<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
File Nos. 33-76566 and 811-8416
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 9
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
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:
Mark Longenecker, Esq. Edward G. Harness, Jr.
Karen McLaughlin, Esq. Touchstone Securities, Inc.
Frost & Jacobs LLP 311 Pike Street
2500 East 5th Street Cincinnati, Ohio 45202
P.O. Box 5715
Cincinnati, Ohio 45201-5715
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on January 4, 1999 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
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
TOUCHSTONE
LOGO
VARIABLE SERIES TRUST
- --------------------------------------------------------------------------------
PROSPECTUS
JANUARY 4, 1999
O TOUCHSTONE EMERGING GROWTH FUND
O TOUCHSTONE INTERNATIONAL EQUITY FUND
O TOUCHSTONE INCOME OPPORTUNITY FUND
O TOUCHSTONE VALUE PLUS FUND
O TOUCHSTONE GROWTH & INCOME FUND
O TOUCHSTONE BALANCED FUND
O TOUCHSTONE BOND FUND
O TOUCHSTONE STANDBY INCOME FUND
Neither the Securities and Exchange Commission nor any state securities
commission has approved any Fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
<PAGE> 3
TABLE OF CONTENTS
3
TABLE OF CONTENTS [ICON]TOUCHSTONE VARIABLE SERIES TRUST
<TABLE>
<CAPTION>
PAGE
<S> <C>
Information About The Funds................................ 4
Touchstone Emerging Growth Fund............................ 5
Touchstone International Equity Fund....................... 8
Touchstone Income Opportunity Fund......................... 11
Touchstone Value Plus Fund................................. 14
Touchstone Growth & Income Fund............................ 16
Touchstone Balanced Fund................................... 18
Touchstone Bond Fund....................................... 22
Touchstone Standby Income Fund............................. 24
Investment Strategies and Risks............................ 27
The Funds' Management...................................... 34
Investing With Touchstone.................................. 38
Distributions and Taxes.................................... 40
Financial Highlights....................................... 41
For More Information....................................... 45
</TABLE>
<PAGE> 4
INFORMATION ABOUT THE FUNDS
4
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
INFORMATION ABOUT THE FUNDS
Touchstone Variable Series Trust
Touchstone Variable Series Trust (TVST) is a group of mutual funds. Each Fund
has a different investment goal and risk level.
Shares of each Fund described in this Prospectus can be purchased by insurance
company separate accounts.
You can invest indirectly in the Funds through your purchase of a Touchstone
variable annuity contract. When you purchase a Touchstone variable annuity
contract, you decide how to invest your purchase payments by selecting from the
available investment options. The investment options include the following
Sub-Accounts: Emerging Growth, International Equity, Income Opportunity, Value
Plus, Growth & Income, Balanced, Bond and Standby Income. Each Sub-Account
invests in the corresponding Fund.
You should read the prospectus for the Touchstone variable annuity contract that
you want to purchase to learn about purchasing a contract and selecting your
investment options. That prospectus also contains information about the
contract, your investment options, the Sub-Accounts and expenses related to
purchasing a variable annuity contract.
<PAGE> 5
TOUCHSTONE EMERGING
GROWTH FUND
5
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE EMERGING GROWTH FUND
The Fund's Investment Goal
The Emerging Growth Fund seeks to increase the value of Fund shares as a
primary goal and to earn income as a secondary goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in the common stocks
of smaller, rapidly growing (emerging growth) companies. In selecting its
investments, the portfolio managers focus on those companies they believe will
grow faster than the U.S. economy in general. They also choose companies they
believe are priced lower in the market than their true value.
When the portfolio managers believe the following securities offer a good
potential for capital growth or income, up to 35% of the Fund's assets may be
invested in:
O Larger company stocks
O Preferred stocks
O Convertible bonds
O Other debt securities, including:
collateralized mortgage obligations (CMOS), stripped U.S. government
securities (Strips) and mortgage-related securities, all of which will
be rated investment grade
The Fund may also invest in:
O Securities of foreign companies traded mainly outside the U.S. (up to
20%)
O American Depositary Receipts (ADRs) (up to 20%)
O Emerging market securities (up to 10%)
<PAGE> 6
TOUCHSTONE EMERGING
GROWTH FUND
6
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If the stock market as a whole goes down
O Because securities of small-cap companies may be more thinly traded and
may have more frequent and larger price changes than securities of larger
cap companies
O If the market continually values the stocks in the Fund's portfolio lower
than the portfolio managers believe they should be valued
O If the stocks in the Fund's portfolio are not undervalued as expected
O If the companies in which the Fund invests do not grow as rapidly as
expected
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because collateralized mortgage obligations (CMOs), stripped U.S.
government securities (Strips) and mortgage-related securities may lose
more value due to changes in interest rates than other debt securities
and are subject to prepayment
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
O Because emerging market securities involve unique risks, such as exposure
to economies less diverse and mature than that of the U.S. and economic
or political changes may cause larger price changes in emerging market
securities than other foreign securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
<PAGE> 7
TOUCHSTONE EMERGING
GROWTH FUND
7
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Emerging
Growth Fund. It shows changes in the performance of the Fund's shares from year
to year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
EMERGING GROWTH FUND PERFORMANCE
<TABLE>
<CAPTION>
YEARS TOTAL RETURN
<S> <C>
1995 19.57%
1996 11.16%
1997 33.67%
</TABLE>
During the period shown in the Bar Chart, the highest quarterly return
was 18.63% (for the quarter ended June 30, 1997) and the lowest
quarterly return was -2.79% (for the quarter ended March 31, 1997).
The performance information shown here does not reflect fees that are paid by
the separate accounts through which shares of the Fund are sold. Inclusion of
those fees would reduce the total return figures for all periods.
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Russell 2000 Index and to the Wiesenberger Small
Cap - MF. The Russell 2000 Index is a widely recognized unmanaged index of small
cap stock performance. The Wiesenberger Small Cap - MF is a composite index of
the annual returns of mutual funds that have an investment style similar to that
of the Emerging Growth Fund.
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PAST 12 SINCE
MONTHS FUND STARTED
<S> <C> <C>
EMERGING GROWTH FUND 33.7% 20.7%
- -------------------------------------------------------------------------
RUSSELL 2000 INDEX 22.4% 22.7%
- -------------------------------------------------------------------------
WIESENBERGER SMALL CAP - MF 21.6% 24.5%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 8
TOUCHSTONE INTERNATIONAL
EQUITY FUND
8
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE INTERNATIONAL EQUITY FUND
The Fund's Investment Goal
The International Equity Fund seeks to increase the value of Fund shares over
the long-term.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily (at least 80% of total assets) in equity securities
of foreign companies and will invest in at least three countries outside the
United States. A large portion of those non-U.S. equity securities may be
issued by companies active in emerging market countries (up to 40% of total
assets).
The Fund may also invest in certain debt securities issued by U.S. and
non-U.S. entities (up to 20%), including non-investment grade debt securities
rated as low as B.
The portfolio manager uses a growth oriented style to choose investments for
the Fund. This includes the use of both qualitative and quantitative analysis
to identify markets and companies that offer solid growth prospects at
reasonable prices. The portfolio manager's investment process seeks to add
value by making good regional and country allocations as well as by selecting
individual stocks within a region.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If the stock market as a whole goes down
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
O Because emerging market securities involve unique risks, such as exposure
to economies less diverse and mature than that of the U.S. and economic
or political changes may cause larger price changes in emerging market
securities than other foreign securities
O If the stocks in the Fund's portfolio do not grow over the long term as
expected
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because issuers of non-investment grade securities held by the Fund are
more likely to be unable to make timely payments of interest or principal
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
<PAGE> 9
TOUCHSTONE INTERNATIONAL
EQUITY FUND
9
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the International
Equity Fund. It shows changes in the performance of the Fund's shares from year
to year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
INTERNATIONAL EQUITY FUND PERFORMANCE
<TABLE>
<CAPTION>
YEARS TOTAL RETURN
<S> <C>
1995 15.46%
1996 11.47%
1997 14.76%
</TABLE>
During the period shown in the Bar Chart, the highest quarterly return
was 11.30% (for the quarter ended June 30, 1997) and the lowest
quarterly return was -3.89 (for the quarter ended March 31, 1995).
<PAGE> 10
TOUCHSTONE INTERNATIONAL
EQUITY FUND
10
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The performance information shown here does not reflect fees that are paid by
the separate accounts through which shares of the Fund are sold. Inclusion of
those fees would reduce the total return figures for all periods.
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the MSCI EAFE Index and the Wiesenberger Non-US
Equity - MF index. The MSCI EAFE Index is a Morgan Stanley index that includes
stocks traded on 16 exchanges in Europe, Australia and the Far East. The
Wiesenberger Non-US Equity - MF is a composite index of the annual returns of
mutual funds that have an investment style similar to that of the International
Equity Fund.
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PAST 12 SINCE
MONTHS FUND STARTED
<S> <C> <C>
INTERNATIONAL EQUITY FUND 14.8% 8.3%
- -------------------------------------------------------------------------
MSCI EAFE INDEX 2.1% 6.6%
- -------------------------------------------------------------------------
WIESENBERGER NON-US EQUITY - MF -2.0% 4.8%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 11
TOUCHSTONE INCOME
OPPORTUNITY FUND
11
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE INCOME OPPORTUNITY FUND
The Fund's Investment Goal
The Income Opportunity Fund seeks to achieve a high level of current income as
its main goal. The Fund may also seek to increase the value of Fund shares, if
consistent with its main goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily in debt securities. These debt securities will
generally be more risky non-investment grade corporate and government
securities (up to 100%). Non-investment grade debt securities are often
referred to as "junk bonds" and are considered speculative.
The Fund's investments may include:
O Securities of foreign companies (up to 100%), but only up to 30% of its
assets in securities of foreign companies that are denominated in a
currency other than the U.S. dollar
O Debt securities that are emerging market securities (up to 65%)
O Mortgage-related securities, loans and loan participations
O Currency futures and option contracts
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because issuers of non-investment grade securities held by the Fund are
more likely to be unable to make timely payments of interest or principal
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
O Because emerging market securities involve unique risks, such as exposure
to economies less diverse and mature than that of the U.S. and economic
or political changes may cause larger price changes in emerging market
securities than other foreign securities
O Because mortgage-related securities may lose more value due to changes in
interest rates than other debt securities and are subject to prepayment
O Because loans and loan participations may be more difficult to sell than
other investments and are subject to the risk of borrower default
O If the stock market as a whole goes down
<PAGE> 12
TOUCHSTONE INCOME
OPPORTUNITY FUND
12
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Income
Opportunity Fund. It shows changes in the performance of the Fund's shares from
year to year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
INCOME OPPORTUNITY FUND PERFORMANCE
<TABLE>
<CAPTION>
YEARS TOTAL RETURN
<S> <C>
1995 23.35%
1996 27.37%
1997 12.03%
</TABLE>
During the period shown in the Bar Chart, the highest quarterly return
was 15.38% (for the quarter ended June 30, 1995) and the lowest
quarterly return was -4.56% (for the quarter ended March 31, 1995).
<PAGE> 13
TOUCHSTONE INCOME
OPPORTUNITY FUND
13
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The performance information shown here does not reflect fees that are paid by
the separate accounts through which shares of the Fund are sold. Inclusion of
those fees would reduce the total return figures for all periods.
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Corporate Bond Index, the
Wiesenberger Corp - High Yield - MF and the Wiesenberger Global Income - MF. The
Lehman Brothers Corporate Bond Index is based on all publicly issued
intermediate fixed-rate, non-convertible investment grade domestic corporate
debt. The Wiesenberger Corp. - High Yield - MF index and the Wiesenberger Global
Income - MF index are composite indexes of the annual returns of mutual funds
that have an investment style similar to the Income Opportunity Fund.
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PAST 12 SINCE
MONTHS FUND STARTED
<S> <C> <C>
INCOME OPPORTUNITY 12.0% 17.7%
- -------------------------------------------------------------------------
LEHMAN BROTHERS CORPORATE BOND INDEX 10.2% 11.6%
- -------------------------------------------------------------------------
WIESENBERGER CORP - HIGH YIELD - MF 12.6% 13.7%
- -------------------------------------------------------------------------
WIESENBERGER GLOBAL INCOME - MF 3.3% 8.7%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 14
TOUCHSTONE VALUE PLUS FUND
14
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE VALUE PLUS FUND
The Fund's Investment Goal
The Value Plus Fund seeks to increase the value of Fund shares over the
long-term.
As with any mutual fund, there is no guarantee that the fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in common stock of
larger companies that the portfolio manager believes are undervalued. In
choosing undervalued stocks, the portfolio manager looks for companies that
have proven management and unique features or advantages but are believed to
be priced lower than their true value. These companies may not pay dividends.
The Fund may also invest in common stocks of rapidly growing companies to
enhance the Fund's return and vary its investments to avoid having too much of
the Fund's assets subject to risks specific to undervalued stocks.
Up to 70% of total assets may be invested in large cap companies and up to 30%
may be invested in mid cap companies.
The Fund may invest in:
O Preferred stocks (up to 35%)
O Investment grade debt securities
O Convertible securities
In addition, the Fund may invest in:
O Cash equivalent investments (up to 10%)
O Short-term debt securities
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If the stock market as a whole goes down
O If the market continually values the stocks in the Fund's portfolio lower
than the portfolio manager believes they should be valued
O If the stocks in the Fund's portfolio are not undervalued as expected
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
<PAGE> 15
TOUCHSTONE VALUE PLUS FUND
15
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate, or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation may be important to you, but you may not want to take extreme risks
in order to achieve it. This Fund's approach may be most appropriate for you if
you are many years from retirement and are comfortable with a moderate level of
risk.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Value Plus Fund started on May 1, 1998,
there is no performance information included in this Prospectus.
<PAGE> 16
TOUCHSTONE GROWTH &
INCOME FUND
16
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE GROWTH & INCOME FUND
The Fund's Investment Goal
The Growth & Income Fund seeks to increase the value of Fund shares over the
long-term, while receiving dividend income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in dividend-paying
common stocks, preferred stocks and convertible securities in a variety of
industries. The portfolio manager may choose to purchase securities which do
not pay dividends (up to 35%) but which are expected to increase in value or
produce high income payments in the future.
In choosing securities for the Fund, the portfolio manager will follow a value
oriented style, generally buying securities with yields that are at least 20%
higher than the average yield of companies in the S&P 500. The portfolio
manager focuses on investing in companies that have a market capitalization of
at least $1 billion, but may invest in companies of any size.
The Fund may also invest up to 20% of its total assets in debt
securities -- and within this 20% limitation, the Fund may invest the full 20%
in investment grade debt securities or up to 5% in non-convertible
non-investment grade debt securities.
The Fund may also invest in:
O Securities of foreign companies including American Depository Receipts
(ADRs) (up to 20%)
O Real estate investment trusts (REITs) (up to 10%)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If the stock market as a whole goes down
O If any of the stocks in the Fund's portfolio do not increase in value as
expected
O If earnings of companies the Fund invests in are not achieved and income
available for interest or dividend payments is reduced
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
<PAGE> 17
TOUCHSTONE GROWTH &
INCOME FUND
17
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
O Because investments in REITs are more sensitive to changes in interest
rates and other factors that affect real estate values
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation of your investment capital may be important to you, however, you
may be uncomfortable taking extreme risk in order to achieve it. This Fund's
approach may be most appropriate for you if you are many years from retirement
and are comfortable with a moderate level of risk.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Growth & Income Fund started on January
4, 1999, there is no performance information included in this Prospectus.
<PAGE> 18
TOUCHSTONE BALANCED FUND
18
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE BALANCED FUND
The Fund's Investment Goal
The Balanced Fund seeks to achieve both an increase in share price and current
income.
As with any mutual fund, there is no guarantee that the fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests in both equity securities (generally about 60% of total
assets) and debt securities (generally about 40%, but at least 25%). The debt
securities will be rated investment grade or at the highest level of
non-investment grade.
The Fund may also invest in:
O Warrants
O Preferred stocks
O Convertible securities
The Fund may also invest up to one-third of its assets in securities of
foreign companies, and up to 15% in emerging market securities.
In choosing equity securities for the Fund, the portfolio manager will seek
out companies that are in a strong position within their industry, are owned
in part by management and are selling at a price lower than the company's
intrinsic value. Debt securities are also chosen using a value style. The
portfolio manager will focus on higher yielding securities, but will also
consider expected movements in interest rates and industry position.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If the stock market as a whole goes down
O If the stocks in the Fund's portfolio do not increase in value as
expected
O If earnings of companies the Fund invests in are not achieved and income
available for interest or dividend payments is reduced
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
O Because emerging market securities involve unique risks, such as exposure
to economies less diverse and mature than that of the
<PAGE> 19
TOUCHSTONE BALANCED FUND
19
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
U.S. and economic or political changes may cause larger price changes in
emerging market securities than other foreign securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are a risk neutral or moderately
conservative investor. You may typically take a relatively low risk approach to
investing and may be comfortable with a low level of volatility in your
investments. While safety may be important to you, you may also value
appreciation of your investments. If you invest in this Fund, you should be
willing to accept some risk. This Fund's approach may be appropriate for you if
you are several years from retirement.
The Fund's Performance
The bar chart shown on the following page indicates the risks of investing in
the Balanced Fund. It shows changes in the performance of the Fund's shares from
year to year since the Fund started.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
<PAGE> 20
TOUCHSTONE BALANCED FUND
20
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
BALANCED FUND PERFORMANCE
<TABLE>
<CAPTION>
YEARS TOTAL RETURN
<S> <C>
1995 24.56%
1996 16.78%
1997 18.61%
</TABLE>
During the period shown in the bar chart, the highest quarterly return
was 10.08% (for the quarter ended June 30, 1997) and the lowest
quarterly return was -0.62% (for the quarter ended March 31, 1997).
The performance information shown here does not reflect fees that are paid by
the separate accounts through which shares of the Fund are sold. Inclusion of
those fees would reduce the total return figures for all periods.
The table on the following page shows how the Fund's average annual returns for
the periods shown compare to those of the Standard & Poor's Composite Index of
500 Stocks, the Lehman Brothers Government/ Corporate Index and to the
Wiesenberger Balanced Domestic - MF index. The Lehman Brothers
Government/Corporate Index is composed of 5,400 publicly issued corporate and
U.S. government debt rated Baa or better with at least one year to maturity and
at least $25 million par outstanding. The Wiesenberger Balanced Domestic - MF
Index is a composite index of the annual returns of mutual funds that have an
investment style similar to the Balanced Fund.
<PAGE> 21
TOUCHSTONE BALANCED FUND
21
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PAST 12 SINCE
MONTHS FUND STARTED
<S> <C> <C>
BALANCED FUND 18.6% 19.8%
- -------------------------------------------------------------------------
S&P 500 INDEX 33.4% 30.8%
- -------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX 9.8% 10.4%
- -------------------------------------------------------------------------
WIESENBERGER BALANCED DOMESTIC - MF 18.6% 18.6%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 22
TOUCHSTONE BOND FUND
22
TOUCHSTONE BOND FUND [ICON]TOUCHSTONE VARIABLE SERIES TRUST
The Fund's Investment Goal
The Bond Fund seeks to provide a high level of current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests primarily in higher quality investment grade debt securities
(at least 65% of total assets). The Fund's investment in debt securities may
be determined by the direction in which interest rates are expected to move
because the value of these securities generally moves in the opposite
direction from interest rates. The Fund expects to have an average maturity
between five and fifteen years.
The Fund invests in:
O Mortgage-related securities
O Asset-backed securities
O Preferred stocks
The Fund also invests in U.S. or foreign debt securities which are rated
non-investment grade (up to 35%).
In addition, the Fund may invest in:
O Debt securities denominated in foreign currencies (20% or less)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If interest rates go up, causing the value of any debt securities held by
the Fund to decline
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
O Because issuers of non-investment grade securities held by the Fund are
more likely to be unable to make timely payments of interest or principal
O Because mortgage-related securities and asset-backed securities may lose
more value due to changes in interest rates than other debt securities
and are subject to prepayment
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
<PAGE> 23
TOUCHSTONE BOND FUND
23
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Who May Want to Invest
This Fund is most appropriate for you if you prefer to take a relatively low
risk approach to investing. Safety of your investment may be the most important
factor to you. You may be willing to accept potentially lower returns in order
to maintain a lower, more tolerable level of risk. This Fund's approach may be
most appropriate for you if you are nearing retirement.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Bond Fund started on January 4, 1999,
there is no performance information included in this Prospectus.
<PAGE> 24
TOUCHSTONE STANDBY
INCOME FUND
24
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
TOUCHSTONE STANDBY INCOME FUND
The Fund's Investment Goal
The Standby Income Fund seeks to provide a higher level of current income than
a money market fund, while also seeking to prevent large fluctuations in the
value of your initial investment. The Fund does not try to keep a constant
$1.00 per share net asset value.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
Its Principal Investment Strategies
The Fund invests mostly in various types of money market instruments. All
investments will be rated at least investment grade. On average, the
securities held by the Fund will mature in less than one year.
The Fund's investments may include:
O Short-term government securities
O Mortgage-related securities
O Asset-backed securities
O Repurchase agreements
The Fund may invest up to 50% of total assets in:
O Securities denominated in U.S. dollars and issued in the U.S. by foreign
issuers (known as Yankee bonds)
O Eurodollar Certificates of Deposit
In addition, the Fund may invest in:
O Debt securities denominated in foreign currencies (up to 20%)
O Corporate bonds, commercial paper, certificates of deposit, and bankers'
acceptances
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
O If interest rates go up, causing the value of any debt securities to
decline
O Because mortgage-related securities and asset-backed securities may lose
more value due to changes in interest rates than other debt securities
and are subject to prepayment
O Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
<PAGE> 25
TOUCHSTONE STANDBY
INCOME FUND
25
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you take a relatively low risk approach
to investing. Safety of your investment is of key importance to you.
Additionally, you are willing to accept potentially lower returns in order to
maintain a lower, more tolerable level of risk. This Fund's approach may be most
appropriate for you if you are nearing retirement, or if you have a longer time
horizon, but nevertheless, have a lower risk tolerance. This Fund is also
appropriate for you if you want the added convenience of writing checks directly
from your account.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Standby Income
Fund. It shows changes in the performance of the Fund's shares from year to year
since the Fund's inception.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
STANDBY INCOME FUND -- PERFORMANCE
<TABLE>
<CAPTION>
YEARS TOTAL RETURN
<S> <C>
1995 5.90%
1996 5.18%
1997 5.41%
</TABLE>
During the period shown in the bar chart, the highest quarterly return
was 1.61% (for the quarter ended December 31, 1995) and the lowest
quarterly return was 1.09% (for the quarter ended September 30, 1995).
