOLIO
- TOUCHSTONE STANDBY INCOME PORTFOLIO
Touchstone Advisors, Inc.
311 Pike Street
Cincinnati, Ohio 45202
ADMINISTRATOR, FUND ACCOUNTING
AGENT, CUSTODIAN AND TRANSFER 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
29
<PAGE> 72
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A
FOR THE REGISTRANT (except for Value Plus Portfolio):
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B
FOR THE REGISTRANT (except for 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
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
(b) EXHIBITS:
(1A) Amended Declaration of Trust of the Trust.(3)
(1B) Amendment to the Amended Declaration of Trust of the Trust.(5)
(2) Amended By-Laws of the Trust.(3)
(3) Inapplicable.
(4) Inapplicable.
(5A) Investment Advisory Agreement.(5)
(5B) Amendment No. 1 to Investment Advisory Agreement.(5)
(5C) Amendment No. 2 to Investment Advisory Agreement.(6)
(5D) Form of Portfolio Advisory Agreement with respect to Value Plus
Portfolio.(5)
(5E) Portfolio Advisory Agreements with respect to Emerging Growth
Portfolio.(3)
(5F) Portfolio Advisory Agreement with respect to International Equity
Portfolio.(3)
(5G) Portfolio Advisory Agreement with respect to Balanced Portfolio.(5)
(5H) Portfolio Advisory Agreement with respect to Income Opportunity
<PAGE> 73
Portfolio.(3)
(5I) Portfolio Advisory Agreement with respect to Standby Income
Portfolio.(3)
(6) Inapplicable.
(7) Inapplicable.
(8) Custody Agreement.(2)
(9A) Administration Agreement.(4)
(9B) Sponsor Agreement.(2)
(9C) Transfer Agency Agreement.(4)
(9D) Fund Accounting Agreement.(4)
(10) Opinion of counsel.(2)
(11) Consent of independent accountants.(6)
(12) Inapplicable.
(13) Investment letter of initial shareholders.(2)
(14) Inapplicable.
(15) Inapplicable.
(16) Method of computation of performance information.(2)
(17) Powers of Attorney.(5)
(27) Financial Data Schedules.(6)
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 (the "SEC") on March 17, 1994.
2 Incorporated herein by reference from Pre-Effective Amendment No. 1 to the
Registration Statement as filed with the SEC on November 14, 1994.
3 Incorporated by reference from Post-Effective Amendment No. 2 to the
Registration Statement as filed with the SEC via Edgar on April 29, 1996.
4 Incorporated by reference from Post-Effective Amendment No. 3 to the
Registration Statement as filed with the SEC via Edgar on February 28, 1997.
5. Incorporated by reference from Post-Effective Amendment No. 5 to the
Registration Statement as filed with the SEC via Edgar on February 13, 1998.
6. Filed herein.
<PAGE> 74
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
(as of March 31, 1998)
<S> <C>
Emerging Growth Portfolio 3
International Equity Portfolio 3
Balanced Portfolio 3
Income Opportunity Portfolio 3
Standby Income Portfolio 3
</TABLE>
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
<PAGE> 75
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 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 each 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 ADVISERS 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 Executive Officer
William F. Ledwin* Director none
Donald J. Wuebbling* Director, Secretary
and Chief Legal Officer none
James J. Vance* Treasurer Treasurer
Edward S. Heenan* Vice President Controller
and Controller
J. Thomas Lancaster* Vice President and
Treasurer none
Richard K. Taulbee* Vice President none
Patricia Wilson Chief Compliance Officer none
Robert F. Morand* Assistant Secretary none
</TABLE>
<PAGE> 76
<TABLE>
<S> <C> <C>
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.
Inapplicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Select Advisors Variable Insurance Trust
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 and fund accounting agent)
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
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.
<PAGE> 77
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 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 VARIABLE INSURANCE TRUST
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
EDWARD G. HARNESS, JR.* President and Trustee
Edward G. Harness, Jr.
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
James J. Vance Financial Officer and
Principal Accounting
Officer)
</TABLE>
<PAGE> 78
*By /s/ ANDREW S. JOSEF
------------------------------------
Andrew S. Josef, as Attorney-in-fact
(pursuant to powers of attorney
filed herewith).
<PAGE> 79
SELECT ADVISORS VARIABLE INSURANCE TRUST
EXHIBITS TO
REGISTRATION STATEMENT ON
FORM N-1A
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
5(c) Amendment No. 2 to Investment Advisory Agreement
(11) Consent of Independent Accountants
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
Exhibit 5(c)
AMENDMENT NO. 2
TO
INVESTMENT ADVISORY AGREEMENT
BETWEEN
TOUCHSTONE ADVISORS, INC. AND SELECT ADVISORS VARIABLE INSURANCE TRUST
This Amendment No. 2 to Investment Advisory Agreement is dated as of
May 1, 1998 and amends the Investment Advisory Agreement (the
"Advisory Agreement") dated September 9, 1994 made by and between Touchstone
Advisors, Inc., an Ohio corporation (the "Advisor"), and Select Advisors
Variable Insurance Trust, a Massachusetts business trust created pursuant to a
Declaration of Trust dated February 7, 1994 (the "Trust").