<PAGE> 26
TOUCHSTONE STANDBY
INCOME FUND
26
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The performance information shown here does not reflect fees that are paid by
the separate accounts through which shares of the Fund are sold. Inclusion of
those fees would reduce the total return figures for all periods.
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Merrill Lynch 91-Day Treasury Index and to the
30-Day Money Market Yield Index. The Merrill Lynch 91-Day Treasury Index
consists of short-term U.S. Treasury securities, maturing in 91 days. The 30-Day
Money Market Yield Index is an index of money market funds based on 30-day
yields.
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PAST 12 SINCE
MONTHS FUND STARTED
<S> <C> <C>
STANDBY INCOME FUND 5.4% 5.5%
- -------------------------------------------------------------------------
MERRILL LYNCH 91-DAY TREASURY INDEX 5.3% 5.6%
- -------------------------------------------------------------------------
30-DAY MONEY MARKET YIELD INDEX 5.1% 5.2%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 27
INVESTMENT STRATEGIES
AND RISKS
27
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
INVESTMENT STRATEGIES AND RISKS
Can a Fund depart from its normal strategies?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
Do the Funds engage in active trading of securities?
The International Equity Fund, Income Opportunity Fund and Bond Fund may engage
in active trading to achieve their investment goals. This may cause the Fund to
realize higher capital gains which would be passed on to you. Higher capital
gains could increase your tax liability. Frequent trading also increases
transaction costs, which would lower the Fund's performance.
Can a Fund change its investment goal?
A Fund's investment goal(s) may be changed by a vote of the Board of Trustees
without shareholder approval. You would be notified at least 30 days before any
such change took effect.
Year 2000 risk
Touchstone has implemented steps intended to assure that its major computer
systems and processes are capable of Year 2000 processing. We are also examining
the third parties with whom we work to assess their readiness and are developing
contingency plans to assure that any problems in their systems will not
materially affect Touchstone's operations.
Companies or governmental entities in which Touchstone Funds invest could also
be affected by the Year 2000 issue, but at this time the Funds cannot predict
the degree of impact.
Computer systems failure of Touchstone, a Fund Sub-Advisor or that of any Fund
service provider could impair Fund services and have a negative impact on a
Fund's operations and returns.
The Funds at a glance
The following two tables can give you a quick basic understanding of the types
of securities a Fund tends to invest in and some of the risks associated with a
Fund's investments. You should read all of the information about a Fund and its
risks before deciding to invest.
<PAGE> 28
INVESTMENT STRATEGIES
AND RISKS
28
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
How can I tell, at a glance, which types of securities a Fund
might invest in?
The following table shows the main types of securities in
which each Fund generally will invest. Some of the Funds'
investments are described in detail below:
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME GROWTH STANDBY
GROWTH EQUITY OPPORTUNITY VALUE PLUS & INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS
- -------------------------------
Invests in U.S. stocks -- -- -- -- --
- -------------------------------
Invests in foreign stocks -- -- -- --
- -------------------------------
Invests in investment grade
debt securities -- -- -- -- -- -- --
- -------------------------------
Invests in non-investment
grade debt securities -- -- -- -- --
- -------------------------------
Invests in foreign debt
securities -- -- -- -- -- --
- -------------------------------
Invests in futures contracts
- -------------------------------
Invests in forward currency
contracts --
- -------------------------------
Invests in asset-backed
securities -- --
- -------------------------------
Invests in mortgage-related
securities -- -- -- --
- -------------------------------
Invests in real estate
investment trusts (REITs) --
- -------------------------------
INVESTMENT TECHNIQUES
- -------------------------------
Emphasizes securities of
small cap companies --
- -------------------------------
Emphasizes securities of mid
cap companies --
- -------------------------------
Emphasizes securities of
large cap companies -- -- --
- -------------------------------
Emphasizes undervalued
stocks -- -- --
- -------------------------------
Invests in securities of
emerging markets countries -- -- -- -- --
- -------------------------------
Emphasizes dividend-paying
common stocks --
- -------------------------------
Invests in short-term debt
securities -- --
- -------------------------------
</TABLE>
Additional Information about Fund Investments
FOREIGN COMPANIES. A foreign company is organized under the
laws of a foreign country and:
O Has the principal trading market for its stock in a
foreign country
O Derives at least 50% of its revenues or profits from
operations in foreign countries or has at least 50% of
its assets located in foreign countries
AMERICAN DEPOSITORY RECEIPTS (ADRS). ADRs are securities
that represent an ownership interest in a foreign security.
They are generally issued by a U.S. bank to U.S. buyers as a
substitute for direct ownership of the foreign security and
are traded on U.S. exchanges.
<PAGE> 29
INVESTMENT STRATEGIES
AND RISKS
29
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
INVESTMENT GRADE SECURITIES. Investment grade securities are generally rated
BBB or better by Standard & Poor's Rating Service (S&P) or Baa or better by
Moody's Investor Service, Inc. (Moody's).
NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are higher
risk, lower quality securities, often referred to as "junk bonds" and are
considered speculative. They are rated by S&P as less than BBB or by Moody's as
less than Baa.
ASSET-BACKED SECURITIES. Asset-backed securities represent groups of other
assets, for example credit card receivables, that are combined or pooled for
sale to investors.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent groups of
mortgage loans that are combined for sale to investors. The loans may be grouped
together by:
O The Government National Mortgage Association (GNMA)
O The Federal National Mortgage Association (FNMA)
O The Federal Home Loan Mortgage Corporation (FHLMC)
O Commercial banks
O Savings and loan institutions
O Mortgage bankers
O Private mortgage insurance companies
REAL ESTATE INVESTMENT TRUSTS (REITS). REITs pool investors' money to invest
primarily in income-producing real estate or real estate-related loans or
interests.
"LARGE CAP" AND "MID CAP" COMPANIES. A large cap company has a market
capitalization of more than $5 billion. A mid cap company has a market
capitalization of between $1 billion and $5 billion.
EMERGING GROWTH COMPANIES. Emerging Growth Companies are companies that have:
O A total market capitalization less than that of the average of the
companies in the Standard & Poor's 500 Composite Stock Price Index (S&P
500)
O Earnings that the portfolio managers believe may grow faster than the
U.S. economy in general due to new products, management changes at the
company or economic shocks such as high inflation or sudden increases or
decreases in interest rates
EMERGING MARKET SECURITIES. Emerging Market Securities are issued by a company
that:
O Is organized under the laws of an emerging market country (any country
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Holland, Italy, Japan, Luxembourg, New Zealand, Norway, Spain,
Sweden, Switzerland, the United Kingdom and the United States)
O Has its principal trading market for its stock in an emerging market
country
<PAGE> 30
INVESTMENT STRATEGIES
AND RISKS
30
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
O Derives at least 50% of its revenues or profits from operations within
emerging market countries or has at least 50% of its assets located in
emerging market countries
UNDERVALUED STOCKS. A stock is considered undervalued if the portfolio manager
believes it should be trading at a higher price than it is at the time of
purchase. Factors considered are:
O Price relative to earnings
O Price relative to cash flow
O Price relative to financial strength
REPURCHASE AGREEMENTS. Repurchase Agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, and instrumentalities. A repurchase agreement is a transaction in
which a security is purchased with a simultaneous commitment to sell it back to
the seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date. This date is usually not more than seven days from
the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest, which is unrelated to the coupon rate or
maturity of the purchased security.
<PAGE> 31
INVESTMENT STRATEGIES
AND RISKS
31
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
How can I tell, at a glance, a Fund's key risks?
The following table shows some of the main risks to which
each Fund is subject. Each risk is described in detail
below:
<TABLE>
<CAPTION>
EMERGING INTERNATIONAL INCOME GROWTH STANDBY
GROWTH EQUITY OPPORTUNITY VALUE PLUS & INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET RISK -- -- -- -- --
------------------------------
Emerging Growth Companies --
----------------------------
Real Estate Investment
Trusts --
----------------------------
INTEREST RATE RISK -- -- -- -- -- -- --
------------------------------
Mortgage-Related Securities -- -- -- --
----------------------------
CREDIT RISK -- -- -- -- -- -- --
------------------------------
Non-Investment Grade
Securities -- -- -- --
----------------------------
FOREIGN INVESTING RISK -- -- -- -- --
------------------------------
Emerging Market Risk -- -- -- --
----------------------------
Political Risk -- --
----------------------------
</TABLE>
Risks of investing in the Funds
MARKET RISK. A Fund that invests in common stocks is
subject to stock market risk. Stock prices in general may
decline over short or even extended periods, regardless of
the success or failure of a particular company's
operations. Stock markets tend to run in cycles, with
periods when stock prices generally go up and periods when
they generally go down. Common stock prices tend to go up
and down more than those of bonds.
O Emerging Growth Companies. Investment in Emerging
Growth Companies is subject to enhanced risks
because such companies generally have limited
product lines, markets or financial resources and
often exhibit a lack of management depth. The
securities of such companies can be difficult to
sell and are usually more volatile than securities
of larger, more established companies.
O Real Estate Investment Trusts (REITs). Investment
in REITs is subject to risks similar to those
associated with the direct ownership of real estate
(in addition to securities markets risks). REITs are
sensitive to factors such as changes in real estate
values and property taxes, interest rates, cash flow
of underlying real estate assets, supply and demand,
and the management skill and creditworthiness of the
issuer. REITs may also lose value due to changes in
tax or other regulatory requirements.
<PAGE> 32
INVESTMENT STRATEGIES
AND RISKS
32
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
INTEREST RATE RISK. A Fund that invests in debt securities is subject to the
risk that the market value of the debt securities will decline because of rising
interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
O Mortgage-Related Securities. Payments from the pool of loans underlying
a Mortgage-Related Security may not be enough to meet the monthly
payments of the Mortgage-Related Security. If this occurs the
Mortgage-Related Security will lose value. Also, prepayments of mortgages
or mortgage foreclosures will shorten the life of the pool of mortgages
underlying a Mortgage-Related Security and will affect the average life
of the Mortgage-Related Securities held by a Fund. Mortgage prepayments
vary based on several factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and
other demographic conditions. In periods of falling interest rates, there
are usually more prepayments. The reinvestment of cash received from
prepayments will, therefore, usually be at a lower interest rate than the
original investment, lowering a Fund's yield. Mortgage-Related Securities
may be less likely to increase in value during periods of falling
interest rates than other debt securities.
<PAGE> 33
INVESTMENT STRATEGIES
AND RISKS
33
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
CREDIT RISK. The debt securities in a Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
investment grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
O Non-Investment Grade Securities. Non-Investment Grade securities are
sometimes referred to as junk bonds and are very risky with respect to
their issuers' ability to make payments of interest and principal. There
is a high risk that a Fund which invests in Non-Investment Grade
securities could suffer a loss caused by the default of an issuer of such
securities. Part of the reason for this high risk is that, in the event
of a default or bankruptcy, holders of Non-Investment Grade securities
generally will not receive payments until the holders of all other debt
have been paid. In addition, the market for Non-Investment Grade
securities has, in the past, had more frequent and larger price changes
than the markets for other securities. Non-Investment Grade securities
can also be more difficult to sell for good value.
FOREIGN INVESTING. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
O Emerging Markets Risk. Investments in a country that is still relatively
underdeveloped involves exposure to economic structures that are
generally less diverse and mature than in the U.S. and to political and
legal systems which may be less stable. In the past, markets of
developing countries have had more frequent and larger price changes than
those of developed countries.
O Political Risk. Political risk includes a greater potential for revolts,
and the taking of assets by governments. For example, a Fund may invest
in Eastern Europe and former states of the Soviet Union. These countries
were under communist systems that took control of private industry. This
could occur again in this region or others in which a Fund may invest, in
which case the Fund may lose all or part of its investment in that
country's issuers.
<PAGE> 34
THE FUNDS' MANAGEMENT
34
THE FUNDS' MANAGEMENT[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Investment Advisor
Touchstone Advisors, Inc., (the Advisor or Touchstone Advisors) located at 311
Pike Street, Cincinnati, Ohio 45202 is the investment advisor of the Funds.
Touchstone Advisors has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
June 30, 1998, Touchstone Advisors had $361 million in assets under management.
Touchstone Advisors is responsible for selecting Fund Sub-Advisors who have
shown good investment performance in their areas of expertise. The Board of
Trustees of the Trust reviews and must approve the Advisor's selections.
Touchstone considers various factors in evaluating Fund Sub-Advisors, including:
O Level of knowledge and skill
O Performance as compared to its peers or benchmark
O Consistency of performance over five years or more
O Level of compliance with investment rules and strategies
O Employees, facilities and financial strength
O Quality of service
Touchstone will also continually monitor each Fund Sub-Advisor's performance
through various analyses and through in-person, telephone and written
consultations with the Fund Sub-Advisors.
Touchstone discusses its expectations for performance with each Fund Sub-
Advisor. Touchstone provides written evaluations and recommendations to the
Board of Trustees, including whether or not each Fund Sub-Advisor's contract
should be renewed, modified or terminated.
Touchstone is also responsible for running all of the operations of the Funds,
except for those that are subcontracted to the Fund Sub-Advisors, custodian,
transfer agent and administrator.
Two or more Fund Sub-Advisors may manage a Fund, with each managing a portion of
the Fund's assets. If a Fund has more than one Fund Sub-Advisor, Touchstone
allocates how much of a Fund's assets are managed by each Sub-Advisor.
Touchstone may change these allocations from time to time, often based upon the
results of the evaluations of the Fund Sub-Advisors.
Each Fund pays Touchstone a fee for its services. Out of this fee Touchstone
pays each Fund Sub-Advisor a fee for its services.
<PAGE> 35
THE FUNDS' MANAGEMENT
35
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
The fee paid to Touchstone by each Fund for the year ended December 31, 1997 is
shown in the table below:
<TABLE>
<CAPTION>
FEE TO TOUCHSTONE
(AS % OF AVERAGE
DAILY NET ASSETS)
<S> <C> <C>
EMERGING GROWTH FUND 0.80%
- ----------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND 0.95%
- ----------------------------------------------------------------------------
INCOME OPPORTUNITY FUND 0.65%
- ----------------------------------------------------------------------------
VALUE PLUS FUND 0.75%
- ----------------------------------------------------------------------------
GROWTH & INCOME FUND 0.80%
- ----------------------------------------------------------------------------
BALANCED FUND 0.80%
- ----------------------------------------------------------------------------
BOND FUND 0.55%
- ----------------------------------------------------------------------------
STANDBY INCOME FUND 0.25%
- ----------------------------------------------------------------------------
</TABLE>
Fund Sub-Advisors
The Fund Sub-Advisors make the day-to-day decisions regarding buying and selling
specific securities for a Fund. Each Fund Sub-Advisor manages the investments
held by the Fund it serves according to the applicable investment goals and
strategies.
David L. Babson & Company, Inc. (Babson)
One Memorial Drive, Cambridge, MA 02142-1300
Fund Sub-Advisor to the Emerging Growth Fund
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 June 30, 1998, Babson and affiliates had assets
under management of $21.1 billion. Babson has been managing the Emerging Growth
Fund since the Fund's inception.
Dennis J. Scannell, Peter C. Schliemann and Lance F. James have primary
responsibility for the day-to-day management of the Fund. Mr. Scannell has been
with the firm since 1993, Mr. Schliemann has been with Babson since 1979, and
Mr. James has been with the firm since 1986.
Westfield Capital Management Company, Inc. (Westfield)
One Financial Center, Boston, MA 02111
Fund Sub-Advisor to the Emerging Growth Fund
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 June 30, 1998, Westfield had assets under
management of $1.5 billion. Westfield has been managing the Emerging Growth Fund
since the Fund's inception.
Michael J. Chapman has managed the portion of the Emerging Growth Fund's assets
allocated to Westfield by the Advisor since October 1994. Mr. Chapman (CFA) has
been with Westfield since 1990.
<PAGE> 36
THE FUNDS' MANAGEMENT
36
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
BEA Associates (BEA)
One Citicorp Center, 153 East 53rd Street, New York, NY 10022
Fund Sub-Advisor to the International Equity Fund
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 June 30, 1998, BEA had assets under management of $35.6 billion.
BEA has been managing the International Equity Fund since the Fund's inception.
The Fund is managed by the BEA International Equity Management Team. The team
consists of William Sterling, Richard Watt, Steven D. Bleiberg, Susan Boland,
Emily Alejos and Robert B. Hrabchak.
Alliance Capital Management L.P. (Alliance)
1345 Avenue of the Americas, New York, NY 10105
Fund Sub-Advisor to the Income Opportunity Fund
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 June 30, 1998, Alliance had assets under management
of $263 billion. Alliance has been managing the Income Opportunity Fund since
the Fund's inception.
Wayne Lyski and Vicki Fuller have primary responsibility for the day-to-day
management of the Fund. Mr. Lyski has been with Alliance since 1983. Ms. Fuller
(CPA) has been with Alliance, and its predecessors, since 1985.
Fort Washington Investment Advisors, Inc. (Fort Washington)
420 East Fourth Street, Cincinnati, OH 45202
Fund Sub-Advisor to the Value Plus Fund, Bond Fund, and Standby Income Fund
Fort Washington has been registered as an investment advisor under the Advisers
Act since 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of June 30, 1998, Fort Washington had
assets under management of $9.8 billion. Fort Washington has been managing the
Value Plus Fund, the Bond Fund and the Standby Income Fund since each Fund's
inception.
VALUE PLUS FUND: John C. Holden has managed the Value Plus Fund since May 1998.
Mr. Holden (CFA) joined 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.
BOND FUND: Roger Lanham and Brendan White have managed the Bond Fund since
October 1994. Mr. Lanham is a CFA and has been with Fort Washington since 1980.
Mr. White is a CFA and has been with Fort Washington since 1993.
<PAGE> 37
THE FUNDS' MANAGEMENT
37
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
STANDBY INCOME FUND: Christopher J. Mahony has managed the Standby Income Fund
since October 1994. Mr. Mahony joined Fort Washington in 1994 after eight years
of investment experience with Neuberger & Berman.
Fort Washington is an affiliate of Touchstone. Therefore, Touchstone may have a
conflict of interest when making decisions to keep Fort Washington as a Fund
Sub-Advisor. The Board of Trustees reviews all of Touchstone's decisions to
reduce the possibility of a conflict of interest situation.
Scudder Kemper Investments, Inc. (Scudder Kemper)
345 Park Avenue, New York, NY 10154
Fund Sub-Advisor to the Growth & Income Fund
Scudder Kemper and its predecessors have provided investment advisory services
to mutual fund investors, retirement and pension plans, institutional and
corporate clients, insurance companies, and private family and individual
accounts since 1943. As of June 30, 1998, Scudder Kemper had assets under
management of $235 billion. Scudder Kemper has been managing the Growth & Income
Fund since June 1997.
Robert T. Hoffman, Lori Ensinger, Benjamin W. Thorndike and Kathleen T. Millard
have primary responsibility for the day-to-day management of the Fund. Mr.
Hoffman, Lead Product Manager, joined Scudder in 1990. He has 13 years of
experience in the investment industry, including several years of pension fund
management experience. Lori Ensinger, Lead Portfolio Manager, focuses on stock
selection and investment strategy. She has been a portfolio manager since 1983
and joined Scudder in 1993. Benjamin W. Thorndike, Portfolio Manager, is the
Fund's chief analyst and strategist for convertible securities. Mr. Thorndike,
who has 18 years of investment experience, joined Scudder in 1983. Kathleen T.
Millard, Portfolio Manager, has worked as a portfolio manager since 1986. Ms.
Millard, who joined Scudder in 1991, focuses on strategy and stock selection.
OpCap Advisors (OpCap)
Oppenheimer Tower, One World Financial Center, New York, NY 10281
Fund Sub-Advisor to the Balanced Fund
OpCap is a subsidiary of Oppenheimer Capital. Oppenheimer Capital has been
registered as an investment advisor under the Advisers Act since 1968 and its
employees perform all investment advisory services provided to the Fund. As of
June 30, 1998, Oppenheimer Capital and its subsidiaries had assets under
management of $67.3 billion. OpCap has been managing the Balanced Fund since May
1997.
Alan Gutmann has managed the equity portion of the Balanced Fund since June
1997. Robert J. Bluestone and Matthew Greenwald have managed the fixed-income
portion of the Balanced Fund since June 1997. 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.
<PAGE> 38
INVESTING WITH TOUCHSTONE
38
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
INVESTING WITH TOUCHSTONE
Choosing the Appropriate Funds to Match Your Goals
Investing well requires a plan. We recommend that you meet with your financial
advisor to plan a strategy that will best meet your financial goals. Your
financial advisor can help you buy a Touchstone variable annuity contract that
would allow you to choose the Funds.
Purchasing Shares
You cannot buy shares of the Funds directly. You can invest indirectly in the
Funds through your purchase of a Touchstone variable annuity contract. You
should read this prospectus and the prospectus of the Touchstone variable
annuity contract carefully before you choose your investment options.
The Touchstone variable annuity contracts are issued by separate accounts of
Western-Southern Life Assurance Company. The separate accounts buy Fund shares
based on the instructions that they receive from the contract owners.
O Investor Alert: Touchstone may refuse any purchase order.
Selling Shares
To meet various obligations under the contracts, the separate accounts may sell
Fund shares to generate cash. For example, a separate account may sell Fund
shares and use the proceeds to pay a contract owner who requested a partial
withdrawal or who canceled a contract. Proceeds from the sale are usually sent
to the separate account on the next business day. The Fund may suspend sales of
shares or postpone payment dates when the New York Stock Exchange (NYSE) is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as otherwise permitted by the SEC.
Pricing of Fund Shares
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the NYSE is
open. The fund calculates the NAV per share, generally using market prices, by
dividing the total value of its net assets by the number of its shares
outstanding. Shares are purchased at the NAV next determined after a purchase or
sale order is received in proper form by Touchstone.
A Fund's investments are valued based on market value or, if no market value is
available, based on fair value as determined by the Board of Trustees (or under
their direction). All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. dollar values. Some specific pricing
strategies follow:
O All short-term dollar-denominated investments that mature in 60 days or
less are valued on the basis of amortized cost which the Board of
Trustees has determined represents fair value.
O Securities mainly traded on a U.S. exchange are valued at the last sale
price on that exchange or, if no sales occurred during the day, at the
current quoted bid price.
<PAGE> 39
INVESTING WITH TOUCHSTONE
39
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
O Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However, if
an event which may change the value of a security occurs after the time
that the closing value on the non-U.S. exchange was determined, the Board
of Trustees might decide to value the security based on fair value. This
may cause the value of the security on the books of the fund to be
significantly different from the closing value on the non-U.S. exchange
and may affect the calculation of NAV.
O Because portfolio securities that are primarily listed on non-U.S.
exchanges may trade on weekends or other days when a Fund does not price
its shares, a Fund's NAV may change on days when shareholders will not be
able to buy or sell shares.
<PAGE> 40
DISTRIBUTIONS AND TAXES
40
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
DISTRIBUTIONS AND TAXES
Dividends and Other Distributions
Each Touchstone Fund intends to distribute to its shareholders substantially all
of its income and capital gains. The table below outlines when dividends are
declared and paid for each Fund:
<TABLE>
<CAPTION>
DIVIDENDS DECLARED DIVIDENDS PAID
------------------ --------------
<S> <C> <C>
STANDBY INCOME FUND Daily Monthly
- ----------------------------------------------------------------------------
GROWTH & INCOME FUND Monthly Monthly
- ----------------------------------------------------------------------------
INCOME OPPORTUNITY FUND Monthly Monthly
- ----------------------------------------------------------------------------
BOND FUND Monthly Monthly
- ----------------------------------------------------------------------------
VALUE PLUS FUND Quarterly Quarterly
- ----------------------------------------------------------------------------
BALANCED FUND Quarterly Quarterly
- ----------------------------------------------------------------------------
EMERGING GROWTH FUND Annually Annually
- ----------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND Annually Annually
- ----------------------------------------------------------------------------
</TABLE>
Distributions of any net realized long-term and short-term capital gains earned
by a Fund will be made at least annually.
Tax Information
The type that appears in the side bars in the typeset document is enclosed in
Brackets "[" and "]" in the electronic file.
[***You should consult with your tax advisor to address your own tax
situation.]
Because you do not own shares of the Funds directly, your tax situation is not
likely to be affected by a Fund's distributions. The separate accounts in which
you own a variable annuity contract, as the owner of the Funds' shares, may be
affected.
Each Fund's distributions may be taxed as ordinary income or capital gains
(which may be taxable at different rates depending on the length of time the
Fund holds its assets). Each Fund's distributions may be subject to federal
income tax whether distributions are reinvested in Fund shares or received as
cash.
<PAGE> 41
FINANCIAL HIGHLIGHTS
41
FINANCIAL HIGHLIGHTS [ICON]TOUCHSTONE VARIABLE SERIES TRUST
These financial highlights tables are intended to help you
understand the Funds' financial performance for the past 5 years
or, if shorter, the period of a Fund's operations. Certain
information reflects financial results for a single Fund share.
The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, are included
in the Statement of Additional Information, which is available
upon request.
Touchstone Emerging Growth Fund
<TABLE>
<CAPTION>
12/31/94(a) 12/31/95 12/31/96 12/31/97 6/30/98
PERIOD ENDED (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $10.00 $10.10 $11.27 $ 12.20 $ 15.40
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------------------------------------------------------------------------
Net Investment Income 0.04 0.11 0.04 0.03 0.01
- -------------------------------------------------------------------------------------------------
Net Gains or Losses on
Securities (both realized and
unrealized) 0.06 1.87 1.22 4.06 0.87
- -------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.10 1.98 1.26 4.09 0.88
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Dividends (from net investment
income) -- (0.15) (0.04) (0.03) --
- -------------------------------------------------------------------------------------------------
Distributions (from capital
gains) -- (0.66) (0.29) (0.86) --
- -------------------------------------------------------------------------------------------------
Total Distributions -- (0.81) (0.33) (0.89) --
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.10 $11.27 $12.20 $ 15.40 $ 16.28
- -------------------------------------------------------------------------------------------------
Total Return (b) 1.00% 19.57% 11.16% 33.67% 5.71%
- -------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- -------------------------------------------------------------------------------------------------
Net Assets, End of Period
(000s) $2,020 $2,615 $5,771 $19,417 $28,837
- -------------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets 1.15% 1.15% 1.15% 1.15% 1.15%
- -------------------------------------------------------------------------------------------------
Ratio of Net Income to Average
Net Assets 3.67% 1.09% 0.50% 0.27% 0.19%
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 101% 89% 88% 32%
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 42
FINANCIAL HIGHLIGHTS
42
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Touchstone International Equity Fund
<TABLE>
<CAPTION>
12/31/94(a) 12/31/95 12/31/96 12/31/97 6/30/98
PERIOD ENDED (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $ 9.51 $10.00 $ 11.07 $ 12.01
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net Investment Income -- 0.04 0.06 0.07 0.13
- -------------------------------------------------------------------------------------------------------
Net Gains or Losses on Securities
(both realized and unrealized) (0.49) 0.48 1.08 1.56 2.70
- -------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.49) 0.52 1.14 1.63 2.83
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
Dividends (from net investment income) -- (0.03) (0.07) (0.05) 0.00
- -------------------------------------------------------------------------------------------------------
Distributions (from capital gains) -- -- -- (0.64) 0.00
- -------------------------------------------------------------------------------------------------------
Total Distributions -- (0.03) (0.07) (0.69) 0.00
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.51 $10.00 $11.07 $ 12.01 $ 14.84
- -------------------------------------------------------------------------------------------------------
Total Return (b) (4.90)% 15.45% 11.47% 14.76% 23.56%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period $4,757 $5,215 $8,758 $19,703 $32,202
- -------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net
Assets 1.25% 1.25% 1.25% 1.25% 1.25%
- -------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net
Assets 1.23% 0.46% 0.86% 0.71% 1.40%
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 0% 86% 90% 149% 53%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Touchstone Income Opportunity Fund
<TABLE>
<CAPTION>
12/31/94(A) 12/31/95 12/31/96 12/31/97 6/30/98
PERIOD ENDED (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $ 9.42 $10.09 $ 11.21 $ 11.02
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------
Net Investment Income 0.12 1.22 1.17 1.20 0.54
- -------------------------------------------------------------------------------------------------------
Net Gains or Losses on Securities
(both realized and unrealized) (0.70) 0.79 1.45 0.11 (0.42)
- -------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.58) 2.01 2.62 1.31 0.12
- -------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
Dividends (from net investment income) -- (1.34) (1.17) (1.19) (0.48)
- -------------------------------------------------------------------------------------------------------
Distributions (from capital gains) -- -- (0.33) (0.31) 0.00
- -------------------------------------------------------------------------------------------------------
Total Distributions -- (1.34) (1.50) (1.50) (0.48)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.42 $10.09 $11.21 $ 11.02 $ 10.66
- -------------------------------------------------------------------------------------------------------
Total Return (b) (5.80)% 23.35% 27.37% 12.03% 0.82%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $1,883 $2,602 $8,268 $26,879 $37,064
- -------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net
Assets 0.85% 0.85% 0.85% 0.85% 0.85%
- -------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net
Assets 11.24% 12.81% 11.85% 10.93% 10.14%
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 45% 104% 213% 189% 104%
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 43
FINANCIAL HIGHLIGHTS
43
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Touchstone Value Plus Fund
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
June 30, 1998(d)
(UNAUDITED)
<S> <C>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------
Net Investment Income 0.01
- ------------------------------------------------------------------------------------
Net Gains or Losses on Securities (both realized and
unrealized) (0.17)
- ------------------------------------------------------------------------------------
Total from Investment Operations (0.16)
- ------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------
Dividends (from net investment income) --
- ------------------------------------------------------------------------------------
Distributions (from capital gains) --
- ------------------------------------------------------------------------------------
Total Distributions --
- ------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.84
- ------------------------------------------------------------------------------------
Total Return (b) (1.60)%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- ------------------------------------------------------------------------------------
Net Assets, End of Period $1,800
- ------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.15%
- ------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.02%
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 3%
- ------------------------------------------------------------------------------------
</TABLE>
Touchstone Balanced Fund
<TABLE>
<CAPTION>
6/30/98
PERIOD ENDED 12/31/94(A) 12/31/95 12/31/96 12/31/97 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $10.17 $11.48 $ 12.84 $ 13.99
- --------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------
Net Investment Income 0.05 0.32 0.30 0.31 0.17
- --------------------------------------------------------------------------------------------------------
Net Gains or Losses on Securities (both
realized and unrealized) 0.12 2.15 1.60 2.05 0.87
- --------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.17 2.47 1.90 2.36 1.04
- --------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------------
Dividends (from net investment income) -- (0.37) (0.30) (0.32) (0.16)
- --------------------------------------------------------------------------------------------------------
Distributions (from capital gains) -- (0.79) (0.24) (0.89) 0.00
- --------------------------------------------------------------------------------------------------------
Total Distributions -- (1.16) (0.54) (1.21) (0.16)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.17 $11.48 $12.84 $ 13.99 $ 14.87
- --------------------------------------------------------------------------------------------------------
Total Return (b) 1.70% 24.56% 16.78% 18.61% 7.44%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period $2,034 $2,895 $6,695 $22,287 $35,960
- --------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 0.90% 0.90% 0.90% 0.90% 0.90%
- --------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 4.26% 2.87% 2.76% 2.61% 2.79%
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 3% 124% 75% 86% 16%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 44
FINANCIAL HIGHLIGHTS
44
[ICON]TOUCHSTONE VARIABLE SERIES TRUST
Touchstone Standby Income Fund
<TABLE>
<CAPTION>
6/30/98
PERIOD ENDED 12/31/94(a) 12/31/95 12/31/96 12/31/97 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $10.03 $10.02 $ 10.01 $ 10.00
- ----------------------------------------------------------------------------------------------------
Income From Investment Operations
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 0.05 0.56 0.52 0.54 0.27
- ----------------------------------------------------------------------------------------------------
Net Gains or Losses on Securities (both
realized and unrealized) 0.03 (0.01) (0.01) (0.01) 0.00
- ----------------------------------------------------------------------------------------------------
Total from Investment Operations 0.08 0.55 0.51 0.53 0.27
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Dividends (from net investment income) (0.05) (0.56) (0.52) (0.54) (0.27)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.03 $10.02 $10.01 $ 10.00 $ 10.00
- ----------------------------------------------------------------------------------------------------
Total Return (b) 0.30% 5.90% 5.18% 5.41% 2.71%
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA (c)
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Period $5,013 $5,790 $9,105 $17,562 $21,762
- ----------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 0.50% 0.50% 0.50% 0.50% 0.50%
- ----------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net
Assets 4.90% 5.59% 5.15% 5.42% 5.40%
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 56% 159% 143% 251% 245%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C>
(a) The Fund commenced operations on November 21, 1994.
(b) Total returns would have been lower had certain expenses not been reimbursed or waived
during the periods shown. Total return figures are not annualized.
(c) Ratios are annualized. Portfolio turnover is not annualized.
(d) The Fund commenced operations on May 1, 1998.
</TABLE>
<PAGE> 45
FOR MORE INFORMATION
45
FOR MORE INFORMATION [ICON]TOUCHSTONE VARIABLE SERIES TRUST
For investors who want more
information about the Funds, the
following documents are available
free upon request:
STATEMENT OF ADDITIONAL INFORMATION
(SAI): The SAI provides more
detailed information about the Funds
and is legally a part of this
prospectus.
ANNUAL/SEMI-ANNUAL REPORTS: The
Funds' annual and semi-annual
reports provide additional
information about the Funds'
investments. In each Fund's annual
report, you will find a discussion
of the market conditions and
investment strategies that
significantly affected the Fund's
performance during its last fiscal
year.
You can get free copies of the SAI,
the reports, other information and
answers to your questions about the
Funds by contacting your financial
advisor, or the Funds at:
Touchstone Variable Annuity
Service Center
400 Broadway
Cincinnati, Ohio 45202
800.669.2796 (Press 2)
http://www.touchstonefunds.com
You can view the Funds' SAI and the
reports at the Public Reference Room
of the Securities and Exchange
Commission.
For a fee, you can get text-only
copies by writing to the Public
Reference Room of the Commission,
450 Fifth Street N.W., Washington,
D.C. 20549-6009. You can also call
1.800.SEC.0330.
You can also view the SAI and the
reports free from the Commission's
Internet website at
http://www.sec.gov.
Investment Company Act file no. 811-8380.
TOUCHSTONE VARIABLE SERIES TRUST
O TOUCHSTONE EMERGING
GROWTH FUND
O TOUCHSTONE INTERNATIONAL
EQUITY FUND
O TOUCHSTONE INCOME
OPPORTUNITY FUND
O TOUCHSTONE VALUE
PLUS FUND
O TOUCHSTONE GROWTH &
INCOME FUND
O TOUCHSTONE BALANCED FUND
O TOUCHSTONE BOND FUND
O TOUCHSTONE STANDBY
INCOME FUND
<PAGE> 46
TOUCHSTONE VARIABLE SERIES TRUST
(formerly Select Advisors Variable Insurance Trust)
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Touchstone Balanced Fund
Touchstone Bond Fund
Touchstone Standby Income Fund
Statement of Additional Information
January 4, 1999
This Statement of Additional Information is not a Prospectus, but it relates to
the Prospectus of Touchstone Variable Series Trust dated January 4, 1999.
Financial statements are incorporated by reference into this Statement of
Additional Information from the Funds' most recent annual and semi-annual
reports.
You can get a free copy of the Prospectus of Touchstone Variable Series Trust or
the Funds' most recent annual and semi-annual reports, request other information
and discuss your questions about the Funds by contacting your financial advisor
or Touchstone at:
Touchstone Variable Annuity Service Center
311 Pike Street
Cincinnati, Ohio 45202
(800) 669-2796 (Press 2)
http://www.touchstonefunds.com
You can view the Funds' Prospectus as well as other reports at the Public
Reference Room of the Securities and Exchange Commission.
You can get text-only copies:
For a fee by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009. Telephone: 1-800-SEC-0330.
Free from the Commission's Internet website at http://www.sec.gov.
<PAGE> 47
TABLE OF CONTENTS
PAGE
The Trust and the Funds...................................................... 3
Description of the Funds and Their Investments and Risks..................... 4
Fund Policies................................................................ 26
Management of the Trust...................................................... 29
Investment Advisory and Other Services....................................... 31
Brokerage Allocation and Other Practices..................................... 35
Capital Stock and Other Securities........................................... 36
Purchase, Redemption and Pricing of Shares................................... 37
Taxation of the Funds........................................................ 38
Performance Information...................................................... 41
Financial Statements......................................................... 43
Appendix..................................................................... 44
2
<PAGE> 48
THE TRUST AND THE FUNDS
Touchstone Variable Series Trust (the "Trust") is composed of eight
funds: Emerging Growth Fund, International Equity Fund, Income Opportunity
Fund, Value Plus Fund, Growth & Income Fund, Balanced Fund, Bond Fund and
Standby Income Fund (each, a "Fund" and collectively, the "Funds"). Each Fund
is an open-end, diversified, management investment company. The Trust was
formed as a Massachusetts business trust on November 9, 1994.
Prior to January 1999, the Trust was called Select Advisors Variable
Insurance Trust and each Fund was referred to as a "Portfolio".
Touchstone Advisors, Inc. ("Touchstone" or the "Advisor") is the
investment advisor of each Fund. The specific investments of each Fund are
managed on a day-to-day basis by their respective portfolio advisors
(collectively, the "Fund Sub-Advisors"). Investors Bank & Trust Company
("Investors Bank" or the "Administrator") serves as administrator and fund
accounting agent to each Fund.
The Prospectus dated January 4, 1999, provides the basic information
investors should know before investing, and may be obtained without charge by
calling the Trust at the telephone number listed on the cover. 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 Fund for which an investor has not received a
Prospectus.
3
<PAGE> 49
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
INVESTMENT GOALS
The investment goal(s) of each Fund is described in the Prospectus. There
can be no assurance that any Fund will achieve its investment goal(s).
INVESTMENT STRATEGIES AND RISKS
The following provides additional information about the investment
policies and types of securities which may be invested in by one or more Funds.
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 Funds 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 Funds. The market value of the obligations held by a
Fund can be expected to vary inversely to changes in prevailing interest rates.
As a result, shareholders should anticipate that the market value of the
obligations held by the Fund 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 Fund's yield will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, a Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a Fund 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 Fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Fund 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 Standard & Poor's Rating Service ("S&P") and
Moody's Investor Service, Inc. ("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 Fund 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 "Additional Risks and Investment Techniques --
When-Issued and Delayed-Delivery Securities" below.
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.
4
<PAGE> 50
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 Fund Sub-Advisor's
research and credit analysis are an especially important part of managing
securities of this type held by a Fund. In light of these risks, the Board of
Trustees of the Trust has instructed the Fund Sub-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 Funds 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 Funds to purchase and may
also have the effect of limiting the ability of a Fund to sell securities at
their fair value either to meet redemption requests or to respond to changes in
the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund 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 Fund may decline relatively proportionately
more than a portfolio consisting of higher rated securities. If a Fund
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 Fund and increasing the exposure of the Fund 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 Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the Fund Sub-Advisor will consider this event in its determination of whether
the Fund should continue to hold the securities.
5
<PAGE> 51
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 Fund, the Fund Sub-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 Fund Sub-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.
A Fund 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 Fund.
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
6
<PAGE> 52
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 Fund Sub-Advisor will monitor the liquidity of Rule 144A securities
in each Fund's portfolio under the supervision of the Board of Trustees. In
reaching liquidity decisions, the Fund Sub-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).
RELATED INVESTMENT POLICIES
No Fund 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 Fund may not invest in illiquid
securities other than Rule 144A securities. If a security becomes illiquid after
purchase by the Fund, the Fund will normally sell the security unless to do so
would not be in the best interests of shareholders.
Each Fund 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
Fund's 15% limit on illiquid securities. The Board of Trustees of the Trust,
with advice and information from the respective Fund Sub-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 Fund Sub-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 Fund's illiquidity could be increased and the Fund could be adversely
affected.
No Fund will invest more than 10% of its total assets in restricted
securities (excluding Rule 144A securities).
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.
7
<PAGE> 53
EMERGING MARKET SECURITIES
Emerging Market Securities are securities that are issued by a company
that (i) is organized under the laws of an emerging market country (any country
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Holland, Italy, Japan, Luxembourg, New Zealand, Norway, Spain, Sweden,
Switzerland, the United Kingdom and the United States), (ii) has its principal
trading market for its stock in an emerging market country, or (iii) derives at
least 50% of its revenues or profits from corporations within emerging market
countries or has at least 50% of its assets located in emerging market
countries. 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 policies which may
restrict a Fund'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.
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 Funds'
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).
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 Fund 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
Fund's shareholders.
CURRENCY EXCHANGE RATES
A Fund's share value may change significantly when the currencies, other
than the U.S. dollar, in which the Fund'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.
8
<PAGE> 54
OPTIONS
OPTIONS ON SECURITIES
The respective Funds may write (sell), to a limited extent, only covered
call and put options ("covered options") in an attempt to increase income.
However, the Fund 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 Fund.
When a Fund 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 Fund 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 Fund has no control, the Fund must sell
the underlying security to the option holder at the exercise price. By writing a
covered call option, the Fund 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 Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund 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 Fund has no control, the Fund must purchase the underlying security from the
option holder at the exercise price. By writing a covered put option, the Fund,
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 Fund 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 Fund 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 Fund writes an option, an amount equal to the net premium received
by the Fund is included in the liability section of the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of 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 Fund
enters into a closing purchase transaction, the Fund 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 Fund 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.
When a Fund writes a call option, it will "cover" its obligation by
segregating the underlying security on the books of the Fund's custodian or by
placing liquid securities in a segregated account at the Fund's custodian. When
a Fund writes a put option, it will "cover" its obligation by placing liquid
securities in a segregated account at the Fund's custodian.
A Fund may purchase call and put options on any securities in which it may
invest. The Fund 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 Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities
9
<PAGE> 55
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 Fund 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 Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund'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 Fund's
portfolio securities. Put options also may be purchased by the Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. The Fund 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 Fund has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Fund'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 Fund 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
Fund 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 Fund Sub-Advisor will
monitor the creditworthiness of dealers with whom a Fund enters into such
options transactions under the general supervision of the Board of Trustees.
RELATED INVESTMENT POLICIES
Each Fund 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 Fund owns the underlying stock sold by the Fund
exposes the Fund 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 Fund exposes the Fund 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 Fund 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 Fund 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 Fund
10
<PAGE> 56
may make a "closing sale transaction" which involves liquidating the Fund's
position by selling the option previously purchased.
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
Fund generally will only purchase or write such an option if the Fund
Sub-Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless the Advisor
and the respective Fund Sub-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 Fund'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 Fund Sub-Advisor may be forced to liquidate portfolio
securities to meet settlement obligations.
When a Fund 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 Fund's custodian.
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.
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 Fund
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 Fund of options on security indexes will be subject to the Fund Sub-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.
11
<PAGE> 57
RELATED INVESTMENT POLICIES
Each Fund may purchase and write put and call options on securities
indexes listed on domestic and, in the case of those Funds 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.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Fund may invest in options on foreign stock indexes in lieu
of direct investment in foreign securities. The Fund may also use foreign stock
index options for hedging purposes.
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 Fund may purchase put options on the foreign currency. If the
value of the currency does decline, a Fund 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 Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund derived 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 Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging
purposes. For example, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the 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 Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund 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
Fund 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 Fund 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 Funds intend to write covered call options on foreign currencies.
A call option written on a foreign currency by a Fund is "covered" if the Fund
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price
12
<PAGE> 58
of the call written if the difference is maintained by the Fund in cash and
liquid securities in a segregated account with its custodian.
Certain Funds 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 Fund
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 Fund 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.
RELATED INVESTMENT POLICIES
Each Fund 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 Fund 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 Fund
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 Fund's position, it may
not forfeit the entire amount of the premium plus related transaction costs. In
addition, the Fund may purchase call options on currency when the Fund
Sub-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
Fund is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund 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 Fund 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 Fund pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. The Fund'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 Fund 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.
FORWARD CURRENCY CONTRACTS
Because, when investing in foreign securities, a Fund 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 Funds 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 Fund 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.
13
<PAGE> 59
A forward currency contract is an obligation by a Fund 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 Fund 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 Fund's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
A Fund 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 Fund Sub-Advisor's long-term
investment decisions, a Fund will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the Fund
Sub-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 Fund'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 Fund'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 Fund 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 Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject a Fund 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 Fund may not always be able to enter into forward
currency contracts at attractive prices and this will limit the Fund's ability
to use such contract to hedge or cross-hedge its assets. Also, with regard to a
Fund'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 Fund's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which the Fund's assets that are the subject of such cross-hedges are
denominated.
14
<PAGE> 60
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The successful use of such instruments draws upon the Fund Sub-Advisor's
skill and experience with respect to such instruments and usually depends on the
Fund Sub-Advisor's ability to forecast interest rate and currency exchange rate
movements correctly. Should interest or exchange rates move in an unexpected
manner, a Fund 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 Fund 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
Fund 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 Fund 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 Fund 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 Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund 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 Fund which holds or intends to acquire fixed-income securities, is to
attempt to protect the Fund 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 Fund
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 Fund. If interest rates did increase, the value of the
debt security in the Fund would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate,
15
<PAGE> 61
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. The Fund 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
Fund 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 Fund 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 Fund could then buy debt securities on the
cash market.