WHEREAS, the Advisor acts as investment advisor to the Trust pursuant to
the Advisory Agreement; and
WHEREAS, the Trust's Board of Trustees has amended and restated the
Establishment and Designation of Series appended to the Trust's Declaration of
Trust (the "Declaration") to add an additional series of Shares (as defined in
the Declaration) of the Trust, to be designated the Touchstone Value Plus
Portfolio;
NOW, THEREFORE, Schedule 1 to the Advisory Agreement is hereby amended,
effective as of May 1, 1998, to read as set forth in Exhibit A to
this Amendment, the sole change in such Schedule being the addition of the Value
Plus Portfolio.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and delivered in their names and on their behalf as of the day and year
first above written.
SELECT ADVISORS VARIABLE
INSURANCE TRUST
By: /s/ Edward G. Harness, Jr.
-----------------------------------
Edward G. Harness, Jr., President
TOUCHSTONE ADVISORS INC.
By: /s/ Patricia J. Wilson
-------------------------------
Secretary
14
<PAGE> 2
Exhibit A to Amendment No. 2 to
Investment Advisory Agreement
SCHEDULE 1
Emerging Growth Portfolio 0.80%
International Equity Portfolio 0.95%
Balanced Portfolio 0.80%
Income Opportunity Portfolio 0.65%
Standby Income Portfolio 0.25%
Value Plus Portfolio 0.75%
15
<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.
7 to the Registration Statement under the Investment Company Act of 1940 of
Touchstone Select Advisors Variable Insurance Trust on Form N-1A of our report
dated February 13, 1998, on our audit of the financial statements and financial
highlights of the Touchstone Emerging Growth Portfolio, Touchstone International
Equity Portfolio, Touchstone Balanced Portfolio, Touchstone Income Opportunity
Portfolio and Touchstone Standby Income Portfolio, which report is included in
the Annual Report for Touchstone Select Advisors Variable Insurance Trust
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
VARIABLE INSURANCE TRUST 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 PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 14,331,373
<INVESTMENTS-AT-VALUE> 17,151,048
<RECEIVABLES> 340,028
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,239,257
<TOTAL-ASSETS> 19,730,333
<PAYABLE-FOR-SECURITIES> 157,619
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 155,764
<TOTAL-LIABILITIES> 313,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,385,765
<SHARES-COMMON-STOCK> 1,260,959
<SHARES-COMMON-PRIOR> 473,013
<ACCUMULATED-NII-CURRENT> 3,217
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 208,293
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,819,675
<NET-ASSETS> 19,416,950
<DIVIDEND-INCOME> 105,090
<INTEREST-INCOME> 69,919
<OTHER-INCOME> 0
<EXPENSES-NET> 141,782
<NET-INVESTMENT-INCOME> 33,227
<REALIZED-GAINS-CURRENT> 1,327,486
<APPREC-INCREASE-CURRENT> 2,197,739
<NET-CHANGE-FROM-OPS> 3,525,225
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 892,720
<NUMBER-OF-SHARES-REDEEMED> 174,447
<SHARES-REINVESTED> 69,673
<NET-CHANGE-IN-ASSETS> 13,645,617
<ACCUMULATED-NII-PRIOR> 384
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 106,584
<GROSS-ADVISORY-FEES> 98,956
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 269,413
<AVERAGE-NET-ASSETS> 12,328,846
<PER-SHARE-NAV-BEGIN> 12.20
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 4.06
<PER-SHARE-DIVIDEND> 0.89
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.40
<EXPENSE-RATIO> 1.15
<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
VARIABLE INSURANCE TRUST 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 PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 17,199,075
<INVESTMENTS-AT-VALUE> 18,614,544
<RECEIVABLES> 100,420
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,504,321
<TOTAL-ASSETS> 21,219,285
<PAYABLE-FOR-SECURITIES> 1,287,072
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 229,482
<TOTAL-LIABILITIES> 1,516,554
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,285,104
<SHARES-COMMON-STOCK> 1,640,973
<SHARES-COMMON-PRIOR> 791,521
<ACCUMULATED-NII-CURRENT> (56,246)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 58,471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,415,402
<NET-ASSETS> 19,702,731
<DIVIDEND-INCOME> 197,309
<INTEREST-INCOME> 81,871
<OTHER-INCOME> 0
<EXPENSES-NET> 178,076
<NET-INVESTMENT-INCOME> 101,104
<REALIZED-GAINS-CURRENT> 1,133,852
<APPREC-INCREASE-CURRENT> 577,604
<NET-CHANGE-FROM-OPS> 1,812,560
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 858,524
<NUMBER-OF-SHARES-REDEEMED> 98,268
<SHARES-REINVESTED> 89,196
<NET-CHANGE-IN-ASSETS> 10,944,451
<ACCUMULATED-NII-PRIOR> 363
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 166,470
<GROSS-ADVISORY-FEES> 135,300
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 453,864
<AVERAGE-NET-ASSETS> 14,246,091
<PER-SHARE-NAV-BEGIN> 11.07
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.58
<PER-SHARE-DIVIDEND> 0.69
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.03
<EXPENSE-RATIO> 1.25
<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
VARIABLE INSURANCE TRUST FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> TOUCHSTONE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 19,813,493
<INVESTMENTS-AT-VALUE> 21,002,227
<RECEIVABLES> 251,104
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,268,245
<TOTAL-ASSETS> 22,521,576
<PAYABLE-FOR-SECURITIES> 65,025
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169,484
<TOTAL-LIABILITIES> 234,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,922,008
<SHARES-COMMON-STOCK> 1,592,899
<SHARES-COMMON-PRIOR> 521,224
<ACCUMULATED-NII-CURRENT> 14,838
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 148,018
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,202,203
<NET-ASSETS> 22,287,067
<DIVIDEND-INCOME> 88,185
<INTEREST-INCOME> 381,574
<OTHER-INCOME> 0
<EXPENSES-NET> 120,109
<NET-INVESTMENT-INCOME> 349,650
<REALIZED-GAINS-CURRENT> 1,435,996
<APPREC-INCREASE-CURRENT> 475,638
<NET-CHANGE-FROM-OPS> 2,261,284
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 350,429
<DISTRIBUTIONS-OF-GAINS> 1,314,627
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 967,476
<NUMBER-OF-SHARES-REDEEMED> 16,607
<SHARES-REINVESTED> 120,806
<NET-CHANGE-IN-ASSETS> 15,592,375
<ACCUMULATED-NII-PRIOR> 1,153
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 46,957
<GROSS-ADVISORY-FEES> 103,999
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 262,449
<AVERAGE-NET-ASSETS> 13,345,432
<PER-SHARE-NAV-BEGIN> 12.84
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 2.05
<PER-SHARE-DIVIDEND> 1.21
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.99
<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
VARIABLE INSURANCE TRUST FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> TOUCHSTONE INCOME OPPORTUNITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 25,479,121
<INVESTMENTS-AT-VALUE> 25,249,660
<RECEIVABLES> 705,065
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,353,069
<TOTAL-ASSETS> 28,307,794
<PAYABLE-FOR-SECURITIES> 1,277,510
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 150,873
<TOTAL-LIABILITIES> 1,428,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,605,983
<SHARES-COMMON-STOCK> 2,439,073
<SHARES-COMMON-PRIOR> 737,841
<ACCUMULATED-NII-CURRENT> 26,479
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (523,075)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (229,976)
<NET-ASSETS> 26,879,411
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,973,709
<OTHER-INCOME> 0
<EXPENSES-NET> 141,705
<NET-INVESTMENT-INCOME> 1,832,004
<REALIZED-GAINS-CURRENT> 191,074
<APPREC-INCREASE-CURRENT> (528,803)
<NET-CHANGE-FROM-OPS> 1,494,275
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,814,515
<DISTRIBUTIONS-OF-GAINS> 227,491
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,651,438
<NUMBER-OF-SHARES-REDEEMED> 174,262
<SHARES-REINVESTED> 224,056
<NET-CHANGE-IN-ASSETS> 18,611,279
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18,918
<GROSS-ADVISORY-FEES> 108,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 286,006
<AVERAGE-NET-ASSETS> 16,671,149
<PER-SHARE-NAV-BEGIN> 11.21
<PER-SHARE-NII> 1.20
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 1.50
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.02
<EXPENSE-RATIO> 0.85
<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
VARIABLE INSURANCE TRUST FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> TOUCHSTONE STANDBY INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 17,401,961
<INVESTMENTS-AT-VALUE> 17,401,759
<RECEIVABLES> 115,669
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 116,352
<TOTAL-ASSETS> 17,633,780
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,579
<TOTAL-LIABILITIES> 71,579
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,571,962
<SHARES-COMMON-STOCK> 1,755,724
<SHARES-COMMON-PRIOR> 910,034
<ACCUMULATED-NII-CURRENT> 1,366
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,925)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (202)
<NET-ASSETS> 17,562,201
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 813,493
<OTHER-INCOME> 0
<EXPENSES-NET> 68,413
<NET-INVESTMENT-INCOME> 745,080
<REALIZED-GAINS-CURRENT> (8,448)
<APPREC-INCREASE-CURRENT> (382)
<NET-CHANGE-FROM-OPS> 736,250
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 745,079
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,900,755
<NUMBER-OF-SHARES-REDEEMED> 1,129,387
<SHARES-REINVESTED> 74,322
<NET-CHANGE-IN-ASSETS> 8,457,068
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1,112
<GROSS-ADVISORY-FEES> 34,222
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 202,856
<AVERAGE-NET-ASSETS> 13,682,614
<PER-SHARE-NAV-BEGIN> 10.01
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