When a Fund enters into a futures contract for any purpose, the Fund will
establish a segregated account with the Fund's custodian to collateralize or
"cover" the Fund'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 Fund 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 Fund Sub-Advisor may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although each applicable Fund
Sub-Advisor believes that use of such contracts will benefit the respective
Fund, if the Fund Sub-Advisor's investment judgment about the general direction
of interest rates is incorrect, a Fund's overall performance would be poorer
than if it had not entered into any such contract. For example, if a Fund 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 Fund 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 Fund 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 Fund may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS
Each Fund 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
Fund 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.
16
<PAGE> 62
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 Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund'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 Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund 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 Fund'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 Fund 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 Fund 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 Fund 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 Fund and premiums paid on outstanding options on
futures contracts owned by the Fund would exceed 5% of the market value of the
total assets of the Fund.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by a Fund 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 Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
17
<PAGE> 63
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 Fund'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 Fund 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 Fund'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.
FUTURES CONTRACTS AND RELATED OPTIONS
Each Fund 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
agreement of the Fund Sub-Advisor that such contracts are necessary or
appropriate in the management of the Fund'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 Fund intends to purchase.
No Fund will hedge more than 25% of its total assets by selling futures,
buying puts, and writing calls under normal conditions. In addition, no Fund
will buy futures or write puts whose underlying value exceeds 25% of its total
assets, and no Fund will buy calls with a value exceeding 5% of its total
assets.
A Fund 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 Fund's assets after taking into account unrealized profits and unrealized
losses on any contracts it has entered into.
A Fund 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 Fund'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
18
<PAGE> 64
Fund Sub-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 Fund 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 Fund may not be
able to close a futures or options position without incurring a loss in the
event of adverse price movements.
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.
LENDING OF FUND SECURITIES
By lending its securities, a Fund 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 Fund
will adhere to the following conditions whenever its securities are loaned: (i)
the Fund 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 Fund must be able to terminate the
loan at any time; (iv) the Fund 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 Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; 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.
Each Fund may lend securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 30% of a Fund's
assets taken at value. A Fund's loans of securities will be collateralized by
cash, letters of credit or U.S. Government securities. The cash or instruments
collateralizing a Fund's loans of securities will be maintained at all times in
a segregated account with the Fund'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 Fund 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.
DERIVATIVES
The Funds 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
19
<PAGE> 65
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 Fund Sub-Advisor will use
derivatives only in circumstances where the Fund Sub-Advisor believes they offer
the most economic means of improving the risk/reward profile of the Fund.
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 Fund. The use of derivatives for non-hedging purposes
may be considered speculative. A description of the derivatives that the Funds
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 Funds. 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.
U.S. GOVERNMENT SECURITIES
Each Fund 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 Fund 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.
20
<PAGE> 66
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 Fund. 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 Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Fund 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 Fund'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 Fund
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 Fund 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 Fund
Sub-Advisor, the investment restriction limiting a Fund's investment in illiquid
instruments to not more than 15% of the value of its net assets will apply.
STRIPPED MORTGAGE-RELATED SECURITIES
These securities are either issued and guaranteed, or privately-issued but
collateralized by securities issued, by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage-related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Fund 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 Fund Sub-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 Fund.
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 Fund not fully recovering its initial
investment in an interest-only stripped mortgage-related security. Under current
market conditions, the Fund 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 Fund will be able to effect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Fund will
acquire stripped mortgage-related securities only if a secondary market for the
21
<PAGE> 67
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 Funds
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 Fund 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 Fund's distribution obligations, in which
case the Fund 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 Fund 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
Fund 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 Fund to supply additional cash to the
borrower on demand at the time when a Fund would not have otherwise done so,
even if the borrower's condition makes it unlikely that the amount will ever be
repaid.
These instruments will be considered illiquid securities and so will be
limited, along with a Fund's other illiquid securities, to not more than 15% of
the Fund's net assets.
SWAP AGREEMENTS
To help enhance the value of its portfolio or manage its exposure to
different types of investments, the Funds 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.
22
<PAGE> 68
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 Fund's
performance. Swap agreements involve risks depending upon the other party's
creditworthiness and ability to perform, as judged by the Fund Sub-Advisor, as
well as the Fund'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 Fund's other illiquid securities, to 15% of
that Fund'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 Fund is authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund 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 Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund 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 Fund 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 Fund 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 Fund may include securities purchased on a "when, as and if issued" basis
under which the issuance of the securities depends on the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose
a Fund to risk because the securities may experience fluctuations in value prior
to their actual delivery. The Fund 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
23
<PAGE> 69
Each of the Funds may engage in repurchase agreement transactions. Under
the terms of a typical repurchase agreement, a Fund 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 Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. A Fund 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 Fund Sub-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 Fund
enters into repurchase agreements. In entering into a repurchase agreement, a
Fund bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund 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 Fund 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 Funds may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Fund 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 Fund 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 Fund may
decline below the repurchase price of the securities. Reverse repurchase
agreements and forward roll transactions are considered to be borrowings by a
Fund for purposes of the limitations described in "Certain Investment
Restrictions" below and in the Trust's Statement of Additional Information.
TEMPORARY INVESTMENTS
For temporary defensive purposes during periods when the Fund Sub-Advisor
of a Fund believes, in consultation with the Advisor, that pursuing the Fund's
basic investment strategy may be inconsistent with the best interests of its
shareholders, the Fund 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 Fund Sub-Advisor of the
International Equity Fund 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 Fund Sub-Advisor to be of
equivalent quality. Each Fund 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.
24
<PAGE> 70
CONVERTIBLE SECURITIES
Convertible securities may offer higher income than the common stocks into
which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
REAL ESTATE INVESTMENT TRUSTS
The Growth & Income Fund may invest in REITs, which can generally be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which
invest the majority of their assets directly in real property, derive their
income primarily from rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs, which invest
the majority of their assets in real estate mortgages, derive their income
primarily from interest payments on real estate mortgages in which they are
invested. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs.
Investment in REITs is subject to risks similar to those associated with
the direct ownership of real estate (in addition to securities markets risks).
REITs are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRs")
The Growth & Income Fund may invest in SPDRs. SPDRs typically trade like a
share of common stock and provide investment results that generally correspond
to the price and yield performance of the component common stocks of the S&P 500
Index. There can be no assurance that this can be accomplished as it may not be
possible for the portfolio to replicate and maintain exactly the composition and
relative weightings of the S&P 500 Index securities. SPDRs are subject to the
risks of an investment in a broadly based portfolio of common stocks, including
the risk that the general level of stock prices may decline, thereby adversely
affecting the value of such investment.
ASSET COVERAGE
To assure that a Fund'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 Fund 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 Fund's commitment with respect to these
instruments or contracts.
25
<PAGE> 71
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 Fund
Sub-Advisor also makes its own evaluation of these securities, subject to review
by the Board of Trustees. After purchase by a Fund, an obligation may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event would require a Fund to eliminate the obligation from
its portfolio, but a Fund Sub-Advisor will consider such an event in its
determination of whether a Fund 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.
FUND POLICIES
The following investment restrictions are "fundamental policies" of each
Fund and may not be changed with respect to the Fund without the approval of a
"majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this Statement of Additional
Information and the Prospectus, means, the lesser of (i) 67% or more of the
outstanding voting securities of the Fund present at a meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding voting securities
of the Fund.
As a matter of fundamental policy, no Fund may:
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's net
assets, it may borrow money (including through reverse repurchase agreements,
forward roll transactions involving mortgage-backed securities or other
investment techniques entered into for the purpose of leverage), and except that
it may pledge, mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely for the
purpose of participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions, see clause
(i) under the caption "Additional Restrictions" below;
(2) underwrite securities issued by other persons except insofar as the
Funds may technically be deemed an underwriter under the 1933 Act in selling a
portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
(4)(a) (all Funds except the Growth & Income Fund) purchase or sell real
estate (including limited partnership interests but excluding securities secured
by real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Fund may hold and sell, for the
Fund's portfolio, real estate acquired as a result of the Fund's ownership of
securities);
(4)(b) (Growth & Income Fund only)
(i) purchase or sell real estate (except that (a) the Fund may invest in
(i) securities of entities that invest or deal in real estate, mortgages, or
interests therein and (ii) securities secured by real estate or interests
26
<PAGE> 72
therein and (b) the Fund may hold and sell real estate acquired as a result of
the Fund's ownership of securities.
(ii) purchase or sell interests in oil, gas or mineral leases, commodities
or commodity contracts (except futures and options contracts) in the ordinary
course of business.
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of a
Fund's investment objective(s), up to 25% of its total assets may be invested in
any one industry;
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its total assets taken at market value, invest
in assets other than cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies and other
securities for purposes of this calculation limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer.
ADDITIONAL RESTRICTIONS
Each Fund (or the Trust, on behalf of each Fund) 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 Fund may
borrow for temporary or emergency purposes up to 10% of its total assets;
provided, however, that no Fund may purchase any security while outstanding
borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the
Fund's total assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, and reverse repurchase agreements are not
considered a pledge of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except
that such short-term credit as may be necessary for the clearance of purchases
and sales of securities may be obtained and except that deposits of initial
deposit and variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its ownership
of other securities it has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission, or except when
such purchase, though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any investment company
will not be purchased for the
27
<PAGE> 73
Fund if such purchase at the time thereof would cause: (a) more than 10% of the
Fund's total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the Fund's total
assets (taken at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting securities of
any such issuer to be held for the Fund; provided further that, except in the
case of a merger or consolidation, the Fund shall not purchase any securities of
any open-end investment company unless the Fund (1) waives the investment
advisory fee with respect to assets invested in other open-end investment
companies and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 15% of the Fund's net assets (taken at the greater of
cost or market value) in securities that are illiquid or not readily marketable
(defined as a security that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
security) not including (a) Rule 144A securities that have been determined to be
liquid by the Board of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which is not traded flat or in default as to
interest or principal and either (i) is rated in one of the two highest
categories by at least two nationally recognized statistical rating
organizations and the Fund's Board of Trustees have determined the commercial
paper to be liquid; or (ii) is rated in one of the two highest categories by one
nationally recognized statistical rating agency and the Fund's Board of Trustees
have determined that the commercial paper is equivalent quality and is liquid;
(viii) invest more than 10% of the Fund's total assets in securities that are
restricted from being sold to the public without registration under the 1933 Act
(other than Rule 144A Securities deemed liquid by the Fund's Board of Trustees);
(ix) purchase securities of any issuer if such purchase at the time thereof
would cause the Fund to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be subject to this
restriction;
(x) make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue and equal in amount to, the
securities sold short, and unless not more than 10% of the Fund's net assets
(taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time (the Funds
have no current intention to engage in short selling);
(xi) purchase puts, calls, straddles, spreads and any combination thereof if by
reason thereof the value of the Fund'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 Fund 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
Fund's net assets; (c) the securities subject to the exercise of the call
written by the Fund must be owned by the Fund at the time the call is sold and
must continue to be owned by the Fund until the call has been exercised, has
lapsed, or the Fund has purchased a closing call, and such purchase has been
confirmed, thereby extinguishing the Fund's obligation to deliver securities
pursuant to the call it has sold; and (d) at the time a put is written, the Fund
establishes a segregated account with its custodian consisting of cash or liquid
securities equal in value to the amount the Fund will be obligated to pay upon
exercise of the put (this account must be maintained until the put is exercised,
has expired, or the Fund 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
28
<PAGE> 74
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 Fund'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 Fund's total
assets.
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.
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 Touchstone Series Trust (formerly named Select Advisors Trust A).
TRUSTEES OF THE TRUST
*EDWARD G. HARNESS, JR. (Born: 11/10/48) -- 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); Trustee of
Touchstone Series Trust.
*WILLIAM J. WILLIAMS (Born: 12/19/15) -- 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); Trustee of Touchstone Series Trust. His address is
400 Broadway, Cincinnati, OH 45202.
JOSEPH S. STERN, JR., (Born: 3/31/18) -- Trustee; Retired Professor
Emeritus, College of Business, University of Cincinnati; Trustee of Touchstone
Series Trust. His address is 3 Grandin Place, Cincinnati, OH 45208.
PHILLIP R. COX (Born: 11/24/47) -- 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; Trustee of Touchstone Series Trust. His address is 105 East
Fourth Street, Cincinnati, OH 45202.
ROBERT E. STAUTBERG (Born: 9/6/34) -- Trustee; Retired Partner and
Director, KPMG Peat Marwick; Chairman of the Board of Trustees, Good Samaritan
Hospital; Trustee of Touchstone Series Trust. His address is 4815 Drake Road,
Cincinnati, OH 45243.
DAVID POLLAK (Born: 10/28/17) -- Trustee; President, The Ultimate
Distributing Company (1986-1993); Director Emeritus, Fifth Third Bank; Trustee
of Touchstone Series Trust. His address is 1313 Kemper Road, Suite 111,
Cincinnati, OH 45246.
29
<PAGE> 75
OFFICERS OF THE TRUST
Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Fund.
JAMES J. VANCE (Born: 7/12/61) -- Treasurer; Treasurer, Western-Southern
Life Insurance Company (since January, 1994); Corporate Financing Manager,
Eastman Kodak Company (June, 1988 to December, 1993). His address is 400
Broadway, Cincinnati, OH 45202.
EDWARD S. HEENAN (Born: 12/13/43) - Controller; 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.
DAVID DENNISON (Born: 2/20/62) -- Assistant Treasurer; Vice President of
Administration, IFS Financial Services and Touchstone Securities, Inc. (since
August, 1994); Director of Strategic Marketing, Providian Capital Management
(January, 1993 to July, 1994).
ANDREW S. JOSEF (Born: 2/25/64) - 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 (Born: 1/29/55) -- Assistant Secretary; Director, Legal
Administration, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995). Her address
is 200 Clarendon Street, Boston, Massachusetts 02116.
TIMOTHY F. OSBORNE (Born: 12/3/66) -- Assistant Treasurer; Director,
Mutual Fund Administration, Investors Bank (since May, 1995); Account
Supervisor, Mutual Fund Administration, Chase Global Funds Services Company
(prior to May, 1995).
PAUL J. JASINSKI (Born: 2/17/47) -- 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, Osborne and Jasinski also hold similar
positions for Touchstone Series Trust and certain unaffiliated investment
companies for which Investors Bank serves as administrator.
No director, officer or employee of the Advisor, the Fund Sub-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 and
Touchstone Series Trust, (together, the "Fund Complex") pay, in the aggregate,
each Trustee who is not a director, officer or employee of the Advisor, the Fund
Sub-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.
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>
30
<PAGE> 76
As of September 30, 1998, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of any Fund or the Trust (all series
taken together).
CONTROL PERSONS
As of September 30, 1998, (i) Western-Southern Life Assurance Company, 400
Broadway, Cincinnati, Ohio 45202, an Ohio corporation ("WSLAC"), was the record
owner of 100% of the outstanding shares of the Emerging Growth Fund,
International Equity Fund, Balanced Fund, Income Opportunity Fund and Standby
Income Fund, respectively; (ii) Western-Southern was the record owner of 54.2%
of the outstanding shares of the Value Plus Fund, and (iii) Western and Southern
Life Insurance Company, 400 Broadway, Cincinnati, Ohio 45202, an Ohio
corporation ("WSLIC"), was record owner of 45.8% of the outstanding shares of
the Value Plus Fund. WSLAC is a wholly owned subsidiary of WSLIC. Because WSLAC
owns more than 50% of the outstanding shares of the above-named Funds, it may
take actions requiring a majority vote without the approval of any other
investor in such Funds.
INVESTMENT ADVISORY AND OTHER SERVICES
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 Funds. 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.
Touchstone Advisors provides service to each Fund pursuant to an
Investment Advisory Agreement with the Trust (the "Advisory Agreement"). The
services provided by the Advisor consist of directing and supervising each Fund
Sub-Advisor, reviewing and evaluating the performance of each Fund Sub-Advisor
and determining whether or not any Fund Sub-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.
The Advisory Agreement is terminable, with respect to a Fund 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 Fund, a majority vote
of the Fund'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 Funds, 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 Fund incurred the following investment
advisory fees equal on an annual basis to the following percentages of the
average daily net assets of each Fund.
31
<PAGE> 77
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Fund Fund Fund Balanced Fund Fund
<S> <C> <C> <C> <C> <C>
Rate 0.80% 0.95% 0.65% 0.80%* 0.25%
For the Year Ended December
31, 1997 $98,956 $135,300 $108,452 $103,999 $34,222
For the Year Ended December
31, 1996 $28,916 $62,256 $27,962 $29,360 $17,132
For the Year Ended $18,059 $45,830 $13,754 $16,874 $13,198
December 31, 1995
</TABLE>
- ----------
* Prior to May, 1997 the rate was 0.70%.
The Advisor has contractually agreed to reimburse each Fund for certain of
its fees and expenses as described in the Prospectus. For the periods indicated,
the Advisor reimbursed each Fund the following amounts:
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Fund Fund Fund Balanced Fund Fund
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1997 $102,973 $247,296 $110,959 $125,649 $107,078
For the Year Ended
December 31, 1996 $ 70,043 $103,586 $ 77,994 $ 68,161 $ 57,820
For the Year Ended
December 31, 1995 $ 53,734 $107,717 $ 52,598 $ 56,860 $ 54,343
</TABLE>
Pursuant to the Sponsor Agreement, the Sponsor has contractually agreed to
waive or reimburse certain fees and expenses of each Fund such that after such
waivers and reimbursements, the aggregate Operating Expenses of each Fund (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 Fund's expense cap (the "Expense Cap"). Each Fund's Expense
Cap is as follows: Value Plus Fund - 1.15%; Emerging Growth Fund - 1.15%;
International Equity Fund - 1.25%; Growth & Income Fund - 0.85%; Income
Opportunity Fund - 0.85%; Balanced Fund - 0.90%; Bond Fund - 0.75%; and Standby
Income Fund - 0.50%. An Expense Cap may be terminated with respect to a Fund
upon 30 days prior written notice by the Sponsor at the end of any calendar
quarter after December 31, 1999.
32
<PAGE> 78
FUND SUB-ADVISORS
The Advisor has, in turn, entered into a portfolio advisory agreement
(each, a "Fund Agreement") with each Fund Sub-Advisor selected by the Advisor
for a Fund. Under the direction of the Advisor and, ultimately, of the Board of
Trustees, each Fund Sub-Advisor is responsible for making all of the day-to-day
investment decisions for the respective Fund (or portion of a Fund).
Each Fund Sub-Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Fund
Agreement contains provisions similar to those described above with respect to
the Advisory Agreement.
The Advisor pays each Fund Sub-Advisor a fee for its services provided to
the Fund that is computed daily and paid monthly at an annual rate equal to the
percentage specified below of the value of the average daily net assets of the
Fund:
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
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 FUND
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
INCOME OPPORTUNITY FUND
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
VALUE PLUS FUND
- --------------------------------------------------------------------------------
Fort Washington Investment 0.45%
Advisors, Inc.
- --------------------------------------------------------------------------------
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
- --------------------------------------------------------------------------------
BALANCED FUND
- --------------------------------------------------------------------------------
OpCap Advisors 0.60% on the first $20 million
0.50% on the next $30 million
0.40% thereafter
- --------------------------------------------------------------------------------
BOND FUND
- --------------------------------------------------------------------------------
Fort Washington Investment 0.30%
Advisors, Inc.
- --------------------------------------------------------------------------------
STANDBY INCOME FUND
- --------------------------------------------------------------------------------
Fort Washington Investment 0.15%
Advisors, Inc.
- --------------------------------------------------------------------------------
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.
33
<PAGE> 79
As administrator and fund accounting agent, Investors Bank provides, on
behalf of the Trust and its Funds, 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 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 Funds for
which Investors Bank acts as custodian up to $500 million and 0.02% on an annual
basis of such average daily net assets for the next $500 million and 0.01% on an
annual basis of such average daily net assets which exceed $1 billion. As
compensation for its services as transfer agent, each Fund pays Investors Bank
$5,000 annually.
Prior to December 1, 1996, Signature Financial Services, Inc.
("Signature") served as administrator and fund accounting agent to the Trust.
The Funds incurred the following administration and fund accounting fees
for the periods indicated:
<TABLE>
<CAPTION>
Emerging Growth International Equity Income Opportunity Standby Income
Fund Fund Fund Balanced Fund Fund
<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 $ 27,265 $ 29,793 $ 27,061
12/31/96*
For the Year Ended $ 28,035 $ 33,909 $ 27,169 $ 30,059 $ 28,485
12/31/95
</TABLE>
- ----------
* Includes administrative and fund accounting fees paid to Signature Financial
Services, Inc. and to Investors Bank & 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 Fund, without penalty by majority vote of the shareholders of the Fund 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 Fund.
PricewaterhouseCoopers LLP, One Post Office Square, Boston,
34
<PAGE> 80
Massachusetts 02109, acts as independent accountants of the Trust and each Fund,
providing audit services, tax return review and assistance and consultation
in connection with the review of filings with the SEC.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS
The Fund Sub-Advisors are responsible for decisions to buy and sell
securities, futures contracts and options on such securities and futures for
each Fund, 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 Fund
Sub-Advisors or their subsidiaries or affiliates. Purchases and sales of certain
portfolio securities on behalf of a Fund are frequently placed by the Fund
Sub-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
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as market-makers reflect the spread between the bid and asked
prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Fund Sub-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 Fund to
reported commissions paid by others. In placing orders for the purchase and sale
of securities for a Fund, the Fund Sub-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 Fund Sub-Advisors review on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Fund Sub-Advisors are authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for a Fund 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 Fund Sub-Advisor may use this research
information in managing a Fund'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 Fund Sub-Advisors may consider sales of
shares of the Trust or the Funds as a factor in the selection of broker-dealers
to execute portfolio transactions. The Fund Sub-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 Fund and to the corresponding Fund Sub-Advisor,
it is the opinion of the management of the Funds that such information is only
supplementary to the Fund Sub-Advisor's own research effort, since the
information must still be analyzed, weighed and reviewed by the Fund
Sub-Advisor's staff. Such information may be
35
<PAGE> 81
useful to the Fund Sub-Advisor in providing services to clients other than the
Funds, and not all such information is used by the Fund Sub-Advisor in
connection with the Funds. Conversely, such information provided to the Fund
Sub-Advisor by brokers and dealers through whom other clients of the Fund
Sub-Advisor effect securities transactions may be useful to the Fund Sub-Advisor
in providing services to the Funds.
In certain instances there may be securities which are suitable for a Fund
as well as for one or more of the respective Fund Sub-Advisor's other clients.
Investment decisions for a Fund and for the Fund Sub-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 Fund is concerned.
However, it is believed that the ability of a Fund to participate in volume
transactions will produce better executions for the Fund.
COMMISSIONS
The Funds paid the following brokerage commissions for the periods
indicated:
<TABLE>
<CAPTION>
Aggregate Emerging Growth International Equity Income Opportunity Standby Income
Commission Fund Fund Fund Balanced Fund Fund
<S> <C> <C> <C> <C> <C>
For the Year Ended $ 31,847 $108,088 $ 0 $ 34,791 $ 0
12/31/97
For the Year Ended $ 8,834 $ 37,164 $ 0 $ 5,732 $ 0
12/31/96
For the Year Ended $ 2,204 $ 15,378 $ 0 $ 2,043 $ 0
12/31/95
</TABLE>e
CAPITAL STOCK AND OTHER SECURITIES
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by the Trust, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
36
<PAGE> 82
PURCHASE, REDEMPTION AND PRICING OF SHARES
OFFERING PRICE
Shares of the Funds are offered at Net Asset Value.
VALUATION OF SECURITIES
The value of each security for which readily available market quotations
exist 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 value.
The accounting records of the Funds 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 Fund purchases securities which are restricted as
to resale or for which current market quotations are not available, the Fund
Sub-Advisor will value such securities based upon all relevant factors as
outlined in FRR 1.
REDEMPTION IN KIND
Each Fund 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 Fund's net asset value (a
37
<PAGE> 83
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 Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act as a result of which each Fund is obligated to redeem shares or with
respect to any one investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of
the period.
TAXATION OF THE FUNDS
The Trust intends to qualify annually and to elect each Fund to be treated
as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of: (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year; (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year; and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December with a record date in
38
<PAGE> 84
such a month and paid by the Fund during January of the following calendar year.
Such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
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 Fund's assets to be
invested in various countries will vary.
If a Fund is liable for foreign taxes, and if more than 50% of the value
of the Fund'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 Fund. 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 Fund'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 Fund 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.
FOREIGN INCOME TAXES: Net income or capital gains earned by any Fund investing
in foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced tax rate or even a tax exemption
on related income and gains. It is impossible to determine the effective rate of
foreign tax in advance since the amount of these Funds' assets to be invested
within various countries is not known. Plus, a Fund may elect to treat foreign
income taxes as income taxes paid by its shareholders for U.S. federal income
tax purposes, under U.S. federal income tax principals, if a Fund meets certain
requirements. These requirements of a Fund include:
- qualification as a regulated investment company;
- satisfaction of certain distribution requirements; and
- more than 50% of the value of that Fund's assets at the close of the
taxable year must consist of stocks or securities of foreign
corporations.
If a Fund makes this election, an amount equal to the foreign income taxes paid
by the Fund would be included in the income of its shareholders. The
shareholders would then be allowed to credit their portions of this amount
against their U.S. tax liabilities, if any, or to deduct it from their U.S.
taxable income, if any. Shortly after any year for which it makes this election,
a Fund will report to its shareholders, in writing, the amount per share of
foreign tax that must be included in each shareholder's gross income and the
amount which will be available for deduction or credit.
INTERNATIONAL EQUITY FUND: The International Equity Fund is expected to qualify
for and make this election in most of its taxable years (but not necessarily
all).
39
<PAGE> 85
- SPECIAL TAX CONSIDERATION: 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.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions of net capital
gains, if any, designated as capital gain dividends are taxable as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares, and are not eligible for the dividends-received deduction. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the net asset value
of a share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. federal tax status of distributions.
FOREIGN WITHHOLDING TAXES
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
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 Fund intends to
comply with these requirements.
40
<PAGE> 86
PERFORMANCE INFORMATION
From time to time, quotations of a Fund'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 Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period, and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. Income is calculated
for purposes of yield quotations in accordance with standardized methods
applicable to all stock and bond mutual funds. Dividends from equity investments
are treated as if they were accrued on a daily basis, solely for the purpose of
yield calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to bonds
trading at a discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the calculation.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions of the Fund paid over the same period or the rate of income
reported in the Fund's financial statements. For the 30-day period ended
December 31, 1997, the Fund's yields were as follows: Income Opportunity Fund
11.09%, Balanced Fund 2.57%, Standby Income Fund 5.46%.
The Standby Income Fund's 7-day yield for the period ended December 31,
1997 was 6.13%.
TOTAL RETURN:
A Fund's standardized average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end of
the periods. A Fund may also calculate non-standardized total return figures
which represent aggregate (not annualized) performance over any period or
year-by-year performance.
<TABLE>
<CAPTION>
AVERAGE Emerging Growth International Equity Income Opportunity Standby Income
ANNUAL Fund Fund Fund Balanced Fund Fund
TOTAL RETURN
<S> <C> <C> <C> <C> <C>
For the Year Ended
12/31/97 33.67% 14.76% 12.03% 18.61% 5.41%
For the Period 11/21/94* to 20.67% 8.33% 17.68% 19.80% 5.49%
12/31/97
AGGREGATE
TOTAL RETURN
For the Year Ended
12/31/97 33.67% 14.76% 12.03% 18.61% 5.41%
For the Period 11/21/94* to 79.45% 28.27% 65.96% 75.46% 18.09%
12/31/97
</TABLE>
- ----------
* Commencement of operations
41
<PAGE> 87
Any total return quotation provided for a Fund should not be considered as
representative of the performance of the Fund in the future since the net
asset value of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund, but also on
changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the
methods used to calculate total return should be considered when comparing
the total return of a Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services, to the performance of
various indices and investments for which reliable performance data is
available. The performance figures of unmanaged indices may assume reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs. The performance of the Funds may also be compared to averages,
performance rankings, or other information prepared by recognized mutual fund
statistical services. Evaluations of a Fund's performance made by independent
sources may also be used in advertisements concerning the Fund. Sources for a
Fund's performance information could include Asian Wall Street Journal,
Barron's, Business Week, Changing Times, The Kiplinger Magazine, Consumer
Digest, Financial Times, Financial World, Forbes, Fortune, Global Investor,
Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Money, The New York Times, Personal Investing News, Personal Investor,
Success, U.S. News and World Report, The Wall Street Journal and
CDA/Weisenberger Investment Companies Services.
42
<PAGE> 88
FINANCIAL STATEMENTS
The following financial statements for the Trust at and for the fiscal
periods indicated are incorporated herein by reference from their current
semi-annual and annual 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.
TOUCHTONE VARIABLE SERIES TRUST (other than the Bond Fund and the Growth &
Income Fund)
Schedule of Investments, June 30, 1998
Statement of Assets and Liabilities, June 30, 1998
Statement of Operations, for the year ended June 30, 1998
Statement of Changes in Net Assets for the periods ended June 30, 1998 and
June 30, 1997
Financial Highlights
Notes to Financial Statements
Touchtone Variable Series Trust (other than the Value Plus Fund, the Bond
Fund and the Growth & Income Fund)
Schedule of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations, for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997
and December 31, 1996
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
43
<PAGE> 89
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
MOODY'S BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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:
44
<PAGE> 90
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the 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
45
<PAGE> 91
following characteristics: Liquidity ratios are better than industry average.
Long-term debt rating is A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow are in an upward
trend. Typically, the issuer is a strong company in a well-established industry
and has superior management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics 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.
46
<PAGE> 92
TOUCHSTONE VARIABLE SERIES TRUST
- TOUCHSTONE EMERGING GROWTH FUND
- TOUCHSTONE INTERNATIONAL EQUITY FUND
- TOUCHSTONE INCOME OPPORTUNITY FUND
- TOUCHSTONE VALUE PLUS FUND
- TOUCHSTONE GROWTH & INCOME FUND
INVESTMENT ADVISOR - TOUCHSTONE BALANCED FUND
- TOUCHSTONE BOND FUND
Touchstone Advisors, Inc. - TOUCHSTONE STANDBY INCOME FUND
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 JANUARY 4, 1999
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
47
<PAGE> 93
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS:
(a1) Amended Declaration of Trust of the Trust.(1)
(a2) Amendment to the Amended Declaration of Trust of the Trust.(3)
(a3) Form of Amendment No. 5 to Amended Declaration of Trust of the Trust.(6)
(b) Amended By-Laws of the Trust.(1)
(c) Inapplicable.
(d1) Form of Amended and Restated Investment Advisory Agreement.(7)
(d2) Form of Amended and Restated Sub-Advisory Agreement with respect to Value
Plus Fund.(7)
(d3) Form of Amended and Restated Sub-Advisory Agreement with respect to
Emerging Growth Fund (David L. Babson & Company, Inc.).(7)
(d4) Form of Amended and Restated Sub-Advisory Agreement with respect to
International Equity Fund.(7)
(d5) Form of Amended and Restated Sub-Advisory Agreement with respect to
Balanced Fund.(7)
(d6) Form of Amended and Restated Sub-Advisory Agreement with respect to Income
Opportunity Fund.(7)
(d7) Form of Amended and Restated Sub-Advisory Agreement with respect to
Standby Income Fund.(7)
(d8) Form of Sub-Advisory Agreement with respect to the Bond Fund. (7)
(d9) Form of Sub-Advisory Agreement with respect to the Growth & Income
Fund. (7)
(d10) Form of Amended and Restated Sub-Advisory Agreement with respect to
Emerging Growth Fund (Westfield Capital Management).(7)
<PAGE> 94
(e) Inapplicable.
(f) Inapplicable.
(g) Custodian Agreement.(5)
(h1) Administration Agreement.(2)
(h2) Sponsor Agreement.(5)
(h3) Transfer Agency Agreement.(2)
(h4) Fund Accounting Agreement.(2)
(i1) Opinion of counsel.(5)
(i2) Opinion of counsel regarding Growth & Income Fund and Bond Fund by Bingham
Dana, LLP.(7)
(i3) Opinion of counsel regarding Value Plus Fund by Bingham Dana, LLP.(7)
(j) Consent of independent accountants.(6)
(k) Inapplicable.
(l) Investment letter of initial shareholders.(5)
(m) Inapplicable.
(n) Financial Data Schedules.(6)
(o) Inapplicable.
(1) Incorporated by reference from Post-Effective Amendment No. 2 to the
Registration Statement as filed with the SEC via Edgar on April 29, 1996.
(2) Incorporated by reference from Post-Effective Amendment No. 3 to the
Registration Statement as filed with the SEC via Edgar on February 28,
1997.
(3) Incorporated by reference from Post-Effective Amendment No. 5 to the
Registration Statement as filed with the SEC via Edgar on February 13,
1998.
(4) Incorporated by reference from Post-Effective Amendment No. 6 to the
Registration Statement as filed with the SEC via Edgar on April 28, 1998.
(5) Incorporated by reference from Post-Effective Amendment No. 7 to the
Registration Statement as filed with the SEC via Edgar on July 30, 1998.
(6) Incorporated by reference from Post-Effective Amendment No. 8 to the
Registration Statement as filed with the SEC via Edgar on October 20,
1998.
(7) Filed herein.
(8) To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST.
Inapplicable.
<PAGE> 95
ITEM 25. 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
<PAGE> 96
shall deem advisable. (d) The rights of indemnification herein provided shall be
severable, shall not affect any other rights to which any Trustee or officer may
now or hereafter be entitled, shall continue as to a Person who has ceased to be
such a Trustee or officer and shall inure to the benefit of the heirs, executors
and administrators of such Person. Nothing contained herein shall affect any
rights to indemnification to which personnel other than Trustees and officers
may be entitled by contract or otherwise under law. (e) Expenses of preparation
and presentation of a defense to any claim, action, suit, or proceeding of the
character described in paragraph (a) of this Section 5.3 shall be advanced by
the Trust prior to final disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if it is ultimately
determined that he is not entitled to indemnification under this Section 5.3,
provided that either: (I) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured against losses arising
out of any such advances; or (ii) a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter) or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification. As used in this
Section 5.3 a "Disinterested Trustee" is one (i) who is not an "Interested
Person" of the Trust (including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the Commission), and
(ii) against whom none of such actions, suits or other proceedings or another
action, suit or other proceeding on the same or similar grounds is then or had
been pending. As used in this Section 5.3, the term "independent legal counsel"
means an attorney who is independent in all respects from the Trust and from the
person or persons who seek indemnification hereunder and in any event means an
attorney who has not been retained by or performed services for the Trust or any
person to be so indemnified within the five years prior to the Initial request
for indemnification pursuant hereto.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to Trustees, officers and
controlling persons of the Trust pursuant to the foregoing provisions, or
otherwise, the Trust has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Trust of expenses incurred or paid by a Trustee, officer
or controlling person of the Trust in the successful defense of any action, suit
or proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Trust will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
<PAGE> 97
ITEM 26. 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.
POSITIONS AND OFFICES
WITH TOUCHSTONE POSITION AND OFFICES
NAME ADVISERS WITH THE REGISTRANT
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
Robert A. Dressman* Assistant Treasurer none
Timothy D. Speed* Assistant Treasurer none
*Principal business address is 400 Broadway, Cincinnati, Ohio 45202
ITEM 27. PRINCIPAL UNDERWRITERS.
Inapplicable.
<PAGE> 98
Item 28. 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 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant 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 30th day of December, 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 December 30, 1998.
SIGNATURE TITLE
/s/ EDWARD G. HARNESS, JR. President and Trustee (Principal
- ------------------------------- Executive Officer)
Edward G. Harness, Jr.
/s/ WILLIAM J. WILLIAMS Trustee
- -------------------------------
William J. Williams
Trustee
- -------------------------------
Joseph S. Stern, Jr.
/s/ PHILLIP R. COX Trustee
- -------------------------------
Phillip R. Cox
/s/ ROBERT E. STAUTBERG Trustee
- -------------------------------
Robert E. Stautberg
/s/ DAVID POLLAK Trustee
- -------------------------------
David Pollak
/s/ JAMES J. VANCE Treasurer (Principal Financial
- ------------------------------- Officer and Principal Accounting
James J. Vance Officer)
<PAGE> 100
SELECT ADVISORS VARIABLE INSURANCE TRUST
EXHIBITS TO
REGISTRATION STATEMENT ON
FORM N-1A
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(d1) Form of Amended and Restated Investment Advisory Agreement.
(d2) Form of Amended and Restated Sub-Advisory Agreement with respect
to Value Plus Fund.
(d3) Form of Amended and Restated Sub-Advisory Agreement with respect
to Emerging Growth Fund (David L. Babson & Company, Inc.).
(d4) Form of Amended and Restated Sub-Advisory Agreement with respect
to International Equity Fund.
(d5) Form of Amended and Restated Sub-Advisory Agreement with respect
to Balanced Fund.
(d6) Form of Amended and Restated Sub-Advisory Agreement with respect
to Income Opportunity Fund.
(d7) Form of Amended and Restated Sub-Advisory Agreement with respect
to Standby Income Fund.
(d8) Form of Sub-Advisory Agreement with respect to the Bond Fund.
(d9) Form of Sub-Advisory Agreement with respect to the Growth &
Income Fund.
(d10) Form of Amended and Restated Sub-Advisory Agreement with respect
to Emerging Growth Fund (Westfield Capital Management).
(i2) Opinion of Counsel regarding Growth & Income Fund and Bond Fund by
Bingham Dana, LLP.
(i3) Opinion of Counsel regarding Value Plus Fund by Bingham Dana, LLP.
<PAGE> 1
Exhibit (d1)
INVESTMENT ADVISORY AGREEMENT
TOUCHSTONE VARIABLE SERIES TRUST
INVESTMENT ADVISORY AGREEMENT, dated as of January 1, 1999, by and between
TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and TOUCHSTONE
VARIABLE SERIES TRUST (formerly Select Advisors Variable Insurance Trust) a
Massachusetts business trust created pursuant to a Declaration of Trust dated
February 7, 1994, as amended from time to time (the "Trust").
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended, (the
"1940 Act"); and
WHEREAS, shares of beneficial interest in the Trust are divided into
separate series (each, along with any series which may in the future be
established, a "Fund"); and
WHEREAS, the Trust desires to avail itself of the services,
information, advice, assistance and facilities of an investment advisor and to
have an investment advisor perform for it various investment advisory and
research services and other management services; and
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and desires to provide investment
advisory services to the Trust;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE ADVISOR. The Trust hereby employs the Advisor to
manage the investment and reinvestment of the assets of each Fund subject to the
control and direction of the Trust's Board of Trustees, for the period on the
terms hereinafter set forth. The Advisor hereby accepts such employment and
agrees during such period to render the services and to assume the obligations
herein set forth for the compensation herein provided. The Advisor shall for all
purposes herein be deemed to be independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISOR. In
providing the services and assuming the obligations set forth herein, the
Advisor may, at its expense, employ one or more subadvisors for any Fund. Any
agreement between the Advisor and a subadvisor shall be subject to the renewal,
termination and
<PAGE> 2
amendment provisions of paragraph 10 hereof. The Advisor undertakes to provide
the following services and to assume the following obligations:
a) The Advisor will manage the investment and
reinvestment of the assets of each Fund, subject to
and in accordance with the respective investment
objectives and policies of each Fund and any
directions which the Trust's Board of Trustees may
issue from time to time. In pursuance of the
foregoing, the Advisor may engage separate investment
advisors ("Sub-Advisor(s)") to make all
determinations with respect to the investment of the
assets of each Fund, to effect the purchase and sale
of portfolio securities and to take such steps as may
be necessary to implement the same. Such
determination and services by each Sub-Advisor shall
also include determining the manner in which voting
rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities
shall be exercised. The Advisor shall, and shall
cause each Sub-Advisor to, render regular reports to
the Trust's Board of Trustees concerning the Trust's
and each Fund's investment activities.
b) The Advisor shall, or shall cause the respective
Sub-Advisor(s) to place orders for the execution of
all portfolio transactions, in the name of the
respective Fund and in accordance with the policies
with respect thereto set forth in the Trust's
registration statements under the 1940 Act and the
Securities Act of 1933, as such registration
statements may be amended from time to time. In
connection with the placement of orders for the
execution of portfolio transactions, the Advisor
shall create and maintain (or cause the Sub-Advisors
to create and maintain) all necessary brokerage
records for each Fund, which records shall comply
with all applicable laws, rules and regulations,
including but not limited to records required by
Section 31(a) of the 1940 Act. All records shall be
the property of the Trust and shall be available for
inspection and use by the Securities and Exchange
Commission (the "SEC"), the Trust or any person
retained by the Trust. Where applicable, such records
shall be maintained by the Advisor (or Sub-Advisor)
for the periods and in the places required by Rule
31a-2 under the 1940 Act.
c) In the event of any reorganization or other change in
the Advisor, its investment principals, supervisors
or members of its investment (or comparable)
committee, the Advisor shall give the Trust's Board
of Trustees written notice of such reorganization or
change within a reasonable time (but not later than
30 days) after such reorganization or change.
2
<PAGE> 3
d) The Advisor shall bear its expenses of providing
services to the Trust pursuant to this Agreement
except such expenses as are undertaken by the Trust.
In addition, the Advisor shall pay the salaries and
fees, if any, of all Trustees, officers and employees
of the Trust who are affiliated persons, as defined
in Section 2(a)(3) of the 1940 Act, of the Advisor.
e) The Advisor will manage, or will cause the
Sub-Advisors to manage, the Fund assets and the
investment and reinvestment of such assets so as to
comply with the provisions of the 1940 Act and with
Subchapter M of the Internal Revenue Code of 1986, as
amended.
3. EXPENSES. The Trust shall pay the expenses of its operation,
including but not limited to (i) charges and expenses for Trust accounting,
pricing and appraisal services and related overhead; (ii) the charges and
expenses of the Trust's auditors; (iii) the charges and expenses of any
custodian, transfer agent, plan agent, dividend disbursing agent and registrar
appointed by the Trust with respect to the Funds; (iv) brokers' commissions, and
issue and transfer taxes, chargeable to the Trust in connection with securities
transactions to which the Trust is a party; (v) insurance premiums, interest
charges, dues and fees for Trust membership in trade associations and all taxes
and fees payable by the Trust to federal, state or other governmental agencies;
(vi) fees and expenses involved in registering and maintaining registrations of
the Trust and/or shares of the Trust with the SEC, state or blue sky securities
agencies and foreign countries, including the preparation of Prospectuses and
Statements of Additional Information for filing with the SEC; (vii) all expenses
of meetings of Trustees and of shareholders of the Trust and of preparing,
printing and distributing prospectuses, notices, proxy statements and all
reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; (x) the cost of preparing and printing share certificates; and (xi)
interest on borrowed money, if any.
4. COMPENSATION OF THE ADVISOR.
a) As compensation for the services rendered and
obligations assumed hereunder by the Advisor, the
Trust shall pay to the Advisor monthly a fee that is
equal on an annual basis to that percentage of the
average daily net assets of each Fund set forth on
Schedule 1 attached hereto (and with respect to any
future Fund, such percentage as the Trust and the
Advisor may agree to from time to time). Such fee
shall be computed and accrued daily. If the Advisor
serves as investment advisor for less than the whole
of any period specified in this Section 4a, the
compensation to the Advisor shall be prorated. For
purposes of calculating the
3
<PAGE> 4
Advisor's fee, the daily value of each Fund's net
assets shall be computed by the same method as the
Trust uses to compute the net asset value of that
Fund.
b) The Advisor will pay all fees owing to each
Sub-Advisor, and the Trust shall not be obligated to
the Sub-Advisors in any manner with respect to the
compensation of such Sub-Advisors.
c) The Advisor reserves the right to waive all or a part
of its fee.
5. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the Trust
hereunder are not to be deemed exclusive, and the Advisor shall be free to
render similar services to others. It is understood that the Trustees and
officers of the Trust are or may become interested in the Advisor as
stockholders, officers or otherwise, and that stockholders and officers of the
Advisor are or may become similarly interested in the Trust, and that the
Advisor may become interested in the Trust as a shareholder or otherwise.
6. USE OF NAMES. The Trust will not use the name of the Advisor in any
prospectus, sales literature or other material relating to the Trust in any
manner not approved prior thereto by the Advisor; except that the Trust may use
such name in any document which merely refers in accurate terms to its
appointment hereunder or in any situation which is required by the SEC or a
state securities commission; and provided further, that in no event shall such
approval be unreasonably withheld. The Advisor will not use the name of the
Trust in any material relating to the Advisor in any manner not approved prior
thereto by the Trust; except that the Advisor may use such name in any document
which merely refers in accurate terms to the appointment of the Advisor
hereunder or in any situation which is required by the SEC or a state securities
commission. In all other cases, the parties may use such names to the extent
that the use is approved by the party named, it being agreed that in no event
shall such approval be unreasonably withheld.
The Trustees of the Trust acknowledge that, in consideration
of the Advisor's assumption of certain organization expenses of the Trust and of
the various Funds, the Advisor has reserved for itself the rights to the name
"Touchstone Variable Series Trust" (or any similar names) and that use by the
Trust of such name shall continue only with the continuing consent of the
Advisor, which consent may be withdrawn at any time, effective immediately, upon
written notice thereof to the Trust.
7. LIMITATION OF LIABILITY OF THE ADVISOR.
a) Absent willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or
duties hereunder on the part of the Advisor, the
Advisor shall not be subject to liability to the
Trust or to any holder of an interest in any Fund for
any act or omission in the
4
<PAGE> 5
course of, or connected with, rendering services
hereunder or for any losses that may be sustained in
the purchase, holding or sale of any security. As
used in this Section 7, the term "Advisor" shall
include Touchstone Advisors, Inc. and/or any of its
affiliates and the directors, officers and employees
of Touchstone Advisors, Inc. and/or any of its
affiliates.
b) The Trust will indemnify the Advisor against, and
hold it harmless from, any and all losses, claims,
damages, liabilities or expenses (including
reasonable counsel fees and expenses) resulting from
acts or omissions of the Trust. Indemnification shall
be made only after: (i) a final decision on the
merits by a court or other body before whom the
proceeding was brought that the Trust was liable for
the damages claimed or (ii) in the absence of such a
decision, a reasonable determination based upon a
review of the facts, that the Trust was liable for
the damages claimed, which determination shall be
made by either (a) the vote of a majority of a quorum
of Trustees of the Trust who are neither "interested
persons" of the Trust nor parties to the proceeding
("disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties
hereto, whose determination shall be set forth in a
written opinion. The Advisor shall be entitled to
advances from the Trust for payment of the reasonable
expenses incurred by it in connection with the matter
as to which it is seeking indemnification in the
manner and to the fullest extent that would be
permissible under the applicable provisions of the
General Corporation Law of Ohio. The Advisor shall
provide to the Trust a written affirmation of its
good faith belief that the standard of conduct
necessary for indemnification under such law has been
met and a written undertaking to repay any such
advance if it should ultimately be determined that
the standard of conduct has not been met. In
addition, at least one of the following additional
conditions shall be met: (i) the Advisor shall
provide security in form and amount acceptable to the
Trust for its undertaking; (ii) the Trust is insured
against losses arising by reason of the advance; or
(iii) a majority of a quorum of the Trustees of the
Trust, the members of which majority are
disinterested non-party Trustees, or independent
legal counsel in a written opinion, shall have
determined, based on a review of facts readily
available to the Trust at the time the advance is
proposed to be made, that there is reason to believe
that the Advisor will ultimately be found to be
entitled to indemnification.
8. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Advisor agrees that the Trust's
obligations hereunder in any
5
<PAGE> 6
case shall be limited to the Trust and to its assets and that the Advisor shall
not seek satisfaction of any such obligation from the holders of the shares of
any Fund nor from any Trustee, officer, employee or agent of the Trust.
9. FORCE MAJEURE. The Advisor shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a) This Agreement shall continue in effect, unless
sooner terminated as hereinafter provided, for a
period of twelve months from the date hereof and it
shall continue indefinitely thereafter as to each
Fund, provided that such continuance is specifically
approved by the parties hereto and, in addition, at
least annually by (i) the vote of holders of a
majority of the outstanding voting securities of the
affected Fund or by vote of a majority of the Trust's
Board of Trustees and (ii) by the vote of a majority
of the Trustees who are not parties to this Agreement
or interested persons of the Advisor, cast in person
at a meeting called for the purpose of voting on such
approval.
b) This Agreement may be terminated at any time, with
respect to any Fund(s), without payment of any
penalty, by the Trust's Board of Trustees or by a
vote of the majority of the outstanding voting
securities of the affected Fund(s) upon 60 days'
prior written notice to the Advisor and by the
Advisor upon 60 days' prior written notice to the
Trust.
c) This Agreement may be amended at any time by the
parties hereto, subject to approval by the Trust's
Board of Trustees and, if required by applicable SEC
rules and regulations, a vote of the majority of the
outstanding voting securities of any Fund affected by
such change. This Agreement shall terminate
automatically in the event of its assignment.
d) The terms "assignment," "interested persons" and
"majority of the outstanding voting securities" shall
have the meaning set forth for such terms in the 1940
Act.
6
<PAGE> 7
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Pursuant to the Trust's Declaration of Trust, dated as of February 7, 1994, the
obligations of this Agreement are not binding upon any of the Trustees or
shareholders of the Trust individually, but bind only the Trust estate.
TOUCHSTONE VARIABLE SERIES TRUST
By:
-----------------------------------
TOUCHSTONE ADVISORS, INC.
By:
-----------------------------------
7
<PAGE> 8
SCHEDULE 1
Touchstone Emerging Growth Fund 0.80%
Touchstone International Equity Fund 0.95%
Touchstone Growth & Income Fund 0.80% on the
first $150 million of average
daily net assets and 0.75% on
such assets in excess of $150
million
Touchstone Balanced Fund 0.80%
Touchstone Income Opportunity Fund 0.65%
Touchstone Bond Fund 0.55%
Touchstone Value Plus Fund 0.75%
Touchstone Standby Income Fund 0.25%
<PAGE> 1
Exhibit (d2)
SUB-ADVISORY AGREEMENT
TOUCHSTONE VALUE PLUS FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and FORT
WASHINGTON INVESTMENT ADVISORS, INC., an Ohio corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Value Plus
Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise),
<PAGE> 2
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc.
shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with
-2-
<PAGE> 3
all applicable laws, rules and regulations, including but not limited
to records required by Section 31(a) of the 1940 Act. All records shall
be the property of the Trust and shall be available for inspection and
use by the Securities and Exchange Commission (the "SEC"), the Trust or
any person retained by the Trust. Where applicable, such records shall
be maintained by the Advisor for the periods and in the places required
by Rule 31a-2 under the 1940 Act. When placing orders with brokers and
dealers, the Sub-Advisor's primary objective shall be to obtain the
most favorable price and execution available for the Fund, and in
placing such orders the Sub-Advisor may consider a number of factors,
including, without limitation, the overall direct net economic result
to the Fund (including commissions, which may not be the lowest
available but ordinarily should not be higher than the generally
prevailing competitive range), the financial strength and stability of
the broker, the efficiency with which the transaction will be effected,
the ability to effect the transaction at all where a large block is
involved and the availability of the broker or dealer to stand ready to
execute possibly difficult transactions in the future. The Sub-Advisor
is specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
-3-
<PAGE> 4
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.45% of the
average daily net assets of the Fund. Such fee shall be computed and
accrued daily. If the Sub-Advisor serves in such capacity for less than
the whole of any period specified in this Section 3a, the compensation
to the Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Fund's net assets shall be
computed by the same method as the Trust uses to compute the net asset
value of the Fund for purposes of purchases and redemptions of
interests thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor shall report to the Trustees the total number and type
of such other accounts and the approximate total asset value thereof (but not
the identities of the beneficial owners of such accounts). The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of business among the Fund and its other clients.
-4-
<PAGE> 5
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6, the term
"Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the
directors, officers and employees of the Sub-Advisor and/or any of its
affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited
-5-
<PAGE> 6
to acts of civil or military authority, national emergencies, work stoppages,
fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of
communication or power supply. In the event of equipment breakdowns beyond its
control, the Sub-Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose
-6-
<PAGE> 7
shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the address of the
Sub-Advisor shall be 420 East 4th Street, Cincinnati, Ohio 45202.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
By ________________________________
Edward G. Harness, Jr.
President
FORT WASHINGTON INVESTMENT
ADVISORS, INC.
By ________________________________
Name: _______________________________
Title: ______________________________
-7-
<PAGE> 1
Exhibit (d3)
SUB-ADVISORY AGREEMENT
TOUCHSTONE EMERGING GROWTH FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and
DAVID L. BABSON & COMPANY, INC., an Massachusetts corporation (the
"Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services with respect to certain
assets of the Touchstone Emerging Growth Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of that portion of the
assets of the Fund allocated to it by the Advisor (which portion, until changed
by the Advisor by not less than ten days prior written notice, shall be 50% of
the total assets of the Fund) (the said portion, as it may be changed from time
to time, being herein called the "Fund Assets"), subject to the control and
direction of the Advisor and the Trust's Board of Trustees, for the period and
on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws
<PAGE> 2
and regulations, both state and federal. The Sub-Advisor shall for all purposes
herein be deemed an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to act
for or represent the Trust in any way or otherwise be deemed an agent of the
Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the Fund Assets and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc. shall from time to
time request; provided, however, that in the absence of extraordinary
circumstances, the individual primarily responsible for management of
Fund Assets for the Sub-Advisor will not be required to attend in
person more than one meeting per year with the trustees of the Trust.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor with respect to a composite of other funds managed by the
Sub-Advisor that are comparable, in investment objective and
composition, to the Fund, and (iii) access to the individual(s)
responsible for day-to-day management of the Fund for marketing
conferences, teleconferences and other activities involving the
promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of those clients pre-approved by the Sub-Advisor to which the
Sub-Advisor provides investment management
-2-
<PAGE> 3
services, subject to receipt of the consent of such clients to the use of their
names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with all applicable laws,
rules and regulations, including but not limited to records required by
Section 31(a) of the 1940 Act. All records shall be the property of the
Trust and shall be available for inspection and use by the Securities
and Exchange Commission (the "SEC"), the Trust or any person retained
by the Trust. Where applicable, such records shall be maintained by the
Advisor for the periods and in the places required by Rule 31a-2 under
the 1940 Act. When placing orders with brokers and dealers, the
Sub-Advisor's primary objective shall be to obtain the most favorable
price and execution available for the Fund, and in placing such orders
the Sub-Advisor may consider a number of factors, including, without
limitation, the overall direct net economic result to the Fund
(including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing
competitive range), the financial strength and stability of the broker,
the efficiency with which the transaction will be effected, the ability
to effect the transaction at all where a large block is involved and
the availability of the broker or dealer to stand ready to execute
possibly difficult transactions in the future. The Sub-Advisor is
specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
-3-
<PAGE> 4
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.50% of the
average daily net Fund Assets. Such fee shall be computed and accrued
daily. If the Sub-Advisor serves in such capacity for less than the
whole of any period specified in this Section 3a, the compensation to
the Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Fund Assets shall be computed
by the same method as the Trust uses to compute the net asset value of
the Fund for purposes of purchases and redemptions of interests
thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request, subject to the limitation on
personal attendance at such meetings set forth in Section 2a) (i) the financial
condition and prospects of the Sub-Advisor, (ii) the nature and amount of
transactions affecting the Fund that involve the Sub-Advisor and affiliates of
the Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of
-4-
<PAGE> 5
advisory services to the Fund and to its other accounts, and (iv) such other
information as the Board of Trustees shall reasonably request regarding the
Fund, the Fund's performance, the services provided by the Sub-Advisor to the
Fund as compared to its other accounts and the plans of, and the capability of,
the Sub-Advisor with respect to providing future services to the Fund and its
other accounts. The Sub-Advisor agrees to submit to the Trust a statement
defining its policies with respect to the allocation of business among the Fund
and its other clients.
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto and will hereafter supply to
the Advisor, promptly upon the preparation thereof, copies of all amendments or
restatements of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6, the term
"Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the
directors, officers and employees of the Sub-Advisor and/or any of its
affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth
-5-
<PAGE> 6
in its Declaration of Trust. The Sub-Advisor agrees that (i) the Trust's
obligations to the Sub-Advisor under this Agreement (or indirectly under the
Advisory Agreement) shall be limited, in any event to the assets of the Fund and
(ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the
holders of shares of the Fund nor from any Trustee, officer, employee or agent
of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
-6-
<PAGE> 7
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be One Memorial Drive, Cambridge, Massachusetts
02142-1300.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- -------------------------------- ------------------------------------
Edward G. Harness, Jr.
Name: President
--------------------------
Title:
--------------------------
DAVID L. BABSON & COMPANY, INC.
Attest:
BY
- ------------------------------- -------------------------------------
Name: Name:
-------------------------- -----------------------------------
Title: Title:
------------------------- ----------------------------------
-7-
<PAGE> 1
Exhibit (d4)
SUB-ADVISORY AGREEMENT
TOUCHSTONE INTERNATIONAL EQUITY FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and BEA
ASSOCIATES, an New York general partnership (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone
International Equity Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise),
<PAGE> 2
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc.
shall from time to time reasonably request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, consisting of: (i) permission to
use the Sub-Advisor's name as provided in Section 5, (ii) permission to
use the past performance and investment history of the Sub-Advisor as
the same is applicable to the Fund, and (iii) access to the
individual(s) responsible for the management of the Fund for marketing
conferences, teleconferences and other activities involving the
promotion of the Fund, subject to the reasonable request of the Advisor
and to the limitation that the individual primarily responsible for
management of the Fund Assets for the Sub-Advisor will not be required
to attend more than one meeting of the Trust's Trustees in any one
year, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements
-2-
<PAGE> 3
may be in effect from time to time. In connection with the placement of
orders for the execution of portfolio transactions, the Sub-Advisor
will create and maintain all necessary brokerage records of the Fund in
accordance with all applicable laws, rules and regulations, including
but not limited to records required by Section 31(a) of the 1940 Act.
All records shall be the property of the Trust and shall be available
for inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where
applicable, such records shall be maintained by the Advisor for the
periods and in the places required by Rule 31a-2 under the 1940 Act.
When placing orders with brokers and dealers, the Sub-Advisor's primary
objective shall be to obtain the most favorable price and execution
available for the Fund, and in placing such orders the Sub-Advisor may
consider a number of factors, including, without limitation, the
overall direct net economic result to the Fund (including commissions,
which may not be the lowest available but ordinarily should not be
higher than the generally prevailing competitive range), the financial
strength and stability of the broker, the efficiency with which the
transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker
or dealer to stand ready to execute possibly difficult transactions in
the future. The Sub-Advisor is specifically authorized, to the extent
authorized by law (including, without limitation, Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to
pay a broker or dealer who provides research services to the
Sub-Advisor an amount of commission for effecting a portfolio
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting such transaction, in
recognition of such additional research services rendered by the broker
or dealer, but only if the Sub-Advisor determines in good faith that
the excess commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer
viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it
manages. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change. In addition, the
Sub-Advisor will notify the Advisor
-3-
<PAGE> 4
of any change in the membership of the Sub-Advisor within a reasonable
time (but not more than 30 days) after such change takes place.
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. Based on account information regarding the Fund provided by
the Advisor, the Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended; provided, however, that with respect
to the provisions of the 1940 Act regarding transactions with
affiliates, the obligations of the Sub-Advisor shall be limited to
matters involving its own affiliates and such other persons as the
Advisor shall expressly identify as affiliated persons.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered
and duties undertaken hereunder by the Sub-Advisor, the
Advisor will pay to the Sub-Advisor a monthly fee equal on an
annual basis to 0.85% of the first $30 million of the average
daily net assets of the Fund, 0.80% of the average daily net
assets of the Fund in excess of $30 million and up to $50
million, 0.60% of the average daily net assets of the Fund in
excess of $50 million and up to $75 million, and 0.50% of the
average daily net assets of the Fund in excess of $75 million.
Such fee shall be computed and accrued daily. If the
Sub-Advisor serves in such capacity for less than the whole of
any period specified in this Section 3a, the compensation to
the Sub-Advisor shall be prorated. For purposes of calculating
the Sub-Advisor's fee, the daily value of the Fund's net
assets shall be computed by the same method as the Trust uses
to compute the net asset value of the Fund for purposes of
purchases and redemptions of interests thereof.
b. The Sub-Advisor reserves the right to waive all or
a part of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) information reasonably requested by
such Board of Trustees regarding (i) the nature and amount of transactions
affecting the Fund
-4-
<PAGE> 5
that involve the Sub-Advisor and affiliates of the Sub-Advisor, (ii) any
potential conflicts of interest arising by reason of its continuing provision of
advisory services to the Fund and to its other accounts, and (iii) such other
matters as the Board of Trustees shall reasonably request regarding the Fund,
the Fund's performance, the services provided by the Sub-Advisor to the Fund as
compared to its other accounts and the plans of, and the capability of, the
Sub-Advisor with respect to providing future services to the Fund and its other
accounts. The Sub-Advisor agrees to submit to the Trust a statement defining its
policies with respect to the allocation of business among the Fund and its other
clients.
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR.
a. Absent willful misfeasance, bad faith, gross negligence, or reckless
disregard of obligations or duties hereunder on the part of the Sub-Advisor, the
Sub-Advisor shall not be subject to liability to the Advisor, the Trust or to
any holder of an interest in the Fund for any act or omission in the course of,
or connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security. As used in this
Section 6, the term "Sub-Advisor" shall include the Sub-Advisor and/or any of
its
-5-
<PAGE> 6
affiliates and the directors, officers and employees of the Sub-Advisor and/or
any of its affiliates.
b. The Trust or the Advisor will indemnify the Sub-Advisor against, and
hold it harmless from, any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting from its
activities under and pursuant to this Agreement, except to the extent that such
losses, claims, damages, liabilities or expenses result from the gross
negligence, bad faith or willful misfeasance of the Sub-Advisor or from a breach
of its obligations or duties hereunder. Indemnification shall be made only
after: (i) a final decision on the merits by a court or other body before whom
the proceeding was brought that the Trust or Advisor was liable for the damages
claimed or (ii) in the absence of such a decision, a reasonable determination
based upon a review of the facts, that the Trust or the Advisor was liable for
the damages claimed, which determination shall be made by either (a) the vote of
a majority of a quorum of Trustees of the Trust who are neither "interested
persons" of the Trust nor parties to the proceeding ("disinterested non-party
Trustees") or (b) an independent legal counsel satisfactory to the parties
hereto, whose determination shall be set forth in a written opinion. The
Sub-Advisor shall be entitled to advances from the Trust for payment of the
reasonable expense incurred by it in connection with the matter as to which it
is seeking indemnification in the manner and to the fullest extent that would be
permissible under the applicable provisions of the General Corporation Law of
Ohio. The Sub-Advisor shall provide to the Trust a written affirmation of its
good faith belief that the standard of conduct necessary for indemnification
under such law has been met and a written undertaking to repay any such advance
if it should ultimately be determined that the standard of conduct was not met.
In addition, at least one of the following additional conditions shall be met:
(a) the Sub-Advisor shall provide security in form and amount acceptable to the
Trust for its undertaking; (b) the Trust is insured against losses arising by
reason of the advance; or (c) a majority of a quorum of the Trustees of the
Trust, the members of which majority are disinterested non-party Trustees, or
independent legal counsel in written opinion, shall have determined, based on a
review of facts readily available to the Trust at the time of the advance is
proposed to be made, that there is reason to believe that the Sub-Advisor will
ultimately be found to be entitled to indemnification.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
-6-
<PAGE> 7
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with
-7-
<PAGE> 8
this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be One Citicorp Center, 153 East 53rd Street,
New York, New York 10122.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- ------------------------------------- ----------------------------------
Edward G. Harness, Jr.
Name: President
-------------------------------
Title:
-------------------------------
BEA ASSOCIATES
Attest:
BY
- ------------------------------------ ----------------------------------
Name: Name:
------------------------------- --------------------------------
Title: Title:
------------------------------ -------------------------------
-8-
<PAGE> 1
Exhibit (d5)
SUB-ADVISORY AGREEMENT
TOUCHSTONE BALANCED FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and
OPCAP ADVISORS(the "Sub-Advisor"), a subsidiary of Oppenheimer Capital, a
Delaware general partnership.
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Balanced
Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise),
<PAGE> 2
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc. shall from time to
time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with
-2-
<PAGE> 3
all applicable laws, rules and regulations, including but not limited
to records required by Section 31(a) of the 1940 Act. All records shall
be the property of the Trust and shall be available for inspection and
use by the Securities and Exchange Commission (the "SEC"), the Trust or
any person retained by the Trust. Where applicable, such records shall
be maintained by the Advisor for the periods and in the places required
by Rule 31a-2 under the 1940 Act. When placing orders with brokers and
dealers, the Sub-Advisor's primary objective shall be to obtain the
most favorable price and execution available for the Fund, and in
placing such orders the Sub-Advisor may consider a number of factors,
including, without limitation, the overall direct net economic result
to the Fund (including commissions, which may not be the lowest
available but ordinarily should not be higher than the generally
prevailing competitive range), the financial strength and stability of
the broker, the efficiency with which the transaction will be effected,
the ability to effect the transaction at all where a large block is
involved and the availability of the broker or dealer to stand ready to
execute possibly difficult transactions in the future. The Sub-Advisor
is specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. The Advisor recognizes that, subject to the foregoing
provisions of this Section 2, an affiliate of the Sub-Advisor may act
as the regular broker for the fund so long as it is lawful for it so to
act and that such affiliate may be a major recipient of brokerage
commissions paid by the fund. Any such affiliate may effect securities
transactions for the fund only if (1) the commissions, fees or other
remuneration received or to be received by it are reasonable and fair
compared to the commissions, fees or other remuneration received by
other brokers in connections with comparable
-3-
<PAGE> 4
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time and (2) the
Trustees, including a majority of those Trustees who are not interested
persons, have adopted procedures pursuant toe Rule 17e-1 under the 1940
Act for determining the permissible level of such commissions.
e. The Advisor understands that (i) when orders to purchase or
sell the same security on identical terms are placed by more than one
of the funds and/or other advisory accounts managed by the Sub-Advisor
or its affiliates, the transactions generally will be executed as
received, although a fund or advisory account that does not direct
trades to a specific broker ("free trades") usually will have its order
executed first, (ii) although all orders placed on behalf of the Fund
will be considered free trades, having an order placed first does not
necessarily guarantee the most favorable price, and (iii) purchases
will be combined where possible for the purpose of negotiating
brokerage commissions, which in some cases might have a detrimental
effect on the price or volume of the security in a particular
transaction as far as the Fund is concerned.
f. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
g. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
h. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.60% of the
first $20 million of the average daily net assets of the Combined
Funds, 0.50% of such average daily net assets in excess of $20 million
and up to $50 million and 0.40% of such average daily net assets in
excess of $50 million.
-4-
<PAGE> 5
b. "Combined Funds," for purposes of this Section 3, means the
combined assets of the Fund and the Touchstone Balanced Fund of the
Touchstone Series Trust, to which fund the Sub-Advisor also acts as an
investment advisor.
c. The fee of the Sub-Advisor hereunder shall be computed and
accrued daily. If the Sub-Advisor serves in such capacity for less than
the whole of any period specified in Section 3a, the fee to the
Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the net assets of the Combined
Funds shall be computed by the same method as the Trust and Touchstone
Series Trust use, respectively, to compute the net asset value of each
such Fund for purposes of purchases and redemptions of interests
thereof.
d. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor shall report to the Trustees the total number and type
of such other accounts and the approximate total asset value thereof (but not
the identities of the beneficial owners of such accounts). The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of business among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
-5-
<PAGE> 6
Nothing in this Agreement shall prevent the Sub-Advisor, any parent,
subsidiary or affiliate, or any director or officer thereof, from acting as
investment advisor for any other person, firm, or corporation, and shall not in
any way limit or restrict the Sub-Advisor or any of its directors, officers,
stockholders or employees from buying, selling or trading any securities or
commodities for its or their own account or for the account of others for whom
it or they may be acting, if such activities will not adversely affect or
otherwise impair the performance by the Sub-Advisor of its duties and
obligations under this Agreement. The Sub-Advisor will (i) supply to the
Advisor, upon execution of this Agreement, with a true copy of its currently
effective Code of Ethics and policies regarding insider trading and (ii)
thereafter supply to Advisor copies of any amendments to or restatements of such
Code of Ethics or insider trading policies, and (iii) report to the Board of
Trustees not less often than quarterly with respect to any violations of such
Code of Ethics or insider trading policies by persons covered thereby to the
extent that such violations involve the assets or activities of the Fund.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6, the term
"Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the
directors, officers and employees of the Sub-Advisor and/or any of its
affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth
-6-
<PAGE> 7
in its Declaration of Trust. The Sub-Advisor agrees that (i) the Trust's
obligations to the Sub-Advisor under this Agreement (or indirectly under the
Advisory Agreement) shall be limited, in any event to the assets of the Fund and
(ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the
holders of shares of the Fund nor from any Trustee, officer, employee or agent
of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
-7-
<PAGE> 8
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be 225 Liberty Street, 16th Floor, New York,
New York 10281.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- ------------------------------- ------------------------------
Edward G. Harness, Jr.
Name: President
------------------------
Title:
------------------------
OPCAP ADVISORS
Attest:
BY
- ------------------------------- ------------------------------
Name: Name:
------------------------ ------------------------------
Title: Title:
------------------------ ------------------------------
-8-
<PAGE> 1
Exhibit (d6)
SUB-ADVISORY AGREEMENT
TOUCHSTONE INCOME OPPORTUNITY FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and
ALLIANCE CAPITAL MANAGEMENT, L.P., a limited partnership organized under the
laws of Delaware (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Income
Opportunity Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the
oversight responsibilities of the Advisor under the Advisory Agreement and of
the Trust's Board of Trustees under applicable law, for the period and on the
terms hereinafter set forth. The Sub-Advisor hereby accepts such employment and
agrees during such period to render the services and to perform the duties
called for by this Agreement for the compensation herein provided. The
Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as
<PAGE> 2
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and
subject to the oversight responsibilities of the Advisor under the
Advisory Agreement and of the Trust's Board of Trustees under
applicable law, under each case with respect to the Fund. In
furtherance of the foregoing, the Sub-Advisor will make all
determinations with respect to the investment of the assets of the Fund
and the purchase and sale of portfolio securities and shall take such
steps as may be necessary or advisable to implement the same. The
Sub-Advisor also will determine the manner in which voting rights,
rights to consent to corporate action and any other rights pertaining
to the portfolio securities will be exercised. The Sub-Advisor will
render regular reports to the Trust's Board of Trustees, to the Advisor
and to BARRA RogersCasey, Inc. (or such other advisor or advisors as
the Advisor shall engage to assist it in the evaluation of the
performance and activities of the Sub-Advisor). Such reports shall be
made in such form and manner and with respect to such matters regarding
the Fund and the Sub-Advisor as the Trust, the Advisor or BARRA
RogersCasey, Inc. shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of those clients to which the Sub-Advisor provides investment
management services, subject to receipt of the consent of such clients
to the use of their names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of
-2-
<PAGE> 3
orders for the execution of portfolio transactions, the Sub-Advisor
will create and maintain all necessary brokerage records of the Fund in
accordance with all applicable laws, rules and regulations, including
but not limited to records required by Section 31(a) of the 1940 Act.
All records shall be the property of the Trust and shall be available
for inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where
applicable, such records shall be maintained by the Advisor for the
periods and in the places required by Rule 31a-2 under the 1940 Act.
When placing orders with brokers and dealers, the Sub-Advisor's primary
objective shall be to obtain the most favorable price and execution
available for the Fund, and in placing such orders the Sub-Advisor may
consider a number of factors, including, without limitation, the
overall direct net economic result to the Fund (including commissions,
which may not be the lowest available but ordinarily should not be
higher than the generally prevailing competitive range), the financial
strength and stability of the broker, the efficiency with which the
transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker
or dealer to stand ready to execute possibly difficult transactions in
the future. The Sub-Advisor is specifically authorized, to the extent
authorized by law (including, without limitation, Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to
pay a broker or dealer who provides research services to the
Sub-Advisor an amount of commission for effecting a portfolio
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting such transaction, in
recognition of such additional research services rendered by the broker
or dealer, but only if the Sub-Advisor determines in good faith that
the excess commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer
viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it
manages. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization(s) or other change(s) in
the Sub-Advisor, its executive officers or members of its investment
(or comparable) committee that, individually or collectively, are
likely to have a material adverse effect on the ability of the
Sub-Advisor to manage the Fund or otherwise perform its obligations to
the Advisor and the Trust under this Agreement, the Sub-Advisor shall
give the Advisor and the Trust's Board of Trustees written notice of
such reorganization or change within a reasonable time (but not later
than 30 days) after such reorganization or change. In
-3-
<PAGE> 4
addition, the Sub-Advisor will notify the Advisor of any change in
membership of the Sub-Advisor's general partners within a reasonable
time (but not later than 30 days) after such change.
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR. As compensation for the services to
be rendered and duties undertaken hereunder by the Sub-Advisor, the Advisor will
pay to the Sub-Advisor a monthly fee equal on an annual basis to 0.40% of the
first $50 million of the average daily net assets of the Fund, 0.35% of the
average daily net assets of the Fund in excess of $50 million and up to $70
million and 0.30% of the average daily net assets of the Fund in excess of $70
million and up to $90 million and 0.25% of the average daily net assets of the
Fund in excess of $90 million. Such fee shall be computed and accrued daily. If
the Sub-Advisor serves in such capacity for less than the whole of any period
specified in this Section 3, the compensation to the Sub-Advisor shall be
prorated. For purposes of calculating the Sub-Advisor's fee, the daily value of
the Fund's net assets shall be computed by the same method as the Trust uses to
compute the net asset value of the Fund for purposes of purchases and
redemptions of interests thereof.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the nature and amount of
transactions affecting the Fund that involve the Sub-Advisor and affiliates of
the Sub-Advisor, (ii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iii) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of investment opportunities among the Fund and its other clients.
-4-
<PAGE> 5
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6, the term
"Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the
directors, officers and employees of the Sub-Advisor and/or any of its
affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited
-5-
<PAGE> 6
to acts of civil or military authority, national emergencies, work stoppages,
fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of
communication or power supply. In the event of equipment breakdowns beyond its
control, the Sub-Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment (as defined below).
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment" and "majority of the outstanding
voting securities" shall have the meaning set forth for such terms in
the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose
-6-
<PAGE> 7
shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the address of the
Sub-Advisor shall be 1345 Avenue of the Americas, New York, New York 10105.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- ---------------------------------- --------------------------------
Edward G. Harness, Jr.
Name: President
-------------------------
Title:
-------------------------
ALLIANCE CAPITAL MANAGEMENT, L.P.
by ALLIANCE CAPITAL MANAGEMENT
CORP., General Partner
Attest:
BY
- ---------------------------------- --------------------------------
Name: Name:
------------------------- -----------------------------
Title: Title:
------------------------- -----------------------------
-7-
<PAGE> 1
Exhibit (d7)
SUB-ADVISORY AGREEMENT
TOUCHSTONE STANDBY INCOME FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and FORT
WASHINGTON INVESTMENT ADVISORS, INC., an Ohio corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Standby
Income Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise),
<PAGE> 2
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc. shall from time to
time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with
-2-
<PAGE> 3
all applicable laws, rules and regulations, including but not limited
to records required by Section 31(a) of the 1940 Act. All records shall
be the property of the Trust and shall be available for inspection and
use by the Securities and Exchange Commission (the "SEC"), the Trust or
any person retained by the Trust. Where applicable, such records shall
be maintained by the Advisor for the periods and in the places required
by Rule 31a-2 under the 1940 Act. When placing orders with brokers and
dealers, the Sub-Advisor's primary objective shall be to obtain the
most favorable price and execution available for the Fund, and in
placing such orders the Sub-Advisor may consider a number of factors,
including, without limitation, the overall direct net economic result
to the Fund (including commissions, which may not be the lowest
available but ordinarily should not be higher than the generally
prevailing competitive range), the financial strength and stability of
the broker, the efficiency with which the transaction will be effected,
the ability to effect the transaction at all where a large block is
involved and the availability of the broker or dealer to stand ready to
execute possibly difficult transactions in the future. The Sub-Advisor
is specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
-3-
<PAGE> 4
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.15% of the
average daily net assets of the Fund. Such fee shall be computed and
accrued daily. If the Sub-Advisor serves in such capacity for less than
the whole of any period specified in this Section 3a, the compensation
to the Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Fund's net assets shall be
computed by the same method as the Trust uses to compute the net asset
value of the Fund for purposes of purchases and redemptions of
interests thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor shall report to the Trustees the total number and type
of such other accounts and the approximate total asset value thereof (but not
the identities of the beneficial owners of such accounts). The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of business among the Fund and its other clients.
-4-
<PAGE> 5
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR.
a. Absent willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of
the Sub-Advisor, the Sub-Advisor shall not be subject to liability to
the Advisor, the Trust or to any holder of an interest in the Fund for
any act or omission in the course of, or connected with, rendering
services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6,
the term "Sub-Advisor" shall include the Sub-Advisor and/or any of its
affiliates and the directors, officers and employees of the Sub-Advisor
and/or any of its affiliates.
b. The Advisor will indemnify the Sub-Advisor against, and
hold it harmless from, any and all losses, claims, damages, liabilities
or expenses (including reasonable counsel fees and expenses) resulting
from acts or omissions of the Advisor and/or the Trust. Indemnification
shall be made only after: (i) a final decision on the merits by a court
or other body before whom the proceeding was brought that the Trust or
the Advisor was liable for the damages claimed or (ii) in the absence
of such a decision, a reasonable determination based upon a review of
the facts, that the Trust or
-5-
<PAGE> 6
the Advisor was liable for the damages claimed, which determination
shall be made by either (a) the majority of a quorum of Trustees of the
Trust who are neither "interested persons" of the Trust nor parties to
the proceeding ("disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties hereto, whose
determination shall be set forth in a written opinion. The Sub-Advisor
shall be entitled to advances from the Trust for payment of the
reasonable expenses incurred by it in connection with the matter as to
which it is seeking indemnification in the manner and to the fullest
extent that would be permissible under the indemnification provisions
of the General Corporation Law of Ohio. The Sub-Advisor shall provide
to the Trust a written affirmation of its good faith belief that the
standard of conduct necessary for indemnification under such law has
been met and a written undertaking to repay any such advance if it
should ultimately be determined that the standard of conduct has not
been met. In addition, at least one of the following additional
conditions shall be met: (a) the Sub-Advisor shall provide security in
form and amount acceptable to the Trust for its undertaking; (b) the
Trust is insured against losses arising by reason of the advance; or
(c) a majority of a quorum of the Trustees of the Trust, the members of
which majority are disinterested non-party Trustees, or independent
legal counsel in a written opinion, shall have determined, based on a
review of facts readily available to the Trust at the time the advance
is proposed to be made, that there is reason to believe that the
Sub-Advisor will ultimately be found to be entitled to indemnification.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall
-6-
<PAGE> 7
continue thereafter provided that such continuance is specifically
approved by the parties and, in addition, at least annually by (i) the
vote of the holders of a majority of the outstanding voting securities
(as herein defined) of the Fund or by vote of a majority of the Trust's
Board of Trustees and (ii) by the vote of a majority of the Trustees
who are not parties to this Agreement or interested persons of either
the Advisor or the Sub-Advisor, cast in person at a meeting called for
the purpose of voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be 420 East 4th Street, Cincinnati, Ohio 45202.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
By ________________________________
Edward G. Harness, Jr.
President
FORT WASHINGTON INVESTMENT
ADVISORS, INC.
By ________________________________
Name: _______________________________
Title: ______________________________
-8-
<PAGE> 1
Exhibit (d8)
SUB-ADVISORY AGREEMENT
TOUCHSTONE BOND FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and FORT
WASHINGTON INVESTMENT ADVISORS, INC., an Ohio corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Bond Fund
(the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise),
<PAGE> 2
have no authority to act for or represent the Trust in any way or otherwise be
deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees, to the Advisor and to BARRA RogersCasey,
Inc. (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as
the Trust, the Advisor or BARRA RogersCasey, Inc. shall from time to
time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with
-2-
<PAGE> 3
all applicable laws, rules and regulations, including but not limited
to records required by Section 31(a) of the 1940 Act. All records shall
be the property of the Trust and shall be available for inspection and
use by the Securities and Exchange Commission (the "SEC"), the Trust or
any person retained by the Trust. Where applicable, such records shall
be maintained by the Advisor for the periods and in the places required
by Rule 31a-2 under the 1940 Act. When placing orders with brokers and
dealers, the Sub-Advisor's primary objective shall be to obtain the
most favorable price and execution available for the Fund, and in
placing such orders the Sub-Advisor may consider a number of factors,
including, without limitation, the overall direct net economic result
to the Fund (including commissions, which may not be the lowest
available but ordinarily should not be higher than the generally
prevailing competitive range), the financial strength and stability of
the broker, the efficiency with which the transaction will be effected,
the ability to effect the transaction at all where a large block is
involved and the availability of the broker or dealer to stand ready to
execute possibly difficult transactions in the future. The Sub-Advisor
is specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
-3-
<PAGE> 4
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.30% of the
average daily net assets of the Fund. Such fee shall be computed and
accrued daily. If the Sub-Advisor serves in such capacity for less than
the whole of any period specified in this Section 3a, the compensation
to the Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Fund's net assets shall be
computed by the same method as the Trust uses to compute the net asset
value of the Fund for purposes of purchases and redemptions of
interests thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor shall report to the Trustees the total number and type
of such other accounts and the approximate total asset value thereof (but not
the identities of the beneficial owners of such accounts). The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of business among the Fund and its other clients.
-4-
<PAGE> 5
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR.
a. Absent willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of
the Sub-Advisor, the Sub-Advisor shall not be subject to liability to
the Advisor, the Trust or to any holder of an interest in the Fund for
any act or omission in the course of, or connected with, rendering
services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6,
the term "Sub-Advisor" shall include the Sub-Advisor and/or any of its
affiliates and the directors, officers and employees of the Sub-Advisor
and/or any of its affiliates.
b. The Advisor will indemnify the Sub-Advisor against, and
hold it harmless from, any and all losses, claims, damages, liabilities
or expenses (including reasonable counsel fees and expenses) resulting
from acts or omissions of the Advisor and/or the Trust. Indemnification
shall be made only after: (i) a final decision on the merits by a court
or other body before whom the proceeding was brought that the Trust or
the Advisor was liable for the damages claimed or (ii) in the absence
of such a decision, a reasonable determination based upon a review of
the facts, that the Trust or
-5-
<PAGE> 6
the Advisor was liable for the damages claimed, which determination
shall be made by either (a) the majority of a quorum of Trustees of the
Trust who are neither "interested persons" of the Trust nor parties to
the proceeding ("disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties hereto, whose
determination shall be set forth in a written opinion. The Sub-Advisor
shall be entitled to advances from the Trust for payment of the
reasonable expenses incurred by it in connection with the matter as to
which it is seeking indemnification in the manner and to the fullest
extent that would be permissible under the indemnification provisions
of the General Corporation Law of Ohio. The Sub-Advisor shall provide
to the Trust a written affirmation of its good faith belief that the
standard of conduct necessary for indemnification under such law has
been met and a written undertaking to repay any such advance if it
should ultimately be determined that the standard of conduct has not
been met. In addition, at least one of the following additional
conditions shall be met: (a) the Sub-Advisor shall provide security in
form and amount acceptable to the Trust for its undertaking; (b) the
Trust is insured against losses arising by reason of the advance; or
(c) a majority of a quorum of the Trustees of the Trust, the members of
which majority are disinterested non-party Trustees, or independent
legal counsel in a written opinion, shall have determined, based on a
review of facts readily available to the Trust at the time the advance
is proposed to be made, that there is reason to believe that the
Sub-Advisor will ultimately be found to be entitled to indemnification.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall
-6-
<PAGE> 7
continue thereafter provided that such continuance is specifically
approved by the parties and, in addition, at least annually by (i) the
vote of the holders of a majority of the outstanding voting securities
(as herein defined) of the Fund or by vote of a majority of the Trust's
Board of Trustees and (ii) by the vote of a majority of the Trustees
who are not parties to this Agreement or interested persons of either
the Advisor or the Sub-Advisor, cast in person at a meeting called for
the purpose of voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be 420 East 4th Street, Cincinnati, Ohio 45202.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
By ________________________________
Edward G. Harness, Jr.
President
FORT WASHINGTON INVESTMENT
ADVISORS, INC.
By ________________________________
Name: _______________________________
Title:_______________________________
-8-
<PAGE> 1
Exhibit (d9)
SUB-ADVISORY AGREEMENT
TOUCHSTONE GROWTH & INCOME FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and between
TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and SCUDDER
KEMPER INVESTMENTS, INC., a Delaware corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Growth &
Income Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it with
portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Advisor hereby represents that (i)
it has authority under the Advisory Agreement to appoint the Sub-Advisor to act
as an investment advisor to the Trust, and (ii) this Agreement is valid and
binding upon the Advisor. The Sub-Advisor hereby accepts such employment and
agrees during such period to render the services and to perform the duties
called for by this Agreement for the compensation herein provided. The
Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all
<PAGE> 2
applicable laws and regulations, both state and federal. The Sub-Advisor shall
for all purposes herein be deemed an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the following
services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment of the
assets of the Fund, subject to and in accordance with the investment
objectives, policies and restrictions of the Fund and any directions which
the Advisor or the Trust's Board of Trustees may give from time to time
with respect to the Fund. In furtherance of the foregoing, the Sub-Advisor
will make all determinations with respect to the investment of the assets
of the Fund and the purchase and sale of portfolio securities and shall
take such steps as may be necessary or advisable to implement the same. The
Sub-Advisor also will determine the manner in which voting rights, rights
to consent to corporate action and any other rights pertaining to the
portfolio securities will be exercised. The Sub-Advisor will render regular
reports to the Trust's Board of Trustees, to the Advisor and to BARRA
RogersCasey, Inc. (or such other advisor or advisors as the Advisor shall
engage to assist it in the evaluation of the performance and activities of
the Sub-Advisor). Such reports shall be made in such form and manner and
with respect to such matters regarding the Fund and the Sub-Advisor as the
Trust, the Advisor or BARRA RogersCasey, Inc. shall from time to time
reasonably request.
b. The Sub-Advisor shall provide support to the Advisor with respect
to the marketing of the Fund in a manner comparable to the support provided
to comparable clients of the Sub-Advisor, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 6, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, provided counsel to the
Trust determine that the use of such information and the manner of
presentation of such information is legally permissible, (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving the
promotion of the Fund, subject to the reasonable request of the Advisor,
(iv) permission to use biographical and historical data of the Sub-Advisor
and individual manager(s), and (v) with respect to clients whose names are
provided to the Advisor by the Sub-Advisor in writing prior to use,
permission to use the names of these clients, subject to any restrictions
imposed by clients on the use of such names or by the Investment Advisors
Act of 1940 and the rules adopted thereunder.
-2-
<PAGE> 3
c. The Sub-Advisor will, in the name of the Fund, place orders for the
execution of all portfolio transactions in accordance with the policies
with respect thereto set forth in the Trust's registration statements under
the 1940 Act and the Securities Act of 1933, as such registration
statements may be in effect from time to time. In connection with the
placement of orders for the execution of portfolio transactions, the
Sub-Advisor will create and maintain all necessary brokerage records of the
Fund in accordance with all applicable laws, rules and regulations,
including but not limited to records required by Section 31(a) of the 1940
Act. All records shall be the property of the Trust and shall be available
for inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where applicable,
such records shall be maintained by the Advisor for the periods and in the
places required by Rule 31a-2 under the 1940 Act. When placing orders with
brokers and dealers, the Sub-Advisor shall seek to obtain the most
favorable price and execution available for the Fund, and in placing such
orders the Sub-Advisor may consider a number of factors, including, without
limitation, the overall direct net economic result to the Fund (including
commissions, which may not be the lowest available but ordinarily should
not be higher than the generally prevailing competitive range), the
financial strength and stability of the broker, the efficiency with which
the transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker or
dealer to stand ready to execute possibly difficult transactions in the
future. The Sub-Advisor is specifically authorized, to the extent
authorized by law (including, without limitation, Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to pay a
broker or dealer who provides research services to the Sub-Advisor an
amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for
effecting such transaction, in recognition of such additional research
services rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided by
such broker or dealer viewed in terms of the particular transaction or the
Sub-Advisor's overall responsibilities with respect to discretionary
accounts that it manages, and that the Fund derives or will derive a
reasonably significant benefit from such research services. The Sub-Advisor
will present a written report to the Board of Trustees of the Trust, at
least quarterly and at such other times as reasonably requested by the
Board of Trustees, indicating total brokerage expenses, actual or imputed,
as well as the services obtained in consideration for such expenses, broken
down by broker-dealer and containing such information as the Board of
Trustees reasonably shall request.
-3-
<PAGE> 4
d. The Sub-Advisor may execute standard account documentation,
agreements, contracts and other documents (collectively, the "Account
Documents") as the Sub-Advisor may be requested by brokers, dealers,
counterparties and other persons in connection with the Sub-Advisor's
management of the Fund Assets, provided that the Advisor and the Trust's
Board of Trustees first authorize the Sub-Advisor to execute Account
Documents. In such respect, and only for this limited purpose, the
Sub-Advisor shall act as the agent and/or attorney-in-fact of the Trust
and/or the Advisor.
e. The Advisor recognizes that, subject to the provisions of Section
2c, Scudder Investor Services, Inc. or its successor ("SIS"), an affiliate
of the Sub-Advisor, may act as the regular broker for the Fund so long as
it is lawful for it so to act and that SIS may be a major recipient of
brokerage commissions paid by the Fund. SIS may effect securities
transactions for the Fund only if (i) the commissions, fees or other
remuneration received or to be received by it are reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time and (ii) the Trustees, including a majority of
those Trustees who are not interested persons, have adopted procedures
pursuant to Rule 17e-1 under the 1940 Act for determining the permissible
level of such commissions.
f. The Advisor understands that (i) when orders to purchase or sell
the same security on identical terms are placed by more than one of the
funds and/or other advisory accounts managed by the Sub-Advisor or its
affiliates, the transactions generally will be executed as received,
although a fund or advisory account that does not direct trades to a
specific broker ("free trades") usually will have its order executed first,
(ii) although all orders placed on behalf of the Fund will be considered
free trades, having an order placed first in the market does not
necessarily guarantee the most favorable price, and (iii) purchases will be
combined where possible for the purpose of negotiating brokerage
commissions, which in some cases might have a detrimental effect on the
price or volume of the security in a particular transaction as far as the
Fund is concerned.
g. The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor for the provision of certain personnel and
facilities to the Sub-Advisor to better enable it to fulfill its duties and
obligations under this Agreement.
-4-
<PAGE> 5
h. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than 30
days) after such reorganization or change.
i. The Sub-Advisor will bear its expenses of providing services to the
Fund pursuant to this Agreement except such expenses as are undertaken by
the Advisor or the Trust.
j. The Sub-Advisor will manage the Fund Assets and the investment and
reinvestment of such assets so as to seek to comply with the provisions of
the 1940 Act and with Subchapter M of the Internal Revenue Code of 1986, as
amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.50% of the first
$150 million of the average daily net assets of the Combined Funds, and
0.45% of such average daily net assets in excess of $150 million.
b. "Combined Funds," for purposes of this Section 3, means the
combined assets of the Fund and the Touchstone Growth & Income Fund of the
Touchstone Series Trust, to which the Sub-Advisor also acts as an
investment advisor.
c. The fee of the Sub-Advisor hereunder shall be computed and accrued
daily and paid monthly. If the Sub-Advisor serves in such capacity for less
than the whole of any period specified in this Section 3a, the fee to the
Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Combined Funds shall be computed
by the same method as the Trust and the Touchstone Series Trust use,
respectively, to compute the net asset value of each such Fund for purposes
of purchases and redemptions of interests thereof.
d. The Sub-Advisor reserves the right to waive all or a part of its
fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. Furthermore, it is understood that the Sub-Advisor
may give
-5-
<PAGE> 6
advice, and take action, with respect to its other clients that may differ from
the advice given, or the time and nature of the action taken, with respect to
the Fund. The Sub-Advisor will report to the Board of Trustees of the Trust (at
regular quarterly meetings and at such other times as such Board of Trustees
reasonably shall request) (i) the financial condition and prospects of the
Sub-Advisor, (ii) the nature and amount of transactions affecting the Fund that
involve the Sub-Advisor and affiliates of the Sub-Advisor, (iii) information
regarding any potential conflicts of interest arising by reason of its
continuing provision of advisory services to the Fund and to its other accounts,
and (iv) such other information as the Board of Trustees shall reasonably
request regarding the Fund, the Fund's performance, the performance of other
comparable accounts to whom the Sub-Advisor provides services and the plans of,
and the capability of, the Sub-Advisor with respect to providing future services
to the Fund and its other accounts. The Sub-Advisor agrees, on an ongoing basis,
to notify the Advisor of any change in the individual(s) responsible for
day-to-day management of the Fund and any material change in the investment
strategies employed by the Sub-Advisor in managing the Fund. At least annually,
the Sub-Advisor shall report to the Trustees the total number and type of such
other accounts and the approximate total asset value thereof (but not the
identities of the beneficial owners of such accounts). The Sub-Advisor agrees to
submit to the Trust a statement defining its policies with respect to the
allocation of investment opportunities among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the Trust as
an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
Nothing in this Agreement shall prevent the Sub-Advisor, any parent,
subsidiary or affiliate, or any director or officer thereof, from acting as
investment advisor for any other person, firm, or corporation, and shall not in
any way limit or restrict the Sub-Advisor or any of its directors, officers,
stockholders or employees from buying, selling or trading any securities or
commodities for its or their own account or for the account of others for whom
it or they may be acting, if such activities will not adversely affect or
otherwise impair the performance by the Sub-Advisor of its duties and
obligations under this Agreement. The Sub-Advisor will (i) supply to the
Advisor, upon the execution of this Agreement, with a true copy of its currently
effective Code of Ethics and policies regarding insider trading and (ii)
thereafter supply to Advisor copies of any amendments to or restatements of such
Code of Ethics or insider trading policies. The Sub-Advisor agrees to provide
the Advisor, on a quarterly basis, a report with respect to material violations
of the
-6-
<PAGE> 7
Sub-Advisor's Code of Ethics or insider trading policies by portfolio managers
who have responsibility for managing the Fund or a written statement indicating
that no such violations have occurred during the quarter. In addition, the
Sub-Advisor agrees to provide to the Advisor such other information concerning
violations of its Code of Ethics or insider trading policies to the same extent
that it provides such information to the Boards of Directors of its proprietary
mutual funds. The parties agree to be bound by the provisions of Rule 17j-1
under the 1940 Act as it may be amended to the extent that the provisions of the
Rule are stricter than the provisions of this paragraph.
5. PROVISION OF INFORMATION BY THE ADVISOR. To facilitate the
Sub-Advisor's fulfillment of its obligations under this Agreement, the Advisor
agrees (i) promptly to provide the Sub-Advisor with all amendments or
supplements to the Trust's registration statements, its Agreement and
Declaration of Trust, and its By-Laws, (ii) on an ongoing basis, to notify the
Sub-Advisor expressly in writing of each change in the fundamental and
nonfundamental investment policies of the Fund, (iii) to provide or cause to be
provided to the Sub-Advisor on an ongoing basis such assistance as may
reasonably be requested by the Sub-Advisor in connection with its activities
under this Agreement, including, without limitation, information concerning the
Fund, its available funds, or funds that may reasonably become available for
investment, and information as to the general condition of the Fund's affairs,
(iv) to provide or cause to be provided to the Sub-Advisor on an ongoing basis
such information as is reasonably requested by the Sub-Advisor for performance
by the Sub-Advisor of its obligations under this Agreement and the Sub-Advisor
shall not be in breach of any term of this Agreement or be deemed to have acted
negligently if such alleged breach or negligent act is the result of the
Advisor's failure to provide or cause to be provided such requested information
and the Sub-Advisor's reliance on the information most recently furnished to the
Sub-Advisor, and (v) promptly to provide the Sub-Advisor with any guidelines and
procedures applicable to the Sub-Advisor or the Fund adopted from time to time
by the Board of Trustees of the Trust and all amendments thereto.
6. USE OF NAMES. Neither the Advisor nor the Trust shall use the name of
the Sub-Advisor in any prospectus, sales literature or other material relating
to the Advisor or the Trust in any manner not approved in advance by the
Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses of
its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a
-7-
<PAGE> 8
state securities commission; and, provided further, that in no event shall such
approval be unreasonably withheld. Upon termination of this Agreement, the
Advisor and the Trust shall immediately cease to use the name of the
Sub-Advisor.
7. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. The Sub-Advisor shall not be liable
to the Advisor or the Trust for any loss suffered as a consequence of any action
or inaction of other service providers to the Trust, provided such action or
inaction of such other service providers to the Fund is not a result of the
willful misconduct, bad faith or gross negligence in the performance of, or
reckless disregard of, the duties of the Sub-Advisor under this Agreement. As
used in this Section 7, the term "Sub-Advisor" shall include the Sub-Advisor
and/or any of its affiliates and the directors, officers and employees of the
Sub-Advisor and/or any of its affiliates.
8. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
9. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner terminated
as hereinafter provided, until December 31, 1999; and it shall continue
thereafter provided that such continuance is specifically approved by the
parties and, in addition, at least annually by (i) the vote of the holders
of a majority of the outstanding voting securities (as herein defined) of
the Fund or by vote of a majority of the Trust's Board of Trustees and (ii)
by the
-8-
<PAGE> 9
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons of either the Advisor or the Sub-Advisor, cast in person
at a meeting called for the purpose of voting on such approval.
b. This Agreement may be terminated at any time, without payment of
any penalty, (i) by the Advisor, by the Trust's Board of Trustees or by a
vote of the majority of the outstanding voting securities of the Fund, in
any such case upon not less than 60 days' prior written notice to the
Sub-Advisor and (ii) by the Sub-Advisor upon not less than 60 days' prior
written notice to the Advisor and the Trust. This Agreement shall terminate
automatically in the event of its assignment.
c. If this Agreement is not approved by the favorable vote of a
majority of the outstanding voting securities of the Fund by February 4,
1999, it will terminate as of the close of business on the last day of such
period.
d. This Agreement will also terminate upon written notice to the other
party that the other party is in material breach of this Agreement, unless
the other party in material breach of this Agreement cures such breach to
the reasonable satisfaction of the party alleging the breach within 30 days
after the written notice.
e. This Agreement may be amended at any time by the parties hereto,
subject to approval by the Trust's Board of Trustees and, if required by
applicable SEC rules and regulations, a vote of the majority of the
outstanding voting securities of the Fund affected by such change.
f. The terms "affiliated persons," "assignment," "interested persons"
and "majority of the outstanding voting securities" shall have the meaning
set forth for such terms in Section 2(a) of the 1940 Act.
11. SEVERABILITY AND INCORPORATED EFFECT. If any provision of this
Agreement shall become or shall be found to be invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. In addition, where the effect of a requirement of the 1940 Act
reflected in any provision of this Agreement is relaxed by a rule, regulation or
order of the SEC, whether of specific or general application, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
12. NOTICE. Any notices under this Agreement shall be in writing addressed
and delivered personally (or by telecopy) or mailed postage-paid, to the other
party at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party,
-9-
<PAGE> 10
it is agreed that the address of the Trust and that of the Advisor for this
purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the address of
the Sub-Advisor shall be 345 Park Avenue, New York, New York 10154.
13. MISCELLANEOUS. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio, or any applicable provisions of the
1940 Act. To the extent that the laws of the State of Ohio, or any of the
provisions in the Agreement, conflict with applicable provisions of the 1940
Act, the latter shall control. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
____________________________ BY ___________________________________
Edward G. Harness, Jr.
Name:_______________________ President
Title:______________________
SCUDDER KEMPER INVESTMENTS, INC.
Attest:
_____________________________ BY ___________________________________
Name:________________________ Name:_________________________________
Title:_______________________ Title:________________________________
-10-
<PAGE> 1
Exhibit (d10)
SUB-ADVISORY AGREEMENT
TOUCHSTONE EMERGING GROWTH FUND
TOUCHSTONE VARIABLE SERIES TRUST
This SUB-ADVISORY AGREEMENT is made as of January 1, 1999, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC., a Massachusetts corporation (the
"Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Variable Series Trust (formerly Select Advisors Variable Insurance Trust) (the
"Trust"), a Massachusetts business trust organized pursuant to a Declaration of
Trust dated February 7, 1994 and registered as an open-end diversified
management investment company under the Investment Company Act of 1940 (the
"1940 Act") to provide investment advisory services to the Touchstone Emerging
Growth Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of that portion of the
assets of the Fund allocated to it by the Advisor (such portion being herein
called the "Fund Assets"), subject to the control and direction of the Advisor
and the Trust's Board of Trustees, for the period and on the terms hereinafter
set forth. The Sub-Advisor hereby accepts such employment and agrees during such
period to render the services and to perform the duties called for by this
Agreement for the compensation herein provided. The Sub-Advisor shall at all
times maintain its registration as an investment advisor under the Investment
Advisers Act of 1940 and shall otherwise comply in all material respects with
all applicable laws and regulations, both state and federal. The Sub-Advisor
shall for all purposes herein be deemed an independent contractor and shall,
except as expressly provided or
<PAGE> 2
authorized (whether herein or otherwise), have no authority to act for or
represent the Trust in any way or otherwise be deemed an agent of the Trust or
the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the Fund Assets, subject to and in accordance with the investment
objectives, policies and restrictions of the Fund and any directions
which the Advisor or the Trust's Board of Trustees may give from time
to time with respect to the Fund. In furtherance of the foregoing, the
Sub-Advisor will make all determinations with respect to the investment
of the Fund Assets and the purchase and sale of portfolio securities
and shall take such steps as may be necessary or advisable to implement
the same. The Sub-Advisor also will determine the manner in which
voting rights, rights to consent to corporate action and any other
rights pertaining to the portfolio securities will be exercised. The
Sub-Advisor will render regular reports to the Trust's Board of
Trustees, to the Advisor and to BARRA RogersCasey, Inc. (or such other
advisor or advisors as the Advisor shall engage to assist it in the
evaluation of the performance and activities of the Sub-Advisor). Such
reports shall be made in such form and manner and with respect to such
matters regarding the Fund and the Sub-Advisor as the Trust, the
Advisor or BARRA RogersCasey, Inc. shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, and (iii) access to
the individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of those institutional clients to which the Sub-Advisor provides
investment management services, subject to receipt of consent of such
clients to the use of their names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create
-2-
<PAGE> 3
and maintain all necessary brokerage records of the Fund in accordance
with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the 1940 Act. All
records shall be the property of the Trust and shall be available for
inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where
applicable, such records shall be maintained by the Advisor for the
periods and in the places required by Rule 31a-2 under the 1940 Act.
When placing orders with brokers and dealers, the Sub-Advisor's primary
objective shall be to obtain the most favorable price and execution
available for the Fund, and in placing such orders the Sub-Advisor may
consider a number of factors, including, without limitation, the
overall direct net economic result to the Fund (including commissions,
which may not be the lowest available but ordinarily should not be
higher than the generally prevailing competitive range), the financial
strength and stability of the broker, the efficiency with which the
transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker
or dealer to stand ready to execute possibly difficult transactions in
the future. The Sub-Advisor is specifically authorized, to the extent
authorized by law (including, without limitation, Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to
pay a broker or dealer who provides research services to the
Sub-Advisor an amount of commission for effecting a portfolio
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting such transaction, in
recognition of such additional research services rendered by the broker
or dealer, but only if the Sub-Advisor determines in good faith that
the excess commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer
viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it
manages, and that the Fund derives or will derive a reasonably
significant benefit from such research services. The Sub-Advisor will
present a written report to the Board of Trustees of the Trust, at
least quarterly, indicating total brokerage expenses, actual or
imputed, as well as the services obtained in consideration for such
expenses, broken down by broker-dealer and containing such information
as the Board of Trustees reasonably shall request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
-3-
<PAGE> 4
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.45% of the
first $10 million of the average daily net assets of the Fund managed
by the Sub-Advisor, 0.40% of the average daily net assets of the Fund
managed by the Sub-Advisor in excess of $10 million and up to $50
million and 0.35% of the average daily net assets of the Fund managed
by the Sub-Advisor in excess of $50 million. Such fee shall be computed
and accrued daily. If the Sub-Advisor serves in such capacity for less
than the whole of any period specified in this Section 3a, the
compensation to the Sub-Advisor shall be prorated. For purposes of
calculating the Sub-Advisor's fee, the daily value of the Fund's net
assets shall be computed by the same method as the Trust uses to
compute the net asset value of the Fund for purposes of purchases and
redemptions of interests thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor will provide to the Trustees information regarding the
composite return of such of its other accounts as are
-4-
<PAGE> 5
comparable, in investment objective and composition, to the Fund. The
Sub-Advisor agrees to submit to the Trust a statement defining its policies with
respect to the allocation of investment opportunities among the Fund and its
other clients.
It is understood that the Sub-Advisor may become interested in the
Trust as an interest holder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any holder of an interest
in the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this Section 6, the term
"Sub-Advisor" shall include the Sub-Advisor and/or any of its affiliates and the
directors, officers and employees of the Sub-Advisor and/or any of its
affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited, in any event to the assets of the Fund
and (ii) the Sub-
-5-
<PAGE> 6
Advisor shall not seek satisfaction of any such obligation from the holders of
shares of the Fund nor from any Trustee, officer, employee or agent of the
Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until December 31, 1999; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
-6-
<PAGE> 7
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be One Financial Center - 27th Floor, Boston,
Massachusetts 02111.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
Attest:
BY
- ---------------------------------- ------------------------------
Edward G. Harness, Jr.
Name: President
---------------------------
Title:
---------------------------
WESTFIELD CAPITAL MANAGEMENT
COMPANY, INC.
Attest:
BY
- ---------------------------------- ------------------------------
Name: Name:
--------------------------- ----------------------------
Title: Title:
--------------------------- ----------------------------
-7-
<PAGE> 1
Exhibit (i2)
December 30, 1998
Select Advisors Variable Insurance Trust
311 Pike Street
Cincinnati, Ohio 45202
Re: Select Advisors Variable Insurance Trust
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Select Advisors
Variable Insurance Trust, a Massachusetts business trust (the "Trust"), in
connection with Post-Effective Amendment No. 9 to the Trust's Registration
Statement on Form N-1A to be filed with the Securities and Exchange Commission
on or about December 30, 1998 (as amended by such Post-Effective Amendment No.
9, the "Registration Statement"), with respect to the shares of beneficial
interest, par value $.00001 per share (the "Shares") of its series Touchstone
Growth and Income Fund and Touchstone Bond Fund (each, a "Fund" and
collectively, the "Funds"). You have requested that we deliver this opinion to
you to be used as an exhibit to the Registration Statement.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the
Commonwealth of Massachusetts as to the existence of the Trust;
(b) a copy of the Trust's Declaration of Trust dated as of
February 7, 1994, Amendment No. 1 to the Declaration dated as of March
15, 1994, Amendment No. 2 to the Declaration dated as of April 11,
1994, Amendment No. 3 to the Declaration dated as of October 31, 1994,
and Amendment No. 4 to the Declaration dated as of September 18, 1997
(collectively, the "Declaration");
(c) a copy of the Trust's Proposed Amendment No. 5 to the
Declaration and the Fourth Amended and Restated Establishment and
Designation of Series dated as of January 4, 1999 (the "Proposed
Designation of Series");
(d) a certificate executed by the Assistant Secretary of the
Trust (the "Secretary's Certificate"), certifying as to, and attaching
copies of, the Trust's Declaration, Proposed Designation of Series,
By-Laws, and certain resolutions adopted by the Trustees of the Trust
at a meeting held on June 18, 1998 (the "Board Resolutions"); and
(e) a printer's proof dated December 29, 1998 of the
Registration Statement.
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that the
<PAGE> 2
Select Advisors Variable Insurance Trust
December 30, 1998
Page 2
Registration Statement as filed with the Securities and Exchange Commission will
be in substantially the form of the printer's proof referred to in paragraph (e)
above, that the minutes setting forth the Board Resolutions will be approved by
the Trustees of the Trust in substantially the form attached to the Secretary's
Certificate referred to in paragraph (d) above, that prior to the effectiveness
of Post-Effective Amendment No. 9, the Proposed Designation of Series will be
duly executed by the Trustees in substantially the form referred to in paragraph
(c) above and that the Proposed Designation will be filed in the office of the
Secretary of the Commonwealth of Massachusetts and such other places as may be
required under the laws of the Commonwealth of Massachusetts.
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or appropriate.
We have made no other review or investigation of any kind whatsoever, and we
have assumed, without independent inquiry, the accuracy of the information set
forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such Commonwealth,
to the extent the same may apply to or govern the transactions covered by this
opinion, except that we express no opinion as to any Massachusetts securities
law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest commonly
referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Registration
Statement will be legally issued, fully paid and non-assessable, except that, as
set forth in the statement of additional information contained in the
Registration Statement, shareholders of the Funds may under certain
circumstances be held personally liable for its obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
The opinions expressed herein concern only the effect of the law as
currently in effect and the facts and assumptions described herein. The
undersigned undertakes no obligation to supplement or update this opinion after
the date hereof.
Very truly yours,
/s/ BINGHAM DANA LLP
<PAGE> 1
Exhibit (i3)
December 30, 1998
Select Advisors Variable Insurance Trust
311 Pike Street
Cincinnati, Ohio 45202
Re: Select Advisors Variable Insurance Trust
----------------------------------------
Ladies and Gentlemen:
We are acting as special Massachusetts counsel to Select Advisors Variable
Insurance Trust, a Massachusetts business trust (the "Trust"), in connection
with Post-Effective Amendment No. 9 to the Trust's Registration Statement on
Form N-1A to be filed with the Securities and Exchange Commission on or about
December 30, 1998 (the "Amendment"), with respect to the shares of beneficial
interest, par value $.00001 per share (the "Shares") of its series Touchstone
Value Plus Fund (the "Fund"), which were initially issued pursuant to the
Trust's Post-Effective Amendment No. 6 to its Registration Statement on Form
N-1A, effective on May 1, 1998 (the "Prior Amendment"). You have requested that
we deliver this opinion to you to be used as an exhibit to the Amendment.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth of
Massachusetts as to the existence of the Trust;
(b) a copy of the Trust's Declaration of Trust dated as of February
7, 1994, Amendment No. 1 to the Declaration dated as of March 15, 1994,
Amendment No. 2 to the Declaration dated as of April 11, 1994, Amendment
No. 3 to the Declaration dated as of October 31, 1994, and Amendment No. 4
to the Declaration dated as of September 18, 1997 (collectively, the
"Declaration");
(c) a copy of the Trust's Third Amended and Restated Establishment
and Designation of Series dated as of September 18, 1997 (the "Designation
of Series");
(d) a certificate executed by the Assistant Secretary of the Trust
(the "Secretary's Certificate"), certifying as to, and attaching copies
of, the Trust's Declaration, Designation of Series, By-Laws, and certain
resolutions adopted by the Trustees of the Trust at a meeting held on
August 15, 1997 (the "Board Resolutions");
(e) a copy of the Prior Amendment; and
(e) a printer's proof dated December 29, 1998 of the Amendment.
<PAGE> 2
Select Advisors Variable Insurance Trust
December 30, 1998
Page 2
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that the
Amendment as filed with the Securities and Exchange Commission will be in
substantially the form of the printer's proof referred to in paragraph (e)
above.
This opinion is based entirely on our review of the documents listed above
and such investigation of law as we have deemed necessary or appropriate. We
have made no other review or investigation of any kind whatsoever, and we have
assumed, without independent inquiry, the accuracy of the information set forth
in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such Commonwealth,
to the extent the same may apply to or govern the transactions covered by this
opinion, except that we express no opinion as to any Massachusetts securities
law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is our
opinion that:
1. The Trust is duly organized and existing under the Trust's Declaration
of Trust and the laws of the Commonwealth of Massachusetts as a voluntary
association with transferable shares of beneficial interest commonly referred to
as a "Massachusetts business trust."
2. The Shares issued on or after May 1, 1998, assuming that they were
issued and sold in accordance with the Trust's Declaration and By-Laws and for
the consideration described in the Prior Amendment, were legally issued, fully
paid and non-assessable, and the Shares to be issued, if issued and sold in
accordance with the Trust's Declaration of Trust and By-Laws and for the
consideration described in the Amendment, will be legally issued, fully paid and
non-assessable, except that, as set forth in the statement of additional
information contained in the Prior Amendment and the Amendment, shareholders of
the Fund may under certain circumstances be held personally liable for its
obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment.
The opinions expressed herein concern only the effect of the law as
currently in effect and the facts and assumptions described herein. The
undersigned undertakes no obligation to supplement or update this opinion after
the date hereof.
Very truly yours,
BINGHAM DANA LLP
